Pinsent Masons advises Photon Energy N.V. and Bankhaus Scheich Wertpapierspezialist AG on EUR 55m GREEN bonds
Out-Law Analysis | 19 Oct 2021 | 11:35 am | 10 min. read
Technology is rapidly evolving and constantly changing our lives. A small business can become a global enterprise with market power within a few years, just because it had the right idea at the right time. At the same time, concerns have been expressed that established tech giants should not be able to acquire start-ups with a promising idea before they can become serious competitors. This is one of the reasons why several European countries, and not least the EU itself, are currently adapting their competition laws so they can scrutinise transactions in the tech sector more closely in future, while many national antitrust authorities are already taking a closer look at the market power of tech companies and transactions in this field.
A study carried out by Pinsent Masons, the law firm behind Out-Law, in partnership with other firms in its European network, identified the trends; reviewed recent and proposed legislative changes; and assessed the key merger control decisions.
Many European countries are currently revising their competition laws to give competition authorities the power to exercise greater control over transactions in the tech sector.
The UK continues to develop its own proposed statutory oversight of anti-competitive practices and transactions of large technology businesses. Under plans published by the UK government, the work of the Digital Markets Unit (DMU) will be placed on a statutory footing, allowing it to focus on the promotion of competition in digital markets for the benefit of consumers. The DMU, which sits within the Competition and Markets Authority (CMA) and was established in April 2021, will regulate businesses that are deemed to have a "strategic market status" (SMS). According to Alan Davis of Pinsent Masons, this is likely to include significant technology businesses.
"The DMU’s role will include overseeing planned corporate transactions of SMS firms under a special merger control regime," Davis said. "Under the proposed regime, SMS firms will have a duty to give advance notice of all imminent merger activity, in tandem with new criteria for triggering the CMA’s review powers. These changes will give the CMA greater scope to review transactions involving target businesses that have either assets or revenues, users, employees, R&D activities or a legal presence in the UK, and will add significantly to the compliance burden for companies designated as having SMS."
Partner, Head of Competition, EU & Trade
The UK's CMA will have greater scope to review transactions involving target businesses that have either assets or revenues, users, employees, R&D activities or a legal presence in the UK, and will add significantly to the compliance burden for companies designated as having strategic market status
Another country that is currently revising its competition law is Poland. At the beginning of this year, the Polish government published a draft law amending the Act on Competition and Consumer Protection. The draft was prepared as part of the implementation of the EU's ECN+ Directive into Polish law. According to Michał Będkowski-Kozioł of law firm Kochański & Partners, it provides for the introduction of fundamental changes to the Polish antitrust law including, among others, extending the liability of entrepreneurs' associations and the liability for violation of competition rules. However, it is currently difficult to judge what shape the proposed provisions will ultimately take and how they will affect transactions in the technology sector in particular, Będkowski-Kozioł said. There are also plans to extend the obligation to provide information and documents at request of the president of the Polish Office of Competition and Consumer Protection (UOKiK).
Denmark is also considering new regulations on competition in the tech industry. Although no new competition law regulation aimed specifically at tech has yet been announced, the Danish government presented a paper in August 2021 with its thoughts on how tech companies are challenging traditional competition law and a couple of initiatives on how to solve this challenge, said the Danish law firm Bech-Bruun.
In Portugal, there are currently no anticipated legislative changes to competition rules aimed at the challenges of digital and tech cases. According to the Portuguese law firm SRS Advogados, this is because a focus on digital markets and tech companies has been part of the Portuguese Competition Authority's (PCA) competition policy priorities since 2018. In 2018, the PCA had published an issues paper and a sector inquiry on financial technology (fintech), followed one year later by an issues paper on digital ecosystems, ‘big data’ and algorithms. In 2020, an inter-departmental taskforce was created in Portugal with specific focus on digital merger control and antitrust cases. SRS Advogados said that the PCA has once more highlighted investigating signs of abuse and collusion in the digital environment as one of its three main priorities for 2021.
As a general trend, there has been a tendency for jurisdictions to change the threshold values for mandatory filings to reflect the rising prices in M&A transactions and also ensure a manageable caseload for the competition authorities.
Two examples of this are in Germany and Austria: the German government adapted its competition law at the beginning of this year, while Austria is still working on new regulations. Both countries have increased or will increase the thresholds for a mandatory filing, leading to a material reduction of the number of filings to the respective national competition authorities. In Germany, the number of filings is expected to drop by as much as 40% or even 50%.
Many jurisdictions, such as Germany and Austria, have introduced thresholds based on the transaction value and the domestic effect of a transaction. Another significant trend is that laws and regulations are being amended in a way that allows competition authorities to obtain jurisdiction over merger control cases that are not caught by the turnover-based merger control thresholds. These amendments are of particular relevance for the tech industries. In Germany, for example, a new Section 39a was introduced into the 'Act against Restraints of Competition' that allows the competition authority to request a merger control filing for mergers that do not fall under the thresholds but fulfil certain other requirements. This may affect, among other things, the acquisition of start-ups by tech giants that would not otherwise be caught by the merger control thresholds.
Similarly, the European Commission has issued guidelines on the interpretation of Article 22 of the EU Merger Regulation that specify under what circumstances the Commission can pick up cases that would normally fall under the jurisdiction of a member state but do not meet the turnover-based thresholds of the EU Merger Regulation. These guidelines allow the Commission to investigate cases where the member states’ own thresholds are not met but the transaction nevertheless threatens to significantly impede effective competition in the internal market. This could be used to capture so-called 'killer acquisitions' - where large companies acquire innovative start-ups and in so doing remove a potential new competitor.
"Recent examples of this power being used include Ireland, France and the Netherlands referring the Facebook/Kustomer transaction to the European Commission for investigation, despite the relevant national merger thresholds not being met," said Michael Reich of Pinsent Masons. "France also chose to take advantage of the EU referral mechanism in relation to biotech company Illumina’s acquisition of Grail, which is now under review by the Commission."
In recognition of the reality of the digital market, where a company’s value is not always reflected in its current turnover, the Danish government has taken the initiative to develop a new model as regards the circumstances under which a merger must be reported
In addition to establishing the new DMU regime, the UK government is also proposing certain reforms to UK competition and merger control laws more generally. This includes proposals to add an additional merger control threshold to allow the CMA to more easily review transactions in the tech sector which would not meet the standard thresholds for the CMA to have jurisdiction. The new proposed thresholds – where either party has a 25% share of supply and £100m UK turnover – would pick up more acquisitions by large companies with strong market positions, regardless of the turnover or market presence of the target company. This would apply regardless of whether the acquirer is has strategic market status under the DMU rules.
According to the law firm Bech-Bruun, the Danish government has identified a similar concern, but has yet to introduce new legislation on the topic: "Today, only mergers over a certain threshold must be reported to the Danish NCA. In recognition of the reality of the digital market, where a company’s value is not always reflected in its current turnover, the government has taken the initiative to develop a new model as regards the circumstances under which a merger must be reported. It is still too early to say something more specific about the new model, but in its paper, the government has pointed out that it is aware of the need to both extending the NCA’s possibility of investigating future mergers and at the same time making it possible for tech firms to decide when a merger must be reported. For a future model, the government is looking at British, Swedish, Icelandic and Norwegian experience with alternative models where such models are already in use."
Recent decisions by national competition authorities under the merger control rules illustrate the current approach by the authorities to these issues.
Most cases that were ultimately prohibited by the competition authorities at Phase 2 concern transactions where the parties had very high market shares, and were active in stable and mature markets with established technologies where innovation does not play a decisive role anymore, such as printing machines or mainframes.
In younger and more dynamic markets, where innovation still plays a major role, the competition authorities were more likely to find that there remain sufficient alternative supply options for the purchasers. In Germany, for example, two transactions in the field of semiconductors and wafers were under close scrutiny and in both instances the German Federal Cartel Office granted clearance since it found the market to be dynamic and offering alternative supply options for the purchasers.
At the same time, we see a tendency that in markets where the players have a technological gatekeeper function or operate networks that are used by others, the competition authorities tend to impose conditions on the merging parties that ensure that third parties have non-discriminatory access to the products or services in question. In Germany, this concerned, for example, a merger of two major glass fibre operators.
In Switzerland, there has been recent merger control focus in the telecommunications sector. According to Gian Marchet Kasper of Blum & Grob, the public takeover of Sunrise by Liberty Global and its subsidiary UPC, which is the number two in TV and broadband in Switzerland, created a real challenger to industry leader Swisscom. "This transaction was in principle the reverse of the previous year’s failed takeover attempt by Sunrise of UPC. Since the Commission had already examined the previous transaction in depth, it refrained from conducting another in-depth examination for this transaction and instead approved the proposed merger straight away," Marchet said. "The Commission also stated that for reasons of procedural economy, a scrutinized examination may be waived in cases where there are indications of the creation or strengthening of a dominant position, but where it is obvious that there is no risk of effective competition being eliminated."
Gian Marchet Kasper
Partner, Blum & Grob
The European Commission has stated that for reasons of procedural economy, a scrutinized examination may be waived in cases where there are indications of the creation or strengthening of a dominant position, but where it is obvious that there is no risk of effective competition being eliminated
Angelique Bret of Pinsent Masons said that competition authorities are increasingly concerned with theories of harm around data in tech transactions. These may involve concerns about customers being forced to share more data with the merged entity than they would otherwise willingly provide, the merged entity gaining an unassailable data advantage over its competitors and vertical concerns for example around input foreclosure by the merged entity that may hamper its rivals’ ability to compete on downstream markets. Data considerations have played an important role in European Commission’s review of digital mergers, for example in the Facebook/WhatsApp, Microsoft/LinkedIn, Apple/Shazam, Google/Fitbit, and Facebook/Kustomer cases. Google’s acquisition of Fitbit was cleared in December 2020, subject to legally binding commitments that restrict Google’s ability to use consumer data for digital advertising purposes and oblige Google to allow data access and technical interoperability for producers of competing wearable devices. The commitments apply for at least 10 years.
In the UK, the CMA notably blocked a vertical merger between Intercontinental Exchange (ICE) and Trayport due to data-related input foreclosure concerns. The CMA considered that, through its acquisition of Trayport, ICE could foreclose access to software products and an integrated platform that included various data services and was used by traders, brokers, exchanges and clearinghouses that competed with ICE in the trading and clearing of European utilities. "In March 2021, the CMA published revised merger assessment guidelines that build on its evolving decisional practice over the past 10 years, particularly in the digital sector", said Paul Williams of Pinsent Masons. "For example, the CMA will more closely consider non-price competition factors, including data access and technological interoperability. It will also take a more interventionist approach in mergers that could reduce innovation or result in 'killer acquisitions' and will reduce its reliance on established market definition tools instead focusing on closeness of competition between merging parties."
In Sweden, the latest large M&A transaction with a tech and sustainability angle was the establishment of AlfaWall Oceanbird, a joint venture between Alfa Laval and Wallenius. Both are among the world’s leading companies within their fields. Their joint venture is set out to develop wind propulsion technologies for any vessel type, thereby cutting emissions radically and supporting the maritime industry’s shift towards zero-emission shipping.
"Since both companies are multinationals, the establishment of the joint venture needed notification to a large number of competition authorities," Ulf Djurberg of Setterwalls said. "In their review of the filings, the authorities had to consider whether an own relevant market had to be defined since there is no other similar technology in the world or whether earlier market definitions should be used. This question is of importance since it is conceivable that two strong companies that establish a new technology will have an advantage over other companies."
The vast majority of competition authorities have already cleared the transaction without any comments or reasoning. According to Djurberg, this would most likely imply that new tech companies merging or acquiring other companies could rely on earlier definitions of the relevant market and that investments made in such markets could probably be made without risks of competition authorities prohibiting such transactions. He said he found this clear view of competition authorities satisfactory since it is likely to result in continued investments by all types of companies.
19 Oct 2021
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Pinsent Masons advises Photon Energy N.V. and Bankhaus Scheich Wertpapierspezialist AG on EUR 55m GREEN bonds