General

Spotlight on below-threshold merger reviews: doubts over European Commission’s powers while in depth probes launched in Italy

Last month, we reported on the landmark Advocate General (AG) opinion in Illumina/GRAIL. The AG assessed whether the European Commission (EC) has jurisdiction (under its revised “Article 22” referrals policy) to review transactions where neither EU nor national merger control notification thresholds are met. He advised the EU’s top court to rule that the EC does not have this power.

Our alert sets out the AG’s view and the implications for EU merger control, including the EC’s ability to review “killer acquisitions”.

The EC is not the only antitrust authority seeking to review below-threshold transactions.

In Italy, on the same day, the Italian Antitrust Authority (IAA) opened two phase 2 investigations into deals that fall below national merger control thresholds. The first concerns cement manufacturer Alpacem’s acquisition of a plant and ready-mix concrete businesses from rival Buzzi. The IAA is concerned that the deal may restrict competition in the 250km catchment area around the plant. The second investigation relates to the acquisition by Servizi Italia of its rival Steris, active in the market for sterilisation of surgical instruments. In this market, competition is based on tenders organized by healthcare providers. The IAA reviewed the tenders organized in Italy between 2019 and 2023 and found that Servizi Italia and Steris (the first and third ranked competitors in Italy by market share) are close rivals.

These cases mark the second and third time the IAA has launched an in-depth probe into a below-threshold deal since it gained the power to call in such transactions in 2022. The first – relating to the acquisition of a port terminal – was referred just a few weeks earlier. All three cases concern markets that are local in scope or of limited dimension in which few players are active.

The fact that neither case concerns a digital nor a life sciences transaction is significant. It is in these types of innovative sectors that killer acquisitions are most likely to occur, and where calls have been loudest for antitrust authorities to review deals that do not trigger merger filing requirements but may nevertheless harm competition. The three cases therefore show the IAA’s intention to take full advantage of its expanded powers to review deals not caught by the Italian thresholds but that have the potential to restrict competition in local markets.

Elsewhere, the chairman of the Dutch Competition Authority has reportedly called for a new instrument to review mergers that fall below national notification thresholds. A step ahead, the Egyptian Competition Authority is set to receive powers to review below-threshold transactions under new merger control rules that will take effect in June. Read our article below for more on this.

Australia proposes landmark move to a mandatory merger control regime

The Australian government has announced much-anticipated proposals for a significant overhaul of the Australian merger control regime.

The current voluntary system will be replaced by a single mandatory and suspensory merger control review mechanism with the following key features:

• Scope: the new regime will apply to all deals meeting certain thresholds (yet to be determined). There will be no power to “call in” transactions falling below the thresholds.
• Filing fees: there will be scaled fees, likely to be in the range of AUD50,000-100,000 (approx. EUR30,000-60,000) per filing.
• Assessment: the Australian Competition and Consumer Commission (ACCC) will be the first instance decision-maker in all cases. It will assess whether it reasonably believes that a transaction is likely to substantially lessen competition, including if it creates, strengthens, or entrenches substantial market power (this is similar to the test applied today, with some tweaks). Notably, the ACCC will be able to consider the cumulative effect of all mergers within the previous three years by the parties, even if those mergers were not notifiable – this is designed to catch potentially anti-competitive serial acquisitions and roll-ups.
• Timing: the ACCC will have an initial 30 working day (phase 1) review period to approve a merger. After 15 days, if no concerns have been identified, there will be a “fast-track” option to clear the deal. Where concerns are raised in phase 1, the ACCC will undertake an in-depth (phase 2) assessment within four and a half months. If concerns remain, parties can ask the ACCC to factor in substantial public benefits (this will replace the current Merger Authorisation process).
• Appeals: parties will be able to appeal adverse ACCC decisions to the Competition Tribunal. This will be a “limited merits review”, meaning that the Tribunal can affirm, set aside, or vary the ACCC’s decision based on material put to the ACCC. It will be subject to time limits and additional fees will apply.
• Transparency: the ACCC will maintain a public register of all merger reviews, setting out details of notified mergers, and publish reasons for its determinations.

The reforms are not imminent – the proposals need to pass through parliament and are not tabled to take effect until January 1, 2026.

Once adopted, however, they will mark a major change. For large businesses and large deals raising at least some antitrust issues, Australian merger control costs will likely increase significantly. Consistent with the global trend, we predict Australia will move towards a system where “simple” cases are cleared quickly and more complex matters face greater regulatory scrutiny, and therefore greater risk.

In the meantime, the government has a lot of work to do on the details of the regime. For example, it needs to set the notification thresholds, determine upfront information requirements and finalise the filing fees. Consultation is expected on each of these elements. We will keep you updated as the reforms progress.

U.S. bans noncompetes in employment contracts nationwide

The U.S. Federal Trade Commission (FTC) has issued a final rule to ban new noncompetes with all workers, including senior executives, after an effective date expected later this year. The FTC has determined such noncompetes to be an unfair method of competition and therefore a violation of Section 5 of the FTC Act.

In addition, existing noncompetes with most U.S. workers will not be enforceable. The FTC has provided model language for employers to provide notice to workers bound to an existing noncompete that it will not be enforced against them.

As an exception, existing noncompetes for senior executives – namely those earning more than USD151,164 annually who are in a “policy-making position” – will remain in force.

Look out for our upcoming alert for further information and analysis.

European Commission launches more foreign subsidy probes targeting Chinese firms

EU Competition Commissioner Margrethe Vestager has announced a new probe under the Foreign Subsidies Regulation (FSR) into “Chinese suppliers of wind turbines”.

The European Commission (EC) will investigate conditions for the development of wind parks in Spain, Greece, France, Romania and Bulgaria. Vestager gave no further details on the probe but it appears to be the first own-initiative investigation under the FSR, which enables the EC to assess any market conduct if there are alleged foreign subsidies distorting the internal market.

Just two weeks later, seemingly as part of another own-initiative investigation, the EC carried out unannounced inspections at the premises of Chinese company Nuctech. It is active in the production and sale of security equipment in the EU.

These probes take the tally of investigations into potentially distortive subsidies (and into Chinese companies) under the FSR to five.

Earlier this month, the EC started two in-depth investigations which stem from notifications submitted in public procurement procedures by two consortia bidding for the design of photovoltaic parks in Romania. One consortium under investigation is composed of Romania’s Enevo Group and a German subsidiary of the Chinese firm Longi Green Energy Technology. Another consortium consists of subsidiaries of Shanghai Electric Group Co. Ltd, a Chinese state-owned company. In the EC’s view there are sufficient indications that both bidders have been granted foreign subsidies that distort the internal market.

In February, the EC launched an in-depth investigation into a public procurement bid by Chinese state owned company CRRC to provide trains for the Bulgarian government (see our commentary here). Following the launch of the probe, the company withdrew its tender offer. This was seen as an early win by the EC, with Commissioner for the Internal Market, Thierry Breton, noting “[i]n just a few weeks, our first investigation under the Foreign Subsidies Regulation has already yielded results”.

The EC has also updated its Q&A relating to FSR concentrations. It has clarified what information companies need to submit in the notification to benefit from certain reporting exemptions, as well as some specific points regarding certain foreign financial contributions. For example, the EC explained that foreign financial contributions granted in the three years before the relevant transaction to a company or business that has been divested or closed must be taken into account when determining whether the FSR notification threshold is met. If the transaction needs to be notified, such financial contributions must be reported in the notification form.

UK updates to phase 2 merger review process should improve engagement and mean earlier focus on issues and remedies

The Competition and Markets Authority (CMA) has implemented a suite of important changes to its phase 2 merger control procedure. This follows a public consultation on ways to improve the process, prompted by the increase in complex multi-jurisdictional cases being reviewed by the CMA post-Brexit, developments in investigatory practices and the CMA’s experience in cases such as Microsoft/Activision Blizzard.

The changes fall into three categories:

1. Improved engagement between CMA and merging parties, including an additional opportunity at the beginning of phase 2 for parties to present their case to the decision-makers and more informal update calls throughout.
2. Earlier focus on the key issues, with a new interim report (replacing the provisional findings decision) setting out the decision-makers’ initial assessment earlier in the process and a revamped oral hearing giving parties the chance to respond.
3. The possibility for earlier “without prejudice” remedies discussions, plus a new phase 2 remedies form and meetings/calls throughout the review to discuss the parties’ remedy proposals.

The CMA has also introduced other procedural changes. It has published a revised notification form and updated confidentiality waiver. Amendments to guidance also make it easier for the CMA to apply the “de minimis exception” (under which it can decide not to refer a transaction for a phase 2 review if it believes that the markets involved are not sufficiently important to justify the reference).

The new procedures apply to all merger reviews opened on or after April 25, 2024.

Overall, the changes are good news for merging parties facing an in-depth merger control investigation in the UK. They should streamline the process, giving parties earlier insight into the CMA’s concerns and more opportunity to respond to these by presenting their arguments and evidence. Early engagement on remedies should also be beneficial, especially where remedy packages are complex and/or involve behavioral commitments.

Egyptian pre-closing merger control regime to apply from June

Egypt has been gearing up for its new pre-closing merger control mechanism for many months. Now, the Executive Regulations (ERs) have been approved and published, and the new rules will take effect on June 1, 2024.

The implementation of the revised regime will mark a fundamental shift from the current post-closing notification mechanism (where the Egyptian Competition Authority (ECA) must be informed about certain transactions up to 30 days after completion) to a system where parties must seek approval from the ECA before they can implement their deal.

Significantly, there will be no grace period after June 1, 2024. Any transactions that have not closed by May 31, 2024, and that meet the relevant thresholds, will be subject to the new regime.

The new rules apply to transactions that amount to an “economic concentration”. Broadly, this is defined as a change of control or material influence occurring through a merger, acquisition or the establishment of certain joint ventures. More detailed guidance – including a safe harbour provision – is set out in the ERs.

Notification is required where one of two thresholds^[1] is met:

1. Domestic Threshold: in the last fiscal year, the combined Egyptian turnover or the value of Egyptian assets of all transaction parties exceeded EGP900 million (approx. USD19m). The Egyptian turnover of each of at least two parties must also exceed EGP200m (approx. USD4.2m).
2. International Threshold: in the last fiscal year, the combined worldwide turnover or the value of assets held worldwide by all transaction parties exceeded EGP7.5 billion (approx. USD158.4m). At least one party must also have an Egyptian turnover exceeding EGP200m (approx. USD4.2m). There is no exemption for transactions which do not have a nexus to Egypt.

Deals meeting either threshold cannot be closed until the ECA grants approval. Parties in breach of this suspension obligation could face significant fines, eg between 1% and 10% of turnover or assets (although it is not clear whether this relates to global or Egyptian turnover/asset values).

Notably, the ECA has the power to review transactions that do not trigger the notification thresholds for up to a year after closing. The ERs set out a non-exhaustive list of when the authority may do this, including transactions that limit innovation or reduce the quality of products or services.

Once the ECA has confirmed that a filing is complete, it has 30 business days to carry out an initial review (extendable by 15 business days). For deals raising antitrust concerns, the ECA may open an in-depth phase 2 investigation and take a further 60 business days (extendable by 15 business days) to issue a decision.

Several elements of the new regime remain unclear and will likely only be clarified once the ECA starts to apply the rules. We also await publication of the filing form. Read more about the new regime and the potential challenges for merging parties in our alert.

U.S. to expand CFIUS’s enforcement and investigative authority

The U.S. Department of the Treasury has issued a proposed rule that would enhance the Committee on Foreign Investment in the United States (CFIUS)’s authority to request and compel information from transaction parties and third parties to covered transactions.

The proposed rule also aims to increase penalties and create new grounds for finding noncompliance with the CFIUS regulations. The maximum penalty for submitting a filing with a material misstatement or omission, for example, would increase sharply from USD250,000 to USD5m per violation. Providing material misstatements or making material omissions in response to CFIUS requests made outside the filing process could incur a new penalty of up to USD5m.

Our alert explains in more detail how the proposed measures would increase the stakes and burdens of compliance with U.S. foreign investment regulations for many transactions. We will provide further updates as the various proposals develop.

Digital & TMT

UK CMA’s AI foundation models review raises “growing concerns”

In September 2023, we reported on the UK Competition and Markets Authority (CMA)’s initial findings in its informal review of competition and consumer protection issues in the development and use of artificial intelligence (AI) foundation models (FMs). The report proposed a set of principles to guide foundation model development and use.

Just seven months later, on the publication of an update paper, the CMA’s CEO stated: “when we started this work, we were curious. Now, we have real concerns”.

The CMA’s paper has noted the number of foundation models is proliferating, with 120 new foundation models released in the six months between the initial report and the update paper. This includes a number of major releases, bringing the total to 330 models globally, with a range of business models including open-source. While this would ordinarily suggest a highly competitive and fast-growing market, the CMA has identified three key interlinked risks to fair, effective and open competition:

1. Firms controlling critical inputs for developing foundation models (including expertise, AI accelerator chips and data) may restrict access to shield themselves from competition.
2. Powerful incumbents could exploit their positions in consumer or business-facing markets (including in apps and platforms) to distort choice in foundation model services and restrict competition in deployment (eg through pre-installation, technical bundling, accessibility, integration and compatibility).
3. Partnerships involving key players could exacerbate existing positions of market power through the value chain (the CMA has identified an “interconnected web” of over 90 such partnerships and strategic investments involving the same six firms).

The authority is ultimately concerned that, if these risks arise in a significant way, businesses and consumers will suffer reduced choice, lower quality and higher prices, and that the flow of innovation and wider economic benefits that AI could otherwise bring will be stunted.

The CMA’s update paper details how the risks would be mitigated by its now finalised guiding principles: access, diversity, choice, fair dealing, transparency and accountability.

In terms of CMA enforcement action, a cloud services market investigation is ongoing. The authority has also committed to step up its merger reviews of partnerships to understand how they could affect competition – it is now seeking views on two such partnerships and Microsoft’s hiring of former employees and related arrangements with Inflection AI, in addition to the partnership between Microsoft and OpenAI. The European Commission (EC) has also stepped into the fray, seemingly seeking to review AI partnerships not under its merger control rules (where the high threshold for “control” may often deprive it of jurisdiction) but as potential anticompetitive agreements.

These reviews do not mean that the CMA or EC will actually find themselves to have jurisdiction, let alone that the terms of the partnerships will be found to breach antitrust rules or require a merger remedy. But businesses making investments in, and partnerships with, leading foundation model developers, as well as strategic hires of key talent, should be aware that this may attract attention from antitrust authorities when a similar arrangement in another sector would not.

On a related front, in preparation for the Digital Markets, Competition and Consumers Bill receiving Parliamentary approval, the CMA is laying the groundwork for deciding which digital activities to prioritise for investigation under the new UK digital markets regime. Notably, it highlights for potential consideration: (i) digital activities that are critical inputs for developing foundation models such as processing capacity; and (ii) digital activities that are critical access points or routes to market for foundation model deployment, such as mobile ecosystems, search and productivity software.

Finally, the CMA flags that, if unfair practices in AI-powered markets emerge, it is ready to use its new powers to directly enforce consumer protection law and impose significant penalties. We discussed the impending sweeping reforms to the UK’s consumer enforcement regime in our March edition of Antitrust in focus.

The CMA will publish a further update on its AI foundation models work in autumn 2024. We will keep you on top of relevant developments in the meantime.

U.S. agencies raise concerns over algorithmic collusion

The U.S. Department of Justice (DOJ) and the U.S. Federal Trade Commission have warned that rival companies’ use of algorithm providers to determine prices risks breaching antitrust laws.

The agencies filed a statement of interest in a case in the hotel sector. It explains that hotels cannot collude on room pricing and cannot use an algorithm to engage in practices that would be illegal if done by a ‘real’ person. The agencies argue that “when a small group of algorithm providers can influence a major segment of a market, competitors are better able to use the algorithm provider to facilitate collusion”.

In the statement, the agencies note that plaintiffs do not need to identify direct communications between competitors to allege an agreement under Section 1 of the Sherman Act, particularly when they allege that an algorithm provider that works with the competitors is acting in concert with them.

In addition, the agencies highlight that an agreement to use shared pricing recommendations, list prices or pricing algorithms is unlawful even when the recommendations are not binding and co-conspirators retain some pricing discretion. According to the agencies, setting or recommending initial starting prices can violate antitrust laws even where the starting prices are not what consumers ultimately pay.

The agencies’ approach is relevant across the economy but will be particularly pertinent in more concentrated markets. Notably, the agencies have filed similar statements in real estate algorithmic price fixing cases and the DOJ has an ongoing case alleging orchestration by a middleman of a meat processing conspiracy. Read more about this DOJ case in our commentary.

Life Sciences

European Commission disparagement case set to be settled with commitments

The European Commission (EC) has invited comments on commitments offered by pharmaceutical company Vifor Pharma (Vifor) to address antitrust concerns over the alleged disparagement of its closest competitor in Europe for intravenous iron treatment, Pharmacosmos’ Monofer.

Almost two years after it opened a formal investigation, the EC has preliminarily found that Vifor is dominant in several markets for the provision of intravenous iron medicines. The authority is concerned that, for many years, Vifor may have abused that dominance by disseminating potentially misleading information regarding Monofer’s safety. According to the EC, these claims primarily targeted healthcare professionals. In the EC’s view, Vifor’s conduct may have unduly hindered Monofer’s uptake in the EEA.

To address the EC’s concerns, Vifor has offered a set of commitments:

• Communication campaign: Vifor would launch a comprehensive and multi-channel communication campaign to “rectify and undo” the effects of its potentially misleading messages about Monofer’s safety. This campaign would include direct clarificatory communication with healthcare professionals in the affected member states, as well as public statements on Vifor’s website and in leading medical journals.
• Promotional conduct: For a period of ten years, across the entire EEA, Vifor would abstain from external promotional and medical communications (written or oral) regarding Monofer’s safety profile, unless the information is from Monofer’s Summary of Product Characteristics or from randomized, controlled clinical head-to-head trials.
• Compliance: Measures and safeguards to ensure compliance would include internal mechanisms to ensure that all external promotional and medical communications, as well as internal training materials, comply with the commitments prior to their use. This would cover annual staff training and a certification system to verify compliance.

A monitoring trustee, appointed by Vifor, would monitor the commitments and report to the EC for ten years.

Vifor is also under scrutiny by the UK Competition and Markets Authority, which launched an investigation a few months ago (its first ever disparagement probe), echoing the EC’s allegations over Vifor’s conduct. You can read more about the UK case in our February edition of Antitrust in focus.

Interestingly, the EC’s other ongoing investigation involving alleged disparagement – into Teva in relation to treatment for multiple sclerosis – covers another novel theory of harm. The EC is also claiming that Teva abused its dominant position by misusing patent procedures by strategically filing and withdrawing secondary and divisional patent applications (sometimes known as the “divisionals game”). Our Life Sciences Talk blog tells you more about the EC’s concerns.

Overall, it is clear that antitrust authorities globally are prioritising antitrust enforcement in the healthcare sector and that many are not afraid to break ground in pursuing new and sensitive theories of harm.

A&O Antitrust team in publication

Recent publications by members of the team include:

Emilio De Giorgi (partner, Milan): Antitrust,Un fondo per litigare. Crescono le azioni risarcitorie delle vittime di illeciti antitrust (Antitrust, A fund for litigation. Compensation actions by victims of antitrust violations are growing) (in Italian, access by paywall), April 6, 2024, Milano Finanza

Footnotes

[1] Foreign currency conversions for the turnover thresholds have been calculated based on the exchange rate applicable on March 2024.