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The Dechert Antitrust Merger Investigation Timing Tracker (DAMITT) is a quarterly release from Dechert LLP’s Antitrust/Competition practice reporting on trends in significant merger control investigations in the United States (U.S.) and European Union (EU).
In the U.S., “significant” merger investigations include Hart-Scott-Rodino (HSR) Act reportable transactions for which the result of the investigation by the Federal Trade Commission (FTC) or the Antitrust Division of the Department of Justice (DOJ) is a consent order, a complaint challenging the transaction, an official closing statement by the reviewing antitrust agency, or the abandonment of the transaction with the antitrust agency issuing a press release.
In light of the procedural differences between the EU and U.S., DAMITT defines “significant” EU merger investigations to include transactions subject to the EU Merger Regulation (EUMR) and resulting in either a Phase I remedy or the initiation of a Phase II investigation.
DAMITT calculates the durations of significant investigations in both jurisdictions from the deal announcement date until the completion of the investigation, and therefore includes the time attributable to pre-notification consultation efforts.
The U.S. antitrust agencies concluded only four significant merger investigations in the first quarter of 2021, with three of those investigations concluding in March alone. This light activity suggests that the antitrust agencies may be in a holding pattern during the transition to the Biden administration, especially since the administration has yet to nominate some of the key officials at both agencies. The four significant merger investigations concluded in Q1 2021 are similar in number to the three that concluded during the last presidential transition in Q1 2017.
While it is tempting to read the tea leaves about this low level of activity during a presidential transition, the first quarter typically sees fewer concluded significant investigations than the rest of the year, and the results from the most recent quarter may simply fit into that pattern. Over the last decade, the first quarter also had four or fewer concluded significant merger investigations in 2011, 2013, 2014, 2016, and 2019, none of which were presidential transition years.
Recall too that the U.S. antirust agencies concluded 12 significant merger investigations in Q4 2020, a record high in the 10-year period tracked by DAMITT. This unusually high number of concluded significant U.S. merger investigations in Q4 2020 may have reflected an effort by the last administration to tie up loose ends before leaving office, which could have also contributed to the lower level of activity the following quarter.
Of note, only one of the four significant merger investigations concluded in Q1 2021 resulted in a consent agreement. The FTC concluded its investigation into Illumina’s proposed acquisition of Grail by filing a complaint seeking to enjoin the transaction altogether, and the remaining two investigations concluded after the transactions were abandoned by the parties. These results potentially signal that the agencies may be raising the bar for consent agreements, leading to a higher percentage of complaints and deal abandonments.
Significant U.S. Merger Investigation Activity is Expected to Increase in Upcoming Quarters
Despite the relatively low number of significant U.S. merger investigations that concluded in Q1 2021, looking ahead there is reason to expect that the number will increase. Since September 2020, U.S. filings under the HSR Act have reached levels not seen in two decades. November 2020 was particularly active, with 424 HSR filings compared to 209 the year before. This pattern appears to have held up going into the new year. In February 2021, for example, the agencies received 304 HSR filings, which is also more than double the 140 filings received in February 2020 or the 145 filings received in February 2019.
This continued upswing in HSR filing activity reverses the large drop in HSR filings that was observed as the COVID-19 pandemic began in 2020. Last April and May, for example, only 79 and 73 filings were received by the agencies, which amounted to less than half the 163 and 191 filings received in April and May 2019. The pandemic-related dip in HSR filings last year could provide another explanation for the low number of significant transactions concluded in Q1 2021. The unusually high number of HSR filings since September 2020 raises the possibility of an increase in significant U.S. merger investigations, especially as the Biden administration moves forward with the appointment and confirmation of key personnel at the agencies. Given the average duration of significant investigations, the impact of this surge in filings is likely to show up later this year.
Six significant EU merger investigations were concluded by the EU Commission in Q1 2021, which is in line with the quarterly average of over the 2011-2020 period tracked by DAMITT. On a rolling 12-month basis, however, the number of significant investigations is nearly 25 percent higher than the previous 12-month period.
Out of the six significant EU merger investigations resolved in Q1 2021, four were resolved following a Phase II investigation and two were cleared with remedies in Phase I. The number of Phase II investigations resolved in Q1 2021 is twice the quarterly average of Phase II resolutions since DAMITT started tracking in 2011. Three of these Phase II investigations concluded with remedies and one deal was abandoned by the parties.
If note is the LSEG/Refinitiv transaction which was cleared with a mix of structural and behavioral remedies, which remains rare in EU Commission practice. Over the 2011-2020 period tracked by DAMITT, only 11 percent of the Phase II remedies cases have included such mixed remedy packages.
The average duration of significant U.S. merger investigations increased by half a month to 11.9 months compared to the prior rolling 12 months. This 11.9-month average ties the record set in calendar year 2019 for the duration of significant U.S. merger investigations over the 2011-2020 period tracked by DAMITT.
The median for the most recent rolling 12-month period was 11.2 months, an increase from the 10.4-month median in 2020 and the 9.8-month median in 2019. This higher median reflects fewer investigations drifting far above the average.
There was an unusually wide variance in the durations between significant investigations concluded in Q1 2021. At the low end, the FTC’s investigation of the Illumina/Grail acquisition lasted just over six months before the FTC filed a complaint seeking to enjoin the transaction. At the top end, Atrium Health Navicent and Houston Healthcare System abandoned their proposed merger after an FTC investigation that lasted more than 27 months. Given this variation, it is notable that the median investigation for the quarter lasted 11.1 months, just shy of the 11.2-month median and 11.9-month average for the full rolling 12-month period. The average duration for Q1 2021 was 14.0 months, but this high average is largely attributable to the small number of significant U.S. merger investigations concluded in the first quarter and the considerable length of the Atrium Health Navicent/Houston Healthcare System investigation.
DAMITT has observed an across-the-board increase in the average duration of significant EU Merger investigations: Phase I remedy cases resolved in Q1 2021 averaged 10.5 months; while Phase II investigations averaged 17.3 months.
EU Phase II Proceedings
The average duration of Phase II investigations resolved in Q1 2021 stands at 17.3 months, which is well above the prior 2015 annual record of 15.6 months over the 2011-2020 period tracked by DAMITT. On a rolling 12-month basis, the average duration of Phase II investigations of 15.7 months is slightly down from the average of 16.0 months in the previous rolling 12-month period.
The high average duration for Phase II investigations resolved in Q1 2021 is largely attributable to the EssilorLuxottica/GrandVision investigation, which lasted 20 months from announcement to clearance. The investigation was suspended for a total of 160 working days, in part due to the complexity of carrying out a market investigation during a lockdown. This is the longest EU clock stoppage observed by DAMITT since 2011. The 2021 average duration will be pushed up by at least two further Phase II investigations, which were hit by long suspensions. The Air Canada/Transat investigation (which came to an end in early Q2 2021 following the parties’ withdrawal) was suspended for more than 100 working days. In addition, the ongoing Phase II investigation in Hyundai Heavy Industries Holdings/Daewoo Shipbuilding & Marine Engineering has already been on hold for more than 200 working days.
In contrast, the average duration of pre-notification contacts (i.e., from announcement until notification) of Phase II investigations concluded in the rolling 12-month period ended Q1 2021 decreased by seven percent compared to the previous rolling 12-month period.
Of note, the ill-fated Fincantieri/Chantiers de l’Atlantique merger, which was ultimately abandoned, has been excluded from DAMITT duration statistics. The transaction is very much an outlier: At the time of its withdrawal, 49.7 months had elapsed since the transaction was announced. This included a clock stoppage of 216 working days during the Phase II investigation. The transaction was highly politicized due to the majority stake owned by the French State and faced considerable opposition from local politicians and trade unions. These exceptional circumstances warrant the exclusion of Fincantieri/Chantiers de l’Atlantique from our statistical analysis.
Phase I Remedy
Phase I remedy cases concluded in Q1 2021 lasted an average of 10.5 months. The sample size for Q1 is limited to two cases, and there was a significant difference in their duration with one investigation lasting 6.7 months, whereas the other was resolved after 14.3 months. Viewed on a rolling 12-month basis, the duration of Phase I remedy cases averaged 9.8 months, up from 8.4 months in the previous 12-month period. The uptick in the average duration is not as significant as the quarterly average, but it remains nearly 1.5 months longer than the previous 12-month period.
The lengthier average duration for Phase I remedy cases is mirrored in the length of pre-filing talks. The average duration from announcement to notification in Phase I remedy cases was 8.1 months in the rolling 12 months ended Q1 2021, 1.5 months longer than during the previous 12-month period. Pre-notification contacts are a longstanding feature of EU merger reviews: Merging parties invariably institute pre-filing talks with EU Commission staff very shortly after the transaction announcement, if not before.
The most notable trend in Q1 2021 in the U.S. is the resurgence of significant merger investigations with vertical aspects. As explained in the DAMITT 2020 Report, the U.S. antitrust agencies concluded only one significant merger investigation with vertical aspects in 2020. This marked a significant decline from three in 2019 and five in 2018 despite the agencies’ introduction of new Vertical Merger Guidelines in June 2020. In Q1 2021 alone, however, three of the four significant U.S. merger investigations concluded by the agencies involved vertical aspects. This represents a sharp reversal from the trend noted in the DAMITT 2020 Report.
The spike in significant U.S. merger investigations with vertical aspects is notable given recent uncertainty about the future of the new Vertical Merger Guidelines. Acting FTC Chairwoman Rebecca Kelly Slaughter has consistently expressed concerns about whether the guidelines adequately address all potential anticompetitive effects of vertical mergers. When the new guidelines were issued in June 2020, then-Commissioner Slaughter issued an initial dissenting statement expressing “substantive concerns about the Guidelines." Along with Commissioner Rohit Chopra, she later issued a joint dissenting statement on the Vertical Merger Commentary released by the FTC in December 2020 “because it supports the approach that we opposed in the Vertical Merger Guidelines." More recently, the Acting Chairwoman provided Congressional testimony calling for the agencies to “reconsider the vertical guidelines[.]”
Despite this lingering uncertainty over the future of the new Vertical Merger Guidelines, the recent spike in significant U.S. merger investigations with vertical aspects demonstrates that vertical issues remain front and center for merger analysis. The U.S. antitrust agencies are not waiting for consensus on revised guidelines before moving forward. To the contrary, the agencies already are showing a heightened interest in potential vertical concerns, as evinced by the number of significant U.S. merger investigations with vertical aspects concluded in Q1 2021.
On March 26, 2021, the EU Commission published new guidance on the application of the referral mechanism included in the EUMR: Article 22. This mechanism allows member states to refer cases falling below the EU thresholds but affecting trade between member states to the EU Commission for review. This mechanism was originally included to address the lack of merger control in certain member states. With all but one member state adopting national merger controls, the EU Commission progressively discouraged member states from referring cases falling below their own national thresholds.
Recent and increasing concerns that deals having a significant impact on competition were escaping merger review have led the EU Commission to depart from previous practice and, under the new guidance, encourage referral from member states even if the national thresholds are not met. This new guidance increases legal uncertainty for non-notifiable deals. Parties to non-notifiable transactions will have to assess the likelihood that at least one of the 27 national competition authorities would refer the merger. Statements from EU Commission officials indicate that deals involving entities active in the digital, healthcare and financial sectors will call for particular attention. Indeed, the Belgian, Dutch, French, Greek, Icelandic and Norwegian authorities already jointly referred a non-notifiable case in the healthcare sector to the EU Commission on 9 March in anticipation of the new EU Commission guidance.
We anticipate that this new approach to application of Article 22 may have an impact on the number of significant investigations carried out by the EU Commission.
Looking back on the EU Commission’s decisional practice, 28 referrals under Article 22 have been accepted since 2011. Of those cases, 64 percent resulted in a significant merger investigation: 18 percent were resolved in Phase I with remedies and 46 percent were subject to a Phase II investigation. By comparison, in 2020 significant investigations represented less than five percent of all decisions adopted by the EU Commission. The broader application of the Article 22 referral mechanism may accordingly lead to an increase in the number of significant EU merger investigations.
The new approach to application of Article 22 referrals may also have an impact on the average duration of significant EU merger investigations. First, under the new interpretation of Article 22, the EU Commission will be able to review completed deals. Such investigations may see longer durations, as calculated by DAMITT, which measures the duration between the announcement of the transaction and the resolution of the investigation. In addition, for non-completed deals, a referral adds a layer of complexity and additional time to the process, in particular for Phase I remedy deals. The duration of significant Phase I investigations resulting from Article 22 referrals over the 2011-2020 period tracked by DAMITT was between 2.6 and 4.8 months longer than the average duration of significant Phase I investigations in the relevant year.
In contrast, the impact of Article 22 referrals on the average duration of Phase II investigations may be less pronounced due to the already extensive pre-notification period. Disregarding Fincantieri/Chantiers de l’Atlantique, only two in-depth investigations following a referral since 2011 lasted longer than the average in the corresponding year and, since 2014, the average duration of Phase II investigations following an Article 22 referral has been four months shorter than the average in the corresponding year. Of note, these figures are based on cases that were notified to at least one national competition authority. It follows that the parties would have already carried out significant preparatory work prior to the submission of the notification to the national competition authority. This may in part explain the limited impact of Article 22 referrals on the duration of Phase II cases.
Since first quarters are typically lighter with concluded merger investigations, the relative lull in concluded significant U.S. merger investigations in Q1 2021 is not unexpected. The universe of issues that may lead to significant merger investigations also may be expanding. If Q1 2021 is any guide, vertical mergers, among other transactions, are likely to see heightened scrutiny in the U.S. looking forward. Combined with an increase in HSR filings since September 2020, we anticipate an increase in significant U.S. merger investigations concluded in the coming quarters.
While the circumstances of future antitrust-sensitive transactions may lead to results above or below DAMITT averages, current statistics suggest that parties to the average “significant” deal subject to review only in the U.S. would have to plan on approximately 12 months for the agencies to investigate their transaction. Parties should also plan for another 7-9 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 accommodate an average lapse of 17 months from announcement to clearance, while deals expecting to be cleared in Phase I with remedies now need to allow for 11 months from announcement to clearance. Parties to non-notifiable deals should also carefully assess the impact of the transaction on competition within the EU to account for the new referral risks. Such risk is particularly heightened in the digital, pharmaceutical and financial sectors.