Using Competition Law to tackle ‘Killer Acquisitions’: Rethinking the current state of Pre-Merger Screening

– Vamsi Krishna

Killer Acquisitions: An Introduction

A Killer/Nascent acquisition can be referred to as the pre-emptive acquisition of a potential competitor by any established undertaking to nullify any future threats of competition. Before a nascent firm reaches its optimal potential and emerges as a competitor in the future, it gets acquired by a dominant firm in a certain industry. Acquisitions of the said character are rarely brought to the attention of the competition authorities as adequate compliance with the turnover thresholds diminishes any further scrutiny. This topic is of great significance as it sheds light on the futility of Turnover Threshold-Driven Anti-Trust screening where it has failed to prevent the proliferation of oligopolies and monopolies. This type of acquisition is much prominent in the case of Pharmaceutical and Tech Industry. In the case of the former, nascent firms are acquired with the objective to bring the ongoing projects and activities to an end. In the paper: ‘Killer Acquisitions’ by Cunningham, Ederer and Ma, the author states that in the pharmaceutical industry, Dominant firms rarely acquire potential competitors to gain access to expertise. On the contrary, potential entrants are acquired to impair any new drugs from making inroads into the market which in-turn shall affect the profits of the dominant firms. This rationale can also be extended to all industries that are highly reliant on Research and Development. Conversely, in the case of the tech industry, potential competitors are purchased for the purpose of accessing a product or a service but in doing so, a nascent competitor is eliminated from an industry. The lack of competitors in the tech industry could result in increase in prices and lack of product variety or innovation. Interestingly, back in July 2020, a series of e-mails between Facebook CEO Mark Zuckerberg and CFO David Ebersman, dating back to early 2012, surfaced on the internet which involved the former expressing his desire to acquire multitudes of early-stage companies, including the likes of Instagram to neutralize any future competition. Thus, it is highly imperative that the criterion that are to be used to evaluate a transaction shouldn’t be based on deal turnovers alone.

How are ‘Killer Acquisitions’ addressed in the EU: Revival of the ‘Dutch Clause’

The European Union’s (“EU”) merger control system has resorted to this issue by resurrecting Article 22 of the EU Merger Regulations (“EUMR”), also referred to as the ‘Dutch Clause’. It was in effect during a time when a sizeable number of member states lacked a merger control regime of their own and were highly reliant on the European Commission (“EC”) to assess a transaction. The said provision essentially empowers a National Competition Authority (“NCA”) to notify the EC when a certain National or EU Turnover Threshold has not been exceeded, provided the transaction in question either affects the trade between the member states or within the territory of one or more member states. In order to address the issue that has arisen, the EC has issued a new guidance on March, 2021 with respect to how Article 22 needs to be applied. The new commission guidelines accord a great deal of clarity to Article 22 by enumerating that a member state can refer a transaction to the EC even if the turnover isn’t indicative of the future competitive potential of any of the undertakings that are sought to be acquired. The EC can assume jurisdiction over firms with a highly competitive potential; innovative/ competitively significant products, services, intellectual property rights etc. The new guidance also enables the EC to review deals not later than six months before closing when the material facts pertaining to a transaction has not been disclosed to the public. It can be noted that the new guidance implicitly recognizes the inadequacies of the Revenue based thresholds present in the EU merger control regime. Almost a month after the reintroduction of the new guidance, an application from a Biotech firm Illumina was filed before the Counsel d’état aka The French Council of State to suspend the referral of its acquisition of an early stage company: ‘Grail’ for 7.1 Billion USD on the ground that the national turnover thresholds weren’t met and there was less likelihood that the said transaction shall result in any potential anti-competitive effect. The French Council of State did not have the requisite jurisdiction to suspend a referral and the same constituted a part and parcel of the EC’s substantive powers. Since Grail was developing a DNA Sampling technology that can be used to screen for cancer in asymptomatic patients, the EC enumerated that the significance of the DNA sampling technology wasn’t reflected in the deal turnover and there is a high chance that the access to the technology shall be restricted or the price of the same shall be increased. The deal is currently in standstill on account of Article 7 of EUMR.

 Inadequacies of the Competition Act, 2002: Envisioning Additional Deal Thresholds

The Competition Act, 2002 of India states that in the event, the asset/turnover based thresholds (3.5 Billion INR worth of assets and 10 Billion INR in the case of turnover) under Sec. 5 of the said act are exceeded, the entities involved in a mergers or combinations are to notify the Competition Commission of India (“CCI”) which evaluates if the transaction might lead to any appreciable adverse effect on competition (“AAEC”). As for Killer acquisitions, they can only be scrutinized if the turnover thresholds are exceeded. This is highly unlikely as the turnover of nascent firms rarely exceed the prescribed threshold. In addition, the Competition Act is devoid of any criteria to assess if a deal is potentially anti-competitive.

However, on the upside, transactions which do not exceed the prescribed thresholds, shall be assessed under Sec.4 of the competition act which prevents firms from abusing their dominant position. It may be possible for reading the notion of Killer Acquisitions into Abuse of Dominant position, as mentioned in Sec. 4 of the act. ‘Abuse of Dominant Position’ under Sec. 4 encompasses placing restrictions on the production or impairing the development of a disruptive/innovative product or a service developed by a nascent company.

Given that the impact of Killer Acquisitions has come to the forefront, it is imperative to come to terms with the inadequacy of Asset/Turnover based thresholds. Even Sec. 4 can be utilized only when the damage has already been inflicted. The existing provisions need to be supplemented with additional criterion for screening a transaction. For instance, the merger control regime can evaluate deals in the context of its value or the transaction size. This threshold is already a part of the United States’ Merger Control Regime and has also been suggested in the 2019 Competition Law Review Committee Report. In addition, The Competition and Markets Authority (“CMA”), the UK Competition regulator, has envisioned what is referred to as the ‘Share of Supply Test’ which enables CMA to exercise jurisdiction over transactions that can bring about an increase in share of supply of goods and services by 25% or more. Also, it is imperative to take into account qualitative thresholds characterized by an assessment of the odds that a certain transaction shall potentially inflict harm on consumers, undermine innovation or result in an anti-competitive effect.

Conclusion

With increasing digitalization of global economy, it doesn’t come as a surprise that many Merger Control Regimes have failed to keep pace with time. It is highly imperative that competition authorities must ensure whether the current thresholds are sufficient to capture Killer Acquisitions and other transactions that might emanate from the current state of the economy. Any potential solutions should be examined in the context of prevention of consumer harm, anti-competitive effect, curtailment of innovation, ability to influence supply of goods and services etc. On the other hand, regulators also shouldn’t fall into the trap of over-regulation which prevents consumers from bearing the fruits of acquisition synergies and innovation.