Decisive Influenc-er? The Proposed UK Backstop to Block the Next ‘Facebook/Instagram’
Part 1: Move Alone and Break Things?
The CMA cannot intervene in a merger where the likelihood of harm is less than 50%, even if the scale of that potential harm is very large … the CMA may be limited in its ability to block a merger like the … acquisition of Instagram by Facebook, even if it occurred today.
UK Government Consultation, 20 Jul. 2021 [para. 188]
Platypus readers already know from our last blog that the proposed UK competition reforms include a special merger control regime that is more lethal to certain “most-wanted” deals: mandatory notification and a lower substantive test threshold to block or otherwise remedy (but probably block) acquisitions by firms designated as having Strategic Market Status (SMS). The SMS set will, in time, surely include Google, Apple, Facebook and Amazon (GAFA) and potentially others.
These proposals would make the UK regime more monotrematic than it is already: substantively, and by definition, the CMA will be able to go places and block deals in global digital markets that other more legally constrained regimes will not.
A Sabre-rattling precursor
We already have at least one prohibition case study of this phenomenon within the current legal framework. In Sabre/Farelogix, blocked by the CMA in early 2020, Sabre had argued that “This … is not a killer acquisition … it does not fit the archetype … [and] is far from Facebook/ Instagram”. The case featured a US acquirer and a US target that had no direct UK customers or revenue (nor, as a B2B player, did Farelogix have UK consumers as part of an ad-funded “free” side to its business model).
The deal was not the first time the CMA intervened in a non-UK-centric transaction in a dynamic global market. But the 2020 case was the first time the CMA leaned in – hard – on jurisdiction to block a deal that the US agency had itself tried to stop and failed. While the CMA’s substantive assessment focused (to some degree) on UK aspects, its remedy was to prohibit the deal globally.
The new SMS test therefore represents the CMA doubling down on the UK as the backstop of Big Tech merger enforcement: if all players but one carry a burden of proof on the balance of probabilities and the last has a prohibition hurdle that the UK Court of Appeal has defined, at the low end, as merely a “more than fanciful” belief in SLC, it will become what economists call the binding constraint on closing an SMS deal.Clearance in other regimes may be as comforting as Sabre’s win in the Delaware federal court. All eyes will be on London’s Canary Wharf — the CMA’s headquarters.
Well, possibly in conjunction with the ACCC’s headquarters in Canberra, Australia. On 27 August, the ACCC proposed Australian merger reform that gives “more than fanciful” a run for its money, arguing that “likely” in the Australian statutory merger test should include … “a possibility that is not remote” (!) However, even if granted this linguistic windfall, the ACCC would — like most common law regimes but unlike the UK — still prosecute mergers in court.
In the above light, the Government should consider whether it wants the CMA to carry the burden of enhanced SMS merger enforcement alone (or possibly as part of an Anglo-Australian alliance) and under what procedural conditions. In this first post we consider whether it is optimal to implement a unilateral UK legislative answer to a global question without (even knowing whether there is any public) peer regime support.
Intellectual honesty
The underlying premise of the UK reforms is a modified version of the Furman Report’s proposal of a balance of harms test.* The goal is to prevent SMS deals with a realistic-but-less-likely-than-not probability (say, a 20% chance) of global-scale and entrenched consumer harm. The rationale: the downside of a “false acquittal” merger clearance in the 20% scenario of consumer harm is thought to be (presumptively) so severe in an SMS deal given the size and nature of the affected market(s) that it justifies lowering the intervention bar from “more likely than not”.
This lower threshold fundamentally implies greater tolerance for “false convictions” not least because, by definition, in more instances than not (e.g. four out of five in the 20% chance scenario) the harm does not actually arise (and any benefits are lost). However, this is perceived as a price worth paying to prevent the really high-impact harmful deals (even if most of that harm would impact foreign consumers, along with UK ones).
Under the current rules, deals involving SMS or other firms can only be stopped by the CMA if a harmful competitive outcome is deemed more likely than not. The UK reform debate has welcome intellectual honesty – if it becomes law, it would be a transparent outcome, endorsed by Parliament, that the intervention threshold is officially and intentionally lower for SMS deals. It avoids the risk that the CMA elasticises the current SLC test for SMS firms by (unconsciously and in good faith) rounding up a realistic chance of a harmful competitive outcome to a likely one (>50% chance) to enable preventative action. Even if done with the best of intentions, rounding up in this way within the current statutory framework would damage the operational legitimacy of the regime.
Unilateral conduct or coordinated interaction?
Platypus does not propose to persuade readers either for or against reform and takes its starting point the Government’s intention to introduce a new regime. But if we take the intellectual honesty of the lower threshold for intervention a step further, and if one believes in a compelling case for reform, wouldn’t it then be right to say that unilateral UK action to block a problematic SMS deal seems a highly leveraged national solution to an inherently cross-border problem?
The nexus? It vexes us.
In order to ensure proportionality and jurisdiction, the merger would also need to have a material impact on the UK, established through a ‘UK nexus test’.
UK Government Consultation, 20 Jul. 2021 [para. 180]
The Consultation proposes a range of possible nexus metrics for mandatory review — revenues, users, assets, employees and/or R&D and legal presence — but for now punts the rather critical question of which ones would make the grade and how (at fn 104). However, Platypus suggests that a paradigm SMS deal will have:
- two non-UK parties, or in MJ parlance, it will be a “foreign to foreign” transaction: GAFA is All-American and most targets are also non-UK. In the FTC’s recently-published study of Non-Reportable HSR acquisition by GAFA plus Microsoft (or GAFAM) over 2010-2019, it looked at 616 transactions, of which roughly two-thirds were domestic i.e. US targets and few of the remainder will be British;
- extra-territorial remedial enforcement from a UK perspective; and
- global relevant digital markets (by definition); which means
- the US and the EU as the two regimes with the most sizeable nexus (as a proxy, UK GDP is less than 10% of that of the combined US/EU), and, commensurately, one cannot expect more than a single-digit percentage of the metric of your choice — users, revenues, assets, employees, and/or total R&D spend — in the UK in a paradigm SMS deal.
Does the CMA have to go it alone?
The paradigm SMS deal will also be capable of being reviewed by those two largest regimes.
- EU review. For a peer regime like Germany or France that remains in the EU, the European Commission is the “best-placed authority” in the EC case referral system to tackle a deal with global markets and extra-territorial remedies (and to weather a political storm). And a paradigm SMS case is an Article 22 referral candidate (see the 10-Member State referral of Facebook/Kustomer) — and indeed a large impetus for the expanded role of Article 22. The EU will therefore be able to review a paradigm SMS deal (even if not a single EU Member State has jurisdiction, subject to the view of the courts in the Illumina/Grail appeal) and there are obvious contemporary policy drivers that point to its use in practice.
- US review. The US has no jurisdictional safe harbours and the agencies can investigate deals below the HSR mandatory filing thresholds. And the recent FTC study of non-reportable deals by GAFAM and the new FTC leadership has put paradigm SMS deals as an investigative priority.
If one is in the pro-reform camp, and finds the logic is compelling in favour of a new lower test, wouldn’t it be ideal if at least one of the US and the EU (the two regimes with the most economic nexus to most global SMS deals), but ideally both, agreed that certain paradigm SMS deals posed a sufficient risk of grave harm that they should be opposed by means of lower intervention thresholds?
Before Parliament debates any bill, should it not be aware of whether there is a multi-regime consensus for appropriate legal reform, or, in the alternative, that the UK proposes to go it alone against Big Tech M&A with merger control weaponry that its closest allies consciously choose not to employ? Platypus agrees with the CMA that it does not necessarily want to be “the world’s police force” or to go it entirely alone on global merger control but if it is given unique powers, it will face pressure to use them.
The pro-reform objection to this might be that SMS deals move fast, the harm is long-lasting, and that it is politically naïve to expect a legislative reform debate at EC level (requiring Member State unanimity) or at US federal level (requiring some sort of bipartisan consensus) compared to the relatively streamlined UK process. On this view, it is time for the UK to step up if no one else will (or can).
It may also be hoped that, if the UK moves first, others will follow, and therefore that the UK (perhaps with Australia) will be a catalyst for change. Perhaps so. But is that not taking a huge punt, where “following” at least by the EU and/to US has the same issue that may be causing the impatience: when would all EU Member States and/or US Congress get behind the idea? While Australia (or at least the ACCC) may be on board, AUKUS is not quite the same without the US.
Who has the CMA’s back?
On the assumption that, for the foreseeable, the CMA would be going it alone, is it not then fair to ask the question: if this idea’s time has come, then should we expect the CMA’s expert peers — the DOJ, FTC and DG Comp — to support the CMA having such backstop powers? Because the case for reform rests on the CMA solving problems (also on behalf of US and EU consumers) that the relevant agencies themselves cannot solve (with existing tools). It works like a global outsourcing arrangement or proxy. And the EC and US agencies of late cannot breezily be dismissed as “pro-GAFA” or inherently cautious or inert. For one, the FTC under Chair Lina Khan, does not like Facebook’s acquisition of Instagram or WhatsApp any more than the CMA: see FTC v. Facebook; for the DOJ and EC, on the behavioural side, see US v Google and the raft of EC Article 102 cases against Google.
If the CMA’s most powerful peers, the US agencies and the EC, were to decline to go on the public record to support the UK reform on global deals with clear (and arguably greater) nexus to the economies and consumers they serve to protect, then that should give the Government pause.
Because a unilateral UK prohibition of many an SMS deal may get politically nasty. And the CMA’s ability to enforce a UK prohibition in US federal court is untested. In principle, litigation could go up to more than one Supreme Court. In such circumstances it would be good to ascertain whether the CMA, and the UK, will have government friends or foes in such an outcome. There may not be anything inherently wrong with the next GE/Honeywell transatlantic spat, but it would be worth factoring in the Government’s risk appetite. It may be naïve to assume that GAFA M&A and the UK/US trade relationship will remain discrete issues, at least across political administrations at either end. The last thing the CMA needs is to be granted new tools and then to be turned upon, politically, when it actually deploys them.
Where the rubber hits the road: the backstop of blocking when others cannot
If one assumes that only the UK changes its test, but the US/EC legal position and process remains unchanged, then the real value-add or practical impact of the change arises only where
- the US/EC either decline to challenge because their concerns cannot meet their domestic legal test for intervention, or
- where they try and fail (see Sabre).
Because if the US/EC can intervene on their current test, the CMA ought to be able to do likewise with the SLC test: the UK regime in process, in substantive discretion and in judicial review is the most generous to the agency/prosecutor of all three: compare Sabre v CMA and H3G v Commission with Sabre v CMA et al.
And if the US/EC were actively against intervention because they think a particular deal is benign or positive, the case for UK reform for such a scenario is highly debatable and the risk of political fallout (and GE/Honeywell echoes) particularly high – where the CMA is blocking deals its US agency peers don’t want it to.
If one removes a domestic lens, the case for reform boils down to the CMA as the global backstop/outsourcing scenario for the West’s major merger control powers to protect many more consumers outside the UK than in.
Regardless of reform intent, this would axiomatically be the consequence of the CMA unilaterally blocking a paradigm SMS deal.
Conclusion
SMS M&A takes place on inherently global markets and merger effects, good or bad, will be likely be global. Like climate change, vaccine administration in a pandemic, digital tax reform and others, all else equal, one state’s actions in isolation will have lesser cross-border legitimacy, and potentially effectiveness, and greater controversy, than if concerted international action is taken.
The US agencies and DG Comp (among other authorities) should not be indifferent to the UK reforms. These reforms would enable the CMA to block a US/US or US/European deal that is capable of review by the US and EC agencies, whose regimes have much greater nexus, and for whom the aggregate expose for consumers in their jurisdiction probably dwarfs that of the UK in the paradigm case.
So the CMA should lead a coordinated dialogue where the US agencies and DG Comp make their position, and their support, plain. That way, the UK Parliament is in the know where others stand. If the support is there, the CMA would effectively have international backing for unilaterally using its unique new test, at least ex ante and in principle.
Conversely, if the Government cannot muster such cross-border support, then one cannot help but ask whether this is a legislative change whose time, rightly or wrongly, has not yet come.
In short, we need to think carefully what we wish for. Especially if our British wish-list is all-British, and highly leveraged.
