Antitrust in focus - September 2022
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This newsletter is a summary of the antitrust developments we think are most interesting to your business. Süleyman Cengiz, counsel based in Istanbul (Gedik & Eraksoy) is our editor this month (learn more about Süleyman in our Q&A feature at the end of the newsletter). He has selected:
He has selected:
- Turkish Competition Authority increases antitrust enforcement with a focus on the tech sector
- UK CMA intervenes in yet more M&A
- Recent fines remind merging parties of the importance of checking merger control notification requirements carefully
- Italy ushers in a step-change in merger control and antitrust enforcement
- European Commission records an uptick in FDI commitment cases as regimes develop across the EU
- U.S. bolsters national security reviews of in-bound foreign investment
- UK national security screening: key considerations and practice points emerge as regime beds in
- Germany allows temporary cooperation between sugar producers and between gas suppliers to deal with gas supply issues
- European Commission’s Illumina/GRAIL prohibition targets protection of innovation
- Healthcare insurance deal one of two merger challenges lost by U.S. DOJ in quick succession
- Recent developments show life sciences sector remains a major priority for antitrust enforcement
The tech sector remains front and centre in Turkish antitrust enforcement. In the last couple of months, the Turkish Competition Authority (TCA) has initiated and/or wrapped up several separate antitrust investigations, many relating to digital markets.
For example, in August, the TCA closed an abuse of dominance investigation into the e-scooter mobile application Marti with legally binding commitments. In response to allegations that Marti had been excluding its rivals from the e-transport market, the firm has agreed not to price its e-scooter services below cost in markets where it holds a 50% share. The commitments mechanism was introduced in Turkey in June 2020 and has already been successfully used a number of times. This summer, the TCA closed two other abuse of dominance probes with commitments, one in relation to a foods and nuts company and the other a Turkish food e-retailer.
Aside from digital markets, the TCA also launched an investigation into a pasta supplier and its two distributors in relation to the determination of resale prices.
All of these cases show that the TCA, which has recently resumed decision-making following a lack of quorum, has undoubtedly increased its antitrust enforcement activity. Going forward, we anticipate that it will continue to focus on digital markets and seek to resolve cases with commitments where possible.
We also expect the TCA to subject tech sector mergers to heightened review. Our March 2022 edition of Antitrust in focus detailed significant amendments to the Turkish merger control regime. These entered into force in early May 2022, introducing a new turnover-based threshold to tackle so-called “killer acquisitions” in the tech sector, as well as higher standard jurisdictional thresholds.
In our May edition of Antitrust in focus we commented that the UK Competition and Markets Authority (CMA)’s record for tough merger control intervention in M&A was continuing in 2022. In recent weeks we have seen several decisions that confirm this trend.
In May, we reported that the CMA had provisionally found that two deals raised antitrust issues. The authority has now confirmed its initial findings in both of those cases:
· Dye & Durham’s acquisition of TM Group has been blocked. The CMA found that the parties are close rivals in the provision of property search services and that, post-merger, competition from other suppliers would not offset the competition lost by the transaction. This is a completed deal – one that was not notified to the CMA and was then called in for review by the CMA’s mergers intelligence committee (which monitors transactions across markets). The CMA concluded that Dye & Durham must sell off the whole of the TM Group, effectively unwinding the transaction.
· Veolia must unwind the UK part of its acquisition of Suez. The CMA concluded that the combination of the two global waste and water management companies would give rise to antitrust concerns in seven markets, where the parties compete closely and face limited post-merger competition. The CMA said the deal would result in higher costs or lower service quality for councils, with knock-on effects for taxpayers and UK businesses. It is requiring Veolia to sell substantial parts of the merged UK business, including both Suez and Veolia divisions. These remedies are in addition to those agreed with the European Commission and Australian Competition and Consumer Commission as part of their conditional approvals of the transaction.
Further intervention is possible. In mid-September, the CMA provisionally concluded that a completed acquisition by NEC Software Solutions of rivals in the supply of communication/control services and duties management software for use by the emergency services could result in a substantial lessening of competition. The CMA’s provisional view is that the sale of the entire target business is the only effective way to remedy these concerns. A final decision is due in October.
But not all transactions which undergo an in-depth phase 2 investigation in the UK are destined for prohibition or remedies.
In early September, the CMA cleared NortonLifeLock’s planned acquisition of Avast, finding after an in-depth review that the deal would not raise antitrust concerns in the supply of cyber safety software to consumers. It concluded that this is a rapidly evolving area and that the merged entity would face significant competition from other specialist suppliers as well as from Microsoft. Allen & Overy advised NortonLifeLock on this transaction.
More recently, the CMA has provisionally found that London Stock Exchange Group’s purchase of Quantile Group – a vertical merger – would not raise concerns. It considers that the merged entity would have no incentive to foreclose rivals of Quantile by reducing their access to London Stock Exchange’s clearing house LCH.
However, of the seven phase 2 merger control decisions the CMA has reached so far in 2022, only two have been cleared unconditionally. Merging parties should therefore continue to carefully assess the risk of CMA intervention in their deals (with particular issues for transactions that have already completed) and pay close attention to the allocation of execution risk in deal documents.
Recent fines remind merging parties of the importance of checking merger control notification requirements carefully
In our Global trends in merger control enforcement report we collect and analyse, on an annual basis, data on fines imposed by antitrust authorities for breaches of procedural merger control rules. In recent years, our analysis has shown a clear increase in the willingness of authorities to investigate and enforce these rules.
This trend appears to be continuing in 2022, in three key ways.
First, in the past couple of months, we have seen some stark reminders of the importance of checking carefully whether the notification thresholds are met in a particular jurisdiction.
In Portugal, for example, the Competition Authority imposed a fine of EUR2.5 million on a charity for implementing its acquisition of the managing firm of the Portuguese Red Cross Hospital before notifying the transaction. The charity argued that the notification thresholds were not met on the basis that its revenue was generated by state lottery funding. The authority disagreed. It marks the highest fine imposed in Portugal for failure to file/gun-jumping conduct. The charity plans to appeal.
Second, it is worth remembering that where a filing is made, ensuring the accuracy of the information submitted to the relevant authority is crucial.
In Mexico this month, the Federal Economic Competition Commission (COFECE) fined AT&T and Warner Bros. Discovery for not notifying the authority of certain carve outs to their deal. The authority fined the companies MXN51.6m (approx. EUR2.6m). COFECE also sanctioned Invesco for not informing it about two funds participating in the acquisition of a gaming company. COFECE imposed a fine of nearly MXN1m (approx. EUR50,000) and withdrew its initial approval of the deal. These are the third and fourth fines imposed by COFECE for breach of procedural merger control rules in the past two months.
Finally, not fully complying with remedies agreed to satisfy an authority’s antitrust concerns over a transaction can also come at a price.
In Spain, the antitrust authority CNMC fined Telefónica EUR5m for failing to comply with some of the remedies voluntarily submitted in 2015 when the CNMC cleared its acquisition of DTS. In particular, the CNMC found that Telefónica failed to provide timely, correct and complete information that the authority needed to check compliance with the remedies regarding the replicability requirements of Telefónica’s commercial offers.
And – hot off the press as we finalised this edition of Antitrust in focus – Altice has settled with the French Competition Authority (FCA) for failing to implement commitments entered into in relation to its acquisition of SFR in 2014. The FCA already fined Altice EUR40m over the infringements in 2017. It also imposed several injunctions setting a schedule for implementation of the commitments, some of which had penalty payments attached. Now, the FCA has found that Altice did not properly comply with the injunctions within the time limits set. As a result, Altice will pay a further EUR75m fine for the clearance of penalty payments and non-compliance with injunctions issued in 2017.
Managing compliance with these procedural merger control rules adds an additional layer of complexity for merging parties. But there are mechanisms available to help minimise the risk of infringements. Read our bulletin on the use of “clean teams” in M&A transactions for guidance on how to prevent anti-competitive information exchange during the transaction process.
Italy’s latest annual Market and Competition Law came into force in late August. It introduces important changes to merger control and antitrust enforcement, including:
- significant amendments to the merger control rules, enabling the Italian Antitrust Authority (IAA) to expressly review “killer acquisitions” and further bringing the rules into line with the EU Merger Regulation, in particular by the introduction of the “SIEC test” and the extension of the rules to catch all “full-function” joint ventures
- introduction of a new settlement procedure for cartel, abuse of dominance and restrictive agreement cases, and greater evidence-gathering powers for the IAA
- extension of the rules on abuse of economic dependence to catch abusive behaviour by digital platforms, by introducing a presumption of economic dependence in dealings with digital platforms that play a “decisive role” in reaching end users and/or suppliers, and adding to the list of practices which are typically considered to amount to abuses
Implementing measures are required to give full effect to the new rules. It is hoped that these will be adopted before the end of the year.
Our alert provides more detail on the reforms as well as our initial thoughts on their impact.
Separately, we have advised MP & Silva in achieving a substantial reduction in a cartel fine. In June, Italy’s highest administrative court ruled that, when calculating penalties, the IAA must take account of the sports management agency’s financial position at the time of the adoption of the infringement decision. The IAA subsequently reduced its fine on MP & Silva from EUR63.9m to EUR424,000 to reflect the amount of turnover achieved by MP & Silva during the year prior to the adoption of the infringement decision.
The European Commission (EC) has published a report and staff working document on the operation of the EU’s foreign direct investment (FDI) screening mechanism in 2021.
Our alert on the EC’s report looks at the data on EU FDI intervention and comments on a clear increase in cases involving the negotiation of mitigating measures.
We also consider the implications of the rapid spread and continuing evolution of EU Member State FDI regimes. In terms of updates to existing regimes, also this month, simplifications to Italy’s “Golden Power” procedure came into effect. Our alert on the Italian amendments explains how a new pre-notification regime will: (i) allow stakeholders to seek clarification on the need to notify a specific transaction; and (ii) potentially allow for a quicker and smoother conclusion of procedures.
Finally, our alert on the EC's report considers what the future holds for investors into the EU as the EC reviews its FDI screening rules and introduces a new separate notification regime for mergers and acquisitions involving certain “foreign subsidies”.
In September, President Biden issued an Executive Order (EO) setting out an expanded range of national security factors that the Committee on Foreign Investment in the United States (CFIUS) must consider when evaluating in-bound investment into the U.S. The move reflects the Biden Administration’s current focus on safeguarding against potential national security risks from “competitor or adversarial nations”, and in particular on enhancing U.S. supply chain resilience and preserving U.S. technological leadership.
Our alert looks at what the EO directs CFIUS to consider when assessing transactions, including new factors relating to aggregate industry investment trends, cybersecurity risks and sensitive data risks. Transaction parties should present their contemplated transactions to CFIUS accordingly and be prepared to answer relevant questions.
The UK’s new national security screening tool ‒ the National Security and Investment Act 2021 ‒ has been in force for over nine months. While there has been very limited transparency on specific cases, its impact on deal making is beginning to crystallise.
- summarises the key aspects of the rules
- picks through the government’s published statistics and final orders for information on notifications, timelines and outcomes (including the fact that two deals have been blocked and four have been cleared with conditions)
- looks at July 2022 government guidance on the need to notify, including in relation to minority investor rights, internal reorganisations and acquisitions of development rights
- gives practical tips for a smooth notification and review process
Overall, determining whether notification is required can be complex. It is also clear that any notification obligation (even if “no issues”) will impact deal timelines and give rise to the need to negotiate risk allocation for process overrun or adverse outcomes.
This month, the European Commission (EC) adopted a proposed Regulation to establish a common framework for media services in the internal market – the European Media Freedom Act (EMFA). Its aim is to protect media pluralism and independence in the European Union. In addition to the EMFA, the EC also adopted a complementary and non-binding Recommendation, which consists of voluntary best practices intended to encourage internal safeguards for editorial independence and greater transparency of ownership.
The EMFA proposes various safeguards against political interference in editorial decisions and against surveillance. These include a requirement for media service providers to publish information on their ownership, non-discriminatory and transparent requirements for the allocation of state advertising, safeguards against the use of spyware on media and journalists, requirements in relation to any public service media, and a user’s right to customise media offers on devices and interfaces.
Importantly, the EMFA also contains provisions concerning media market concentrations.
Without setting specific thresholds, these would oblige Member States to adopt substantive and procedural rules ‒ including mandatory, pre-closing notification ‒ for the assessment of transactions that could have a significant impact on media pluralism and editorial independence. The assessment would be distinct from any antitrust review under merger control rules.
Enforcement of the media market concentrations regime will take place at a national level. However, the EMFA proposes establishing a new and independent advisory body, the European Board for Media Services (Board), comprised of representatives from the national media authorities and the EC.
The relevant national authorities would be obliged to consult the Board when assessing a notifiable media market concentration that may affect the functioning of the internal market. In turn, the Board would issue a non-binding opinion that the national authorities must take into consideration. The Board could also issue opinions in cases where there is no open national assessment or consultation.
The European Parliament and EU Member States will now feed into the EC's proposal. Once adopted, the EMFA will be directly applicable in all Member States. Most provisions will apply six months after entry into force. We will keep you updated on its legislative progress.
Germany allows temporary cooperation between sugar producers and between gas suppliers to deal with gas supply issues
This month the German Federal Cartel Office (FCO) has given the green light to two separate cooperation initiatives instigated in the context of energy shortages.
First, the FCO has cleared four sugar producers to work together until June 2023 to ensure the processing of sugar beets in the event of energy management measures imposed by the government resulting in a reduced or suspended gas supply. In particular, the companies will make production capacities available to each other should gas supply to relevant factories be cut off and production therefore be halted in the factories affected.
The FCO has allowed the “one-time temporary” cooperation project as it is concerned that production stoppages could cause large parts of the beet harvest to rot and result in sugar price rises impacting the entire value chain, ultimately impacting consumers.
Notably, the German sugar industry association will have a facilitation role in the cooperation. It will obtain information on individual factory processing capacities and continuously monitor the situation to determine capacities that can be made available on a voluntary basis.
Unsurprisingly, the cooperation is subject to conditions. For example, the companies must first use all free production capacities available to them at their own factories in Germany and Europe and try to process the sugar beets at one of their other factories not powered by gas, provided that this is economically feasible due to transport costs.
The flow of information will be limited to the “absolute minimum necessary”. First, an independent economic consultant will deal with billing in a way that will make retrospectively determining specific production costs impossible. Second, an agreed collection method will maintain the confidentiality of customer relations, the further use of the processed sugar and the subsequent supply streams.
Second, the FCO has cleared three major German gas importers and wholesalers to work together to set up and operate two floating LNG terminals. It weighed the associated advantages for consumers against the negative effects on competition.
In particular, the fact that the project should ensure rapid commissioning of “urgently needed and price-reducing import capacities” for gas was clearly crucial to the FCO’s decision not to investigate more deeply. Exclusivity arrangements, which are initially in place until 31 March 2024, prevent access to the terminals by third parties. However, the FCO notes that a viable, “complex access model also including additional providers” would take time to put in place and therefore may not maximise use of the terminals, at least in the short term.
These projects could be two of many crisis management initiatives approved by antitrust authorities in Germany and elsewhere in the coming months as industries look for ways to deal with energy shortages and other severe disruptions caused by the impact of the war in Ukraine and/or sanctions. Indeed, the European Competition Network (ECN) has reminded companies that they may approach the European Commission, EFTA Surveillance Authority or relevant national competition authorities for informal guidance on such cooperation initiatives. It also notes that the ECN will take action against companies taking advantage of the current crisis to enter into cartels or abuse their dominant position.
The European Commission (EC) has prohibited Illumina’s implemented acquisition of GRAIL, a company developing blood-based early cancer detection tests. According to the EC, Illumina is the only credible supplier of a gene sequencing technology that allows GRAIL and its rivals to develop and process these tests. The EC is concerned that the merger would give Illumina the ability and incentive to cut off GRAIL’s rivals’ access to the technology or otherwise disadvantage them, for example through delaying supplies, and so hinder innovation and competition in an emerging market.
The decision is unprecedented. It is the EC’s first prohibition based solely on vertical theories of harm. It also marks the first time the EC has blocked a below-threshold merger ‒ in a move endorsed by the General Court in July, the transaction was referred to the EC by EU Member States under Art 22 of the EU Merger Regulation (EUMR) despite the fact that it did not meet EU or national merger control thresholds.
There are a number of key takeaways:
- The EC will seek to protect innovation, especially in nascent markets. In this case, the EC concluded that GRAIL is in an “innovation race” with other companies. It found that while the exact results are uncertain, protecting the current “innovation competition” is crucial to ensure that tests are developed with different features and price points for what the EC expects will become a highly lucrative market.
- The EC rejected a behavioural remedies package. To facilitate the emergence of an alternative gene sequencing supplier, Illumina offered to licence some relevant patents and commit to stop patent lawsuits in the U.S. and Europe against a specific supplier for three years. The EC considered the scope of the patent licence to be insufficient and remained concerned about the cost and time involved in switching supplier. Illumina also offered to commit to conclude agreements with GRAIL’s rivals under conditions set out in a standard contract until 2033. But the EC considered that this would not address all possible foreclosure strategies, and the complexity of the provisions would allow Illumina to easily circumvent its obligations without detection.
- Unwinding completed deals is difficult. The EC will suggest “in due course” a separate decision ordering the parties to dissolve the transaction and restore GRAIL’s independence. In the meantime, interim measures adopted last autumn will continue to apply. In July, the EC alleged that the companies breached the EUMR by implementing the acquisition before receiving clearance after Illumina publicly announced the completion of the deal. We expect the EC to seek to deter future such “troublesome” gun-jumping situations; Executive Vice-President Margrethe Vestager has warned of “hefty fines”.
- Merger outcomes can diverge geographically. Just days before the EC’s prohibition, the U.S. Federal Trade Commission (FTC)’s administrative court judge rejected the FTC’s challenge to the acquisition. Unlike the EC, which identified “a number of rivals” to GRAIL, the judge concluded that potential competition is “speculative” with rival tests “at best years away”. He also considered that the remedy offer, in particular a non-discriminatory long-term supply guarantee, would effectively constrain Illumina from being able to foreclose or disadvantage GRAIL’s rivals. The FTC has filed its notice to appeal the ruling.
Illumina plans to appeal the EC’s prohibition, adding to its challenges of the General Court’s jurisdictional ruling and the EC’s interim measures decision. However, it is also “reviewing strategic alternatives” for GRAIL in the event that a divestiture order is not stayed pending its appeal.
Overall, the EC has signalled that it will review and where necessary intervene in so-called “killer acquisitions”. Merging companies should take account of a possible Article 22 referral in their transactions documents and timetable, in particular in deals involving companies where the EC may consider there to be harm to innovation, especially in the digital or pharma sectors.
It is very rare for the U.S. Department of Justice (DOJ) to lose merger challenges. This month, however, it has lost two in under a week, one in relation to a healthcare insurance deal and the other relating to the sugar refining industry.
The DOJ sued to block UnitedHealth Group’s planned acquisition of Change Healthcare earlier this year (see our March edition of Antitrust in focus). United is a vertically integrated healthcare firm while Change provides software and services to the sector.
The DOJ was concerned that the transaction would enable United to have access to, and potentially use, the competitively sensitive information of its health insurance rivals for its own business purposes. It also claimed that United would be able to control its competitors’ access to innovations in vital healthcare technology.
The DOJ’s suit was seen by many as significant. It showed the willingness of the agency to scrutinise access to data in a merger control context, and was another example of a challenge involving vertical concerns.
However, following a two-week trial in August, a federal judge has rejected the DOJ’s challenge and ruled that the transaction can go ahead.
The judge has ordered Change to divest its claims editing business, ClaimsXTen to TPG Capital, a private equity purchaser. This was a remedy put forward by United as a means to address the DOJ’s horizontal concerns. While the DOJ strongly contended at trial that the divestiture was not enough (arguing that ClaimsXTen would not be able to compete at its current level under TPG’s ownership), the judge took the opposite view, finding that the divestiture would “restore the competitive intensity lost because of the acquisition”.
The judge also disagreed with the DOJ’s claim that the merger raised vertical concerns over access to data and innovations.
He concluded that the DOJ’s allegations were speculative, noting that in order for the transaction to substantially lessen competition, United would have to “uproot its entire business strategy and corporate culture” as well as intentionally breach longstanding firewall policies, breach contractual commitments and sacrifice financial and reputational interests. The DOJ failed to show that the merged entity’s incentives would lead it to take such “extreme” actions, said the judge.
In fact, stated the judge, United will have strong legal, reputational and financial incentives to protect rivals’ data post-merger, supported by existing firewalls and commitments in customer contacts. He also concluded, based on witness testimony at trial, that the DOJ failed to show that the transaction would harm innovation.
Just four days later, the DOJ suffered a second merger trial defeat. A federal judge refused to block U.S. Sugar’s acquisition of Imperial Sugar. The judge in effect rejected the DOJ’s concern that the deal would create a “cozy duopoly” in the supply of refined sugar in the southeastern U.S.
Overall, the two rulings are a blow for the DOJ, which has made frequent statements in recent months about its commitment to challenging anti-competitive mergers. While we do not expect the DOJ to change its enforcement position, the judges’ opinions in these cases may give it pause for thought, particularly in relation to challenges to vertical deals. In responding to the United/Change ruling, the Assistant Attorney General for the DOJ Antitrust Division Jonathan Kanter has noted that the agency “respectfully disagrees” with the court’s decision and is considering its next steps in relation to the transaction. The DOJ has appealed the judge’s decision in U.S. Sugar/Imperial Sugar.
The life sciences sector continues to be a key focus for antitrust authorities across the globe. Recent antitrust enforcement action, particularly in Europe, has targeted excessive and unfair pricing. M&A has also come under scrutiny, with antitrust authorities intervening in so-called “killer acquisitions” (see the article above on Illumina/GRAIL), hospital mergers, and deals involving healthcare insurers (see above on UnitedHealth/Change Healthcare).
Our Life Sciences Hub is a blog dedicated to regulatory, compliance, intellectual property and transactional developments in the sector. In the past few weeks we have posted comments on a number of important antitrust cases and initiatives:
- Advocate General opinions that Servier’s “pay-for-delay” agreements with generic manufacturers amount to “by object” restrictions of competition. Following recent case law of the EU courts, the Advocate General recommends that the European Court of Justice (ECJ), which will ultimately decide on the appeals in this case, confirm that such agreements amount to a restriction of competition by object where two conditions are met. First, that the net gain to the generic manufacturer from the value transfer by the originator (here, Servier) cannot be explained by anything other than the parties’ interest or desire not to compete. Second, that this net gain is large enough to induce the generic manufacturer to refrain from entering or trying to enter the market. Interestingly, the Advocate General also recommended that the ECJ reinstate the European Commission’s original infringement decision (overturned by a lower court ruling) on certain other grounds. The ECJ’s judgment is eagerly awaited.
- UK Competition and Markets Authority (CMA) decision to reimpose fines on Pfizer and Flynn Pharma for abusing their dominant positions by charging excessive and unfair prices for an anti-epilepsy drug. After parts of the CMA’s original infringement decision against the parties were set aside on appeal, the CMA decided to look at the case again. It gathered additional evidence and carried out further analysis, concluding that Pfizer and Flynn charged unfairly high prices for a period after they de-branded the drug. The cost of these price increases was ultimately paid by the UK national health service. The CMA imposed total fines of GBP70m. Pfizer plans to appeal.
- Report by a Belgian think-tank on the compulsory licensing of expensive medicines. The report considers the feasibility and effectiveness of compulsory licences for medicines and treatments sold at excessive prices. It sets out the potential challenges and limitations of this approach and makes various policy recommendations for the use of compulsory licences in Belgium and for action/initiatives at EU-level.
Check out the Hub for more commentary and insights and to register for blog alerts.
A&O Antitrust team in publication
Recent publications/initiatives by members of our global team include:
· Kristina Nordlander (partner, London and Brussels) and Daren Orzechowski (partner, Silicon Valley) moderate a conversation with Thomas Kramler (European Commission): An introduction to the Digital Markets Act with Thomas Kramler from the European Commission, in collaboration with the Berkeley Center for Law & Technology
· Ellen Braun (partner, Hamburg) and Philipp Steinhaeuser (associate, Hamburg): Pharmaceutical Antitrust, Germany, Lexology Getting The Deal Through, 2022