I OVERVIEW OF M&A ACTIVITY
After a return to dealmaking in 2014, M&A reached record highs since the financial crisis in 2015. There was a 47 per cent increase in the value of European M&A activity compared with 2014. This increase saw total deal value rise to €1 trillion, despite a decrease in the number of transactions. The 6,361 deals announced in 2015 represent a 4 per cent decrease in volume from 2014 levels. These figures indicate that dealmaking at the top of the market was responsible for the vast total deal value. The number of deals announced valued at over €5 billion increased 10 per cent to 22, with 17 of these deals being worth over €10 billion.2 Deals with Western European involvement reached 33 per cent of global volume up from 23 per cent in 2014, making Western Europe the biggest market for M&A in 2015.3 However, this rise in high-ticket dealmaking was not matched by a marked turnaround in the fortunes of the eurozone economies. The Greek debt crisis continued, the European Central Bank was forced to begin another programme of quantitative easing and political tensions with Russia have rumbled on. The referendum in the UK on continued EU membership and the rise of anti-EU political parties across the continent has put pressure on the continent’s most important institutions.
Against this backdrop of uncertainty, it was the continued low interest rates and easier access to financing that made the bumper year of M&A possible. The European Central Bank’s policy of renewed quantitative easing in the face of deflation has signalled to the market that interest rates will be low across the eurozone going forward. This has coincided with the rise of the alternative credit market. Lending by non-bank entities is now an established option for financing M&A across Europe, whether by debt funds taking part in syndication or through direct lending.4 A prime example of such lending is the €250 million unitranche facility provided by Ares to fund Eurazeo’s €300 million acquisition of Fintrax, announced in November 2015. With over US$200 billion in ‘dry powder’ funds available and yields of 8 to 10 per cent available, private debt may well be one of the biggest sources of finance for M&A in 2016.5
A further driver of deals has been the increase in deal value in the private equity space. Although the number of deals dropped to 1,093 deals, the value of such deals increased to €122.4 billion.6 Increased competition from sovereign wealth funds, high levels of ‘dry powder’ and cheaper financing have pushed up deal multiples in the space.
A bullish US economy coupled with the reluctance of US corporations to repatriate their big foreign cash piles has led to much transatlantic activity. Such dealmaking has followed the trend for fewer higher value deals, with transaction value reaching €486.9 billion.7 Yet this dealmaking, when structured as a tax inversion, is under threat. The biggest announced deal of 2015, Pfizer’s US$160 billion acquisition of Allergen, which was structured so that the new parent company would be domiciled in Ireland, fell victim in April 2016 to Obama administration measures to clamp down on such structures. However, Johnson Controls’ US$14 billion merger with Tyco, announced in January 2016, shows that such reforms will not be fatal to all dealmaking in the space.
As in 2014, the standout sectors for European M&A continue to be the technology, media and telecoms (TMT) and the pharma, medical and biotech (PMB) sectors. TMT recorded its highest deal values since 2005, with €141 billion worth of deals made across 988 transactions. Deals such as BT’s €16.7 billion acquisition of EE were aimed at integration in the sector. The ability of a single market operator to provide broadband, home and mobile telephone as well as subscription television has become more important as the market consolidates. This integration has continued with cross-border acquisitions such as that of Italian mobile operator Wind Telecommunicazioni by a joint venture company owned by CK Hutchison and VimpelCom for €10.9 billion.8 However, this consolidation has drawn increased scrutiny from competition regulators who are beginning to question whether the downsides of increased market concentration have outweighed the cost savings of integration within the sector. For example, the proposed takeover of Telefónica’s O2 UK business by CK Hutchison for £10.3 billion was blocked by the European Commission in May 2016.9 Moving into 2016, competition concerns have led to a slowdown in big-ticket M&A in the sector, with the European Commission seemingly reluctant to allow any further consolidation to occur in the market.
Despite the collapse of the takeover of Allergen by Pfizer, the PMB sector was very active across Europe. Across the sector, there seems to be an ‘eat or be eaten’ mindset, as big pharma went on a buying spree seeking to acquire strategic assets.10 However, the problems plaguing Valeant Pharmaceuticals, Inc, borne out of debt-fuelled, acquisition-led growth, may well spook companies in the sector.
The other headline high-ticket deal of the year, Anheuser Busch InBev’s €112.16 billion takeover of SABMiller, was in the consumer sector. Aside from its size (which made it the second-largest M&A deal ever in the consumer sector), there were two interesting points about the deal: first, that AB InBev could raise a US$75 billion syndicated loan (the largest ever) to fund the acquisition without a mandated lead arranger,11 and secondly, it precipitated the second-largest deal in the consumer sector of the year, when SABMiller sold its 58 per cent stake in the Miller Coors joint venture for €11.8 billion to Molson Coors Brewing. As competition regulators in Europe and the US become more active, back-to-back divestments such as those in the AB InBev/SABMiller deal will become an even more significant part of big-ticket M&A.
The first quarter of 2016 has seen European M&A slow. Falling oil prices, worries about European banks’ capitalisation and the referendum on British membership of the EU have seen market confidence stall. The extent to which this will continue into the second half of the year is unclear. However, it is hoped that in the wake of increased certainty, market participants may feel confident enough to dust off some shelved investments.
II RECENT EUROPEAN LAW MEASURES RELATING TO CORPORATE LAW
In 2011, the European Commission opened up a Green Paper, ‘The EU Corporate Governance Framework’, for consultation. Following the consultation period, the Commission unveiled an action plan for European company law and corporate governance initiatives, which included the following proposals:
- a enhancing transparency by increased disclosure of company board diversity policies and non-financial risks, and improved corporate governance reports;
- b engaging shareholders, possibly by the amendment of the Shareholder Rights Directive;
- c improving the framework for cross-border operations of EU companies;
- d providing guidance on shareholder cooperation in light of concert party concerns; and
- e codifying EU company law.
As discussed in both the eighth and ninth editions of The Mergers and Acquisitions Review, several of these proposals started to make slow but steady progress into law. In 2015, the Commission made further proposals as part of its company law and corporate governance package. There were also updates to the progress of earlier proposals that were set out in the eighth and ninth editions of The Mergers and Acquisitions Review.
i Codification of company law directives
On 3 December 2015, the European Commission published a proposal to repeal and codify various company law directives. These include the Second Company Law Directive on the formation of public limited companies and the alteration and maintenance of their capital, the Third Company Law Directive on mergers of public limited liability companies and the Sixth Company Law Directive on the division of public limited liability companies. According to the Commission, the aim of these changes ‘is to make EU company law more reader-friendly and to reduce the risk of future inconsistencies.’12 Although all previous law has been left unchanged by this codification exercise, it paves the way for further codification and coordination of EU company law.
ii Cross-border insolvency
On 20 May 2015, the European Parliament approved the new European Insolvency Regulation (ECIR) replacing the previous regulation that came into force in 2002. The ECIR has been extended to rescue proceedings, including debtor-led pre-insolvency proceedings. It will apply to proceedings that are based on a law relating to insolvency. However, it will not apply to proceedings that are based on general company law. Changes to the previous insolvency regulation include the removal of a restriction that secondary proceedings must be winding-up proceedings; the introduction of a concept of ‘group coordination proceedings’, where a ‘group coordinator’ is appointed to oversee the insolvency or restructuring or a group of companies; and the introduction of an interconnected electronic insolvency register for all insolvency cases.
The changes brought about by the ECIR will be put in place over the next 24 months. The impact the ECIR will have on acquisitions from or of insolvent companies remains to be seen.
iii Data protection
On 6 October 2015, the Court of Justice of the European Union held in Schrems v. Data Protection Commissioner that the Commission’s decision on the adequacy of the US safe harbour is invalid.13 The EU Data Protection Directive prohibits the transfer of EU citizens’ data to countries outside the EEA, unless an adequate level of protection of the data is provided. In 2000, the Commission determined that the US safe harbour satisfied this requirement for transfers of personal data to US companies participating in the scheme. It is this determination that the Court has now held to be invalid. Companies currently certified under the US safe harbour, or that transfer personal data out of the EEA to the US in reliance on the safe harbour, will now need to take appropriate action to ensure they remain compliant. On 6 November 2015, the European Commission published practical guidance for organisations wishing to transfer personal data from the EEA to countries such as the US. However, on 27 October 2015, the Information Commissioner’s Office (ICO) stated that the Court’s judgment on the US safe harbour casts doubts over the validity of other existing mechanisms of data transfers, but advised organisations ‘don’t panic’ as ‘for the most part existing ICO guidance is still valid’.
For companies from non-EEA states looking to acquire European subsidiaries, this will mean that any transfers of personal data, for instance during the due diligence process, may not be compliant with data protection legislation implementing the EU Data Protection Directive. The invalidity of the safe harbour will also affect data flows after any acquisition.
III RECENT COMPETITION LAW DEVELOPMENTS
i Treatment of mergers by the European Commission
Between January 2015 and the end of April 2016, the European Commission received 437 merger notifications under the European Merger Regulation (EUMR). During that period, 392 cases were cleared unconditionally at Phase I. In 18 cases, Phase I clearance was conditional on certain remedies being implemented, while 14 cases were referred to Phase II for in-depth consideration. Of the 12 Phase II decisions made during the period, two were cleared unconditionally and 10 were given clearance conditional upon remedies being implemented.
The Commission continues to be rigorous in its approach to remedies and has recently required substantial divestments in a number of cases. For example, the acquirers in Ball/Rexam and AB InBev/SABMiller were required to divest most of the overlaps in Europe to secure conditional clearances, while in May 2016, the Commission prohibited the acquisition by Hutchison (Three) of Telefónica UK (O2), as the remedies offered by Hutchison were not sufficient to resolve the Commission’s concerns. This was the Commission’s first official prohibition decision since 2013. However, the proposed Danish joint venture between TeliaSonera and Telenor was also abandoned in September 2015 after the parties were unable to agree suitable remedies with the Commission. A number of other recent ‘four-to-three’ telecoms mergers were cleared by the Commission subject to substantial remedies, including most recently Orange/Jazztel (2015), Telefónica Deutschland/E-Plus (2014) and Hutchison 3G UK/Telefónica Ireland (2014).
ii Possible reforms to the EUMR
On 9 July 2014, the Commission published a White Paper, ‘Towards more effective EU merger control’, proposing certain reforms to the EUMR. One of the proposals is to amend the EUMR so that a ‘full-function’ joint venture, located and operating outside the EEA and without any effects on EEA markets, falls outside the Commission’s competence even if the turnover thresholds are met. Another proposal is to exempt certain unproblematic mergers from the prior notification requirement (subject to the parties submitting a limited information notice and the Commission deciding not to initiate an investigation). In March 2016, Commissioner Vestager said that the Commission has had ‘very positive feedback’ on these ideas for simplifying the merger control process.14
The White Paper also proposes a mechanism to extend the current merger control regime so as to enable the Commission to review acquisitions of non-controlling minority shareholdings (otherwise known as ‘structural links’). Currently, some national merger control regimes in Europe (including the UK and Germany) and elsewhere (including the United States) extend to non-controlling minority stakes. However, Commissioner Vestager noted in March 2016 that the Commission is still considering this issue, and that there would need to be compelling evidence that the system could work at European level without creating a lot of complexity before it takes any further steps in this direction. She noted that she is, so far, not convinced that this is ‘a change we absolutely have to make to our system’.15 Commissioner Vestager also indicated in March 2016 that the Commission is considering whether the EUMR notification thresholds may need to be adapted to reflect new business models (for example, in the context of the digital economy). Recently, some important transactions were not notifiable under the EUMR as the turnover thresholds were not met, but the parties still had significant assets (such as a customer base or datasets), pipeline products or the ability to innovate, meaning the deals might have had an effect on competition.16
IV RECENT TAX LAW DEVELOPMENTS
i Base erosion and profit shifting (BEPS)
This is clearly the hottest topic in international tax, and in October 2015 the OECD published its final reports on all 15 action points of the BEPS project. Since then, the European Commission has taken action towards the implementation of the OECD’s proposals, as have individual Member States.
In the UK, we have seen the introduction of additional reporting requirements, the diverted profits tax, changes to the patent box and draft legislation aimed at ‘hybrid mismatches’. The UK government also plans to limit interest deductions from next year.17
On 28 January 2016, the European Commission presented its measures against corporate tax avoidance in the form of revisions to the Administrative Cooperation Directive (DAC) to permit automatic exchange of information on country-by-country reporting, a draft Anti-Tax Avoidance Directive (ATAD), recommendations on tax treaty negotiations and a communication on a common approach to external threats of tax avoidance.
The revised DAC was adopted by Ecofin on 25 May 2016 after changes to the original proposal were agreed during an Ecofin meeting on 8 March 2016. The revised DAC will require that companies with a turnover above €750 million report country-by-country on their European activities and, following the scandal surrounding the Panama Papers, also report aggregate figures for other jurisdictions. The European Commission has separately proposed amendments to the Accounting Directive so as to require companies with a turnover above €750 million to publish on their website some of the information (such as profit and tax accrued in each Member State) that will have to be reported to tax authorities under the revised DAC.
The ATAD is the EU’s proposed implementation of a number of the BEPS proposals, taking away some of the flexibility and adding other proposals that had previously been under discussion in the EU as part of the common consolidated corporate tax base (CCCTB). The European Commission intends to re-launch the CCCTB later this year, a plan that is supported by a report, published on 18 May 2016, of the TAXE II committee of the European Parliament. It is, however, difficult to envisage a consensus being reached on the CCCTB in the foreseeable future.
The measures to be introduced under the ATAD are:
- a a limitation of interest deductions;
- b a general anti-abuse rule;
- c provisions to counteract hybrid mismatches;
- d rules on controlled foreign companies;
- e a system of exit taxation upon the transfer of assets or tax residence from a Member State to a third country; and
- f a ‘switch-over’ clause under which taxpayers are to be subject to tax in a Member State in respect of income from third-country permanent establishments, and in respect of distributions from or gains on the disposal of shares in third-country entities, if the third country’s corporate tax rate is lower than 40 per cent of that Member State’s rate.
The ATAD has to be passed unanimously by Ecofin, which made substantial changes to the original proposal at an Ecofin meeting on 25 May 2016, and further discussions on the switch-over clause and the controlled foreign companies and hybrid mismatch provisions are expected. As such, it is likely that these more controversial provisions will be subject to some modifications.
ii Tax competition – inversions
In the cross-border M&A context, tax competition between jurisdictions remains an important factor. Despite the tightening of the US anti-inversion rules,18 which led to the Pfizer/Allergan merger being abandoned in April 2016, other US groups continue to show interest in, and continue to implement, inversions to the UK. One example is the planned US$13 billion merger of IHS Inc and Markit Ltd; the parties have announced that, in their view, the merger would be unaffected by the new rules.
iii State aid
In October 2015, the European Commission announced decisions that tax rulings given respectively by the Dutch and Luxembourg authorities to Starbucks and Fiat constituted illegal state aid. Both rulings concerned certain transfer pricing arrangements that the Commission found to be artificial and not reflecting economic reality. The Commission’s notice on the notion of state aid, published on 19 May 2016, clarifies its view on circumstances in which tax rulings (or indeed special tax regimes) would amount to state aid. It is recommended that companies should, in light of the decisions and notice, review any tax rulings and special regimes from which they currently benefit. In an M&A context, warranty protection should be considered.
Under a new Tax Ruling Directive, which was adopted on 8 December 2015, automatic exchange of tax rulings between Member States will commence on 1 January 2017 and may, in certain circumstances, cover rulings issued, amended or renewed as early as 1 January 2012. Once the information has been digested, this will inevitably lead to more disputes as tax authorities in jurisdictions other than the one that has given the ruling take the opportunity to haggle for a bigger slice of the tax pie.
iv Financial transactions tax (FTT)
It is looking increasingly unlikely that the FTT will be implemented. In February 2016, Estonia, one of the 11 Member States that had agreed in principle to adopt the FTT, pulled out, while in March 2016, the Finance Minister of Germany – one of its most enthusiastic proponents – said that, due to low interest rates and volatile markets, the time is not right to introduce an FTT.
1 Mark Zerdin is a partner at Slaughter and May. The author would like to thank Christopher McCabe for his assistance in preparing this chapter.
2 Mergermarket Deal Drivers EMEA 2015.
3 Allen and Overy M&A Insights Q4, 2015, and Allen and Overy M&A Insights Q4 2014.
4 European Acquisition Debt Report 2016, DLA Piper.
5 ‘Private debt market readies for credit ructions’, Financial Times, 25 November 2015.
6 Mergermarket Deal Drivers EMEA 2015.
9 ‘Healthcare sector leads feverish M&A activity’, Financial Times, 30 March 2015.
10 ‘AB InBev saves by lining up $75bn jumbo itself’, Financial Times, 12 November 2015.
11 ‘AB InBev makes formal £71bn bid for SABMiller’, Financial Times, 11 November 2015.
14 Refining the EU merger control system (speech by Commissioner Vestager at Studienvereinigung Kartellrecht, Brussels), 10 March 2016.
16 Ibid. For example, Facebook’s purchase of WhatsApp in 2014 was not notifiable under the EUMR as WhatsApp did not have sufficiently high turnover, despite the fact that Facebook paid US$19 billion to buy WhatsApp, a company with 600 million customers, a substantial proportion of whom were in Europe.
17 See Section VIII of the UK chapter.
18 See Sections IV and VIII of the US chapter.