Linklaters Tech Legal Outlook for 2022: Tightening the screws on merger control in digital markets
Digital mergers remain a key area of focus for competition authorities and in 2022 we expect them to continue to tighten the screws of their merger control regimes. In addition, regulators are taking diverging paths on the review of digital mergers and regimes are becoming more difficult to predict, which will have an obvious impact on deal certainty and execution risk. We explore these themes in the blog post below.
Expanding jurisdictional reach
In order to review digital mergers, which often involve nascent companies that generate little or no turnover, regulators are stretching the boundaries of the current jurisdictional rules and seeking new thresholds to bring more deals within their remit.
While the UK has a voluntary merger control regime, the Competition and Markets Authority’s jurisdictional tests, including its ‘share of supply’ threshold (which in practice means an ‘overlapping share of something’ and does not equate to an economic market), are uniquely elastic, giving the CMA the power to review deals that other regulators often could not or would not. The UK Government is proposing to stretch the boundaries even further, so that no overlap in the parties’ activities would be required to assert jurisdiction, which would enable it to capture more vertical and conglomerate deals. In relation to digital mergers involving the largest firms with ‘strategic market status’ (or SMS), the UK proposes to introduce an in-advance reporting obligation for all transactions; a transaction value threshold; and mandatory review for a subset of the largest SMS transactions.
Meanwhile, in the EU, the European Commission has announced plans to use the existing referral mechanism (under Article 22 of the EU Merger Regulation) to address a perceived enforcement gap with regard to acquisitions by incumbents of nascent competitors, particularly in the tech and pharma industries. Under this new approach, the Commission will actively cooperate with national competition authorities to identify candidate cases with no or limited turnover in the EU for review by the Commission where competition concerns could arise due to the elimination of potential competition.
While the US has broad jurisdictional rules, the US competition authorities have also been reassessing whether existing rules for mandatory filings need to be expanded. The Federal Trade Commission has taken steps to overturn some prior informal interpretations that have commonly allowed parties to exempt start-up acquisitions in digital markets following a study of non-reportable transactions in the sector. The Federal Trade Commission has also begun to issue warning letters to parties at the end of their waiting period to remind parties of their residual jurisdiction to challenge transactions after closing.
Meanwhile, China has granted its merger review authority residual jurisdiction to investigate transactions which are below the notification thresholds but may have anti-competitive effect. China’s antitrust guidelines on platform economy specifically note that the merger review authority is highly attentive to transactions involving start-ups or newly emerged platforms, and will rely on its residual jurisdiction to investigate such deals.
Dynamic markets and the standard of proof
It goes without saying that digital markets are dynamic and subject to rapid change: identifying the unicorns of tomorrow and predicting how markets will move is inherently uncertain for experts in the sector, let alone competition agencies. And those agencies have become increasingly preoccupied with the risk of erroneously approving problematic deals.
In order to reduce these so-called “type II errors”, there have been calls for changes to the applicable standard of proof by, for example, reversing the burden of proof or employing a ‘balance of harms’ test. The UK government looks set to lower the standard of proof for Phase 2 mergers involving Big Tech from ‘more likely than not’ to a ‘realistic prospect’ of a substantial lessening of competition.
While the new UK test would only apply to a subset of the largest tech firms and their potential targets, the ramifications will be felt more broadly in what are often global markets – if the UK lowers the standard of proof, then the CMA is more likely to block deals that other regulators clear, unless others move in the same direction.
In the US, the antitrust authorities recently announced a review of their merger guidelines to reflect changes in their current approach to digital markets and other features of the modern economy. With updated guidelines due to be released later this year, the authorities are currently consulting with market participants on topics including the market features of digital platforms, acquisitions of nascent competitors, and aggregation of data. While these changes are expected to set out an interventionist approach, the authorities are still cabined by judicial review that is seen as a significant barrier to enforcement in the sector relative to jurisdictions like the UK. Therefore, legislative initiatives have been tabled in both houses of Congress to create presumptions of competitive harm for certain types of transactions and/or shift burdens of proof to the parties to show that the transaction will not harm competition.
Finding solutions to perceived problems
What happens if regulators find competition concerns – can those concerns be ‘remedied’ by offering undertakings or commitments, and how will regulators approach such remedies?
While the European Commission has been willing to accept complex ‘behavioural remedies’ (i.e. involving conduct-based as opposed to structural commitments) in tech sector deals, the CMA’s position is that the behavioural remedies accepted by the Commission would likely have been rejected in the UK were the CMA to have had jurisdiction (as they have been rejected in Australia). The CMA has released a joint statement with the German and Australian competition regulators arguing that the “increasing complexity of dynamic markets and the need to undertake forward-looking assessments require competition agencies to favour structural over behavioural remedies.” In the US, the authorities have been outlining a policy approach that is increasingly sceptical of both behavioural and structural remedies under their current leadership.
Thus, the difference in substantive assessment may result in increasing tension. And even where different regulators identify similar concerns, there is still a risk that alignment on remedies will not be possible.
John Eichlin, Counsel, Lauren O'Brien, Managing Associate and Larry Zhou, Managing Associate at Linklaters
At Linklaters we are following closely and mapping out developments in all major economies. Explore our 2022 report for more details on the legal outlook for the tech sector in 2022 and of our global team of tech-focused experts who cover the full spectrum of relevant legal issues. See also our Global Fintech Trends 2022 for insights specific to the fintech vertical.