Friday, May 19, 2023

Will regulators' disregard for legal bounds of merger control lead to more appeals and/or to more Illumina-Grail-style gun jumps?

The Microsoft-ActivisionBlizzard merger reviews set dangerous precedent in some places, not in terms of legal precedent but with a view to what future acquirers of companies may deem the best regulatory strategy. And it's only the most striking case, but the problem goes beyond.

Some competition authorities are not make responsible use of the primary leverage they have. That primary leverage is not that they can block a deal--for which the legal standard is still fairly high--but that they can delay it by forcing companies to appeal blocking decisions, which takes more time than most merger agreements allow. Overleveraging may work for some time. Ultimately, the question is how future acquirers will respond (and what course of action their in-house and outside counsel will recommend).

In recent years I've seen two major tech acquisitions that the acquirers approached conservatively even though there was no legal basis on which anyone could reasonably prohibit those deals. The first one was IBM-RedHat, the second and currently ongoing one is Microsoft-ActivisionBlizzard. In both cases, the merger agreements allowed for an unusually long period of time (about 1.5 years) to obtain the prerequisite approvals. Formal notifications took quite long after the merger announcements, allowing for extensive prenotification talks. In the Red Hat case, the deal was closed well ahead of schedule. In the Activision Blizzard (ABK for "Activision Blizzard King") case, the question is now--incredibly--whether the parties will extend the merger agreement beyond the current July 18 closing date in order to be able to litigate with the CMA (and also the FTC, though if not for the CMA block the U.S. process could be accelerated anytime by creating a situation in which the FTC needs a preliminary injunction, which it most likely wouldn't win).

It's possible that everything still works out. In formal terms, Microsoft's commitment to a U.S. federal district court was only not to close the deal before May 22 (this coming Monday). The CMA's regulatory excess is viewed increasingly skeptical by the ones who ultimately have the power to get the CMA back on track. It would be quite risky for the CMA to take its chances in the Competition Appeal Tribunal (CATribunal, or just CAT): it could suffer a major, potentially even humiliating defeat there, and the politicians it is accountable to or who ultimately control it (the CMA is "independent" until it is not) wouldn't take that lightly. This week, the CMA faced tough questions in the UK Parliament and a warning from the Chancellor of the Exchequer, arguably the second most powerful person in the current UK government and generally very well respected and trusted:

The BBC's Business Editor noted the important "but" in the Chancellor's remark:

Technically, the CMA case is still open. Today the CMA published three documents related to its request for comments on its proposed final order. I shared the links on Twitter.

It's also possible that the CMA doesn't work out a solution in time for the July 18 closing date. I have no idea what will happen then. Given that the CMA decision is extremely weak, an appeal to the CATribunal may be worth the time and effort. However, it's not a criminal offense to simply close a merger and deal with the consequences. My purely personal opinion is that, clearance decisions in several more jurisdictions provided, the point will come in about a month where unless common ground is found, it might make sense to start the closing process and defeat a preliminary injunction motion by the FTC, and to minimize any potential UK fines by treating the UK cloud-gaming market separately after the merger (such as by not offering ABK games on xCloud in the UK, or maybe no xCloud at all, given that the service is unavailable in many countries anyway, though for infrastructure reasons). I can, however, see reasons why Microsoft might not want to do that.

Whatever happens, the world is watching, and especially future acquirers of companies and their lawyers are watching. I believe that with what has happened so far, different strategies will be needed. A constructive approach to regulators is the right choice as long as regulators are constructive, but some are not and that may not change too soon.

The shortest form in which I can state my concern here is that if regulators don't reciprocate and reward a notifying party's constructive attitude, future parties may be well advised to act less constructively in the first place.

While I commend the EU Commission for having reached a far more reasonable conclusion than the FTC (which according to a new MLex report once again refused to engage in behavioral-remedy discussions, despite the EU outcome) and the CMA, and the EC also gets far more support from the worldwide gamer community, I don't fully agree even with that decision, given that this was a case for unconditional clearance and they imposed remedies. Those remedies are good for consumers, but the end doesn't justify the means.

In other words, even the EC in my opinion overleveraged its regulatory powers here for political reasons. I can't imagine the EC could have defended a blocking decision in court. But Microsoft can't litigate against all of the major regulators at the same time, and at some point wants to close the deal. It is, however, a shame that agencies with much less of a reputation for antitrust regulation actually made far more appropriate decisions, particularly Brazil's CADE and Chile's FNE. They got it right. The Western world's "Big Three" did not (though the EC was less wrong than the other two).

So what's the right regulatory strategy for an acquirer who does a deal that--like Microsoft-ActivisionBlizzard--is legally on the safe side, but there is a regulatory risk for purely political reasons, such as backlash against Big Tech ("techlash")?

The way regulators--even the EC, though primarily the CMA and FTC--have behaved so far in the Activision case, I don't think lawyers can still recommend giving regulators a lot of time prior to formal notification, and hoping that regulators are interested in working out reasonable solutions. One has to prepare for different degrees of unreasonableness in different places.

I see two approaches that are more appropriate for cases that are easy to defend in court but where regulators will act politically and disregard the law or if necessary even the facts:

  • Notify ASAP:

    Instead of giving regulators the courtesy of long pre-notification talks that may just turn out a waste of time, it may be better to notify this type of merger at the earliest opportunity. It can be done within weeks of a merger agreement.

    Then there'll be more time for appeals.

    Regulators won't like that. It also makes it harder to get some favorable decisions in reasonable places before the less constructive regulators decide. But in some cases this could still be the best way forward. If a merger agreement comes with a far-off closing date, but notifications are done very early on, regulators know that the strategy is court-centric. Most regulators don't like to lose in court, so this could get them to act more constructively than being nice.

  • Illumina-Grail ("gun-jumping"):

    The Fierce Biotech website summed up Illumina's completion of the acquisition of Grail without certain regulatory approvals (they even set aside half a billion dollars or so for the potential fines) as "regulators be damned."

    It's risky in various ways. But the fines--and the underlying merits--are subject to court review. The worst-case scenario is that a merger may have to be undone later, and that is another reason for which Illumina-Grail is an unorthodox outlier. It's just that certain regulators provoke more such cases.

    Breakup fees in agreements on future mergers may rise as a result of the Microsoft-ABK situation. The higher a breakup fee is, the more inclined an acquirer may be to go down Illumina-Grail Avenue.

    Illumina-Grail was an extreme case. They disputed some regulators' jurisdiction over the case. That will not be an option in ABK-style deals. So I'm not saying others would do it exactly the same way. What I could imagine, however, is that some companies may seek as many approvals as possible, focus on the positive outcomes, and then determine that one or two negative decisions are not a reason to cancel the deal.

    The only hard limit for a merger between two U.S. companies is a U.S. injunction. No one would want to bear the consequences of acting in contempt of a prohibitive injunction by a U.S. federal court. The risks outside the U.S. can be calculated if it's a U.S.-U.S. deal.

    In other words, an approach that would have been deemed irresponsibly risky in the past may now make sense in certain situations.

The best solution would be for regulators to act constructively and to apply the law faithfully. The latter apparently works in countries like Brazil and Chile, so why shouldn't it in some larger economies where it used to work until recently?