Synapse - July 2020 – 2 / 6 观点
The UK remains an attractive environment for foreign investments. However, in recent months, we've seen trends that indicate that mergers and acquisitions in the tech and life sciences sectors may be subject to closer scrutiny by the UK competition authority (the CMA) and by the UK government in future. The CMA's recent practice of reviewing mergers in these sectors and the recent changes to the rules on foreign direct investment are signs of this increased scrutiny
The UK merger regime is voluntary: there is no requirement to notify a merger or acquisition to the CMA. However, the CMA can open an investigation if the transaction meets the jurisdictional thresholds and the parties have not notified it. Jurisdiction of the CMA is triggered when two or more companies cease to be distinct and when the turnover of the target is over £70 million or the transaction results in the creation of (or increase in) a 25% or more share of supply in the UK.
The share of supply test – which does not correspond to economic markets – has always been used mostly to capture products and services that the acquiror and the target both supplied in competition with each other (the so-called "overlaps").
Recently, the CMA seems to have changed its decision-making practice, especially in innovative sectors such as pharmaceuticals and digital (tech, data, platforms), creating much more uncertainty for the parties. The CMA is expanding the interpretation of the share of supply test. By applying the test "creatively", the CMA is able to capture mergers that it is interested in reviewing, and that in the past might not have been examined.
This was the acquisition of Spark, a US biotech company engaged in the development of potential gene therapy (GT), including Haemophilia A. The deal was not notified to the CMA, but the CMA "called it in", as it concluded that the share of supply test was met. Spark does not sell products in the UK and does not generate turnover in the UK.
But Roche and Spark overlapped more than 25% in the supply of novel non-GT and GT Hem A treatment in the UK, because:
Since the transaction was cleared, there has not been an appeal that would have shed light on this "innovative" use of the 25% share of supply test.
Sabre’s platform connects airlines, hotels, and car rental companies to travel agencies. Farelogix sells a suite of IT solutions to airlines and has no revenue in the UK or direct contracts with UK customers. In the past, Farelogix entered into a "technical agreement" with American Airlines to facilitate booking of code share tickets between the American Airlines and British Airways.
Although British Airways did not contract directly with Farelogix, the existence of the technical agreement was enough for the CMA to determine that Farelogix provided services to a UK airline in the UK. The CMA concluded then that both companies were active in the "supply of IT solutions to UK airlines for the purpose of airlines providing travel service information to travel agencies to enable travel agencies to make bookings".
As Sabre alone supplied more than 25%, Fabelogix’s de minimis share – the contract with American Airlines was not worth much – led to an increment and satisfied the share of supply test. The CMA also issued an order prohibiting the parties to merger for 10 years.
The case is under appeal so it will be interesting to see what the court says about the 25% share of supply being met in such peculiar situation and the 10 year prohibition.
The CMA can investigate mergers where two undertakings have ceased to be distinct and brought under common control. Control is not limited to the acquisition of outright voting control, but includes:
Until recently, material influence might have been found with a minority shareholding as low as 17.9% in conjunction with other specific factors:
In Amazon/Deliveroo (June 2020 – Revised Provisional Findings), the CMA went even further. While Amazon was only acquiring a 16% shareholding, the CMA determined that there was "material influence" because of:
In rapidly evolving sectors such as healthcare and tech, the CMA will not only look at price factors – and potentially be concerned that the mergers might lead to an increase in prices – but also how innovation and quality will be affected negatively by the merger.
The CMA is also focusing on the valuation of the deal to test any pro-competitive rationale. Competition authorities are concerned that large firms might acquire targets solely to discontinue the target’s innovative products and services, eliminate an emerging rival, and prevent future competition (so-called "killer acquisitions" in pharmaceuticals and tech). In these sectors, we see extremely high valuation of companies which might not yet have any revenue.
The CMA will look carefully at the rationale for paying such high figures for innovative companies in order to assess whether a pro-competitive rationale exists or not – for example, whether an acquisition is motivated by the intention to incorporate an innovation in another product or develop it further, or simply to stop its production.
In the UK, the government (through the Secretary of State) can intervene in transactions which are subject to merger review by the CMA on certain public interest grounds: national security, media plurality, financial stability. Those grounds can be expanded, as they were during the financial crisis, when they were broadened to include financial stability.
On 23 June 2020, the UK government introduced another public interest ground: "the capability to combat and mitigate the effects of public health emergencies". The rationale behind this public interest consideration is related to COVID-19. The UK government is concerned that, due to the economic disruption caused by the pandemic, some UK businesses with critical disease fighting capabilities might be subject to hostile takeover or acquired because they are financially distressed.
The new power will allow the UK government to intervene if a business that is directly involved in a pandemic response – for example, a vaccine research company or PPE manufacturer – finds itself the target of a takeover. What's more, on 26 June 2020, the Department for Business, Energy and Industrial Strategy (BEIS) published guidance illustrating that the test is wider than what was thought originally.
Under this ground for intervention, the UK government could intervene if an internet service provider or food supply chain company becomes the subject of a takeover, given the potential for increased demand for internet services or disruption to food supply in a lockdown.
The UK government can also intervene in transactions not subject to merger review but where the target's turnover is above £1 million and it involves goods and services with military dual use and computer hardware technology and quantum technologies. On 23 June 2020, a new statutory instrument was laid in front of Parliament and will come into force when approved. Enterprises involved in artificial intelligence, cryptographic authentication technology, and advanced materials activities could be subject to review.
While we expect Parliament approval and guidance from the government soon, it is clear already that the changes will affect:
These developments have several consequences for merging parties: