FTC & DOJ Review of Merger Guidelines 2023

By Alexandros Kazimirov

On July 19, 2023 the Federal Trade Commission (FTC) and Department of Justice (DOJ) released a draft update of the Merger Guidelines. A couple of weeks later, FTC’s Chair Lina Khan and DOJ’s Assistant Attorney General Jonathan Kanter explained the rationale behind some of the changes proposed in a call with the American Economic Liberties Project.

Starting off, both agency heads lauded the feedback shared by workers and employees, people from many sectors, because as enforcers they may have blind spots. They emphasized the importance of a very robust process of public input and encouraged public participation by submitting comments. From their remarks on the Guidelines, there are five distinguishable points worth noting.

Novel theories of economic harm

Kanter mentioned that competition today looks different than in the 1960s. Today markets are more complex and the agencies should be looking at how competition in any particular market functions holistically. Namely, what are the dimensions of competition (i.e. labor, platforms, privacy etc). Once, there is an understanding of how it works in all dimensions, the potential impact is looked into. Besides the implications that this may entail for the scope of merger investigations, with additional burdens of materials produced, it may also suggest a shift in legal reasoning in enforcement cases. That is, not to start by defining the marketplace, but taking a more nuanced approach by accounting all the different interdependencies, and how they may be affected by the merger.

Consequences for antitrust litigation:

In enforcement cases, after the government has defined the market in question and established the concentration, the impact of the merger is examined. The government “establishes a presumption that the transaction will substantially lessen competition. Once such a presumption has been established, the burden of producing evidence to rebut the presumption shifts to the defendants.” FTC v. Staples

The defendants (the firms pursuing the merger) then often submit quantitative and qualitative analysis that the consumer efficiencies resulting from the merger constitute a greater benefit than the risk of lessened competition. Courts have considered pro-consumer efficiencies to be a legitimate defense to the presumption of harm.

“In this expedited appeal, prudence counsels that the court should leave for another day whether efficiencies can be an ultimate defense to Section 7 illegality. We will proceed on the assumption that efficiencies as presented by Anthem could be such a defense under a totality of the circumstances approach.” United States v. Anthem

However, with the government pivoting towards a more nuanced theory where the interests of multiple classes of constituents are taken into account, the focus may not necessarily lie with the consumer-side anymore. This in turn, may negate the rebutting effect that the pro-consumer efficiency defense has.

Pro-labor momentum

Khan followed up saying that rather than focusing on two-dimensional theories of economic harm, they will focus on the impact on all constituencies. For example, the way mergers harm competition not only on the customer side, but also on the supplier side (including for workers). She also described how the guidelines analyze labor markets differently from consumer-oriented markets. Harm to workers can be inflicted by reducing or freezing wages, cutting benefits, or working-schedule unpredictability. The FTC has been consistent in pursuing its pro-labor policies, as for example with the proposed ban on non-competes earlier in 2023.

Lower HHI thresholds but limited resources

The proposed Guidelines include lower thresholds of market share which triggers the presumption of anti-competitive harm. As to whether the market ought to expect an increase in investigations of mergers, Kanter answered that it’s a small fraction of mergers that are investigated. That a lot of the hysteria is overblown, and that the DOJ only challenges what the DOJ considers to be problematic. He said that “best case scenario is that the problematic mergers aren’t coming to us in the first place.” But in the end, he reiterated the need to take into account present market realities. Despite the bravado however, there were 32 investigations in 2021, with 2022 looking more active but less successful. Expecting resource-limited agencies with a losing-streak to substantially pick up the speed may be counterintuitive.

Focus on potential harm to competitors rather than competition

“Taken as a whole, the legislative history illuminates congressional concern with the protection of competition, not competitors, and its desire to restrain mergers only to the extent that such combinations may tend to lessen competition.” Brown Shoe v. United States. The Guideline draft seeks to prevent firms from barring entry of rivals, or tipping the doorman to do so. In other words, reaching a position of strength, whereupon they may exercise their leverage to foreclose entry to competing products, refuse to deal, or take out nascent competitors altogether.

Serial acquisitions

Another point of interest is serial acquisitions, which result in substantial impact in a market when treated in the aggregate. The Guidelines provide that if an individual transaction is part of a firm’s pattern or strategy of multiple acquisitions, the agencies consider the cumulative effect of the pattern or strategy. This pertains to mergers which individually may not be substantial to harm competition, i.e. with a low market share. It also entails a backward-looking review of an existing pattern of transactions.

Conclusion

Throughout the August 10 call, both agency heads reiterated their commitment to operate on the basis of market realities. In his closing remarks, Kanter reaffirmed that it is important to stay rooted in law and in economics. But the agencies have occasionally struggled to convey this to the courts. In 2021, the DOJ challenged the vertical merger between AT&T and Time Warner under Section 7 of the Clayton Act and lost. The courts found the government’s theories of harm to be too detached from economic reality. While the FTC bounced back with the block of Lockheed Martin’s acquisition of Aerojet Rocketdyne in 2021, a series of setbacks followed in 2022. The latest review of Merger Guidelines offers an insight into the motivation of the agencies to pursue their duties administering the Clayton Act rigorously. What remains obscure is whether the federal courts will be persuaded by their novel theories.

The EU Foreign Subsidies Regulation: a Structural Change to the Internal Market

By Amedeo Rizzo

The EU Foreign Subsidies Regulation (“FSR”) has been published on the 14^th of December 2022 and entered into force on 12 January 2023. The Regulation creates a new regime with the objective of protecting the internal market of the European Union from distortions created by foreign subsidies. In doing so, the FSR imposes an approval procedure for foreign subsidies to companies engaging in commercial activities in the EU and notification obligations for M&A activities of significant EU businesses and large EU public contracts.

The objective of the Regulation is to close an existing loophole in the internal market supervision, which was very restrictive towards EU state aid regulation but did not take into account possible distortions coming from non-EU countries. This is supposed to create a level playing field for all companies that operate in the EU, supervised by the European Commission, through investigatory powers, ex officio, and rights to implement measures to ensure compliance.

Foreign Subsidies covered by the Regulation

The FSR covers any form of contributions, direct or indirect, provided by non-EU governments or any public or private entity whose actions are attributable to the government of the non-EU country. Contributions could be distortive where they confer benefits that would not normally be available on the market EU company, and which are selective in the way they advantage one or more companies or industries as opposed to all companies or all companies active in a particular industry.

The notion of financial contributions under the FSR is a quite broad concept, including many forms of advantages. As provided in the Regulation, financial contributions include but are not limited to:

• the transfer of funds/liabilities, such as capital injections, grants, loans, guarantees, tax incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling;
• the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
• the provision of goods or services or the purchase of goods or services.

These kinds of benefits include zero- or low-interest loans, tax exemptions and reductions, state-funded R&D and other forms of intellectual property subsidization, government contracts and grants of exclusive rights without adequate remuneration.

The subjects that are limited in their ability to provide contributions to companies operating in the EU internal market are all the entities related to the non-EU country and therefore include:

• the central government and public authorities at all other levels;
• any foreign public entity whose actions can be attributed to the third country, taking into account elements such as the characteristics of the entity and the legal and economic environment prevailing in the State in which the entity operates, including the government’s role in the economy; or
• any private entity whose actions can be attributed to the third country, taking into account all relevant circumstances.

Distortion of competition in the EU

One of the fundamental factors to trigger the FSR is that the foreign subsidy needs to potentially distort competition in the EU, meaning that it negatively affects it.

Distortions in the internal market are determined on the basis of indicators, which can include:

• the amount of the foreign subsidy;
• the nature of the foreign subsidy;
• the situation of the undertaking, including its size and the markets or sectors concerned;
• the level and evolution of the economic activity of the undertaking on the internal market;
• the purpose and conditions attached to the foreign subsidy as well as its use on the internal market.

In general, the Commission seems to have quite an extensive distortionary power over the decision-making process of recognizing the negative effects. However, it will have to take into account also the positive effects on the market, which will burden the Commission with a balancing test.

The Regulation provides some dimension-related thresholds for financial contributions to what is likely to distort competition:

• A subsidy that does not exceed the de minimis aid measures, contained in Regulation (EU) No 1407/2013 (EUR 200,000 per third country over any consecutive period of three years) shall not be considered distortive.
• A subsidy that does not exceed EUR 4 million per undertaking over any consecutive period of three years is unlikely to cause distortions.
• A subsidy that exceeds EUR 4 million is likely to cause distortions if it negatively affects competition in the EU.

The role of the European Commission

On its own initiative, the Commission may review a transaction or a public procurement ex-officioon the grounds of information received by any source or notifications of potentially subsidized M&A transactions or public procurement bids. If the Commission finds sufficient evidence concerning the existence of a distortive subsidy, it carries out a preliminary review.

When this procedure leads to enough evidence of the foreign distortive subsidy, the Commission initiates an in-depth investigation. When a foreign distortive subsidy is identified, the Commission can impose redressive measures or accept commitments.

The non-exhausting list of redressive measures includes the reduction of capacity or market presence of the subsidized entity, the refraining from certain investments, and the repayment of the foreign subsidy.

The recipient of the subsidy may offer commitments and, for instance, pay back the subsidy. The Commission may accept commitments if considers them to be full and effective remedies to the distortion.

A separate mechanism of market investigations allows the Commission to investigate a particular business sector, a type of economic activity or a subsidy if there is reasonable suspicion. In its surveillance activities, the Commission can conduct a request for information that entities or their associations provide certain information, irrespective of whether they are subject to an investigation.

To block damaging activities the Commission can impose interim measures. Additionally, it is authorized to impose fines on the entities for breaching procedural requirements or not providing information. The fines can reach 1% of the aggregate turnover or 5% of the average daily aggregate turnover for each day of the violation, calculated on the previous year’s data. Fines can go up to 10% of the turnover when companies fail to notify a transaction or a subsidy granted during a public procurement procedure, implement a notified concentration before the end of the review period, or try to circumvent the notification requirements.

Conclusion

This measure constitutes a paramount change in the EU approach to competition in the internal market. It will become important to see how much the Commission is going to use this new instrument, and the way it is going to assess market distortions on a case-by-case basis, as there is probably going to be a delicate equilibrium with trade legislation and possible countervailing measures.

It is important for companies that operate in the EU that have received these kinds of financial contributions from non-EU countries to quickly prepare to apply this new Regulation. Perhaps some groups that can fall in this situation might want to reform their internal processes to collect information, understand reporting requirements and preparing justifications or notifications to the EU.

European Court of Justice rules on Vivendi-Mediaset

By Gabriele Accardo

On 3 September 2020, the European Court of Justice (“ECJ“) issued a preliminary ruling (in the case C‑719/18) establishing that the restrictions imposed by Italian law on Vivendi’s 28% stake of the capital of Mediaset is contrary to the principles on the freedom of establishment enshrined in Article 49 of the Treaty on the Functioning of the European Union.

The ruling is a timely reminder of the fundamental importance of the “freedoms” established in the EU Treaties, when EU Member States and the European Commission itself are increasing their scrutiny on acquisitions of undertakings and assets by companies from third countries (i.e. outside of the EU).

The practical effects of the principles established by the ECJ in this case will likely be a game-changer in the Italian telecommunications and media sectors, potentially paving the way for further integration and convergence. Indeed, the timing is always of the essence, and this ruling comes at a crucial time, considering that the Italian Government is currently discussing the potential merger between TIM and OpenFiber, which may lead to a new monopoly operator managing the next generation of superfast broadband network.

Interestingly, the ECJ ruling, which upholds Vivendi’s rights, may push Mediaset into the arena to play an active role in this game, a possibility which so far appeared to be prevented by the same provision of Italian law challenged by Vivendi.

Facts at the origin of the dispute

Over the years, Vivendi, which is aFrench group active in the media sector and in the creation and distribution of audiovisual content, has made significant investments in Italy, including acquiring a controlling stake in Italy’s former telecommunications incumbent Telecom Italia SpA (“TIM“), and 28.8% of Mediaset group (and 29.94% of its voting rights), also active in the media sector, as Vivendi.

In turn, Mediaset lodged a complaint before the Italian communications regulatory authority, the Autorità per le Garanzie nelle Comunicazioni (“AGCOM“), claiming that Vivendi’s allegedly hostile acquisition of Mediaset shareholdings infringed a provision of Italian law which, with the aim of safeguarding pluralism of information, prohibits companies, the revenue of which in the electronic communications sector, including that secured through controlled or affiliated undertakings, is greater than 40% of the total revenues generated in that sector, may not earn, within the so-called integrated communications system (“SIC“), revenue exceeding 10% of the total revenues generated in that system (pursuant to Article 43 of Testo Unico dei Servizi di Media Audiovisivi e Radiofonici, consolidating the provisions on broadcasting and audiovisual media services, so-called “TUSMAR“).

Interestingly, the provision in Article 43 of TUSMAR relied upon by Mediaset had been introduced by the Italian Government, when Silvio Berlusconi was its Prime Minister, as a compromise with the political parties of the opposition, so as to introduce a “guarantee” in case Berlusconi’s media empire extended into the telecommunications sector, and actually to prevent Mediaset acquiring control of TIM.

AGCOM upheld Mediaset claim that Vivendi had acquired a significant presence in the electronic communications sector in Italy and ordered Vivendi to put an end to that infringement (ultimately leaving Vivendi to choose whether relinquishing its stake in either TIM or Mediaset).

To comply with the AGCOM decision Vivendi thus transferred to a third company part of its stake of Mediaset, but it then brought an action before the Tribunale Amministrativo Regionale per il Lazio, claiming that ultimately AGCOM’s enforcement of the TUSMAR provision would limit Vivendi’s investments in TIM and Mediaset in violation of EU law principles, such as freedom to provide services and/or the free movement of capital. AGCOM (and Mediaset) claimed that the protection of media pluralism enshrined in the Charter of fundamental rights of the EU, would actually back the restrictions on Vivendi investments in Italy.

The TAR Lazio thus requested the ECJ to issue a preliminary ruling on the compatibility with the EU principles on the freedom of establishment of the threshold of 40% of the total revenues generated in the electronic communications sector, which is set in order to restrict the access of undertakings active in that sector to the SIC.

The provision of Italian law is not proportionate to protect media pluralism

The ECJ preliminarily concurred with the AGCOM that the protection of media pluralism, enshrined in Article 11 of the Charter of Fundamental Rights can, in principle, can justify a restriction on the freedom of establishment, provided the restriction is proportionate to achieve that objective.

However, the ECJ concluded that, in the circumstances, the provision of Article 43 of the TUSMAR is not proportionate to pursue that objective (safeguarding media pluralism) and would ultimately restrict Vivendi’s freedom of establishment, within the meaning of Article 49 TFEU, by preventing it from acquiring more shares in the capital of Mediaset and therefore exert greater influence on that company.

The ECJ clarified that, in essence, Article 43 of the TUSMAR precludes a single undertaking from acquiring a large part (10% of the total revenues) of the media sector (the SIC) in Italy when such an undertaking already has significant presence (40% of the total revenues generated) in the electronic communications sector, and therefore seeks to prevent the negative aspects of convergence between these two sectors.

In order to assess the proportionality of that provision, the ECJ considered the link between, on the one hand, the revenue thresholds referred to in the TUSMAR and, on the other hand, the risk to media pluralism.

First, the ECJ held that the 40% threshold provided for by TUSMAR was calculated based on an artificially narrow definition, noting that AGCOM ought to have taken into consideration all of the markets comprising the electronic communications sector, and not just some of them (such as fixed network wholesale and retail services, mobile wholesale services, radio and TV broadcasting services for the transmission of content to end users). In doing so, the AGCOM left important markets outside its perimeter, such as mobile telephone retail services or other electronic communications services linked to the internet and satellite broadcasting services, which actually are of increasing importance for the transmission of information.

In the same vein, the ECJ also found that whether an undertaking meets the 10% threshold concerning the SIC is not, in itself, an indication of the risk of influencing media pluralism, since the SIC includes a wide range of different markets, potentially leading to false positives or negatives, ultimately being inconclusive as to the risk to media pluralism. For instance, if an undertaking earned more than 10% of the revenue in just one of the markets making up the SIC, with the result that the rate achieved remains below 10% when all the markets making up the SIC are taken into consideration, the fact that the 10% threshold of total revenue generated in the SIC is not achieved would not be such as to exclude all risk to pluralism of the media.  Similarly, in the event the 10% of total revenue in the SIC were reached, would not necessarily point to a risk of media pluralism, where that revenue was shared between each of the markets comprising the SIC.

Finally, the ECJ held that the method used for the calculation of the revenue earned in the electronic communication sector or in the SIC was not appropriate, insofar as treating a “controlled company” in the same way as an “affiliated company” for such purposes is likely to lead to revenue being taken into consideration twice and thus to a distortion of the calculation of revenue generated in the SIC (the same revenue of a company active in the SIC might therefore be taken into account both for the calculation of the income of an undertaking which is its minority shareholder and in calculating the revenue of an undertaking which is its majority shareholder and actually controls it). Such practice does not appear reconcilable with the objective pursued by the provision at issue.

Therefore the ECJ held that Article 43(11) of TUSMAR cannot be considered to be appropriate for attaining the objective which it pursues, in so far as it sets thresholds which bear no relation to the risk to media pluralism, since those thresholds do not make it possible to determine whether and to what extent an undertaking is actually in a position to influence the content of the media.

As to the next steps, it is understood that the AGCOM has requested an opinion to the State Attorney to assess whether it should take any precautionary measure (e.g. revoking its decision or annulling it outright) before the TAR Lazio will hand down its judgment, which most likely will quash the AGCOM decision.

Surely, once again, the ECJ has confirmed the fundamental importance of EU law for EU nationals seeking to invest in other EU Member States and to establish their businesses in those markets. The importance of EU law to build a stronger single market has never been more actual than today.

The Concept of “Irreversible” Transactions and the Application of Ex-post Remedies: the Sky Italia / R2 Decision

By Gabriele Accardo and Sabina Pacifico

On 20 May 2019, the Italian Competition Authority (“ICA” or “Authority“) issued its decision regarding the acquisition by Sky Italian Holding S.p.A. (“Sky“) of certain assets of the digital terrestrial Pay-TV owned by Mediaset Premium S.p.A. (“Mediaset Premium“). The ICA decision imposed significant behavioral remedies to clear the transaction, which the parties decided to close prior to clearance. Sky is the dominant player in the market for Pay-TV services in Italy, and Mediaset Premium was the only significant competitor in the market.

 

Background

Between March and November 2018, Sky and Mediaset Premium entered into a number of preliminary interrelated agreements in view of the sale of R2 S.r.l. (“R2“) to Sky. R2 is a company established in May 2018, through the transfer of a business branch of Mediaset Premium, that carries out technical and administrative activities necessary for companies offering Pay-TV services (such as the management of signal encryption, commercial services, administrative management of customers, activation and deactivation of services, call centers and assistance) and runs the terrestrial digital broadcasting technical platform of Mediaset Premium.

On 28 November 2018, Sky and Mediaset Premium submitted the merger filing to the ICA and two days later the transaction was closed without waiting for the clearance decision of the Authority (there is no stand-still obligation under Italian merger control rules), therefore facing the risk of significant remedies being imposed.

On 28 March 2019 the ICA sent a Statement of Objections (“SO“) to the two companies, wherein it raised serious doubts as to the compatibility of the transaction with the competition rules.

 

The preliminary conclusions in the SO

In the SO, the Authority made clear its competition concerns and highlighted its intention to block the merger or to authorize it with remedies, chiefly due to the following issues:

• The transaction would have strengthened Sky’s already dominant position in the (i) retail market for Pay-TV services – since Mediaset Premium was its sole direct significant competitor – and in the (ii) market for wholesale access to the technical platform used to offer paid digital terrestrial services.
• As a result of the transaction, Sky would be the sole provider of access services to the technical platform necessary for Pay-TV services by triggering the exit of Mediaset Premium from the market. According to the ICA, the mere acquisition of R2 would have the same (anticompetitive) effects as Sky acquiring the entire Mediaset Premium.

In essence, buying R2 allowed Sky to instantly reach almost five million additional customers who already have an R2 smartcard or set-top box.

 

The Decision and the behavioural remedies

Following the concerns set out in the SO, and the clear intention of the Authority to, at best, clear the transaction only with significant remedies, Sky dropped the plan to acquire R2 and withdrew the merger filing.

However, on 5 April the ICA approved the merger by imposing behavioural measures, having concluded that the transaction had already produced irreversible anticompetitive effects in the market.

In fact, as a result of the transaction, Mediaset Premium’s clients migrated to Sky. According to the ICA, once the clients have moved to a different competitor, the effects of the acquisition are irreversible.

Thus, the ICA could not help but imposing remedies aimed at restoring the competitive level that had been reduced by the exit of the main – and sole – significant competitor from the Pay-TV market.

Under the conditions imposed by the ICA, Sky:

• will be prohibited from entering into exclusive rights for audiovisual content and linear channels for internet platforms in Italy for three years in order to restore the level playing field in the market for Pay-TV services and allowing other operators that provide their services through internet;
• shall grant access to competitors to any new platform it may develop that is compatible with the R2’s assets, under fair, reasonable and non-discriminatory conditions.

 

Conclusive remarks

The case shows that the peculiar features of digital markets, such as the Pay-TV market, necessitate close scrutiny of the effects of a transaction in the market, prior to the transaction’s completion. In cases like the one at issue, once a transaction has been completed, it may be difficult – if not impossible – to restore the status quo ante. Therefore, extensive remedies may be expected, since even the “de-merge” would not be enough.

In the case at issue, the returning of R2 to Mediaset Premium could not, according to the ICA, eliminate the anticompetitive effects caused by the transaction – as these occurred before the filing and, most importantly, prior to the clearance decision.

The conclusion reached by the Authority is quite innovative insofar as it approved a transaction and imposed ex post remedies. This decision may further fuel the international debate regarding the approaches that competition authorities may adopt in the face of the challenges posed by the digital economy.

Qualcomm’s Acquisition of NXP Receives Antitrust Clearance by the European Commission, Subject to Commitments

By Kletia Noti

Introduction

On 28 April 2017, the European Commission (“Commission”) received, pursuant to the EU Merger Regulation^[1], notification of a proposed concentration involving the acquisition, within the meaning of Article 3(1)(b) of the EU Merger Regulation, of NXP Semiconductors N.V., a Dutch global semiconductor manufacturer headquartered in Eindhoven, Netherlands, by Qualcomm Incorporated, a United States company world leader in 3G, 4G and next-generation wireless technologies, through its indirect wholly owned subsidiary Qualcomm River Holdings B.V.^[2].

On 9 June 2017, the Commission announced that it was launching an in-depth market investigation (Phase II review). The investigation rests, at least in part, on the basis of conglomerate theories of harm (as will be better seen infra) that resulted from the Commission’s initial market investigation during Phase I.^[3] To do away with the Commission’s concerns, Qualcomm submitted a series of commitments (see infra).

On 18 January 2018,^[4] the Commission announced that it would clear the proposed transaction, as modified by the commitments, on the ground that it would no longer raise competition concerns^[5]. The Commission’s clearance decision is conditional upon Qualcomm’s full compliance with the commitments.

At present, Qualcomm has already received approval from eight of nine required global regulators to finalize the acquisition of NXP. The only exception is China, where clearance is currently pending,^[6] amid USA-China trade tensions^[7]. Should all the regulatory approvals not be in place by the deadline of 25 July, 2018, Qualcomm’s holding company, Qualcomm River Holdings B.V., will pay NXP a termination fee^[8].

 

A background: the companies

Qualcomm Incorporated (Qualcomm) is engaged in the development and commercialization of a digital communication technology called code division multiple access (CDMA). Qualcomm is mostly known for mainly developing and supplying baseband chipsets for smartphones, i.e. chips that allow smartphones to connect to cellular networks.

Qualcomm is divided into two main segments: (i) Qualcomm CDMA Technologies (‘QCT’) and; (ii) Qualcomm Technology Licensing (‘QTL’). QCT is a supplier of integrated circuits and system software based on CDMA, Orthogonal frequency-division multiple access (OFDMA), one of the key elements of the LTE standard, and other technologies for use in voice and data communications, networking, application processing, multimedia and global positioning system products. QTL grants licenses or otherwise provides rights to use portions of Qualcomm Incorporated’s intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products^[9].

NXP Semiconductors N.V. (NXP) is active in the manufacturing and sale of semiconductors, in particular integrated circuits (‘ICs’) and single unit semiconductors. NXP sells broadly two categories of products, standard products and high performance mixed signal (“HPMS”) devices. NXP’s HPMS business includes application-specific semiconductors and system solutions for: (i) Automotive; (ii) Secure Identification Solutions; (iii) Secure Connected Devices; and (iv) Secure Interfaces and Power^[10]. The semiconductors supplied by NXP, including near-field communication (NFC) and secure element (SE) chips for smartphones, are chips enabling short-range connectivity, which are used in particular for secure payment transactions on smartphones.

NXP has also developed and owns MIFARE, a leading technology used as a ticketing/fare collection platform by several transport authorities in the European Economic Area (EEA).

On October 2016, Qualcomm and NXP announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which Qualcomm would acquire NXP by way of a share purchase acquisition carried out through Qualcomm River Holdings B.V.^[11] On May 11, 2018, Qualcomm Incorporated announced that Qualcomm River Holdings B.V. has extended the offering period of its previously announced cash tender offer to purchase all of the outstanding common shares of NXP Semiconductors N.V. (NASDAQ: NXPI) until May 25, 2018.^[12]

 

The Commission’s concerns and the in-depth investigation

Following its initial market investigation, the Commission had several concerns about semiconductors used in mobile devices and the automotive industry.

Concerns in the markets for chipsets used in mobile devices

Conglomerate effects’ theory of harm

More specifically, the Commission’s market investigation showed that, since the merged entity would hold strong market positions within both baseband chipsets (mainly developed and supplied by Qualcomm) and near field communication (NFC)/secure element (SE) chips (supplied by NXP), it would have had the ability and incentive to exclude Qualcomm’s and NXP’s rival suppliers from the markets (through practices such as bundling or tying).

Concerns in the merged entity’s licencing practices related to parties’ significant intellectual property portfolios

Since the merged entity would have combined the two undertakings’ significant intellectual property (IP) portfolios, in particular with respect to the NFC technology, the Commission was additionally concerned that, post-merger, the Commission would have had the ability and incentive to modify NXP’s current IP licensing practices, in relation to NFC’s technology, including by means of bundling the NFC IP to Qualcomm’s patent portfolio.

According to the Commission, this could have caused the merged entity to avail itself of a stronger buying power vis-à-vis customers than absent the transaction. The Commission opined that this would have led to anticompetitive effects in the relevant market, including by means of higher royalties for the NCF patent licences and/or competitors’ foreclosure.

 

Concerns in the markets for semiconductors used in the automotive sector

An additional Commission concern was that the merged entity resulting from the proposed acquisition would have removed competition between in the markets for semiconductors used in the automotive sector, and, more specifically, the emerging Vehicle-to-Everything (“V2X”) technology, which will play an important role in the future development of “connected cars” (through which cars can “talk” to other cars).

Phase II investigation

On 21 June 2017, the Commission launched its Phase II market test.

The Commission’s in-depth market investigation during Phase II of the merger review confirmed some of its initial concerns.

Concerns related to MIFARE

One of the Commission’s concerns was that the merged entity would have had the ability and incentive to make it more difficult for other suppliers to access NXP’s MIFARE technology (a contactless security technology platform used as a ticketing/fare collection platform by EEA transport authorities) by possibly raising licencing royalties and/or refusing to licence such technology, thus resulting in potential anticompetitive foreclosure effects for competitors.

Concerns related to interoperability

In addition, the Commission also noted that, due to Qualcomm’s strong position in the supply of baseband chipsets and NPX’s strong position in the supply of near field communication (NFC)/SE chips, the merged entity would have had the incentive and ability to reduce interoperability of such chipsets with those of rival supplies. The Commission feared that this, in turn, could have resulted in competitors’ foreclosure.

Concern related to the merged-entity’s licencing practices

Finally, the in-depth investigation also confirmed concerns that the merged entity would have had the ability and incentive to modify NXP’s current IP licensing practices for NFC technology, which could have led the merged entity to charge significantly higher royalties.

By contrast, the Commission’s initial concerns concerning the markets for semiconductors in the automotive sector were not confirmed.

 

Qualcomm’s commitments

Qualcomm offered the following remedies^[13] in order to address the Commission’s concerns^[14]:

Concerns related to MIFARE

As seen above, some of the Commission concerns related to possible rivals’ foreclosure effects through actual or constructive refusal to supply of the MIFARE technology.

To address the Commission’s concerns, Qualcomm committed “from the Closing Date and for a period of eight (8) years thereafter, upon written request by any Third Party, to grant any such Third Party a nonexclusive MIFARE License also involving the use of MIFARE Trademarks on commercial terms (including with regard to the fee, scope and duration of the license) which are at least as advantageous as those offered by NXP in existing MIFARE Licenses on the Effective Date”.

Qualcomm also committed “to offer to MIFARE Licensees, on commercially reasonable and nondiscriminatory terms, the extension of the MIFARE Licenses for MIFARE Implementation in an Integrated Secure Element.”

Concerns related to interoperability

A second element of the Commission’s concerns related to the merged entity’s ability and incentive to degrade interoperability of Qualcomm’s baseband chipsets and NPX’s products.

In this respect, Qualcomm also undertook “from the Closing Date, on a worldwide basis and for a period of eight (8) years thereafter to ensure the same level of Interoperability, including, but not limited to, functionality and performance, between: (a) Qualcomm Baseband Chipsets and NXP Products, and the Third Party’s NFC Chips, Secure Element Chips, Integrated Secure Element or NFC/SE or Secure Element Technology; and (b) NXP Products and the Third Party’s Baseband Chipset or Applications Processor as will exist at any point in time between Qualcomm’s Baseband Chipsets and NXP’s Products, unless Qualcomm demonstrates to the Commission by means of a reasoned and documented submission to the Trustee that there are technical characteristics of the Third Party’s products that do not allow Qualcomm to achieve the same level of Interoperability, such as generational differences between Qualcomm’s and the Third Party’s respective chips”.

Concern related to the merged-entity’s licencing practices

The market analysis confirmed the Commission’s initial competition concerns with respect to the licensing of NXP’s NFC patents as a result of the transaction, as seen supra.

Qualcomm committed to not acquire NXP’s NFC standard-essential patents (SEPs) as well as certain of NXP’s NFC non SEPs.  NXP undertook to transfer the abovementioned patents that Qualcomm commits not to acquire to a third party, which would be under an obligation to grant a worldwide royalty free licence to such patents for a period of three years. At the same time, with respect to some of NXP’s NFC non-SEPs that Qualcomm would have acquired, in order to do away with the Commission’s concerns, Qualcomm committed, for as long as the merged entity would own these patents, not to enforce rights with respect to these patents vis-à-vis other parties and to grant a worldwide royalty licence with respect to these parties.

 

Clearance decision

On 18 January 2018,^[15] the Commission rendered public its decision to clear the proposed transaction, as modified by the commitments submitted by Qualcomm, on the grounds that such commitments would suffice to do away with its competition concerns.^[16]

The Commission’s clearance decision is rendered conditional upon Qualcomm’s full compliance with the commitments. A Monitoring Trustee, namely one or more natural or legal person(s) who is/are approved by the Commission and appointed by Qualcomm, has the duty to monitor Qualcomm’s compliance with the obligations attached to this Decision.^[17]

Pending sign-off from China’s regulator, the transaction remains incomplete. At Qualcomm, hopes remain high that the situation will be finalized soon.

[1] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EU Merger Regulation) (Text with EEA relevance) Official Journal L 024 , 29/01/2004 P. 0001 – 0022. Under Article 4(1), It is mandatory to notify concentrations with an EU dimension to the European Commission for clearance.

[2] See prior notification of a concentration (Case M.8306 — Qualcomm/NXP Semiconductors), OJ C 143, 6.5.2017, p. 6–6.

[3] After notification, the Commission has 25 working days to analyze the deal during the Phase I investigation. If there are competition concerns, companies can offer remedies, which extends the phase I deadline by 10 working days. At the end of a phase I investigation: (a) the merger is cleared, either unconditionally or subject to accepted remedies; or

(b) the merger still raises competition concerns and the Commission opens a Phase II in-depth investigation. If Phase II is opened, the Commission has 90 further working days to examine the concentration. This period can be extended by 15 working days when the notifying parties offer commitments. With the parties’ consent, it can be extended by up to 20 working days.

[4]Brussels, 18 January 2018, press release, “Mergers: Commission approves Qualcomm’s acquisition of NXP, subject to conditions”, available at: http://europa.eu/rapid/press-release_IP-18-347_en.htm

[5]Under Article 6(2) EUMR, “Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b). The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.”

[6]On request of China’s commerce ministry (MOFCOM), just days before the regulator’s April 17, 2018 deadline to decide on whether to clear the transaction expired, Qualcomm withdrew its earlier application to MOFCOM on April 14, 2018, and, in concomitance with such withdrawal, it re-filed a new application to obtain clearance of the proposed transaction. See M.Miller, April 16, 2018, Qualcomm to refile China antitrust application for $44 billion NXP takeover: sources, available at: https://www.reuters.com/article/us-china-qualcomm-antitrust/qualcomm-to-refile-china-antitrust-application-for-44-billion-nxp-takeover-sources and Qualcomm Press Release, Qualcomm and NXP Agree, at MOFCOM Request, to Withdraw and Refile Application for Chinese Regulatory Approval, April 16, 2018: https://www.qualcomm.com/news/releases/2018/04/19/qualcomm-and-nxp-agree-mofcom-request-withdraw-and-refile-application.

[7] A. Barry, “Stock Selloff Hurts Arbitrage Traders”, 3 May 2018, https://www.barrons.com/articles/stock-selloff-hurts-arbitrage-traders-1525369030

[8] Qualcomm Press Release, Qualcomm and NXP Agree, at MOFCOM Request, to Withdraw and Refile Application for Chinese Regulatory Approval, April 16, 2018: https://www.qualcomm.com/news/releases/2018/04/19/qualcomm-and-nxp-agree-mofcom-request-withdraw-and-refile-application.

[9] Id.

[10] Id.

[11] Qualcomm Press Release, Qualcomm to acquire NXP, 27 October 2016, available at:   https://www.qualcomm.com/news/releases/2016/10/27/qualcomm-acquire-nxp.

[12] Qualcomm Press Release, Qualcomm extends cash tender offer for all outstanding shares of NXP, May 11, 2018, available at: https://www.qualcomm.com/news/releases/2018/05/11/qualcomm-extends-cash-tender-offer-all-outstanding-shares-nxp

[13] See, for a non-confidential interim text of the commitments, Case M.8306 – QUALCOMM / NXP SEMICONDUCTORS, Commitments to the European Commission, published on 24 January 2018, available at: http://ec.europa.eu/competition/mergers/cases/additional_data/m8306_3395_3.pdf

[14]Brussels, 18 January 2018, press release, “Mergers: Commission approves Qualcomm’s acquisition of NXP, subject to conditions”, available at: http://europa.eu/rapid/press-release_IP-18-347_en.htm

^[15]See above, foonote 4.

^[16] Under Article 6(2) EUMR, “Where the Commission finds that, following modification by the undertakings concerned, a notified concentration no longer raises serious doubts within the meaning of paragraph 1(c), it shall declare the concentration compatible with the common market pursuant to paragraph 1(b). The Commission may attach to its decision under paragraph 1(b) conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission with a view to rendering the concentration compatible with the common market.”

[17] http://ec.europa.eu/competition/mergers/cases/additional_data/m8306_3444_3.pdf

The Italian Competition Authority Authorizes the Acquisition of Two Data Center and Cloud Computing Services Companies

By Valerio Cosimo Romano

With the decision No. 46741, published on 2 October 2017, the Italian Competition Authority (“ICA”) authorized the acquisition of Infracom Italia S.p.A. (“Infracom”) and MC-Link S.p.A. (“MC-Link”) by F2i SGR S.p.A. (“F2i”).

 

The Parties

F2i is an asset management company, owned by institutional investors, which controls two closed-end investment funds and mainly invests in Italian infrastructures. Infracom is a company which provides (i) data center and cloud computing services, which are part of the broader ICT market; (ii) telecommunication services, both wholesale and retail; and (iii) enterprise resource planning services. MC-Link is a publicly listed company which mainly offers data center services (inter alia housing, co-location and server renting).

The transaction was structured as follows: 2i Fiber, a newly incorporated company whose 80% of shares are owned by one of two of F2i’s funds, acquired the exclusive control of Infracom (and, consequently, indirect control of its subsidiaries Softher S.à.r.l. and Multilink Friuli S.r.l., and 89% of MC-Link), and of MC-Link.

 

Relevant markets

The transaction involves the information and communications technology (“ICT”) sector. Coherently with the European Commission’s precedents, the Authority determined that the ICT services market shall be considered individually, without further segmentation. The market separation in smaller divisions, for example co-location provided by data centers, would be unjustified, given the differentiation within the ICT offer itself. Indeed, the ICT offer is usually tailored upon very specific needs of the market base and therefore may change and spread to other markets very easily. The ICA specified that even by ‘unbundling’ the relevant market in smaller segments, there would be no dominance by the new entity.

The ICA further added that, under a geographical point of view, data center and cloud computing services have specific economic characteristics confined to a local market, generally defined by a metropolitan city, given that the client base tends to demand these services within 50 kilometers from its activity. This is due to the fact customers need a signal latency not exceeding certain thresholds, and this is why companies operating in this sector tend to position their facilities in the proximity of urban areas.

According to the ICA, the transaction also involves marginal effects on two other markets: i) wholesale access to fixed public telephone network services; and ii) retail telecommunication on fixed network services, where Infracom owns marginal quotas. However, such markets are generally characterized by the presence of an incumbent operator (Telecom Italia S.p.A.) holding a preeminent position.

 

ICA’s conclusions

ICA concluded that the transaction will not have an impact on competition in the markets of telecommunications and ICT services, with reference to data center and cloud computing services. The Italian Authority for Communications Guarantees (AGCOM) concurred with ICA’s opinion. The transaction was therefore authorized.

Dow/DuPont Merger Cleared by EU Commission

By Maria E. Sturm

On March 27, 2017 the EU Commission cleared the merger of two U.S. chemical companies – The Dow Chemical Company (Dow) and E.I. du Pont de Nemours and Company (DuPont) according to the EU Merger Regulation. The Commission opened the investigation already in August 2016. The reason for the merger being cleared only now, were strong concerns of the EU Commission, which is the highest antitrust regulating authority in the EU. The EU Commission has the competence and duty to control mergers that exceed the thresholds laid down in Article 1 of the Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (EU Merger Regulation). The merger creates the largest crop protection and seed company in an already highly concentrated market. The field of business of Dow and DuPont is particularly sensitive, as farmers strongly depend on seeds and crop protection at affordable prices.

There were three main issues of concern: The EU Commission expected (1) higher prices, (2) less choice for consumers and (3) substantially less innovation.

Both companies operate in two areas: pesticides and petrochemical products.

 

Pesticides

Concerns:

Pesticides comprise herbicides, insecticides and fungicides. Due to the very high market share of Dow and DuPont, after their merger hardly any competitors would be left on the market. This development would most probably lead to higher prices and less choice for consumers. Furthermore, the merger would have detrimental effects on the innovation efforts in the pesticide branch. Globally, only five enterprises (BASF, Bayer, Syngenta, Dow and DuPont) participate in the research and development activity with regard to pesticides, because only those enterprises have the capacity to do large scale research on all three fields of pesticides. Other competitors in this area have no or only very limited research and development capacities and therefore cannot trigger innovation activity on the market. However, innovation is essential to develop pesticides that are less nocuous, more effective or can help when vermin have developed resistances.

Solutions:

Dow and DuPont agreed on selling the worldwide herbicide and insecticide production of DuPont, the worldwide research and development capacities of DuPont and the exclusive license for a DuPont fungicide for rice crop for the European market.

 

Petrochemical products

Concerns:

Dow and DuPont are both in the acid copolymers business. Their merger would reduce the number of competitors in this business from four to three. Furthermore, DuPont has a dominant position in the ionomers business.

Solutions:

Dow sells both its production facilities in Spain and the United States. Furthermore, it terminates its contract with a ionomer provider from whom Dow received the ionomers it sold to its customers.

Dow and DuPont were able to clear initial concerns of the EU Commission about nematicides and seeds. These areas are therefore not affected by the merger decision.

Further mergers are planned in the agro-chemical sector. However, due to the “priority rule” the commission assesses every merger in the order of its notification according to the current market situation. It will be interesting to see, how later mergers will be affected by the Dow/DuPont decision.