Corporate dealmaking is under the spotlight with a more ‘activist’ approach from regulators and competition authorities. In-House Perspective investigates what this means for in-house counsel.

A recent omnibus bill passed in the US in December included measures that raised the eyebrows of antitrust experts. It introduced a new requirement that companies in a proposed deal identify whether or not there’s a foreign subsidy involved in the transaction, even behind the scenes, when filing merger notifications. The new rule in effect introduces a version of the EU’s extensive foreign subsidy regime – and yet another factor that parties to a transaction will need to address. The bill also outlined increased filing fees for larger transactions. The fee has gone up from $280,000 to a staggering $2.25m for transactions over $5bn.

The bill’s new measures indicate that greater activism from the US Department of Justice (DoJ) and Federal Trade Commission (FTC) in the antitrust space is the direction of travel. Daniel Swanson, a former Co-Chair of the IBA Antitrust Section and a partner at Gibson Dunn in Los Angeles and Brussels, says ‘We have not seen this level of activity from the Government agencies in many years, perhaps decades. Even though these things tend to go in cycles, this feels like a multi-decade high point in terms of the level of civil cases, investigations and policy initiatives over the past one or two years’.

Indeed, the increased fees are intended to resource the antitrust authorities so that they can bring more cases and undertake more investigations. As the US Senator Amy Klobuchar put it: ‘We cannot expect our antitrust enforcers to take on the most powerful companies the world has ever known with duct tape and Band-Aids. By restructuring outdated merger filing fees, our bipartisan legislation will enable Congress to get much-needed resources to our antitrust enforcers so they can protect competition.’

A recent legal victory for the DoJ in respect of Penguin Random House’s now abandoned acquisition of Simon & Schuster is one high profile example. The proposed deal involved two of the ‘big five’ publishers in the US (HarperCollins, Hachette Book Group and Macmillan alongside Penguin Random House and Simon & Schuster). According to the US government’s statistical analysis, if the merger had gone ahead, the remaining ‘big four’ would have had a 91 per cent market share of anticipated bestsellers.

The DoJ won the case and the merger was blocked, with Judge Florence Pan concluding that the proposed merger would cause substantial harm to competition in the bestseller rights market. Following the decision, Bertelsmann, which owns Penguin Random House, reiterated that it was the best ‘creative home’ for Simon & Schuster where the latter could operate ‘independently’. In response to a request for comment, Simon & Schuster directed the In-House Perspective’s sister publication, Global Insight, to a statement from November 2022 outlining that Paramount, which owns Simon & Schuster, has terminated its agreement to sell the company to Penguin Random House, and that there will be no appeal of the Court’s decision.

This renewed interest in antitrust is deliberate policy. In July 2021, US President Joe Biden issued an executive order with anti-competitive practices in its sights, stating that: ‘Capitalism without compensation isn’t capitalism. It’s exploitation.’ The order lists a number of actions aimed at ‘enforcing the antitrust laws to meet the challenges posed by new industries and technologies’.

The Biden Administration has also laid its cards on the table with two key appointments. Firstly, in June 2021, Lina Khan was given the chairmanship of the FTC. Khan represents new thinking that is critical of the dominance of Big Tech (namely Google, Apple, Microsoft, Meta) and Amazon, and is increasingly concerned about these companies’ powerful grip on their markets. A few months after Khan’s appointment, Jonathan Kanter, who has been involved in cases against Google, became Assistant Attorney-General of the DoJ’s Antitrust Division.

Renewed fervour from the US agencies has yet to be borne out by the statistics, however. There were around 18 challenges to mergers from the FTC in 2021, and 14 challenges by the DoJ, among over 3,500 total transactions notified in that year, according to the FTC’s most recent annual report. Anecdotally, practitioners say that the number of investigations and cases is increasing. Data on antitrust cases for 2022 may, therefore, tell a different story, when available.

Where’s the harm in that?

It’s also not only about absolute numbers. Experts argue that the shift is as much about emphasis. This can be seen from the Penguin Random House case. In it, the US government didn’t argue against the merger on straight consumer protection and price grounds – ie, that it would make books more expensive – it argued that authors would be paid less. The trial focused on the bidding wars for the rights to bestsellers, which are what drive publishing businesses, with the top four per cent of bestsellers accounting for 60 per cent of profitability. Put simply, the DoJ successfully persuaded the Court that further consolidation in publishing would reduce those competition auctions for the bestsellers and – the key point here – authors would lose out.

Ben Bleicher is Chief Counsel – Finance & Corporate at global mining group Rio Tinto and has been its global adviser on competition law and policy since 2015. He tells In-House Perspective that ‘The competition authorities in the EU and the US appear to be broadening their approach. They are no longer exclusively focusing on what we might call “traditional” competition concerns and areas of harm such as pricing, and are now looking at a broader range of concerns around labour policy, the environment, data protection, and other public interest criteria’. He adds that the way the authorities analyse the price paid for a good or service can vary depending on context. ‘It’s not just about having the lowest price or cost; it also requires analysing potential impacts across a broad range of stakeholders,’ says Bleicher.

But these are new areas of focus that make the adviser’s job of predicting whether or not a proposed acquisition will require notification and will be caught by the authorities much harder. ‘These other aspects of harm can be more difficult to measure, and present issues that antitrust authorities might now consider to be relevant’, explains Bleicher.

Thomas Janssens is a former Co-Chair of the IBA Antitrust Section and a partner at Freshfields in Brussels. He agrees that the issue of harm in competition law is being more expansively addressed. ‘The authorities are using all the tools at their disposal: not only looking at the risks to consumers, but also at where the harm is (taking a cross-jurisdictional approach),’ he says. ‘There are different theories of harm, such as the acquisition of data, that could increase market power.’ The authorities will look at ‘the whole ecosystem in which companies are operating,’ adds Janssens.

Not everyone sees this as a new focus, though. Natalie Salunke, General Counsel at Zilch, the fintech company and credit app, argues that the authorities are looking at antitrust/competition laws through a policy lens as they always have done, but the policies are shifting. ‘I have always seen competition laws and policy as a consumer detriment piece with politics laid over the top,’ she says. ‘It’s just that the politics are changing.’

The result for in-house counsel is that they can find themselves fighting on many different fronts. Bleicher puts forward a conundrum that companies face: that a business may be attempting to address one policy-driven problem only to find that the solution to this creates another problem somewhere else. ‘In a post-COP27 world, climate change and decarbonisation are at the core of government policy and we [at Rio Tinto] want to play our part in that and look carefully at ways to achieve ESG [environmental, social and governance] goals.’ He adds that ‘one of the most effective and quickest ways of responding to this shift in public policy and shareholder priorities is to collaborate on ESG solutions. But when companies collaborate, it is necessary to ensure these efforts comply with antitrust and competition law requirements’.

Greater activity from the authorities in investigating deals means more work – and work earlier on – for in-house lawyers, says Bleicher. ‘Bear in mind that your job is to attempt to maximise transactional certainty. To achieve that you are having to go “deeper and sooner”. You have to look at deals in more detail and earlier on. The business makes a provisional decision to acquire a company and you have to frontload the work: you will have to do a full analysis, which requires a multijurisdictional and economic approach, right from the outset.’ This needs internal and external support so the team’s costs go up.

‘You have to see everything through an economic lens, conducting not only a merger control assessment but also an economic assessment of a deal,’ adds Bleicher. ‘You may well engage competition economists and you need to be able to understand the implications of what they might advise.’

Deals delayed

As referred to above, on the figures available currently, the number of mergers being blocked is still very low when compared with the numbers getting through. But for in-house counsel, this isn’t the whole point. Even if deals are getting through, they are doing so after significant delay. The impact of delay on an acquiring business and the proposed target is huge. Salunke explains that ‘a phase one or two investigation can take a long time and while the authorities are taking their time, the world could change completely in six months. Is your target acquisition still going to be worth the same amount after that? You can’t influence the company that you are hoping to acquire but at the same time you may be bound to buy it so whether it is being managed properly in the meantime, and the value of the asset, are ongoing concerns’.

In mergers and acquisitions, the problem of delay – and cost – is generally pushed onto the buyer, highlights Salunke. ‘We are seeing that warranty and indemnity insurance is becoming more commonplace – and that’s new,’ she says. ‘A decade ago, you would not have had to do that.’ Another deal feature becoming more common is a ‘hell or high water’ clause. This clause, in effect, commits the buyer to acquire the asset with only a very narrow set of circumstances that permit the buyer to walk away – such as, for example, where a regulator won’t clear an acquisition or the acquisition would result in the group having to divest other assets – and ensures that it’s the buyer who takes the risk. ‘There are only very limited conditions where the deal won’t complete,’ says Salunke, ‘so you have to be very sure.’

In the UK, where notification of a proposed deal to the authorities is not mandatory, it’s a gamble, Salunke says. ‘The onus is on the acquiring entity to get comfortable on the approach. Are you going to notify and risk a phase one investigation? If you don’t notify, and then are later faced with an investigation, then that’s very difficult. But if you do notify, you are making a lot of work for yourself, perhaps needlessly. We know that certain sectors may at any time be attracting the authorities’ attention, and it obviously matters how many other players are in the sector. It’s a huge decision.’

The UK and EU perspective

As can be seen, the US agencies are not alone in this renewed activism: authorities in the UK and the EU have become more active in both challenging, and, potentially, blocking or remedying, proposed mergers. Activity has, says Janssens, ‘moved up a gear’. Although, so far, in the UK, the total number of merger control decisions, to end December 2022, is less than 2021 – at 35 to 55 – the number of what Janssens refers to as ‘significant interventions’, where deals are prohibited or abandoned by the parties, or where remedies are agreed, is greater. Here, the numbers are up from 11 in 2021 to 20 in 2022.

For the European Commission, again, though the total number of merger notifications has actually dropped from 405 in 2021 to 371 in 2022, the nature and outcomes of those notifications has changed: there have been more remedies, and more deals blocked or abandoned. In 2021, there were 14 significant interventions, and in 2022 there were 18 such interventions. Indeed, there were no prohibited mergers in 2021, but in 2022 the Commission blocked two.

One example of the Commission ‘moving up a gear’ is it accepting jurisdiction to review cases even though a notification threshold hasn’t been met. This is what happened in 2022 during a proposed acquisition of Grail by Illumina. Illumina is a DNA sequencing company. It created a subsidiary, Grail, which owns Galleri, a test for the early detection of cancer. Grail was then spun off. But in 2020 Illumina proposed to buy it back, for $8bn. In September 2022, the Commission blocked the deal. It took up the case using powers set out in Article 22 of the EU Merger Regulation. These powers enable the Commission to invite national competition authorities to request a referral of a deal being proposed in a Member State, regardless of what the national competition position is.

This has significant implications, particularly for companies whose markets are across several EU jurisdictions. Philipp Girardet is Chair of the European Competition Practice Group at Willkie Farr & Gallagher and based in the UK. He says the development ‘is bad for companies which are trying to assess – before doing a deal – which authorities may review their deal, and whether these reviews may delay or complicate the closing of the transaction’.

Everywhere always

Jurisdictional expansion is an increasingly significant theme in the antitrust/competition law space even without the Article 22 powers. Companies may find that a proposed deal is challenged in a number of different countries, each in slightly different ways. ‘There is a domino effect here as authorities in different jurisdictions talk to each other so a merger may be challenged in many different markets,’ says Sharis Pozen, co-chair of the Global Antitrust Group at Clifford Chance, who’s based in Washington, DC. Though antitrust authorities have always cooperated, she observes that the level of cooperation and liaison has reached new heights. ‘They are sharing information and knowhow at an unprecedented level, and not only between the CMA [the UK’s Competition and Markets Authority], the European Commission, the FTC and DoJ, but also with authorities in China, Brazil and India for instance. Corporates find themselves investigated on many different fronts.’

Bleicher’s point about ‘deeper and sooner’ is crucial here. Part of in-house counsel’s due diligence when a deal is being considered will be from a jurisdictional standpoint. Bleicher says that ‘Jurisdictional uncertainty is a real problem. There are around 140 different merger control regimes. In the past, a filing assessment primarily involved checking the deal value or the transaction parties’ turnover against a set of “bright line” jurisdictional thresholds; you would know with some level of certainty that if the deal value or the parties’ turnover was above or below a certain level, then jurisdictional issues would be relevant’.

But now there could be a number of additional considerations that need to be taken into account when conducting a merger control assessment, he explains, such as supply/market share, value of assets and ‘vaguely defined’ concepts such as being ‘significantly active’ in a jurisdiction. ‘In addition, for certain jurisdictions, the thresholds that apply may vary depending on factors such as deal value or the sector in which companies are involved, among other potential considerations,’ adds Bleicher.

There’s also the fact that we’re talking about the EU and the UK as separate systems, as a result of Brexit. Shaukat Ali, Head of LexisPSL Competition at Lexis Nexis, explains that ‘Brexit means that the CMA is now independent from the “one-stop-shop” of the EU merger control regime and is able to pursue its own merger control investigations into international transactions in parallel with those other authorities. Parties will have to give separate consideration to what the CMA might do or not’.

Businesses must bear in mind that, as time passes, there may be greater divergence between the UK and the EU. ‘The UK is starting to do its own thing from when we were operating under EU law – though we are not sure in what ways yet,’ Salunke says. ‘The current political agenda is pushing “UK Plc”, emphasising that we are free from being governed by trends in the EU now.’  

The antitrust and competition law agenda is just one of many legal conundrums that in-house counsel must grapple with. But, as Bleicher observed, solutions in one area can often cause problems in others. In-house counsel are not operating in a vacuum and must give advice in the context of the business’s overall needs and ambitions. ‘A key part of my role is to collaborate with other parts of the business,’ says Salunke. ‘There is a legal test to consider in competition law but it’s just as much about: What is our policy on this? What do the shareholders think? What’s the temperature of the authorities? I have to input into that and listen to, and work together with, the senior team to decide what’s the right course of action.’ In the face of greater activism from the authorities, identifying that correct course of action just got that bit harder.

Note: The IBA’s Mergers Working Group of the Antitrust Section has recently published a comprehensive guide to how mergers are treated from a competition law perspective across 22 different jurisdictions: https://www.concurrences.com/en/all-books/competition-law-treatment-of-joint-ventures-109114