For legal teams navigating their companies or clients through M&A deals, these US and global trends have far-reaching implications. At very least, they ratchet up costs and expectations. It’s a changing scene and new risks to address in your contracts. Here are the ten trends to watch as we head into 2020.
1. Policy and regulatory uncertainty abound on antitrust fronts.
If Brexit goes through, the Competition and Markets Authority will pick up a lot more work, assuming oversight responsibilities previously shared with the EU Competition Commission. How long will it take to come up to speed?
Add to that a general increase globally in M&A antitrust/competition review. “It used to be that only a few countries out there had merger regimes, but now it’s more than 130,” said Eleanor Tyler, an antitrust specialist with Bloomberg Law. “Merging parties have a lot more to worry about regarding where they’ll trigger a review, how much it will cost and how long it’s going to take.”
And in China, three agencies merged into a single competition regulator. “We’re still waiting to see how that shakes out,” said Tyler. “Because of trade unrest between the US and China, it has become increasingly difficult to parse out whether any change in outcomes is industrial policy or politics. So that’s an insecurity I see going forward.”
2. EU regulators are divided between local or regional control of antitrust concerns.
In the EU, there’s some push from France and Germany, based on fallout from the failed Siemens/Alstom merger, to weaken the EU’s merger regime in favor of regional powerhouses. As Margrethe Vestager, European Commissioner for Competition (“the rich world’s most powerful trustbuster”) nears the end of her term in 3Q2019, there’s disagreement on whether to dial back competition law to allow these regional champions to form.
“This is a possible problem for mergers going forward,” said Tyler. “It could lead to a period of uncertainty where people are less sure of how their merger will be handled, what the rules are, and review could be a lot more opaque than it has been in the past. This is a trend to watch, because many of these decisions are made on a local basis, and a lot of competition is a global thing.”
The controversy in the EU provides a window into the tension between enforcement that considers local markets and what some see as a different international competitive environment.
3. Horizontal mergers will become more challenging due to market conditions.
“A lot of mergers are happening in the same markets in a very tight time frame, and as a result, markets are becoming arguably more concentrated,” said Tyler. “When that happens, it’s harder to justify a merger to competition authorities, because as the competition becomes more concentrated, the harm from each additional accretive merger is greater, and each merger then faces a different competitive environment than the one that happened immediately before it.”
This trend undoubtedly will spur interest in vertical mergers – those joining companies that produce separate services or components along the value chain, rather than the same product.
4. Regulatory reviews will likely be slower.
The UK will have to ramp up for a post-Brexit environment, and the enforcement experience is just developing in two fairly new regimes – Australia and China.
In Australia, merger review is dragging because the Australian Competition and Consumer Commission (ACCC) is using compulsory information gathering much more. The agency’s 2017-2018 annual report showed that fewer than half of phase one reviews were completed within eight weeks, compared to 80% the previous year.
In China, monopoly law is quite young, and according to its website, the new State Administration for Market Regulation has only 16 people working in three divisions related to reviews. For an economy the size of China, that means M&A review is either going to be extremely cursory or extremely slow.
Time is money, and M&A reviews in these countries will undoubtedly consume more of both.
5. Regulators will look more closely at compliance with remedies.
“There’s a very noticeable trend of additional enforcement of responsibilities and remedies” in the US, EU and UK to make sure companies do what they say and competition doesn’t suffer after a merger, said Tyler. “As more regulators get really up to speed, they have begun enforcing against technical violations much more often. A lot of failure to file, a lot of gun-jumping, and a lot of failure to deal truthfully with the authorities is presently being enforced, and companies are meting out big fines in this area. And that’s a relatively new thing.”
6. Behavioral remedies or structural remedies? There’s no consensus.
When reviewing a merger or acquisition, regulators can seek to resolve competitive concerns through structural remedies (such as requiring divestitures of certain product lines or business units) or behavioral remedies (such as requiring companies to continue to do business with certain customers). Which approach is favored?
“The two agencies that enforce competition law in the United States – the Department of Justice and the Federal Trade Commission – are 100% not on the same page about this issue,” said Tyler.
- Makan Delrahim, head of the antitrust division at the Department of Justice, has repeatedly said he thinks behavioral remedies are a bad idea. He sees it as an undesirable form of market regulation, and he’s sunsetting some legacy behavioral remedy agreements that were in place in various industries. And although Delrahim argues that the remedies he proposed for Sprint/T-Mobile are structural, they contain an obviously behavioral component. Was that a one-off?
- On the other hand, the Federal Trade Commission has recently entered behavioral remedies in a couple of different mergers, and that was the only way they felt they could let the mergers go forward (over the objection of some commission members).
“So they’re really not on the same page about this and we’re just going to have to keep watching,” said Tyler. “At this point, it’s possible that whether behavioral remedies are on the table for your deal as opposed to purely structural remedies where you have to give up a chunk of the business, may depend on which of the two agencies draws your review.”
7. Expanding economic sanctions call for deeper due diligence.
For instance, in Iran we have long had sanctions against nuclear and missile programs, the Islamic Revolutionary Guard Corps and high-level economic targets such as the oil, shipping and banking industries. “However, we’re seeing a sea change in what is being targeted,” said Robert Kim of Bloomberg. Kim brings a unique perspective on national security issues that arise in M&A deals from his tenure with the US Treasury Department and the US Securities and Exchange Commission.
New sanctions affect the steel, iron, aluminum and copper industries in Iran. “One can flippantly say that we are trying to sanction Iran into the Stone Age,” said Kim. “More substantively you can say that we are now sanctioning industries that have a basic economic impact, not just the areas that have a national security impact.
“As Iran sanctions continue to expand, US Office of Foreign Assets Control (OFAC) enforcement actions are increasing in both frequency and severity. More parties can expect to be penalized by OFAC and to have heavier penalties applied to them, so due diligence of legacy liability is really quite crucial.
8. Cross-border acquisition of US companies will be tougher than ever.
The interagency Committee on Foreign Investment in the United States (CFIUS) has greatly expanded its staffing, sophistication and the degree of scrutiny it applies to acquisitions of US companies. Ten years ago, the Treasury Department had no one working full-time on CFIUS matters,” said Kim. “Now they have an entire staff and an office dealing with CFIUS issues.”
As a result, the CFIUS disclosures that used to be at the bottom of an M&A checklist are now a mandatory filing in many more cases. Skip this advance analysis at your peril.
“We’ve seen a number of cases of potential Chinese acquisitions of US technology companies being stopped,” said Kim, “along with deals such as the planned acquisition of Qualcomm by Singapore-based Broadcomm in 2018. Moreover, CFIUS scrutiny is being applied in much more picayune ways in areas that probably would never have been thought of before.” CFIUS’s retroactive scrutiny of the acquisition of Grindr by a Chinese company over data privacy concerns is an example. (By late July it was unclear whether CFIUS will require the Chinese company to sell Grindr.)
“All these actions by CFIUS are, going to be further expanded by the Foreign Investment Risk Review Modern- Modernization Act (FIRRMA),” said Kim. “It reforms and strengthens the CFIUS review process and is going to have a major impact in the years to come.”
Many of the actions that involve national security – commonly attributed to the Trump Administration – are actually bipartisan and likely to be here to stay. So keep these in mind and act accordingly.
9. More US agencies are stepping into M&A-related economics and national security issues.
“We’re seeing a major multiplication in the number of US government agencies becoming involved in economic issues with national security significance,” said Kim. For instance:
- The Department of Commerce, which is probably not the department people would most associate with national security issues, has taken center stage with its ban on Huawei Technologies Co. Ltd., the Chinese multinational that violated US sanctions on Iran.
- The Department of Justice was quick to take action regarding Huawei as well, leading to the arrest of the company’s chief operating officer in Canada. A few months later, the DOJ announced a related action to protect US intellectual property from Chinese interests.
- The Federal Communications Commission recently denied China Mobile an FCC license and announced that licenses previously issued to Chinese companies would be further reviewed.
“It’s noteworthy that this was actually a bipartisan announcement by both Republican and, Democrat commissioners, so it’s something that we can probably expect to see for many years to come,” said Kim.
10. The tariff landscape is an open range.
The tariff actions the Trump Administration has taken have long-term implications that could be quite extensive, said Kim. “The legal basis for tariffs is so potentially broad that there are any number of situations in which it could be used” and potentially undermine the economics of a merger or acquisition.
“Past tariffs had been implemented under statutes that deal with trade – the Trade Act, the Trade Expansion Act,” said Kim. “The Mexico tariff announced in May 2019 was under IEEPA [the International Emergency Economic Powers Act] with national security as a concern. IEEPA’s span is quite broad; it authorizes the President to deal with any unusual or extraordinary threat to US national security, foreign policy or economy that originates outside the US, even in part.
This broad language could be applied to any range of conceivable threats to the United States – in this case, illegal immigration into the US. “I wish I could give you a list of regions of the world and potential threats that this could be applied to, but if I did, we would probably be here a very long time,” said Kim.