Antitrust in focus - October 2023

Published Date
Oct 30, 2023
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This newsletter is a summary of the antitrust developments we think are most interesting to your business. Jaime Rodríguez, counsel based in Madrid, is our editor this month. He has selected:

EU foreign subsidies regime: notification obligations kick in

The Foreign Subsidies Regulation (FSR) establishes a new regime, enforced by the European Commission (EC), to regulate subsidies granted by non-EU countries to businesses active in the EU that could distort competition in EU markets.

Importantly, the mandatory, suspensory notification obligations for certain M&A transactions and tenders in public procurements started to apply on 12 October 2023.

Under the transaction review regime, deals must be notified and approved prior to completion if:

  • one or more of the merging parties (in the case of a merger), the target company (in the case of an acquisition), or the joint venture (in the case of a JV) is established in the EU and generated an aggregate group-wide turnover in the EU of at least EUR500 million in the previous financial year; and
  • the parties were granted combined aggregate financial contributions from non-EU countries of more than EUR50m over the previous three years.

Businesses that participate in public tenders in the EU have to file a notification if the EU public procurement rules (including utilities procurement) apply and:

  • the estimated value of the tender or framework agreement is EUR250m or more (or the aggregate value of any “lot” is at least EUR125m); and
  • the party (including its subsidiaries and holding companies), as well as its subcontractors and suppliers involved in the same tender, was granted aggregate financial contributions of at least EUR4m per non-EU country within the previous three years.

Parties should now be considering the application of the FSR alongside merger control and/or foreign investment control. If notification is required under the FSR, it will need to be a condition to closing, alongside any other required merger control and/or foreign investment control approvals. The EC encourages parties to engage in pre-notification discussions. According to public statements of the EC’s officials around 20 deals were pre-notified in the run-up to the notification obligation coming into effect, all running parallel to an EU merger control filing.

Our FSR publications provide more detail on how the overall regime will work, the important procedural rules, the implications of the FSR specifically for infrastructure investors and private equity investors, and the FSR’s impact on public procurement procedures. You can also read about proposed amendments to the U.S. merger control notification form to require information on subsidies received from certain foreign governments and related foreign entities in our Global M&A Insights publication.

In addition, earlier this month, Eddy de Smijter, Head of the International Relations Unit, EC, DG Competition, Conor Quigley KC of Serle Court Chambers, and Nicola Mazzarotto, Global Head of Economics at KPMG, joined our partners Kristina Nordlander and Dominic Long to discuss the impact of the FSR on global businesses. You can watch a recording of the panel discussion here and a summary of the key issues discussed here.

Insights on key issues facing private capital

Private capital firms are currently facing a whole host of headwinds. In our new Private capital insights series, we discuss the key trends and topics impacting funds across the private capital spectrum, including:

You can also read thought leadership on many other issues facing private capital investors. Access Private capital insights here.

EU Advocate General reiterates that information exchange can amount to a “by object” infringement

Advocate General (AG) Rantos has delivered a non-binding opinion to the European Court of Justice (ECJ) on the interpretation of the EU prohibition on anti-competitive agreements and the conditions under which an exchange of information between competitors may be classified as a “restriction of competition by object”.

The case currently before the ECJ stems from a 2019 decision of the Portuguese competition authority fining 14 banks a total of EUR225m for having participated in a standalone exchange of sensitive information about the supply of retail banking products between 2002 and 2013.

The authority found the exchange of information constituted a restriction of competition by object, meaning that it did not need to examine its possible effects on the market. The decision was appealed by the banks in the Portuguese court on the ground that the exchange was not sufficiently harmful in itself to alleviate the authority of the need to consider its effects. The referring court then requested a preliminary ruling from the ECJ.

AG Rantos considers that the ECJ should respond that, under EU antitrust rules, a standalone exchange of commercially sensitive information between competitors that reduces or removes uncertainty as to their strategic conduct on the market can amount to a restriction of competition by object. 

In reaching his opinion the AG considered: (i) the content of the information exchanged; (ii) the objective purpose of the information exchange (this must be obviously anti-competitive in nature or have no other credible explanation); and (iii) the legal and economic context (limited to what is strictly necessary to confirm or cast doubt over the harmful nature and anti-competitive object of the conduct).

In relation to the case at hand, AG Rantos opined that the sporadic exchange of non-public information on current and future commercial conditions applicable to transactions (in particular, current and future credit spreads and risk variables) may be classified as a restriction of competition by object, notwithstanding the fact it was not associated with the finding of a cartel.

The AG’s recommendations tally with the approach of the European Commission in its revised guidelines on horizontal cooperation agreements, which includes much expanded guidance on the analysis of information exchanges under EU antitrust law. Together, they serve as an important reminder that ‘standalone’ exchanges of information can expose businesses to the risk of fines from antitrust authorities, even in the absence of traditional cartel behaviour (eg pricing or market-sharing agreements).

European Commission report evidences efficient operation of EU foreign investment screening mechanism while plans for revision proceed

The European Commission (EC) has published its third annual report detailing statistics on the screening of foreign direct investment (FDI) into the EU and its Member States in 2022.

This shows that, compared to 2021, a larger proportion of FDI in EU companies was formally screened by EU Member States (55%). However, most of those cases gained unconditional authorisation (86%). Only 9% of decisions involved conditions or mitigating measures and 1% were blocked. 87% of notified cases were closed within 15 calendar days.

Our alert looks at the figures and trends in more detail.

It also considers the consequences of a proliferation of FDI regimes across the EU. The Slovak Republic is one of the latest Member States to introduce new rules. Our separate alert on the Slovak FDI regime drills down into the provisions on scope and procedure and gives our first impressions on dealing with the Slovak Ministry of Economy in practice.

Finally, our alert on the EC’s FDI report delves into EU plans for a revised EU FDI screening regulation as well as a new initiative to address security risks related to outbound investments. We will report again as these proposals crystallise – both are anticipated by the end of 2023.

CMA conditionally clears Hitachi Rail/Thales after revising provisional findings (again)

Following a phase 2 review, the UK Competition and Markets Authority (CMA) has approved Hitachi Rail’s planned acquisition of Thales, subject to structural remedies to address concerns that the deal would impact competition for the supply of digital mainline signalling systems. These signalling systems are used on the UK’s main railway networks.

In response to the CMA’s phase 2 findings, Hitachi Rail offered to sell its mainline signalling business in the UK, France and Germany. The CMA will need to approve the purchaser, and Hitachi’s main customers in these countries must consent to the transfer of the relevant signalling contracts.

The deal has now secured merger control approvals in 12 of 13 jurisdictions. Only the EU remains – the parties withdrew their original filing to the European Commission and recently renotified the transaction at the same time as offering commitments (which we expect are similar to those accepted by the CMA).

In the UK, the Hitachi Rail/Thales case is another example of the CMA revising its provisional findings during an in-depth review, effectively changing its mind about its concerns in relation to the deal. Historically, the CMA has only rarely amended its provisional findings. However, Hitachi Rail/Thales is one of three recent cases where we have seen the authority do this.

In its original provisional findings, the CMA identified antitrust concerns in two markets and indicated that prohibition might be the only effective remedy. It subsequently dropped its concerns in one market (urban signalling) after the parties successfully argued that Hitachi Rail would not be a credible bidder for these services in the UK. Successfully convincing the CMA to alter its provisional view in this market has allowed the parties to save the deal from prohibition and instead offer a more limited structural divestment to obtain clearance.

Similarly, in Copart/Hills Motors, the outcome – an unconditional clearance – was as good as it could get for the parties following a referral of the completed transaction into phase 2. The CMA provisionally found that the deal would be anti-competitive and gave its view that only full divestment of the target would remedy its concerns. Later, however, the CMA obtained new evidence from customers that the target played a less significant role in the market than originally thought. It therefore dropped its concerns altogether and cleared the deal.

An about-turn by the CMA might not always lead to a better ultimate outcome. In Microsoft/Activision Blizzard the CMA issued revised provisional findings, dropping its concerns over the impact of the transaction on gaming consoles. But it still went on to block the transaction on other grounds. As reported in last month’s edition of Antitrust in focus, Microsoft subsequently submitted a new, restructured transaction to the CMA for review, under which the cloud streaming rights to current and future Activision games released during the next 15 years (with the exception of the EEA) would not be acquired by Microsoft, but instead divested to a third party, Ubisoft. The CMA has now approved this revised deal, subject to remedies that ensure the terms of the sale of Activision’s rights to Ubisoft are enforceable by the CMA.

Despite the Microsoft example, the fact that the CMA appears increasingly willing to narrow the scope of its concerns even after provisional findings at phase 2 highlights the importance of merging parties continuing to make arguments and submitting evidence in favour of the deal right to the end.

More broadly, the data on CMA phase 2 outcomes in 2023 are striking. So far this year, 50% of concluded in-depth reviews have resulted in unconditional clearances (four of eight cases), compared to 25% or less in the past three years. This looks unlikely to change significantly before the end of the year. We will keep you updated on any major developments.

U.S. DOJ incentivises disclosure of criminal misconduct in M&A with new safe harbour

The Deputy Attorney General of the U.S. Department of Justice (DOJ), Lisa Monaco, has announced a new safe harbour policy for voluntary self-disclosures made in the context of mergers and acquisitions. The aim is to incentivise acquirers to disclose criminal misconduct by target companies that they uncover during the M&A process, without fear of prosecution.

The policy will apply across the DOJ’s work, including in relation to potentially criminal antitrust conduct. But it will not impact civil merger control enforcement.

To benefit from the safe harbour, acquirers must report misconduct of the target within six months of closing (whether the misconduct was discovered pre- or post-acquisition). They then have one year to fully remediate the misconduct.

Importantly for acquirers, the presence of aggravating factors at the target company (such as senior management involvement) will not rule out the safe harbour. Nor will the acquirer be viewed as a recidivist in any future criminal case.

The DOJ’s new policy will have a tangible impact on buyer due diligence and post-transaction integration. Wherever there is a potential U.S. nexus, companies should take this safe harbour into account when determining the appropriate breadth and depth of due diligence.

Find out more about the safe harbour in our alert. 

Cloud services subject to in-depth UK market review and increasing scrutiny in other jurisdictions

The UK Competition and Markets Authority (CMA) has launched an in-depth probe into the supply of public cloud infrastructure services in the UK. It follows a report by communications regulator Ofcom that identified features of the UK market that could limit competition. Ofcom asked the CMA to carry out further investigations.

Cloud services allow remote access to computing resources such as processing, storage, networking and software. Such services are vital for many businesses across the UK and are being rapidly adopted.

Ofcom found that Amazon Web Services and Microsoft are the leading providers of cloud infrastructure services in the UK with a combined market share of 70-80% in 2022. Google is their closest rival, with a share of 5-10%. Together, they are known as the “hyperscalers”.

Ofcom’s main concern is that business customers find it difficult to switch cloud provider or to use multiple providers. It says this is due to three features of the market:

  • Egress fees: charges that customers pay to transfer their data out of a cloud – they can discourage the use of more than one cloud provider and may make switching more costly
  • Technical barriers to interoperability and portability: the additional effort needed to reconfigure data and applications to work on different clouds can restrict the ability of customers to combine services across cloud providers or to change provider
  • Discounts: the structure of these can incentivise customers to use a single cloud provider for all or most of their needs

Ultimately, Ofcom is concerned that, if these features are “left unchecked”, competition could deteriorate and it could become harder for competitors to gain scale and effectively challenge Amazon Web Services and Microsoft.

The CMA will now further examine the UK cloud services market to determine if competition is working well, and what action should be taken to address any issues it finds. The authority has published its issues statement, noting it will consider the three market features identified by Ofcom, as well as look into software licensing practices.

Elsewhere, scrutiny of cloud services is mounting.

Late last month, the French Competition Authority carried out a dawn raid on the back of its cloud computing market study, published in June. The authority is carrying out preliminary investigations based on its findings in the market study and will potentially use these to initiate enforcement action. The Japanese Fair Trade Commission has also reportedly carried out a dawn raid against a cloud service provider in recent weeks. In the past year the sector has been under review in the Netherlands and South Korea.

It is therefore clear that the cloud services market is high on the agenda for a number of antitrust authorities across the globe. As for the CMA’s market investigation, we are unlikely to see the results for another 18 months – the deadline for the final report is April 2025 (and even this date might be extended). In the meantime, the Digital Markets, Competition and Consumers Bill may have become law, more generally providing a framework for the CMA’s work in digital markets.  

European Court of Justice provides clarification on assessment of non-compete agreements between companies active on different markets


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This content was originally published by Allen & Overy before the A&O Shearman merger

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