In this episode of "Fierce Competition," Skadden antitrust attorneys Niels Baeten, Joseph Rancour and Julia Zhu delve into merger enforcement, focusing on transactions that fall below regulatory thresholds but are still investigated by antitrust authorities around the world. The discussion explores which jurisdictions have the authority to review a transaction, how enforcement is implemented and potential future developments in merger oversight.
Episode Summary
Antitrust regulators throughout the world often use their authority to review transactions that fall below filing thresholds. Host Julia Zhu invites Skadden colleagues Joseph Rancour and Niels Baeten to discuss how these deals fit in the global regulatory picture. The three antitrust attorneys cover ways in which enforcement is carried out, how deal-makers know if their transactions are called in and what the future holds in this area. Joe describes the legal frameworks and enforcement activities in the U.S., Niels discusses the environment in the EU and U.K. — including implications of the European Court of Justice’s landmark ruling in Illumina/Grail — and Julia covers the view among regulators in the Asia-Pacific region.
Key Points
- Illumina/Grail: The European Court of Justice ended the European Commission’s practice of reviewing transactions that fell below EU and any national member state thresholds. This issue will be a key focus for the European Commission in the coming months.
- U.S. Landscape: Regulators can and do investigate transactions that fall under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) thresholds if they pose competition concerns.
- SAMR’s Power: China’s antitrust regulator, the State Administration for Market Regulation (SAMR), has indicated that it will pay close attention to “killer acquisitions” involving pharmaceuticals and platform economy.
- Japan and South Korea: Japan has expressed concerns about “killer acquisitions,” but when a voluntary filing is initiated, regulators have employed a measured approach. South Korea, on the other hand, pursues merger enforcement aggressively — evident in high-profile cross-jurisdictional cases, including those that fall below the threshold.
- India: Its competition commission indicates that it has no authority to review below-threshold transactions, but it can initiate an ex officio investigation to assess whether thresholds are met or not.
Voiceover (00:00):
Welcome to Fierce Competition, a podcast from Skadden’s global antitrust and competition group that explores antitrust policy and enforcement around the world. Join our colleagues from across the continents as we discuss the latest developments and what they mean to you in an increasingly complex legal and regulatory landscape.
Julia Zhu (00:21):
Welcome to the new episode of Fierce Competition. My name is Julia Zhu. I am a council on Skadden’s International Competition team in China. In this episode, we zoom into a particular type of merger enforcement that is transactions that fall below the thresholds but are nonetheless still being investigated by antitrust authorities around the world. We’ll discuss which jurisdictions have such power to call a transaction in, how is such enforcement carried out, how would deal makers know if your transaction will be called in and at last, what our listeners should expect from future merger enforcement in this regard. With great delight, I’m joined by Joe Rancour, our partner in our Washington DC office, and Niels Baeten, a partner in our Brussels office. Welcome, Joe and Niels.
Joseph Rancour (01:10):
Hello, everyone.
Niels Baeten (01:11):
Hi, everyone.
Julia Zhu (01:11):
To set the scene, Niels, the European Court of Justice’s final decision in Illumina GRAIL last month on September 3rd has sparked considerable discussions. We know that the EU system of merger control is in principle based on turnover thresholds above which the EC has exclusive jurisdiction. As a supplement to that, the EU regime also provides an avenue, namely Article 22 of the EU Merger Regulation, which serves as an upward referral mechanism to refer certain below threshold transactions from EU member states to the European Commission. That was an issue central to the Illumina GRAIL case. Niels, can you please give our listeners a recap on what happened in the ECJ’s final ruling?
Niels Baeten (01:55):
Sure, Julia. In a nutshell, the EU’s highest court, the ECJ definitively confirmed last month that the European Commission had no power to review a transaction referred to it by EU member states, where none of those member states had jurisdiction to review it under their own national merger control regimes. The judgment put an end to the Commission’s rather controversial practice of reviewing transactions that fell below EU and any national member state thresholds.
Julia Zhu (02:24):
What drove the Commission’s practice of reviewing non-notifiable deals in this way?
Niels Baeten (02:28):
Well, the Commission, like any other regulator around the world, has been considering ways to address some of the gaps and challenges it was facing in capturing and assessing so-called killer acquisitions of startups or innovative players. Basically means transactions which are likely to eliminate a source of future competition where at least one of the party’s turnover doesn’t reflect its actual or future competitive potential. The Commission decided not to go down the more conventional path we’ve seen elsewhere of revising its merger regime to create an explicit legal basis for this type of deals. The legislative process at the EU level is quite unique and changing EU merger control rules requires alignment across EU member states and EU institutions, and so would inevitably lengthy and political. The Commission’s solution to the killer acquisition problem was to implement a policy change expanding the use of Article 22 of its merger rules to allow national competition authorities in the EU to refer to it, not only transactions that met their jurisdictional thresholds, but also transactions which did not.
(03:38):
This novel interpretation of its Article 22 powers was set out in new guidelines issued by the Commission in March 2021. With this change, the Commission really turbocharged Article 22, it empowered itself to review almost any transaction anywhere in the world regardless of whether the businesses have revenues or presence in the EU and regardless of the value of the transaction, including after the deal has already closed. That was an unprecedented shift away from the legal certainty of the EU turnover-based thresholds and pre-closing review powers. The first transaction called in for review under this new policy, Illumina GRAIL, involved a target which at the time had no sales in Europe or actually anywhere in the world, so the transaction didn’t meet any of the EU member state turnover thresholds.
(04:31):
The EU ultimately prohibited his deal following a referral under Article 22. Following an appeal by the merging parties in that case, the ECJ has now confirmed that the Commission’s novel Article 22 interpretation was unlawful. Article 22 was not intended, according to the courts, to be used as a corrective mechanism to allow the Commission to review mergers that would otherwise escape EU merger review, but rather Article 22 was designed to be used by the Commission to review transactions on behalf of member states that didn’t have their own national merger control regime.
Julia Zhu (05:05):
Thanks, Niels. How much of a risk in practice was this new Commission policy? Can you provide some examples of how the Commission implemented its 2021 guidelines before the ECJ ruling?
Niels Baeten (05:17):
Well, the Commission’s 2021 guidance really described itself as a targeted tool focusing on very specific categories of cases, in particular in the pharma and digital space, and the Commission did use its guidance selectively. We know that the Commission seriously considered roughly a hundred candidate cases, but only accepted the referral in three transactions following Illumina GRAIL, where national merger filings in the EU were not triggered. The acquisition of AutoTalks by Qualcomm, the acquisition of Nasdaq Power by EEX and Luxembourg’s Brasserie Nationale acquisition of drinks company, Boissons Heintz, both based in Luxembourg. Interestingly though, Luxembourg doesn’t yet have its own merger control regime in place, so this referral hasn’t fallen over following the ECJ ruling. Nevertheless, the policy shift introduced uncertainty. In particular, the risk of limited nexus deals being reviewed, including the risk of a post-closing call in. While the 2021 guidance called out the pharma and digital sectors as meriting particular scrutiny, no sector was exempt and the consequence of getting it wrong are serious and can include fines up to 10% of global group turnover.
Julia Zhu (06:30):
Okay, so are we seeing a similar trend taking place at the member state level also in the UK?
Niels Baeten (06:34):
Yeah, in Europe, Italy has had its first phase too for a below threshold transaction. And the Irish Competition Authority last year came to power to call in deals that don’t meet the Irish merger review thresholds, but might pose a risk to competition, all adding an additional layer of uncertainty for companies contemplating a merger. The UK Competition Authority already has brought jurisdiction to review transactions based on its share of supplies tests, which only requires the CMA to show that the parties to the transaction post-merger would supply or acquire 25% or more of goods or services of any particular description in the UK. Notably, the share of supply doesn’t need to be tied to any particular product market, and basically the CMA uses this threshold to assert jurisdiction wherever it wants to. For example, in September, the CMA reviewed Microsoft’s acquisition of several employees from AI business inflection. The CMA, which cleared the deal following a phase one review asserted jurisdiction on the basis that the share of supply test was met for the supply of chatbots.
(07:38):
In contrast, the Commission wasn’t able to review the transaction as the relevant turnover thresholds weren’t met. And the CMA will gain new powers later this year or early next year to review transactions where one party good transaction has a UK turnover of 350 million pounds and a share of supply of 33% or more of any category of goods or services in the UK. And another party has UK nexus, which is very broadly defined, and this new threshold was specifically introduced to enable the CMA to review so-called killer acquisitions that were not captured by its existing already, particularly broad jurisdictional tests.
Julia Zhu (08:19):
Thanks, Niels. Joe, I understand that the US antitrust authorities have always policed non-reportable deals. Can you please explain how things work in the US?
Joseph Rancour (08:30):
Sure, Julia. In the US transactions that meet the reporting thresholds of the HSR Act are subject to the statutory waiting periods that prevent parties from closing a transaction. However, the DOJ and the FTC have made clear that this is a procedural regime, so it’s a notice that allows the agencies to have time to investigate transactions that fall under the HSR Act before the parties can close. And they have a number of tools to use order to gather information and data to assess those reportable transactions. However, they can and do investigate transactions that fall under the HSR Act thresholds if they pose competition concerns, even if they’re not reportable and the agencies have taken action to challenge mergers that don’t meet the notification threshold.
(09:12):
So parties need to be aware of the risk, especially if customers are likely to complain about an acquisition or if a transaction involves high profile parties. In particular in sectors that the agencies have flagged as priority areas for enforcement such as technology platforms, pharmaceuticals. And most recently in the last couple of years, private equity has been a focus in terms of transactions that might involve a pattern or serial transactions in certain sectors that regulators may consider to be roll-ups that are enhancing consolidation over time.
(09:44):
So these investigations can occur either before or after transaction closes. The US processes is not explicitly an approval if a competition issue presents itself. Even for a non-reportable deal, agencies can seek remedies including blocking a transaction if it’s yet to close or even unwinding a transaction. Although it’s much rarer than merger challenges that follow an investigation based on the normal HSR process, agencies have even taken actions to unwind mergers that have already closed. And even transactions that have been HSR reportable have also been revisited from time to time where agencies have considered whether the impact of that transaction has had a anti-competitive impact, even if it was previously reviewed. And we’ve seen this play out in a few instances where agencies have even considered past transactions as part of a broader scheme in an investigation around monopolization of markets. If an investigation starts before closing or an integration, then it’s a non-reportable transaction.
(10:39):
Regulators may request that the parties delay or hold assets separate while they complete an investigation, if the assets have not yet been integrated. They can also issue CIDs or subpoenas in order to cause the parties to provide information and data around those transactions while they investigate. So challenging non-reportable deals has some practical challenges because the deal may already have been closed, and essentially the agencies have to ask a judge to unscramble the eggs, so to speak, if the integration’s already occurred. Or in the case of a non-reportable deal that’s not reported anywhere else, they really have to bring the case to a judge in order to enjoin the deal if it hasn’t already closed. So HSR reportable deals are certainly going to be the focus of attention for the agencies, but they’ve shown time and again that in cases where non-reportable deals pose significant competition issues, particularly in sectors that they’re paying close attention to, they have no compunction about going after those deals, investigating them, and even challenging them when the facts are right.
(11:39):
I think one interesting aspect about the other major global agencies looking to expand their reach to non-reportable transactions is that the inclusion of another regulatory process like the EU or China significantly changes the dynamics of merger review in terms of timing, even where that deal is subject to the HSR process. For example, if a transaction is only reportable in the US and is not reportable in other major suspensory jurisdictions, it really puts the onus on the FTC or DOJ to act relatively quickly in gathering the facts and analyzing the deal and deciding whether to challenge it or other regulators exert jurisdiction. There’s less timing pressure for the FTC or DOJ to complete their review because the parties are not able to close in those other jurisdictions. So the expansion of other regulators around the world, increasing the instances where they’ll review transactions that historically would not be reportable has a real timing impact on large global transactions.
Julia Zhu (12:36):
Thanks, Joe. Now let’s shift our focus to the Asia-Pacific region to have a real global coverage in today’s episode. In APAC, we’re seeing that the phenomenon of regulators seeking to review more deals and developing the tools to do it, so very similar to their counterparts in the US and Europe, I would say. For example, we see that China amended its anti-monopoly law in 2022. This amendment expressly authorized its antitrust regulator, the State Administration for Market Regulation or SAMR to call in transactions that do not meet the filing threshold but might otherwise harm competition. So what SAMR did was that after they amended the anti-monopoly law in 2022, they wrote out amended implementation rules in ‘23, which also reflect and flesh out the enforcement of such calling power. From a timings perspective, SAMR can call in cases either before or after the transaction closes. Under the anti-monopoly law, there is no statute of limitations on SAMR’s ability to initiate a post-closing investigation.
Joseph Rancour (13:44):
Julie, I know a lot of our clients have had questions about SAMR’s call in power, given that the merger approval process in China can really have an impact on overall deal timing.
Julia Zhu (13:54):
Yeah, so once a deal is called in for completed transactions, China allows a 120-day period for parties to supplement a filing. But the parties are required to take necessary measures such as suspending the implementation of the concentration to reduce the adverse impact of the deal on competition. If the transaction call in has not yet been consummated, the parties must promptly make a filing. There is no definitive deadline though, but the approval will become, however, a bar on closing with a worldwide scope. One critical question that remains somewhat ambiguous is the criteria for when SAMR will step in to scrutinize below threshold transactions. Well, unsurprisingly, China has opted not to provide specific guidance on this matter like many others we’ve seen.
(14:43):
Instead, the regulations are designed to be flexible outlining only a few factors for consideration. In its latest 2023 guidelines on merger reviews, SAMR highlighted its focus is on transactions that possess substantial value or a potential significant market impact drawing industry-wide attention. As you can tell, this is construed rather broadly, so it allows SAMR to exercise discretion on a case-by-case basis. But in other sector-specific guidelines, SAMR has indicated that they will pay close attention to killer acquisitions involving pharmaceuticals and platform economy.
Joseph Rancour (15:22):
Thanks, Julia. What about other APAC jurisdictions, DC ramped-up enforcement in other places in the area?
Julia Zhu (15:28):
Yeah, definitely yes, Joe. Japan has voluntarily tracked filing to tackle killer acquisitions in addition to its mandatory filing regime. And we see that the JFTC has been known to pressure parties to file transactions that fall below the thresholds to avoid an ex officio investigation. In South Korea, they have a transaction-based mandatory filing threshold in place already. So that seems the KFTC is already sufficient to capture killer acquisitions. This is why we do not see the KFTC makes a particular point about reviewing transactions that do not meet filing thresholds. Nonetheless, we have recently seen a case, which is quite interesting, where the KFTC threatened the parties with an ex officio conduct investigation if the parties did not file. The concern was the transaction may harm innovation. Additionally, in Australia, we are seeing its ongoing reform of its merger control regime echoes the global trend to scrutinize the review of killer acquisitions, although the final threshold won’t come into effect until 2026.
(16:35):
Finally, India’s recent merger review revamp took an approach similar to South Korea by introducing a new alternative deal value threshold for approximately 240 million US dollar, in addition to its traditional turnover and asset-based thresholds. Fortunately, the Competition Commission of India or the CCI has explicitly indicated in its past enforcement that it has no authority to review below-threshold transactions. However, they do have the power to initiate an ex officio investigation to assess whether the thresholds are met or not. So now we have laid out for our listeners the global legal frameworks of regulating transactions that fall below the thresholds. Let’s take a closer look at the latest enforcement trends. Niels, can we please start with you on the EC again?
Niels Baeten (17:24):
Well, Julia, not a whole lot has changed here in the EU, despite the court’s landmark Illumina GRAIL ruling. The immediate consequence of the judgment was that the EU’s 2021 guidelines setting out the Commission’s novel interpretation of Article 22 are no longer valid. But the increasing prevalence of below-threshold review powers at member-state level and the flexible powers in the UK I mentioned before, means that deal-makers still face considerable uncertainty when trying to work out where their deal will need to be reviewed. So to take the inflection example, as soon as the Commission announced that it wouldn’t review the arrangement following the withdrawal of the referral request, the German regulator immediately announced that it would start assessing whether it could carry out the review. The proliferation of EU member states with below thresholds review powers also means that those member states are still able to refer transactions, meeting those thresholds to the Commission under the more conventional interpretation of Article 22, which is of course not going to go away.
Julia Zhu (18:31):
Then what do you think might come next for the Commission as they surely will want to continue to review these types of deals? Will we finally see, for example, the revised merger thresholds?
Niels Baeten (18:42):
Yeah, it’s really back to the drawing board for the Commission and yeah, it’s appetite to intervene in these types of acquisitions, killer acquisitions as they’re called, remain strong. The re-elected president of the Commission, Ursula von der Leyen, has asked the incoming Commissioner responsible for competition to really focus on this issue as a priority. Next steps will be decided by the new college of commissioners, which is expected to be in place in November. So we don’t really know anything for certain just yet. One option on the table is to propose, as I mentioned earlier, revising the longstanding EU merger thresholds to create an explicit legal basis for below thresholds referrals. But it seems unlikely that this will really be the Commission’s first choice, particularly in the current political climate. Based on recent statements coming from Commission officials, it appears that the preferred path for now at least, is for more member states to reform national rules to capture below threshold transactions. So that referrals can be made to the Commission in line with the conventional use of Article 22.
(19:44):
There is of course, another way in which national regulators in the EU can review transactions. Member states have the power to review acquisitions by dominant firms under abuse of dominance rules, even if the transaction is not notifiable under EU or national merger rules. This power was confirmed by the ECJ in a March 2023 ruling in the Towercast case. We’ve seen recent applications of this power in Belgium and France, but this is not the preferred option for a number of reasons, not least because it only applies when specific circumstances are met, such as a position of dominance. While the Commission signaled earlier this year that such investigations could potentially be part of a solution if the ECJ overturned its policy change under Article 22, many DG Comp representatives have since made very clear that it’s really not the preferred way to go. For example, outgoing DG Comp Director General Olivier Guersent called such an approach messier more disruptive and giving companies even less legal certainty.
Julia Zhu (20:52):
Well, it sounds like the Illumina GRAIL ruling will have significant implications for future merger reviews and the broader regulatory landscape, both at the Commission and the national competition authorities level. Now let’s shift our focus across the Atlantic again. Joe, the US agencies have also been very active in scrutinizing below threshold transactions. I think you mentioned a few types of transactions that they are particularly interested in. Can you please give us a bit more color here?
Joseph Rancour (21:23):
Sure, Julia. The agencies have actively investigated and even challenged below threshold transactions in a number of instances. The focus of sectors are kind of run the gamut all over different industries and technologies, including pharmaceuticals, medical products, chemical additives, educational markets, food processing, insurance, platform technologies. So there’s just a number of places where they’ve investigated non-reportable transactions. Recent years technology has been a focus area where the agencies have really tried to determine whether unreported deals have been having a detrimental impact on markets. In 2020, the FTC conducted a study using its so-called 6(b) powers on non-reportable transactions that were entered into since 2010 for a 10-year period by five of the largest US technology companies. And this study included sort of traditional acquisitions, so called acqui-hires of the kind that Niels just mentioned and potential IP transactions among other things. The FTC released a report in 2021 that specifically flagged the acquisition of start-ups patent portfolios and entire teams of technologists as forming the basis of antitrust continued scrutiny of below threshold technology deals.
(22:43):
So they certainly have dug into this space and have considered whether there’s sort of been M&A activity that’s been going under the radar. Because circling back on what we were saying before about the HSR regime, it’s certainly possible for the agencies to investigate and even challenge non-reportable transactions. But they certainly have more tools at their disposal going through the normal HSR review process. The parties have to make an HSR filing. They have to provide certain data, the second request processes at the agency’s disposal in order to do deep dives on the acquisitions and the party’s businesses.
(23:21):
So the profile of transactions that go unreported because they don’t meet the HSR thresholds, certainly as kind of a default proposition present a little bit of less risk because they simply are not going through that formal process. But nevertheless, the agencies have been really focused on thinking through, particularly in technology and other areas, we’ll talk about whether there’s gaps in the enforcement. So that they’re certainly looking for opportunities to take more enforcement and do more investigations, non-reportable deals. So it’s fair to say that in the tech space, particularly where deals involve large buyers or popular platforms, also going back to Neil’s points about theories of killer acquisitions, those are very popular in the US too.
Julia Zhu (24:04):
Thanks, Joe. You mentioned earlier that the US agencies are paying increasing attention to among other things, what they call zero roll-ups and what FTC Chair Lina Khan calls stealth consolidation schemes. So what are we seeing that is happening on the ground here in this area?
Joseph Rancour (24:22):
Going back to the new 2023 merger guidelines that were just released last year, those guidelines take the position that serial acquisitions, even when individually small, can cumulatively violate the antitrust laws. Even if as sort of a technical matter, a specific or individual transaction in that series may not have by itself violated the law in isolation. This theory kind of reflects the agency’s attempts to carve out innovative ideas about theories of harm that could be based on an overarching scheme or strategy to consolidate markets over time. And so that’s one of the reasons they’ve been focused recently on looking at private equity markets where oftentimes there’s investments that are made in particular sectors over periods of time, and both leadership at the FTC and the DOJ have been on record voicing concerns about the potential for, so-called industry roll-ups. So in May of this year, the DOJ and the FTC put out a request for information seeking public input on these so-called serial acquisitions, and these include those roll-up strategies I just mentioned where firms may acquire multiple smaller companies or make similar investments in the same sector over time.
(25:33):
Naturally, private equity as an industry has been part of that focus. And regulators aim to assess whether these strategies which often include below-threshold transactions cumulatively impact market competition. The sectors of interest in this request for information have kind of been expanded and include things like housing, defense, cybersecurity, distribution businesses, agriculture, construction, and other sectors as well. The RFI complements a parallel government inquiry that seeks to understand how certain healthcare market transactions by private equity firms and other companies may lead to consolidation and other changes to the markets and focus on patients, healthcare workers, safety issues, quality of care and affordable healthcare for patients. So these are areas that are of great interest to both antitrust agencies today. Another recent development that’s sort of hot off the press is the release of the updated HSR rules, which will require substantially greater information from parties that are actually making HSR filings for reportable deals, and those are expected to go into effect early next year.
(26:42):
One item of interest that relates both to the serial acquisition concept as well as the potential for the agencies gathering more data on unreported transactions is that HSR filings will now require both buyer and seller to report disclosure of certain prior acquisitions and overlapping product markets over a period of time. Which will provide the agencies more information and data about the acquisition history in a particular sector. And so that will give them more points to triangulate on about trends in particular industries and acquisitions that are taking place, even if those are not HSR reportable. And then in addition to connect on what Niels mentioned about the Microsoft inflection example of a so-called acqui-hire, this is an area that US regulators have also been paying attention to. And there’s been reports that they’ve started investigating some of these arrangements, especially in the technology space, but thus far there’s not been enforcement actions in this area. Julia, how have regulators in APAC been grappling with these kinds of deals that involve the hiring of employees versus making an actual acquisition of assets?
Julia Zhu (27:50):
In Asia, so far, we are not seeing a lot of traction of policing acqui-hires because it could be, as you said, a stretch for the regulators to justify that acqui-hires constitute a concentration when there is clearly no transfer of shares or business. While the only transferred assets are IP licensing agreements that cannot in isolation generate revenues. However, we’ve seen that the regulators here are definitely keeping an eye on the development in this area in the US and Europe, especially relating to the AI industry, which is also clearly a focus area for China, Japan, South Korea, and India. But so far, I think there are more trailing here. Generally, enforcement in the APAC region is more focused on first high profile cross border mergers and acquisitions, especially those that are notified in the US, EU or UK, but somehow do not meet the following thresholds in their home jurisdictions. Or second, deals that have a more pronounced local or regional impact.
(28:51):
So let’s zoom in to China first again. China has historically had the authority to review below threshold transactions, but has not used it often in practice until very recently. Since this is something that they really picked up in the enforcement after the amended anti-monopoly law came into [inaudible 00:29:10] in 2022. We are also aware of past cases where the parties received increase but were not forced to file and the deals have closed without any intervention from China. So that was the case before we entered into the new era of enforcement after 2022.
Joseph Rancour (29:28):
What changes have you seen in SAMR’s enforcement under the amended anti-monopoly law in 2022?
Julia Zhu (29:34):
Well, indeed we have seen China has been more actively enforcing the calling power reiterated in the 2022 amended anti-monopoly law. So we’ve seen that they’ve been calling in some high profile deals. These deals, although below the filing thresholds, are alleged to generate significant domestic interest for China, thereby justifying SAMR’s review. One recent press release by SAMR indicates that so far SAMR has asked two transactions that did not meet the filing thresholds to be filed with them because they were considered to be potentially anti-competitive. One of them we understand was Qualcomm-Autotalks, which Niels mentioned just now, was also called in by the European Commission, and that deal was eventually abandoned by the deal parties earlier this year in March. Interestingly, we have also noticed that several high profile tech transactions below the thresholds have not been caught in, likely due to their limited domestic interest. As background, at the beginning of this year, China doubled its target turnover threshold.
(30:36):
It went from an individual turnover of approximately 60 million US dollar to approximately 120 million US dollar. Now, before the announcement of the new increased thresholds came out, SAMR was advising parties involved in low profile non-issue deals to actually wait instead of filing if they met the old thresholds but not the new one. This, I believe, reflects SAMR’s desire to avoid the review burden for these cases. What we are seeing on the ground more generally is that SAMR wants to concentrate its resources on deals that are strategically important to their industrial policies such as semiconductor or that generate significant domestic interest. For example, in Synopsys-Ansys, a semiconductor deal, we saw that SAMR has for the very first time issued its formal decision compelling and filing as publicly reported. SAMR’s decision in that case made an express note that the parties voluntarily submitted the filing. So they were not called in by SAMR per se. But what’s interesting to see is that SAMR imposed a host of remedies in this case nonetheless, including divestitures and behavioral remedies on, for example, pricing, supply guarantee, and no exclusivity.
Joseph Rancour (31:57):
Well, it seems clear that SAMR is taking proactive stance here, especially with its established now call in power and the recently increased filing thresholds. How are other countries in the area like Japan, South Korea and others in Southeast Asia handling similar enforcement issues? Are we seeing a comparable level of scrutiny for these kinds of deals?
Julia Zhu (32:18):
Yeah, I think generally the answer is yes, Joe. So in Japan, digital platforms have become a significant focus for merger enforcement. The JFTC has expressed concerns about killer acquisitions reflecting the worries of other regulators around the world. However, when a voluntary filing is initiated at the JFTC’s request, we’ve generally seen that Japan employs a pretty measured and conservative approach in this analysis. Unlike Japan’s measured approach, South Korea has been pursuing merger enforcement very aggressively. This ramped up enforcement is evident in high-profile cross-sectional cases, including those that fall below the thresholds. As I mentioned earlier, Korea does not have a clear process structure for below the threshold transactions because the KFTC thinks that they can already capture killer acquisitions using the transaction value thresholds. Nonetheless, Korea’s International Merger Division has been actively monitoring and targeting high-profile transactions of interest in some of our own deals, all involving technology companies, we have seen the KFTC threaten the parties to file with an ex officio conduct investigation.
(33:30):
All of this indicates that the KFTC is just eager to jump on the bandwagon and establish itself as a leading regional authority in merger enforcement. On regulators in Southeast Asia, I think they also warrant attention because in general, this region is also becoming a very active enforcement battleground. But the good thing is regulators in Southeast Asia generally tend to prioritize cases with a pronounced regional impact rather than aggressively pursuing large international cases like we have seen in other Asian Pacific countries. Okay. So far we have covered the legal frameworks and the latest enforcement activities in the EU, the US and APAC. Let’s wrap things up with a few key takeaways for our listeners. Maybe start with Joe on the US first.
Joseph Rancour (34:17):
Sure. Julia, I think a phenomenon that we’ve seen particularly in sectors that are considered strategically important to regulators is that many of the major regulators are seeking to exert influence and be global leaders in antitrust enforcement. While the Illumina GRAIL decision is somewhat of a setback for the EC in this regard, we continue to see regulators reach deep into their so-called toolkits in order to exercise their authority any way they can. In the US, the agencies are leveraging Section 7 of the Clayton Act, the primary merger statute, just as they always have, but are also pursuing theories under other antitrust statutes as well, including the FTC’s flexible unfair competition standard or the monopolization statutes. Whether reportable or not, a critical part of merger work is anticipating at an early stage whether the deal is the type that will either grab the attention of the regulators or is one where customers or competitors are likely to complain in light of the continuing very challenging global regulatory landscape out there.
Niels Baeten (35:17):
Completely agree, Joe. While the Commission hasn’t yet decided which way to go to review such deals following Illumina GRAIL, the issue will really be a key focus for the Commission in the coming months, no doubt. So we’re very much watching this space. In the meantime, uncertainty has shifted to the national level and deal makers will need to carefully consider the patchwork of evolving jurisdictional rules at the national level and make sure transaction agreements properly reflect these risks.
Julia Zhu (35:45):
Thanks Niels and Joe. Then finally, on APAC. Although the regulators here are more trailing the US and Europe, they’re also aware of the potential harm of killer acquisitions and want to have a seat at the table in reviewing high profile international mergers. Geopolitics and domestic interests also tend to play a bigger role here, especially like in China, it’s written into the law that the competition regulator must consider the impact of a deal not only on competition, but also on China’s national economic interests. So this also explains why facing complaints by local customers and competitors, SAMR may feel bigger pressure comparing to its international counterparts to call a transaction in. Given all this, it’s clear that competition regulators worldwide are increasingly scrutinizing transactions that fall below existing filing thresholds. This is definitely an area that deal makers among our listeners should keep a close eye on. With that, I want to thank both of you. Thanks very much, Joe and Niels. Thanks everyone for joining, and we will look forward to welcoming you to our next Fierce Competition podcast.
Voiceover (36:50):
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