In the wake of a European Commission (EC) decision taken in March this year, an entirely new aspect of competition law analysis could be on the horizon.
When a transaction is notified for approval to a competition authority, the impact of the deal on the key elements of competition – such as price, the level of output, quality and choice – are typically assessed. For sectors where innovation is important, a well-known additional aspect of a competition authority’s review is the assessment of a potential loss of innovation due to the elimination of pipeline products – that either would have entered existing markets or created new ones.
During its review of an agrochemicals merger earlier this year, the EC identified a concern relating to competition as regards innovation across the whole crop protection industry – rather than just concerns relating to overlapping portfolios. In particular, the EC was concerned that the merging parties would cut back on the amount they spend on research and development (R&D). To secure a clearance decision for the transaction, the merging parties agreed to a remedies package, which included the divestment of most of the global R&D organization of one of the merging parties.
As part of the established EU Merger Control process, a committee composed of a representative from each of the 28 EU Member States reviews and delivers an opinion on draft EC decisions that impose conditions on a merger. In this case, only nine Member States attended the relevant committee meeting, but all supported the EC’s view. Member States would be prudent, therefore, to understand and apply this new theory to future cases that come before competition authorities.
Global implications and considerations
Given the increasing relevance of innovation to competitive success in many sectors, an open issue is just how far beyond R&D intensive industries the EC will consider applying this new analysis.
In any event, in light of this new approach, parties contemplating transactions in sectors that are R&D intensive should now consider the following additional elements as part of their antitrust risk assessment and global merger control strategy at an early stage:
- The extent to which the merging parties will be considered as important innovators in the industry.
- The R&D capabilities of competitors as compared to the merging parties.
- The possibility for disruptive innovation from new entrants/start-ups.
- The likelihood of third-party complaints about loss of innovation in the industry.
- Relevant IP, personnel, testing facilities and/or other assets that would potentially have to be included in the R&D business to be divested in order to remedy, competition concerns.
- Internal documents specific to innovation that may have to be submitted to the competition authorities (e.g., emails and presentations).
The ruling also raises a question relating to a target’s R&D credentials, which may not be fully known prior to completion, thereby making it difficult for a purchaser to judge properly whether an issue arises. For example, if the target’s R&D efforts include the goal of creating a product that competes with another product made by the purchaser, the EC would likely regard this as raising a competition concern, while the seller/target would likely be reluctant to disclose this information to a purchaser. Such non-disclosure would often be material in a hostile take-over situation, because the target would not be willing to pass information to the purchaser.
Final details concerning the EC’s approach and the basis upon which it reached its conclusion will only be available when its decision is published in the coming months. In particular, it will be interesting to see the extent to which the EC’s analysis will be facts-based and quantitative, or qualitative.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
EY Legal Services Contact:
Kiran Desai – EU Competition Law Leader