Driving Deals Through an Increasingly Complex M&A Clearance Landscape
Recent years have seen the M&A clearances landscape become more complex and multifaceted. Private equity sponsors and asset managers, as active and regular participants in M&A with in many cases large global portfolios, are experiencing this more acutely than most and are having to respond to evolving market practice.
This growing complexity presents significant jurisdictional, substantive and procedural challenges. In this piece, we give an overview of key issues within each of these categories, and offer strategic insights to help you effectively manage compliance and risk during your transactions.
Increasing Jurisdictional Complexity
Historically, merger control regimes were characterised by jurisdictional thresholds that were clear, transparent and quantitative. The few foreign direct investment (“FDI“) regimes which existed pre-COVID had well-defined and relatively narrow jurisdictional scopes, such as those operated by the Committee on Foreign Investment in the United States (“CFIUS“) in the US or the Foreign Investment Review Board in Australia (“FIRB“). As a result, the question of whether a filing needed to be made on any given deal was, until recently, a relatively binary one. It was usually clear when engagement with a regulator would be required or sensible and whether a deal condition would be required, especially in no-issues cases.
Today, however, there are many more merger control and foreign investment regimes globally, requiring sponsors to take a more nuanced and sophisticated approach. A wider range of jurisdictions are now operating merger control regimes and a wider range of regulators are now active enforcers in respect of failures to file (including recently, for example, in Egypt). For private equity sponsors, these regimes will often look to the revenues of the sponsor’s entire investment portfolio and can often have relatively low filing thresholds, so an increasing number of transactions are requiring merger control consent in jurisdictions where the target has limited revenues, and the filing requirement is based almost solely on the acquiring sponsor’s portfolio revenue in that jurisdiction. This can significantly impact transaction deliverability, a key focus for sellers in auction processes.
Additionally, the regulatory oversight of foreign investment has seen expansion. Prominent examples include the Irish Screening of Third Country Transactions Act 2023 and the UK’s National Security and Investment Act 2021 (“NSIA“). These new regimes introduce additional layers of scrutiny to M&A transactions of all sizes and are typically policy-driven to allow additional governmental oversight of M&A. They therefore necessitate a deeper understanding of a wider range of regulatory considerations, including sectoral focus areas and sensitivities, policy drivers of particular governments and organisations and interactions between regimes and regulators.
Merger control regimes in many jurisdictions now also feature flexible thresholds, adding to the complexity of the multi-jurisdictional analysis process that has to be undertaken on each transaction. For example, in early January 2025, the UK Digital Markets, Competition and Consumers Act 2024 (“DMCCA“) introduced the UK’s first ‘no-increment’ share of supply test (introduced to allow the UK Competition and Markets Authority (“CMA“) to review deals that do not involve direct competitors, but where a transaction party exceeds thresholds relating to share of supply of goods/services in the UK and turnover).
In addition, a significant number of EU jurisdictions (Denmark, Hungary, Ireland, Italy, Latvia, Lithuania, Slovenia and Sweden) operate below threshold call-in powers so that a transaction that would not have otherwise met the threshold for merger control approval can still be called in for review by the merger control regulator. Such powers can significantly complicate jurisdictional assessments for transactions which may raise competition concerns. Legal advisers must now identify issues early on and pre-empt regulator action, potentially in some cases engaging regulators informally or voluntarily, to avoid post-closing call-ins of transactions.
Foreign investment regimes are also starting to evolve, so as to capture outward investments. The US recently introduced an Outbound Investment Program targeted at certain investments in China in a number of sensitive areas.
Moreover, the introduction of the EU Foreign Subsidies Regulation (“FSR“) aimed at addressing potential distortions caused by foreign subsidies adds another filing requirement into the mix for larger M&A transactions. This regime can potentially have significant transaction timing implications for sponsors given the need to collect extensive and complex data on “foreign financial contributions”. This concept is defined very widely, and captures almost any transfer of funds, assets and benefits-in-kind received from entities controlled by non-EU states, including investments in funds by sovereign wealth funds and public pension schemes. The data requirements mean that filings can in some cases take months to prepare, before the European Commission’s formal review period of 25 working days has even commenced.
Increasing Substantive Complexity
Regulators in both merger control and FDI are also exploring a broader range of substantive considerations when reviewing deals notified to them, further complicating the process of getting a deal done.
In merger control, regulators are exploring theories of harm which go beyond the conventional focus on issues arising from horizontal combinations and increasing market concentration. Regulators will now often consider other potential harms such as to innovation and data access, as well as a wide range of other vertical and conglomerate issues. It is no longer unusual for the CMA, for example, to take transactions with vertical and conglomerate issues only all the way through a Phase 2 investigation (as was the case in relation to UnitedHealthGroup’s acquisition of EMIS Group plc).
FDI reviews are also increasingly involving consideration of various public policy implications of deals, in addition to impacts on national security and defence. For example, in connection with the acquisition of Vodafone Spain by Zegona, the Spanish regulator required commitments including to invest in future developments.
Regulators are also seeming to take into account a wider range of public policy considerations in the competition space. The CMA has reviewed a number of deals in, and is carrying out a market investigation into, the veterinary sector in the UK. Commentary on this suggests that the CMA has taken particular issue with private equity and corporate roll-ups of independent veterinary practices and the CMA has also recently indicated that “private equity roll-ups” will “come in for very close scrutiny” in the UK more generally. Sponsors will need to bear this risk in mind when considering investments into sectors undergoing rapid consolidation, particularly where the investment thesis relies on undertaking significant buy and build activity.
Given the jurisdictional expansion outlined above, deals now often need to be notified more widely and under different types of regimes. This necessitates a comprehensive deal strategy that harmonises substantive competition arguments with persuasive public interest cases, balancing all the increasingly complex arguments that are required to win these cases. This is because an argument that is used to demonstrate the transaction is in the public interest to seek FDI approval, may also be detrimental to merger control applications on the same transaction. To further complicate matters, regulators have institutional memories and arguments that may have been persuasive in previous instances may no longer hold sway as effectively in subsequent filings.
Increasing Procedural Complexity
The procedural landscape of M&A clearances is also marked by increasing uncertainty, primarily due to enhanced interaction and co-ordination among global regulators. Entities such as the CMA and the Investment Security Unit in the UK (who review NSIA applications), and the Foreign Investment Review Board and the Competition and Consumer Commission in Australia, are now engaging in more frequent inter-agency communications and intelligence sharing within jurisdictions. Similarly, jurisdictions are becoming increasingly globally interconnected which can impact assessment timelines and procedural outcomes.
Regulators are also dedicating more time to consider a broad range of complex issues resulting in extended review periods. An expanded timeline to clearance can have significant repercussions on ability to close deals within reasonable and predictable time frames. This has a particular impact on debt financing where lenders’ willingness to have longstop dates for completion extending beyond 12 months from signing is very limited and lengthy debt commitment periods will also typically have “debt-tickers” increasing sponsors’ cost of capital.
Determining how much information to disclose to regulators also remains a strategic decision. Over-disclosure may invite proactive scrutiny, while under-disclosure can lead to penalties and delays.
Strategic Takeaways
To navigate these complexities, private equity sponsors and asset managers must develop robust, multifaceted strategies for both no-issues and issues transactions. As transactions of all sizes are now potentially being captured by merger control and FDI regimes, consideration needs to be given early in a transaction to whether there is a possibility approvals will need to be sought in order that an appropriate strategy to seeking such approvals can be prepared. Furthermore, when crafting a strategic case strategy for deals which do require filings, a strategy that effectively balances competition and public interest arguments is essential to securing efficient clearances, particularly where multiple filings with potentially conflicting regulatory aims are required.
Legal advisors to strategic asset managers must be focussed on building and fostering relationships with regulatory bodies, as well as their understanding of the nuances and complexities of regulators’ thinking and approaches. Engaging dynamic legal counsel ensures that you stay ahead of evolving regulatory trends and up to date with decisional practice.
