The heightened scrutiny M&A deals are encountering from various regulatory agencies in the US represents only part of the global regulatory regimes that cross-border dealmakers must navigate. European regulators have enacted – and aggressively pursued – a web of regulatory review tools, including merger control, foreign direct investment (FDI) and foreign subsidies control. The proliferation of European regulatory review tools requires dealmakers to develop and implement new strategies to successfully manage a complex and fragmented regulatory landscape.
To execute cross-border transactions, dealmakers must understand the operational nuances of the various regulatory screening regimes – and, often more importantly, the political drivers and enforcement priorities of different national and regional regulators – early in the deal planning and structuring process. Cross-border dealmaking is complicated further as some regulatory regimes in the European Union are administered by the European Commission (EC) at the regional level, while others are administered at the national level, increasing the prospect of divergent outcomes and delays to deal timetables. Strategic acquisitions and large-cap M&A transactions between parties in the same or adjacent sectors are the most likely to face multiple overlapping regulatory reviews in Europe, although increasingly, competitive overlaps are not a requirement for regulatory intervention.
Below are the key considerations for cross-border dealmakers in Europe. The regulatory landscape continues to evolve, and we expect many of the developments, particularly those that are yet to be finalized, to change over time.
Merger control – widening the jurisdictional net
Merger control is likely the most familiar regulatory regime to cross-border dealmakers because it is the oldest – the EU Merger Regulation[1] took effect in 1990. While more than 80% of deals are cleared unconditionally (with a majority of those being examined under the “simplified” or “super-simplified” procedures), in recent years, as a result of a perception that such deals were not sufficiently scrutinized, European regulators have increased the reach and intensity of their review (particularly in deals involving nascent targets and deals in innovative sectors, such as tech and life sciences).
For example, the EC has increased the implementation of “Article 22 referrals,” a tool allowing it to review deals of substantive interest, even where the filing thresholds for automatic jurisdiction are not met, by asking EU member states to refer deals. Although, to date, this tool has been used sparingly, especially in deals where no relevant filing threshold has been met, there were multiple deals in 2023 subject to this procedure – including, most notably, Illumina/Grail, Qualcomm/Autotalks (which was subsequently abandoned by the parties) and European Energy Exchange/Nasdaq Power. In addition, it is understood that the EC has evaluated more than 50 deals under this procedure for potential referral without ultimately taking action.
Similarly, in the UK, recent legislative changes are poised to give the Competition and Markets Authority (CMA) even wider discretion to review mergers of substantive interest. The recently enacted Digital Markets, Competition and Consumers (DMCC) Act introduced a third jurisdictional threshold, in addition to the existing target turnover and share of supply thresholds, which will give the CMA jurisdiction to review deals where:
- Either party has at least a 33% share of supply or purchases of goods/services in the UK or a substantial portion thereof.
- That party has more than 350 million pounds of turnover in the UK.
- A UK nexus test is met with respect to the other party.
For cross-border dealmakers, this means that the customary multijurisdictional filing analysis that is standard for deals in Europe not only needs to consider whether mandatory filing thresholds are met, but also whether the deal and the parties involved have substantive characteristics that will pique the interest of European regulators. The outcome of this assessment must be reflected in the risk allocation provisions of the transaction documents.
Merger control – new theories of harm
Cross-border dealmakers also must contend with evolving substantive trends in merger reviews. Deals involving parties with competing or potentially competing products, especially in innovative sectors like technology and life sciences, must consider that European regulators may continue to scrutinize the competitive impact on a long-term horizon, potentially stretching many years into the future. Such an analysis typically involves a close examination of the parties’ internal documents – in particular, any discussions of the deal rationale or a buyer’s future plans in the relevant sector.
In this context, European regulators are increasingly reviewing and intervening in deals where parties act at different levels of the supply chain or have activities in adjacent supply chains with common customers. For example, in September 2023, the EC blocked Booking.com’s proposed acquisition of Etravelion the basis of a novel “ecosystems” theory of harm. The EC found that the deal would allow Booking to purchase a company with activities adjacent to its own, thereby broadening its “ecosystem” and ultimately strengthening its dominant position in online hotel and travel agency services. While Booking appealed the decision, the parties abandoned the merger and instead renewed an existing partnership agreement. The parallel investigations by the EC and CMA in Microsoft/Activision and Amazon/iRobot also primarily focused on theories of harm where there was no competitive overlap between the parties.
Foreign direct investment (FDI) – navigating national review regimes
Ongoing geopolitical tensions have resulted in European governments continuing to look inwards and implementing measures to protect national security and national economic interests. Unlike merger control and regulation of foreign subsidies (discussed below), FDI reviews are typically conducted at the national level. While not every EU member state has adopted an FDI screening regime, 2023 saw the introduction of several new regimes (e.g., in Ireland, the Netherlands and Sweden), with several other member states also expanding the ambit of their existing mechanisms (e.g., France and Romania).
As with merger control, the vast majority of deals that fall within the purview of various European FDI regimes are ultimately cleared. For example, the UK cleared more than 90% of notified deals within 30 working days.[2] In the EU, member states handled 1,444 authorization requests and ex officio reviews in 2022. Of these, approximately 55% resulted in a formal screening procedure. Of the screened deals, 86% were cleared unconditionally, with only 9% of reviewed deals approved with conditions and 1% of cases blocked. The remaining 4% were withdrawn by the parties.
Dealmakers, along with their legal teams, need to develop sufficient knowledge about local processes and political drivers in order to get their deals approved. While the EC is seeking to achieve more coherence among member states through a set of legislative proposals, the FDI review landscape is likely to remain fragmented in the near to medium term.
The ‘new kid on the block’ – the EU Foreign Subsidies Regulation
After much anticipation, the EU Foreign Subsidies Regulation (FSR) was introduced on 14 December 2022, applying to deals agreed after 12 July 2023. The FSR creates a mandatory screening regime with the goal to “level the playing field” with respect to unfair advantages that non-EU government subsidies may cause in the context of M&A – such as a non-EU acquirer outbidding EU rivals in an auction process by offering a superior price supported by state-backed financing that does not reflect market terms.
For cross-border dealmakers, there are two key takeaways following enactment of the FSR. First, the FSR regime is only likely to be relevant in deals with a substantial European nexus, as this mandatory notification to the EC is only required when two thresholds are satisfied:
- EU-wide turnover exceeds 500 million euros, in the most recent financial year, that is attributable to the target being acquired, one of the merging parties or the joint venture.
- Third-country-backed financial contributions exceed 50 million euros, in the three years preceding the deal, that are awarded to the transaction parties, taken together.
Second, if a deal is within the ambit of the FSR regime, parties should expect increased deal preparation time and costs, because the diligence requirements for the FSR regime can be cumbersome and require gathering large amounts of technical financial information, including, most notably, a list of all third-country financial contributions received by a member of the parties’ respective corporate groups obtained within three years before the transaction. Recent reports also suggest that, as of early 2024, the EC had not yet reached full staffing capacity for reviews, potentially introducing further timing delays.
Accounting for divergent outcomes
To navigate the three-dimensional regulatory and multinational web in Europe, dealmakers must develop jurisdiction-specific strategies early in the deal process. These strategies should account for the risk of regulatory divergence, which remains a possibility – e.g., as a result of different review timelines and legal tests, evidence available to different regulators or a difference of views as to how regulators should exercise their decision-making discretion. For example, in 2023, the EC blocked two cross-border deals that had previously been cleared unconditionally by the CMA – Booking/Etraveli and Amazon/iRobot. Similarly, the Microsoft/Activision transaction was cleared subject to two different sets of remedies in the EU and UK, with the CMA identifying significant concerns with the remedy accepted by the EU.
While overall the majority of cross-border deals with a European review dimension continue to secure unconditional regulatory clearances, the process for securing all relevant approvals is becoming increasingly burdensome. As such, familiarity with these and other developing regulatory regimes, as well as early planning on a jurisdiction-by-jurisdiction basis, is imperative for dealmakers to bear in mind – along with engaging appropriate counsel.
Contributors
[1] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EU Merger Regulation).
[2] See the National Security and Investment Act 2001 Annual Report 2022 – 2023.
