Vertical antitrust merger theories have received increased public attention in recent years. With deals such as the $70 billion CVS Health/Aetna, $85 billion AT&T/Time Warner, and $66 billion Bayer/Monsanto mergers grabbing headlines in 2018, the business and antitrust communities have sought greater clarity on vertical merger analysis. Perhaps in response, top officials from the antitrust agencies gave speeches in 2018 dedicated to these vertical issues; the U.S. antitrust agencies contemplated issuing new vertical merger guidelines to address uncertainties; and the FTC held hearings to explore what this vertical analysis might look like.
Data for the United States show an uptick in significant vertical investigations that is consistent with this increased public attention. Over the past three years (2016-2018), there were 14 significant investigations with vertical aspects (i.e., those with at least one vertical allegation identified in the complaint, one vertical remedy included in the consent decree, or one vertical issue mentioned in the closing statement), up 250% from only four over the prior three years (2013-2015).
Over the eight years tracked by DAMITT, significant U.S. investigations with vertical aspects lasted two months longer on average than those without vertical aspects. This result could be driven by the fact that vertical analyses are not as straightforward as pure horizontal analyses. Economic modeling of vertical issues can also be more complex than that required for horizontal mergers.
EU investigations in 2018 that went to Phase II lasted on average 12.5 months from announcement to resolution, double the theoretical duration of the fixed timetable under the EU Merger Regulation but a sharp decrease from 2017’s record high year over the eight-year period tracked by DAMITT. Phase I remedy cases lasted an average of 8.4 months, nearly 10% higher than the 2011-2018 average and more than five times the theoretical period under EU Merger Regulation. The difference between the statutory timetable and actual review period is in part attributable to companies engaging in extensive pre-filing talks with Directorate-General for Competition (DG Competition) staff over the scope and detail of the parties’ filings, and the ever-growing use of timetable extensions in Phase II.
Phase II Proceedings
In 2018, the average duration of EU proceedings that were resolved in Phase II dropped to 12.5 months from an average of 15.1 months in 2017. The 17.3% decline in this average duration is the sharpest decrease recorded in DAMITT’s eight-year history.
This significant drop is in part attributable to the reduction in the average time between the announcement and the notification of transactions. In 2018, the average time that elapsed between announcement and notification of transactions was 5.8 months, down from the 8.3-month record high recorded in 2017 and bucking the trend of year-on-year increases. Despite this decrease, the average remains well above the 2011 low of 3.2 months from announcement to notification. Merging parties invariably institute pre-filing talks with DG Competition staff very shortly after transaction announcement, if not before, and the recent growth of the period between announcement and notification is mostly explained by the intensity of staff demands for the inclusion of data and internal documents in the filing before the formal timetable is triggered. In contrast, the time between notification and the resolutions of investigations remains unchanged from the previous year with an average of 6.7 months.
Another key factor accounting for the drop in the average duration of Phase II investigations is the number of unconditional clearances decisions adopted in 2018. Unconditional clearances went from representing only about 20% of Phase II decisions adopted by the Commission from 2013-2017 to 40% in 2018. Phase II investigations resulting in unconditional clearances in 2018 took an average of 11.1 months, whereas Phase II transactions that were cleared with remedies (conditional clearances) took an average of 14.6 months - more than 30% longer. This difference in the average duration is further reflected in both a decrease of the average duration of pre-filing discussions - 4.7 months for transactions resulting in unconditional clearances compared to an average of 6.9 months for transactions that were conditionally cleared - and a decrease of the formal review period with unconditional clearances taking an average of 6.4 months, compared to 7.7 months for transactions resulting in conditional clearances.
Notably, 2 of the 4 unconditional clearance decisions - Essilor/Luxottica and Apple/Shazam - mainly gave rise to vertical or conglomerate issues. Qualcomm/NXP, which was cleared in Phase II subject to behavioral remedies, was also a primarily non-horizontal merger. This observation could be interpreted as a sign that the Commission, like its counterparts in the United States, is paying closer attention to vertical and conglomerate mergers. But in two of these cases, at least, the Commission determined that they were not problematic, albeit after extended consideration.
All but one Phase II investigations entailed the use of “voluntary” extensions of time under Article 10(3) of the EU Merger Regulation. These Article 10(3) extensions are common practice, occurring in 86% of all Phase II investigations during the 2011-18 period analyzed by DAMITT and on average adding approximately 0.8 months. These extensions may be at the behest of the parties (for example to create space for a remedy discussion), but they are often conceded at the instigation of staff. The maximum duration permitted for “voluntary” extensions is 20 working days (0.9 months).
In addition to the extensive use of voluntary extensions of time, the Commission used its powers under Article 10(4) of the EU Merger Regulation to “stop the clock” in 50% of 2018 Phase II investigations, adding an average of 1.3 months to each affected investigation. Excluding Qualcomm/NXP, which was an outlier suspended for an exceptional period of 4.4 months, would bring the average time added to the remaining 11 investigations down to 0.7 months. The proportion of investigations that were hit with “stop the clock” orders in 2018 remains below the all-time high of 71% recorded in 2014, but there has been a steady increase in the Commission’s use of this procedural tool in the last three years (from 33% in 2016 to 40% in 2017 to 50% in 2018).
Average Period from Announcement to End of EU Phase II Cases (2011 – 2018)
Phase I Cases
The average duration of Phase I cases resolved with remedies was 8.4 months, an approximately 15% increase from the 7.3-month average in 2017 but about 10% higher than the 7.5-month average over the 2011-2018 period tracked by DAMITT. This increase in 2018 is in part attributable to the increase in the duration of pre-filing talks, which is reflected in the period from announcement to the notification of transactions going up more than 20% from 5.5 months in 2017 to 6.6 months in 2018.
The increase in the average duration of Phase I cases is further explained in part by the decision of parties to pull-and-refile in at least two cases - Knauf/Armstrong and Quaker/Global Houghton. Both notifications were withdrawn approximately one month into the review, with one transaction re-notified approximately 3 months later, while the other transaction was re-notified after a delay of approximately 7 months. In total, from announcement to decision, Knauf/Armstrong and Quaker/Global Houghton were resolved in 12.7 and 20.5 months, respectively. “Pull and refile” is not a familiar device in the EU, by way of contrast to U.S. practice. The reason for its use in these two cases is unclear. Excluding these two transactions would bring the average duration down to 7.3 months, which is slightly below the 2011-2018 average.
Average Period from Announcement to End of EU Phase I Remedy Cases (2011 – 2018)
A No-Deal Brexit Could Significantly Impact the Merger Review Process and Complexity of Cross-Border Deals in Europe
The effect of the UK’s impending exit from the EU remains a matter of speculation but there could be a significant impact on merger review filings and timing in Europe.
In the event the UK Government is able to get the Withdrawal Agreement (or a similar agreement) signed into law, the UK competition regime will remain tethered to the EU during the implementation and transition period until at least the end of 2020. During that period, the EU Merger Regulation will continue to apply and the Commission will have exclusive jurisdiction over transactions that meet the EU jurisdictional thresholds under the one-stop shop principle. This outcome would delay any impact until at least 2021, allowing for better merger planning.
However, in the event of a no-deal Brexit, which remains a possibility amid the political turmoil, the UK will at once become a significant new standalone jurisdiction. According to the UK Competition and Markets Authority’s own estimates, Brexit could increase the merger control caseload of the UK’s Competition and Markets Authority (CMA) by 50% or more. Despite recent recruitment drives and an increase in funding, the prospect of this sudden increase in workload is a real challenge. Conversely, there will likely be a slight reduction in the number of cases that qualify for review under the EU Merger Regulation since revenues generated in the UK will no longer count towards the EU jurisdictional thresholds. But this is likely to be a slight reduction only, since many of the cases triggering UK review will still need EU filing. And it is true of course that cases taken out of EU review will then be likely to trigger national filings at the member state level.
For cross-border transactions that trigger multiple filings including the EU and the UK, in addition to the increased administrative burden, there is a risk that companies may encounter difficulties where they are seeking to coordinate the various review timelines. This risk is particularly higher in cases that require remedies. In this regard, U.S. merger control practice provides for a somewhat flexible review period, which allows some scope for coordinating the timing of EU-US merger reviews. In contrast, the UK operates under a theoretically fixed statutory timetable, which is not aligned with the EU timetable, and has a remedies process that is entirely separate from the substantive review.
The most immediate challenge of a no-deal rupture concerns transactions under DG Competition review at the moment of Brexit. It appears that these deals will become subject to UK review, in addition to the ongoing EU examination.
Given these contingencies and uncertainty, companies should plan accordingly by negotiating appropriate flexibility in their transaction agreements.
2018 U.S. Merger Trials Completed Faster than Prior Years
U.S. merger litigations brought in 2018 were completed significantly more quickly than in prior years. The FTC’s 2018 preliminary injunction litigations blocking both the Tronox/Cristal and Wilhelmsen/Drew Marine transactions averaged only 104 days from the filing of the complaint to the judge’s decision, significantly more rapid than the 207-day average for 2016 and the 203-day average for 2017.
The shorter duration was primarily driven by the Tronox litigation, which had a unique procedural posture, and may not be representative of future durations. Typically, the FTC files complaints in administrative and district court proceedings nearly simultaneously. In Tronox, however, the FTC filed an administrative complaint in December 2017 and a district court complaint in July 2018 - more than seven months later. The FTC and Tronox were able to engage in discovery during this seven-month period and even completed the administrative trial, obviating the need for extensive discovery in the federal court proceeding. Consequently, the Tronox district court hearing began only 28 days after the district court complaint was filed, more than three months sooner than average for complaints filed in 2016 and 2017. Overall, Tronox was decided only 58 days after the filing of the district court complaint. By comparison, the FTC’s case against Wilhelmsen was decided 149 days after the complaint, which was closer to, but still faster than, the average duration of preliminary injunction actions over the prior two years. Wilhelmsen and the 5-7 month average observed in recent years should be viewed as more representative of the current duration of merger litigation.
Time to Litigate Government Antitrust Merger Challenges in Federal Court (Complaints Filed in 2011, 2015, 2016, 2017, and 2018 and Litigated to a Decision)
Outlook for 2019: Impact of Brexit and U.S. Merger Review Reforms (Amid Partial U.S. Government Shutdown)
While the circumstances of future antitrust-sensitive transactions may lead to results above or below DAMITT averages, 2018 statistics suggest that parties to the hypothetical average “significant” deal subject to review only in the United States would have to plan on approximately 10-11 months for the agencies to investigate a transaction, and another five to seven months if they want to preserve their right to litigate an adverse agency decision. Deal timetables for EU cases where the investigation is likely to proceed to Phase II need to account for an average lapse of almost 13 months from announcement to clearance.
These trends could see significant shifts in 2019. In the United States, citing results from DAMITT, the antitrust agencies announced several encouraging reforms late in 2018. If these reforms are fully and successfully implemented in 2019, following an end to the partial government shutdown, we expect the duration of significant U.S. antitrust merger investigations will likely shorten. In Europe, Brexit could add a layer of complexity on the merger review process. A no-deal Brexit in particular would increase the workload of the CMA, potentially creating merger delays and uncertainty; it could also trigger additional national filings at member state level. Due to these uncertainties, businesses should plan accordingly by negotiating flexibility into transaction agreements to address these contingencies.