Changes to merger control rules in the UK and the EU which are relevant to venture capital firms, private equity and investment funds

Introduction and importance of those changes for your business

Start-up or nascent firms play a vital role in competitive markets but, traditionally, their relevance to merger control has been limited as the turnover/revenues of the acquired entities tended to be low and therefore no merger filing clearance was needed when they were acquired. For many years competition authorities have been concerned that they had no recourse under competition law to deal with incumbent firms which acquire small innovative start-ups with little or no turnover in order to either discontinue or subsume the target’s innovative projects and stifle future competition in the incumbent’s market. These are called ‘killer acquisitions’ and are most frequent in the pharma and tech sector where there is substantial innovation and the presence of several large players who have benefitted profoundly over the years from many of these types of acquisitions. 

New rules have given competition authorities in the UK and in the EU powers to review such acquisitions. The changes will have a significant impact on the typical exit strategies of venture capital firms and investment funds that invest in both early-stage start-ups and emerging companies that have been deemed to have high growth potential. Small companies that are not used to merger control and which, in most cases, do not even have an in-house lawyer, should become familiar with the rules as they might find themselves part of a merger control investigation which can be time consuming and costly. This memo will address the impact of those changes on the sector.

European Commission

The European Commission has dealt with the issue in two different ways: a reinterpretation of Article 22 of the EU Merger Regulation (EUMR) and the introduction of the Digital Markets Act (DMA).

Article 22 EUMR

The EUMR requires compulsory and exclusive prior notification to the European Commission (Commission) of mergers, acquisitions and certain joint ventures that involve a change of control and meet certain (high) turnover thresholds. 

When the Regulation was adopted in 2004, Article 22 EUMR gave the Commission the power to examine transactions that took place in Member States that did not have national regimes for merger clearance at that time. It was known as the ‘Dutch clause’ because the Netherlands was the main country not to have merger control. 

It allowed relevant Member States to request that the Commission examine any concentration that did not meet the Commission's thresholds but which did meet the following criteria:

• affects trade between Member States
• threatens to significantly affect competition within the territory of the requesting Member State. 

Soon after the EUMR came into force most Member States implemented their own national regimes and Article 22 EUMR became obsolete. Then, without any public consultation, in March 2021, the Commission issued new Guidance on the application of the referral mechanism set out in Article 22 EUMR, effectively reinterpreting the provision. The Guidance says that any Member State may refer to the Commission any transaction below EU and national turnover thresholds, where the above criteria are met. If the Commission accepts the referral, then the transaction will be reviewed under the EU Merger Regulation. The Commission has singled out pharma and tech as the sectors where it will most likely be applied. 

The Commission has stated that cases that are appropriate for referral include those where the turnover of the target does not reflect its actual or future potential, for example where the target:

• is a start-up or recent entrant with significant competitive potential that has yet to develop or implement a business model generating significant revenues (or is still in the initial phase of implementing such business model)
• is an important innovator or is conducting important research
• is an actual or potential competitive force
• has access to competitively significant assets (such as for instance, raw materials, infrastructure, data or intellectual property rights)
• provides products or services that are key inputs/ components for other industries

In its assessment the Commission may also consider whether the value of the consideration received by the seller is particularly high compared to the current turnover of the target. 

The first case in 2021 was a referral from France regarding Illumina’s acquisition of Grail. Many others followed. Judgement by the European Court of Justice on whether this novel interpretation of Article 22 EUMR by the Commission is legal is expected soon .

The consequence of the Commission's broad interpretation of Article 22 EUMR is that it is no longer possible to assess with certainty whether transactions are captured by the EU merger rules or not. A small acquisition that does not meet any merger threshold might end up being reviewed, even after completion, with the possibility of having to unwind the transaction if the Commission does not give its approval. Legal uncertainty is being introduced in what used to be a very certain and efficient system. 

Digital Markets Act

The Digital Markets Act (DMA) establishes a set of clearly defined objective criteria to identify “gatekeepers”. Gatekeepers are large digital platforms providing core platform services, such as for example online search engines, app stores, and messenger services. Gatekeepers have to comply with the do’s (ie obligations) and don’ts (ie prohibitions) listed in the DMA. 

So far, the following companies have been designated as gatekeepers for certain of their services:

• Alphabet Inc
• Amazon.com Inc
• Apple Inc
• Booking.com
• ByteDance Ltd
• Microsoft Corporation

Article 14 of the DMA relates to concentrations and acquisition by gatekeepers and states that a gatekeeper must inform the Commission of any intended concentration where the merging entities or the target of concentration provide core platform services or any other services in the digital sector or enable the collection of data, irrespective of whether it is notifiable to the Commission under the EUMR or to a competent national competition authority under national merger rules. 

A gatekeeper shall inform the Commission of such a concentration prior to its implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest. The information to be provided should include a description of the undertakings concerned by the concentration, their EU and worldwide annual turnovers, their fields of activity, including activities directly related to the concentration, and the transaction value of the agreement or an estimation, along with a summary of the concentration, its nature and rationale and a list of Member States affected.

Even where no merger thresholds are met, the duty to inform the Commission might lead, through the use of Article 22 EUMR, to the examination of transactions in tech in which the Commission has an interest or concerns.

UK

In the UK two different powers have been introduced to tackle ‘killer acquisitions’, both within the Digital Markets, Competition and Consumers Act (DMCC) which was passed in May 2024. The DMCC introduces a new digital markets regime to enforce competition in digital markets and more general amendments to the competition regulator's powers, including merger control.

Digital Markets Regime

The new digital markets regime will be enforced by the Competition and Markets Authority (CMA) through the Digital Markets Units (DMU) and it will affect those companies that the DMU has confirmed as having “strategic market status” (SMS) in respect of a digital activity linked to the UK. There are five cumulative conditions for companies to meet in order for the DMU to assign it such a designation:

• carries on a digital activity 
• linked to the UK
• substantial and entrenched market power 
• position of strategic significance
• turnover requirements.

The regime is intended to capture the largest of the tech companies. The consequences of being designated as having SMS are significant and each company will have to comply with bespoke conduct requirements. These will be developed and enforced by the DMU and will operate alongside existing competition law and consumer protection rules.

In relation to acquisitions, SMS firms will be subject to mandatory reporting obligations in respect of any proposed acquisition that triggers specific thresholds around share of equity or voting rights and value of consideration. This will be the case where a transaction results in an entity in the SMS group having:

• qualifying status: equity increases that cross the following thresholds: 15%, 25%, 50%
• in a UK-connected body corporate: where the target is or is intended to be active in the UK, and
• where the consideration for the transaction is at least £25 million.

Reporting must take place prior to closing and the CMA has five days to consider whether the mandatory report is sufficient for it to determine whether to investigate under the normal merger rules. 

UK merger control

A new merger threshold will be added for the CMA to review transactions when at least one merging business has an existing 33% share of supply in the UK and a UK turnover of at least £350 million, while the other party is a UK business, either directly active or supplying goods and services in the UK. This forms an additional basis for establishing jurisdiction in the UK's voluntary regime and it is primarily aimed at capturing “killer acquisitions” and other mergers between non-competitors.

Conclusion

Small start-ups with high potential for growth and which have an exit strategy based on being bought by a large player should be aware of the risks that such acquisitions can entail. Both VC and investment funds should take competition law in consideration, even for small transactions. The outcome of these changes is that competition authorities now have the power to review and block or impose conditions on acquisitions of small companies and start-ups, where they are deemed to be anti-competitive. Investors should bear this in mind when they implement their exit strategy as such exits may not be as straightforward as they have otherwise been. Merger investigations can be time consuming and costly and the authorities can request much information from all parties in order to assess the competitive concerns that may be identified. Third parties (including competitors, customers and suppliers) will also be invited for comment.

Consequently, venture capital companies and investment funds that are not used to merger control should become familiar with competition law. They should also be careful on what is put down in internal memos, particularly about future markets, the impact of potential mergers and competition generally, as that might have to be disclosed to a competition authority.

We have significant experience in this area and would be happy to discuss the issues raised with you.