European Commission opens first phase 2 M&A foreign subsidies investigation
The European Commission (EC) has opened an in-depth investigation to assess the proposed acquisition by the Emirates Telecommunications Group Company (e&) of sole control of PPF Telecom’s non-Czech businesses (i.e., its telecoms operations in Bulgaria, Hungary, Serbia, and Slovakia).
It is the first merger to face an in-depth probe under the EU Foreign Subsidies Regulation (FSR) since the new regime started to apply in July 2023.
It is also the first in-depth review of non-Chinese investment. As previously reported, the EC’s in-depth public procurement investigations (each of which resulted in the relevant bidders subsequently withdrawing their tenders) and own-initiative probes have so far all targeted Chinese firms.
After a preliminary investigation, the EC considers that there are “sufficient indications” that e&—a state-controlled telecoms operator based in the UAE—may have been granted foreign subsidies that could distort the EU internal market.
The EC is looking at three types of alleged subsidies:
- An unlimited guarantee, granted by the UAE in the form of an exemption from UAE bankruptcy law. The EC believes this is “liable to enable e& to obtain more favourable financial terms in its negotiations with financial institutions, which has materialised in the three years preceding the conclusion of the agreement”.
- A term loan from a syndicate of five UAE-controlled banks, used by e& to finance the transaction. According to the EC there are “sufficient indications” that this “was not obtained under normal market conditions”.
- Possible other foreign financial contributions that may qualify as foreign subsidies, including in relation to contracts awarded to e&.
As the EC notes, both of the first two types of subsidy fall within the FSR’s “categories of foreign subsidies most likely to distort the internal market”. The EC has concerns that they may have “improved e&’s capacity to perform the acquisition as well as the competitive position of the merged entity in the EU going forward, notably by improving its capacity to finance its EU activities at preferential terms”.
During its in-depth investigation, the EC will assess whether:
- The foreign subsidies lead to actual or potential negative effects on, or altered the outcome of, the acquisition process, including by allowing e& to “deter or outbid” other companies interested in the acquisition and/or by allowing e& to make the acquisition in the first place.
- The foreign subsidies lead to actual or potential negative effects in the internal market with respect to the merged entity’s activities.
We will report on the outcome of the EC’s investigation as well as any clarification on the application of the FSR’s “balancing test”. This test could be used by the EC to determine whether any positive effects of the transaction outweigh any negative effects of foreign subsidies. The authority has until October 15, 2024 to make a decision. It is also due to issue guidance on the balancing test by July 2024.
Chinese merger control reviews see longest stop-the-clock so far and tougher gun-jumping fines
This month we saw China’s State Administration for Market Regulation (SAMR) reach its first conditional merger control clearance of 2024: JX Advanced Metals’ acquisition of Tatsuta Electrical Wire and Cable.
The authority was concerned that the deal might restrict competition in the Chinese markets for various electronic components. To gain approval, the parties agreed to a package of remedies. These include refraining from tying or bundling, continuing to supply certain products to Chinese customers on fair, reasonable, and non-discriminatory terms, and refraining from reducing compatibility with third party products.
The decision is another example of SAMR’s willingness to accept behavioral commitments, continuing a long-standing trend. See our latest global trends in merger control enforcement report for more on this.
SAMR’s use of its stop-the-clock powers in the case is also significant.
The stop-the-clock mechanism was introduced into the Chinese merger control regime in 2022. It aimed to inject greater flexibility into the review process and replace the previous process of withdrawing and refiling notifications if SAMR was unable to complete its assessment by the statutory deadline.
SAMR has been keen to apply its new powers. It stopped the clock in three of its four conditional clearances in 2023 and now again in the JX/Tatsuta review. This suggests that the mechanism is likely to become a common practice, particularly in cases involving remedy negotiations and market tests.
However, the lengthy pause in this case—11 months—may ring alarm bells for parties to upcoming deals with a Chinese nexus. It is almost double the longest stop-the-clock period (six months) that we saw in 2023. Whether this represents a move by SAMR to impose longer stop-the-clocks more generally, or simply reflects the particular features of this case, should become clearer as more precedents emerge.
This month has also been notable in yielding SAMR’s first gun-jumping fines since 2022 amendments increased the maximum penalty for deals raising no antitrust concerns to RMB5 million (approx. EUR650,000). This is ten times the previous level.
SAMR has sanctioned Shanghai Highly Group and Qingdao Haier Air Conditioner RMB1.5m (approx. EUR200,000) each for completing the business registration of their new joint venture before obtaining merger clearance.
Interestingly, the fines were well below the RMB5m cap. SAMR notes that the parties took steps to remedy their conduct, including establishing a merger compliance system. This is likely to have been a factor when setting the level of the penalty—recent merger compliance guidelines state that the authority will take into account a properly deployed merger control compliance management system when investigating gun-jumping. The fining decision also highlights other relevant considerations, including the nature and duration of the breach, whether the companies are first-time offenders, and whether the companies actively cooperated with the investigation and provided relevant evidence.
After a period of nearly two years without a published gun-jumping fine, this case is likely to capture the attention of merging parties. Procedural enforcement of merger control rules is back on SAMR’s agenda.
All eyes will now be on how SAMR’s fining practice evolves and whether it will make use of its powers to impose even greater penalties (up to 10% of turnover or even higher for serious violations) where parties implement a concentration in violation of the merger control regime that is ultimately found to be anticompetitive.
U.K. government expands repertoire of national security mitigation measures
The first half of 2024 has seen the U.K. government conditionally approve six transactions under the U.K.’s national security regime.
In May, it imposed a package of commitments to address national security concerns relating to Intelligent Safety Electronics’ (ISE) acquisition of 100% of FireAngel Safety Technology. The U.K.-based target distributes products including smoke alarms and heat sensors, as well as software applications which support its internet-enabled devices. ISE is wholly owned by a Chinese high-tech manufacturer, Siterwell Electronics.
Notices of final orders published by the government do not generally provide much detail on the national security risks identified or any conditions ultimately imposed. However, in this case, the conditions apparently contain some novel elements.
To address national security concerns relating to “the potential for access to data”, the parties have been ordered to appoint a dedicated chief information security officer with U.K. security vetting clearance. The officer will oversee requirements relating to infrastructure, data handling, access to IT systems, and software and firmware updates.
In addition, the parties must implement security protocols for visitors and secondees to FireAngel Group sites and meet certain requirements related to the design of networked products, such as the continued screening of samples by an accredited testing authority.
The remaining requirements relate to corporate governance—certain members of the executive committee and board of directors will need U.K. security vetting clearance. Together with requirements to maintain strategic capabilities in the U.K. and/or continuity of supply to the U.K. government, such board composition conditions more commonly feature in the government’s final orders.
Most recently, the government has conditionally approved a joint venture between the University of Liverpool and Chinese electrical engineering company Pinggao Group. The parties plan to establish an institute to undertake research in energy and power technologies, including renewables.
To address national security concerns relating to access to the university’s wider research and intellectual property, the clearance is conditioned on the university establishing an “Insider Threat Stakeholder Group”, overseen by a chair with U.K. security vetting clearance. The group will be responsible for ensuring the university’s work is protected and will oversee policies and processes in relation to the institute’s personnel, e.g., in relation to additional research bids, physical access and access to business systems. The government must approve the group’s terms of reference before the institute is established.
Notably, this case is the fourth conditional approval involving an asset acquisition. The government’s revised statement setting out how it expects to exercise its power to call in acquisitions highlights an increasing focus on whether asset acquisitions allow the transfer of technology, intellectual property or expertise to an acquirer, or parties linked to an acquirer, which could undermine or threaten national security now or in the future.
Since the NSIA came into force in January 2022, the U.K. government has notched up five prohibitions and 18 conditional clearances, with Chinese investment attracting the most scrutiny and intervention covering a wide range of sectors.
Our summary of the U.K. national security regime takes you through the notification and review process, potential outcomes, and enforcement. Parties to deals falling within its scope should ensure they build into the transaction timetable the time necessary to notify and obtain approval and include appropriate contractual protections in deal documentation.
European Commission imposes novel dawn raid obstruction fine
It is well known that the EC will readily investigate and impose fines for obstruction during unannounced antitrust inspections. The authority has fined companies for breaking EC seals—E.ON EUR38m in 2008 and Suez and a subsidiary EUR8m in 2011—and fined Czech energy companies EUR2.5m in 2012 for changing passwords on blocked accounts and attempting to redirect emails from key personnel inboxes. It has also increased a substantive fine for refusing to answer oral questions and shredding documents during an inspection.
This month the EC went a step further and imposed its first fine for the deletion of messages exchanged via social media apps on a mobile phone.
It has fined International Flavors & Fragrances (IFF) EUR15.8m after a senior employee intentionally deleted WhatsApp messages exchanged with a competitor containing business-related information. The obstruction took place in March 2023 during dawn raids in the consumer fragrance sector.
The EC has used the case to signal two key messages.
First, the authority’s forensic IT experts are armed with cutting edge tools to detect any deletion or manipulation of electronic information during inspections. EC inspectors detected the IFF deletion themselves after the mobile phone was submitted for review. They were ultimately able to recover the deleted data.
Second, the EC’s cooperation procedure extends to procedural infringement cases. Given the seriousness of the breach, the EC concluded that a fine amounting to 0.3% of IFF’s total turnover (out of a legal maximum of 1%) would be both proportionate and deterrent. However, it rewarded IFF for its proactive cooperation during and after the inspection and for acknowledging liability and reduced the fine by 50% to 0.15% of IFF’s total turnover.
Summing up, Competition Commissioner Margrethe Vestager notes that companies must ensure that employees do not delete or manipulate business records, including communications on mobile phones. The EC will “firmly pursue and sanction” any action that could impact the effectiveness of its investigations.
Hungarian court ruling highlights difficulties of challenging a merger under abuse of dominance rules
The European Court of Justice (ECJ)’s landmark ruling in Towercast confirmed that Member State antitrust authorities can use abuse of dominance rules to assess deals falling below national merger control thresholds.
In last month’s Antitrust in focus, we reported on a French case that applied the Towercast ruling to assess whether a series of transactions that did not meet French merger control thresholds nevertheless breached antitrust rules.
Most recently, we have seen the Towercast principle considered by a Hungarian court.
The case related to the acquisition by Hungarian telecoms and IT company 4iG of a controlling stake in Vodafone Hungary. The deal met Hungarian merger control thresholds, but was declared as having “an importance of national strategy” by the Hungarian government. It was therefore exempt from the Hungarian merger control regime.
The Hungarian Competition Authority (GVH) received a complaint about the deal, relying on Towercast and asking the authority to review it under EU and national abuse of dominance rules. The GVH rejected the complaint and the complainant appealed this decision.
The Hungarian court ultimately sided with the GVH.
It ruled that the authority had no powers under national law to review the deal, given the government’s declaration that it was a strategically important transaction. Given that the substantive test under the Hungarian merger control regime contains an abuse of dominance test, allowing a transaction to be assessed as a possible abuse of dominance in these circumstances would circumvent the exemption regime.
The court also held that the GVH was justified in deciding not to examine the deal under EU abuse of dominance rules. In particular, the complaint defined the relevant markets as not wider than national. As EU antitrust rules only apply where there is an effect on trade between Member States, the court was satisfied that there was no basis for a GVH investigation. The court also held that the GVH had some flexibility in deciding whether or not to apply EU abuse of dominance rules when enforcing the national merger control regime.
The case highlights two key hurdles faced by complainants and antitrust authorities when seeking to challenge a transaction under abuse of dominance rules.
First, one of the parties must be dominant. In a number of the markets impacted by this transaction (e.g., mobile telephony and fixed line telecoms), the deal would have resulted in a reduction from four to three players. These markets were not addressed in the complaint, presumably due to the difficulty with showing that either party held a dominant position given the presence of other market players.
Second, the need to show that the transaction would affect trade between Member States. This is normally a relatively low bar to meet. But where local markets are involved, this could well be crucial in taking the deal out of scope of the EU antitrust regime.
You can read more about the case in our alert.
North Carolina hospital deal abandoned despite FTC court loss and successful failing firm arguments
Novant Health has announced it will walk away from its acquisition of two North Carolina hospitals from Community Health Systems (CHS). It says it has been “met with opposition” from the Federal Trade Commission (FTC) “at every step” and the agency’s “continued roadblocks” mean that it does not see a way to finalize the transaction.
In January 2024, the FTC filed an administrative complaint challenging the deal, which was agreed by the parties in early 2023. In March, the FTC moved for a preliminary injunction in federal district court to prohibit Novant from consummating its acquisition until the administrative hearing.
The agency alleged that the transaction would allow Novant to control nearly 65% of the market for inpatient general acute care services in a particular area of North Carolina. It said that this would likely lead to increased annual heath care costs (that would be passed on to patients) and would reduce Novant’s incentives to compete and improve the quality of its offering. Significantly, the FTC claimed the deal was presumptively illegal under the revised U.S. Merger Guidelines, which provide a structural presumption of illegality for mergers resulting in a market share of 30% or more.
This month, a U.S. District Court denied the FTC’s request for a preliminary injunction.
The court accepted the parties’ arguments that both CHS hospitals were in financial difficulty. It found that one hospital (Davis) would close without the transaction. It concluded that, due to lack of capital investment, the other hospital (Lake Norman) had a relatively insignificant competitive position. Its sale to Novant would therefore be at least as likely to enhance competition as to reduce it.
The court also found that, despite efforts by CHS to sell the hospitals to other acquirers, there were no other bidders.
The court assessed whether it would be in the public interest to grant an injunction. It concluded that immediate harm to competition was unlikely and that the risk of losing critical medical services outweighed the potential harms that could be caused by the transaction.
Our Need-to-Know Litigation article tells you more about the parties’ arguments and the court’s reasoning.
The District Court’s ruling, however, was not the end of the story. The FTC filed a motion on June 10 stating its intention to appeal the ruling and seeking an injunction pending appeal. Just over a week later, the Fourth Circuit Court of Appeals granted the FTC’s bid, prohibiting the merging parties from closing their deal pending the outcome of the appeal. A hearing before an administrative judge in the FTC’s administrative review process was also scheduled for late June.
For Novant, despite its success in the District Court, the FTC’s persistence in opposing the deal was apparently too much. The deal joins the growing tally of transactions abandoned this year due to enforcement activity by the U.S. antitrust agencies.
The case is nevertheless an important one. It shows how parties can (before the district court, at least) put forward a compelling case that the “unique circumstances” of the relevant market and the parties themselves should overcome the structural presumption of illegality in the Merger Guidelines. It is also a rare example of parties managing to meet the high bar needed to satisfy the “failing firm” and “weakened competitor” defenses.
EU’s top court upholds aspects of Servier pay-for-delay infringement but sends points back to lower court for another review
In a significant ruling, the ECJ has confirmed that agreements concluded between Servier and several generic manufacturers breached EU antitrust rules. However, following Advocate General Kokott’s opinion, it disagreed with the General Court’s findings on other aspects of the case—including on abuse of dominance and agreements between Servier and generic company Krka—and has asked the General Court to take another look.
The case stems from 2014 EC findings that Servier entered into anticompetitive “pay-for-delay” settlement agreements with several generics manufacturers in relation to the hypertension drug perindopril. Under these agreements, in return for payments from Servier, the generics manufacturers committed not to dispute patents relating to the drug and not to enter the market with generic versions of it. The EC also concluded that Servier abused its dominant position by implementing a strategy of exclusion. Total fines of EUR438m were imposed.
On appeal, the General Court partially annulled the EC’s decision. It upheld most of the agreements as anticompetitive but ruled that the EC failed to prove that arrangements between Servier and Krka breached EU antitrust rules. The court also overturned the abuse of dominance finding, saying that the EC wrongly defined the relevant market. It reduced Servier’s fine from EUR331m to EUR228m.
The ECJ’s ruling is important as further confirmation of the framework for analyzing pharma pay-for-delay arrangements. Watch out for our upcoming alert, which will give you more commentary on the ruling and its implications.
European Commission greenlights first Important Project of Common European Interest in the health sector
The EC has approved an Important Project of Common European Interest (IPCEI)—IPCEI Med4Cure—under which six EU Member States will provide up to EUR1 billion in public funding in the health sector.
The aim of the project is to enhance drug discovery, in particular for unmet medical needs such as rare diseases, and to develop innovative and more sustainable production processes for pharmaceuticals.
The public funding will go towards research and development projects covering all key steps in the pharmaceutical value chain. It is expected to unlock an additional EUR5.9bn in private investments and have positive spill-over effects across the EU.
Read our life sciences blog post to find out more about the scope of the project and how it met the EC’s state aid conditions. We also consider how IPCEIs are driving EU-based innovation in other developing industries, including microelectronics, batteries, hydrogen and next generation cloud infrastructure.
Need-to-Know: updates on U.S. antitrust litigation
Our Need-to-Know Litigation Weekly publication analyzes notable U.S. litigation decisions, orders, and developments. From an antitrust perspective, we have featured the following cases over the past month:
- U.S. District Court for the Western District of North Carolina denies FTC bid to block North Carolina hospital deal (read here, and see the article above)
- Wisconsin District Court dismisses motorcycle purchasers’ tying claims (read here)
-DOJ fails to secure jury trial in adtech monopoly suit after damages claim mooted by USD2.3m cashier’s check (read here)
You can access Need-to-Know Weekly in full here. If you would like to be added to the distribution list, contact us at litigation_weekly@aoshearman.com.
A&O Shearman Antitrust team in publication
Recent publications by members of the team include:
- Dominic Long (Deputy Global Head of Antitrust, London/Brussels) and Chris Best (counsel, London): contributed to National Security: Law, Procedure and Practice, Second Edition, May 2024, Oxford University Press
- Richard Macko (associate, Bratislava): Publication of a judgment at the costs of the losing party in unfair competition lawsuits, Bulletin of Slovak Advocacy, 2024, No. 3, pp. 17-25 (available in Slovak original only)
- Emilio De Giorgi (partner, Milan): Lavoro, la lente della Ue sugli accordi tra aziende per fissare salari e non rubarsi talenti. Ecco il quadro (Work, the EU lens on wage-fixing and no-poach agreements between companies. Here's the framework) (in Italian), June, 1 2024, Repubblica.it
Also this month, Hugh Hollman (partner, Washington D.C.) spoke on behalf of the BIAC at an OECD roundtable discussion: The Intersection between Competition and Data Privacy. See here for an accompanying paper, drafted with the assistance of Pauline Van Sande (associate, Brussels).
