Legal Alert – The FCCA Eager to Initiate In-depth Investigation in Merger Cases – How Does This Affect M&A?
Over the past two years, the number of in-depth merger investigations or so-called “second phase” investigations opened by the Finnish Competition and Consumer Authority (FCCA) has increased five-fold from 3% of all merger cases in 2014 to 14% of all merger cases in 2017 and 17% of all merger cases in 2018. This increase is noteworthy because an in-depth investigation can take three months and can be extended by two months by the Finnish Market Court.
The FCCA’s Increased Acitivity
The FCCA is increasingly dedicating resources to investigating regional markets, even though one could expect most markets to be Europe-wide, as Finland has been a member of the EU since 1995. However, this does not appear to always be the case according to competition authorities. For example, the European Commission pointed out in its recent communication to the European Parliament titled “The Single Market in a changing world” on 22 November 2018 that “administrative and regulatory barriers continue to discourage small businesses from expanding cross-border.” It appears that the European Commission does not consider itself to have succeeded well enough in the creation of an internal market.
Furthermore, the FCCA has ended up with even narrower geographic markets in the context of merger control for example in the following cases:
- In the acquisition of Restel Hotellit Oy by Scandic Hotels Oy in 2017, the FCCA stated that the acquisition would have a negative impact on competition in the local accommodation markets. The FCCA mandated and received local divestments.
- In the acquisition of Med Group’s dental business by Colosseum Dental Group in 2018, the FCCA investigated private local oral care markets. During the in-depth investigation, the FCCA investigated negative impacts at the level of individual dental clinics and came to the conclusion that the acquisition would have had a negative impact on competition in four locations. The FCCA mandated and received divestments in those cities.
- Local concerns were also raised by the FCCA in connection with the merger of two security companies, Prevent 360 Group and Avarn Security, this year. The FCCA’s approval was, in the end, conditional upon the divestment of a part of the merging entity’s manned guarding and security services related business. In addition, the merging entity committed to subcontracting manned guarding and security services to competitors for the duration of three years.
- The FCCA opened an in-depth investigation into Posti’s acquisition of Transval, which has strong market positions in the allegedly local internal logistics and warehousing markets, in December 2018.
The FCCA’s investigation period has also grown in duration, partly due to disagreement on relevant market definitions. In fact, the FCCA has declared certain submitted notifications to be incomplete close to the end of the in-depth investigation period, resulting in the relevant case being returned to the starting point. Moreover, it has become customary for the FCCA to request further extensions from the Finnish Market Court in complex cases.
Impact on M&A
The FCCA’s increased activity and its new ways of approaching and handling merger control cases have a direct impact on parties on both sides of M&A deals. This impact is, of course, primarily felt in terms of deal security, timing and valuation/cost. In transaction terms, this means that the parties need to consider a number of issues and risks, such as the following:
- Merger Clearance Risk. Who should bear the risk of the merger control approval? Is it a “hell or high water” ? Should there be a break fee in case the transaction is not approved? Earlier, the latter was considered as a fairly remote chance in Finland, but not so much anymore under the “new FCCA”
- Costs. A second phase investigation means increased external and internal costs. Even though most of the external costs are incurred by the buyer, should the buyer also cover the seller’s external costs? In the event that closing accounts are prepared, any costs incurred by the target should be discussed as well
- Locked Box Interest. The locked box mechanism has been the prevailing purchase price mechanism especially in auction processes. With a longer period between signing and closing, the amount of interest or “ticker” should be considered carefully on both sides.
- Conduct Between Signing and Closing, Gun-jumping. A longer period between signing and closing puts pressure on so-called “Conduct Between Signing and Closing” covenants, which usually impose at least some limits on the target’s operations after signing and are usually put in place to protect the buyer. However, at the same time, the target must be able to continue operating as an independent competitor and, for example, cannot share commercially sensitive information with the buyer (so-called suspension rules). Combined with the usual eagerness to start integration, the parties need to be vary of not breaching suspension rules – a phenomenon known as “gun-jumping”.
- Risk Allocation. How should the risk inherent in the representations and warranties be allocated between parties between signing and closing? The matter must be assessed quite differently if the closing takes place, for example, six months after the signing, instead of one month.
- Deal Security and Conditions Precedent (CP). Merger clearance is often the most obvious of the deal’s CPs, but it is not the only one. A longer period between signing and closing may also increase risk under the other CPs and thereby the entire deal.
- Risk to the Target’s Business. A longer period between signing and closing also results in some uncertainty for the target’s customers and suppliers, which may negatively affect the target’s business. The target’s other competitors may also take advantage of this uncertainty.
There is no right answer to the above questions. Circumstances are always different and at the end result usually boils down to each party’s risk appetite and negotiation power. However, the above provides some examples of the many impacts had by the FCCA’s increased activity. Furthermore, in many cases where the transaction is cleared during the first phase, the parties will nevertheless still need to come to an agreement on most of the above items already at the negotiation table before the deal is actually signed and filed with the FCCA.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.