The Digital Markets, Competition and Consumers Act 2024 (UK DMCC) introduces significant reforms to the UK’s Competition and Markets Authority (UK CMA) and competition laws. The UK DMCC forms part of a global trend to focus merger review increasingly on vertical concerns and concerns about eliminating nascent competition, including by so-called “killer acquisitions” of firms perceived as future competitive threats. The reforms are particularly relevant to the technology and pharmaceutical sectors given the heightened attention to nascent competition in such fields and will require new thinking on the approach to global merger review processes.
New Jurisdictional Test
The UK DMCC, which received Royal Assent in May 2024, makes several significant changes to the UK CMA and the country’s competition laws relevant to merger review. Among those changes, the UK DMCC creates a new threshold for UK CMA jurisdiction over potential mergers. The UK CMA now gains jurisdiction over a merger where only one party to the merger supplies at least 33% of relevant goods or services in the UK (or a substantial part of it) and has an annual turnover of £350 million or more in the UK, provided that the other party has a UK nexus (i.e., supplies goods or services or has a presence in the UK).
This new jurisdictional test is in addition to the current tests, which provide for UK CMA jurisdiction where (1) both parties, after the merger, would have a share of supply of goods or services of 25% or (2) the target has an annual turnover of £70 million (increased to £100 million with the UK DMCC).
Under the existing thresholds, unless there was an increment to the pre-merger shares of supply of the parties that either brought the parties over the 25% or reinforced a share above 25%, the UK CMA would not have had jurisdiction to review the merger. As such, purely vertical deals (e.g., combinations between a supplier and a distributor) or deals where the target company was still an early-stage company with no established presence could escape UK CMA scrutiny.
This led the UK CMA in recent years to apply an increasingly flexible interpretation of the rules, and its jurisdiction has been challenged in the courts, even if the UK CMA ultimately prevailed. Notwithstanding, there is only so far the authority has been comfortable pushing these rules and it has found itself needing to concede to a lack of jurisdiction over deals involving targets with limited UK nexus.
Focus on ‘Killer Acquisitions’ and Nonhorizontal Concerns
This new test, which can be triggered by one party’s share of supply alone, is designed to address this lacuna and introduce greater legal certainty. The new threshold is intended to capture situations where a party with potential market power acquires an entity that could develop into a competitor down the road, even if the acquisition target lacks any meaningful current market position, such as an innovative startup. Antitrust agencies around the world have referred to such acquisitions, if harmful to competition, as “killer acquisitions,” which they view as a potential means for established companies to eliminate future competitive threats. The new threshold will also give the UK CMA the power to review more vertical deals as well as conglomerate mergers, where two parties operate in different (but related) industries.
UK Remains a Voluntary Merger Control Regime, With One Key Exception
Importantly, the UK merger control regime remains voluntary, meaning there is no positive obligation to notify the UK CMA of a transaction or seek approval in advance, except for specific firms active in the digital space (discussed below). The UK CMA’s merger intelligence unit, however, proactively monitors M&A activity and is expected to continue to focus its attention on killer acquisitions and deals taking place involving nascent, innovative startups. Where the UK CMA has jurisdiction over completed deals it can call-in, investigate, order the parties to hold the businesses separate during its investigation, and eventually prohibit and order parties to unwind the transaction.
Given the expanded jurisdiction of the UK CMA, it is therefore important that parties considering a merger engage with UK antitrust counsel to determine an appropriate strategy for engagement and risk allocation provisions in contracts to avoid unintended consequences.
New Merger Notification Obligations for Digital Firms with ‘Strategic Market Status’
As an exception to the voluntary nature of the UK merger control regime, the UK DMCC creates a positive notification requirement for a select number of firms designated as having Strategic Market Status (SMS) by the UK CMA’s new Digital Markets Unit (DMU). The DMU will designate firms as having SMS for a digital activity if they meet specific revenue thresholds (>£25 billion revenue globally or >£1 billion revenue in the UK) and if they are deemed to have substantial and entrenched market power.
Such entities will be subject to a duty to report prospective mergers in situations where (1) they cross a 15%, 25%, or 50% share ownership/voting threshold (regardless of whether the SMS firm will exercise control or material influence over the target) and (2) the total deal value exceeds £25 million.
Crucially, SMS firms will not be able to close any acquisition that meets the thresholds until they have notified the UK CMA and the agency has had the opportunity to review the deal. While this review is, in effect, only an initial screening (timing is limited: five days to confirm the notification is complete and a further five days to review the substance), it will give the UK CMA time to reach a view as to whether to initiate a more fulsome investigation and, if necessary, potentially impose a binding order preventing closing.
DMCC Timing
While the UK DMCC was passed in May of this year, the new thresholds are not expected to come into full force until autumn 2024 when the new UK government passes the relevant regulations. SMS designations are not expected until at least 2025 as the UK CMA must first launch an investigation.
For more background on the UK DMCC, see our earlier LawFlash.
The UK DMCC is just the latest in a global trend of merger control regimes focusing on “killer acquisitions” and vertical or conglomerate mergers. In December 2023, the US Federal Trade Commission (US FTC) and US Department of Justice (US DOJ) jointly released the 2023 Merger Guidelines. While these Merger Guidelines are not binding law, they provide valuable insight into how US agencies view merger enforcement. The 2023 Merger Guidelines raised concerns about acquisitions of nascent competitors and suggested increased focus from the US FTC and US DOJ on “killer acquisitions” and vertical and conglomerate mergers.
The United States’ increased focus on mergers affecting nascent competitors is reflected in recent cases such as the Matter of Sanofi/Maze Therapeutics, Inc. On December 11, 2023, the US FTC brought an action seeking to block Sanofi’s proposed acquisition of an exclusive license to Maze Therapeutics’ therapy in development for treatment of Pompe disease. The US FTC alleged that Sanofi was a monopoly supplier of approved drugs to treat Pompe disease.
Though Maze Therapeutics’ therapy had not yet hit the market or completed the clinical trials necessary to seek US FDA approval at the time of the action, and thus did not possess any market share, the US FTC claimed it threatened Sanofi’s market position in the future and alleged that the acquisition would eliminate this competition. The parties abandoned the transaction following the US FTC’s action.
In the European Union (EU), this global trend is reflected in the European Commission’s (EC’s) Illumina/GRAIL case and the European Court of Justice’s (ECJ’s) Towercast judgment. The Illumina/GRAIL case involved Illumina’s acquisition of GRAIL, a startup with no existing EU revenue at the time of the deal. The deal raised alleged vertical competition concerns based on Illumina’s role as an anticipated supplier to GRAIL as well as GRAIL’s anticipated rivals.
While the deal did not meet the EU’s mandatory notification thresholds because GRAIL did not have any turnover within the EU—and critically nor did it meet notification thresholds in the referring EU Member States—the EC asserted jurisdiction on the basis of Member State referrals under Article 22 of the EU Merger Regulation. The parties completed the acquisition notwithstanding the EC’s investigation. The EC blocked the acquisition in September 2022 due to vertical competition concerns and in October 2023 ordered the parties to unwind the merger.
However, the ECJ determined in September 2024 that the EC had acted unlawfully in accepting the referral request under the Article 22 procedure where the transaction would otherwise have escaped merger control review by the EC and individual Member States because it did not meet the relevant jurisdictional thresholds.
While the Illumina/GRAIL ECJ judgment undoubtedly represents a blow to the EC’s attempt to enforce against below-threshold acquisitions, a number of Member States have jurisdictional thresholds that are more flexible than those of the EC and may allow those states to assert jurisdiction over deals below the EC thresholds and provide a basis for Article 22 referral for some “killer acquisitions.” It is also likely the EC will recommend other Member States implement similar changes to their laws, and the EC may also consider amending its own jurisdictional thresholds in time.
Another avenue for below-threshold merger enforcement in the EU is to apply EU competition law to mergers after they have closed. The ability for the EC to do so was recently confirmed in the ECJ’s March 2023 Towercast judgment. In that ruling, the ECJ ruled that the Member State authorities and national courts may scrutinize mergers as an unlawful abuse of a dominant position. This is likely to be a last resort as it would require complex and lengthy investigations, but certain Member State authorities—Belgium and France in particular—have indicated that they intend to use the Towercast caselaw to investigate consummated deals.
For more background on the implications of the ECJ’s judgment in Illumina/GRAIL, see our earlier LawFlash.
The UK CMA has gained a reputation in recent years as an aggressive and impactful antitrust enforcer. The UK DMCC only bolsters its powers, and as such it is more relevant than ever to consider the role of and approach to the UK CMA as part of the global merger review process. The new mandatory merger reporting requirements for parties in digital industries with an SMS designation will compel these parties to develop their advocacy positions at an earlier stage in the merger process and may impact timing considerations across multiple reviewing jurisdictions.
Meanwhile, the increased investigative focus by competition watchdogs in the United Kingdom, United States, and EC on smaller and nonhorizontal deals is relevant for navigating merger reviews in the artificial intelligence, technology, and pharmaceutical industries in particular. These industries have been the focus of much investigative attention to date, and the industries feature active startup ecosystems from which some startups will seek potential exit opportunities through mergers and acquisitions with existing firms.
Navigating those transactions requires an appreciation of current antitrust thinking, including about nonhorizontal concerns, and an understanding of the impacts of the evolving regulatory regimes and anticipated timelines across jurisdictions.
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