I OVERVIEW OF M&A ACTIVITY
Despite the level of uncertainty facing Europe in 2016, it was a strong year for European M&A, with deal activity reaching some record highs. There were 6,999 deals announced in 2016, a 4 per cent increase in deal volume over 2015.2 International confidence in Europe as an investment destination appeared to be maintained, as foreign investors initiated more projects in Europe in 2016 than recorded in previous years; inbound M&A activity was especially notable in Q4. Indeed, there were 5,845 foreign direct investment projects launched in Europe during 2016, a 15 per cent increase on 2015.3 That said, there was a 10 per cent decrease in the combined value of announced deals in 2016, which was down to €729.5 billion.4 The number and value of ‘mega-deals’ announced in 2016 was slightly lower than in 2015. There were 21 mega-deals valued at over €5 billion, with a combined total value of €298.4 billion5 (compared with 22 deals of comparable size the previous year).
Europe’s M&A performance came at a time of great political shift. On 23 June 2016, the UK voted to leave the European Union, which created a degree of uncertainty across the continent and beyond; the full extent of Brexit’s impact on the remaining Member States is yet to be seen. Indeed, the apparent rise of anti-EU political parties across Europe put pressure on its most important institutions. The election of French President Emmanuel Macron, however, appeared to represent a potential turning point in anti-European sentiment.
Political uncertainty in Europe brought the euro to parity with the US dollar from the early part of 2017, and the pound fell in value at least in part in response to the Brexit vote. Currency fluctuations might well have contributed to deal activity in 2016 by producing cheaper targets for overseas bidders. Indeed, US investors spent more than US$70 billion on European targets in Q1 2017, perhaps also reflecting the uncertainty around President Donald Trump’s domestic antitrust policies in light of his opposition to AT&T Inc’s proposed US$85 billion merger with Time Warner Inc.6 A notable example of last year’s healthy transatlantic dealmaking is 21st Century Fox Inc’s £11.7 billion bid for the 61 per cent in Sky plc that it does not already own, as Fox looks to access Sky’s 22 million customers throughout the UK, Ireland, Germany, Austria and Italy. The deal was announced in December 2016 and gained unconditional EU competition clearance in April 2017, but is still subject to an investigation by the media regulator Ofcom on grounds of media plurality, and it could potentially be referred for a full investigation by the UK competition authority. The deadline for publishing the results of the investigation was pushed back as a result of the UK’s snap general election on 8 June 2017, and the findings are expected to be published in the summer of 2017.
A further driver of deals overall was the private equity industry. The number of buyouts increased by 10 per cent to 1,245 in 2016, although the value of such deals decreased by 11 per cent to €108 billion.7 Long-term infrastructure projects were particularly attractive to investors. Sovereign wealth funds contributed to this growth, with the China Investment Authority, the Qatar Investment Authority and the Kuwait Investment Authority all acquiring stakes in European infrastructure projects. Interest from Chinese investors comes as no surprise given that 2016 saw a high-water mark for outbound Chinese investment, although many expect the tide to turn somewhat in 2017 as Chinese regulators impose stricter controls on the outflow of capital. Indeed, Chinese outbound deal value totalled US$11.8 billion in Q1 2017, down from US$82 billion in Q1 2016.8
As in 2014 and 2015, the standout sector for European M&A continues to be technology, media and telecoms (TMT), followed by the industrials and chemicals sector. Within the TMT arena, there were two prominent transactions responding to changes in the semiconductor subsector.9 There is a trend of companies operating in this area looking to diversify their offering as the semiconductor market consolidates. A prime example is US mobile chipmaker Qualcomm’s US$47 billion bid for Dutch-based NXP Semiconductors, which is set to be Europe’s largest ever technology acquisition. As the smartphone market flattens somewhat,10 Qualcomm likely sees NXP Semiconductors as a possible entry route into, inter alia, the automotive industry. Similarly, Japanese telecoms company SoftBank Group Corp acquired UK-based ARM Holdings plc for approximately £24 billion in Q3 2016. SoftBank Group Corp was looking to become a provider of core technology to the growing ‘internet-of-things’ (IoT) market,11 namely the market covering the network of devices that are connected to each other through the internet. Given the prediction that more than half of new businesses will run on the IoT by 2020,12 and that spending on IoT technologies is expected to reach €250 billion in the same period,13 it would not come as a surprise if this innovative sector continued to drive dealmaking throughout 2017 and beyond.
Deal value for the European industrials and chemicals sector saw an increase of 45 per cent to €144.7 billion, with Germany, Austria and Switzerland accounting for 49.2 per cent of the sector’s value.14 Investors were motivated by cheap financing, which helped fuel the first half of 2016, but increased regulation in the manufacturing sector and the prospect of protectionist policies coming from both the US and China gave rise to concerns for companies in the industry.
The first quarter of 2017 has seen European M&A slow. The UK’s official notification to the EU of its impending withdrawal and wider uncertainty on the continent has had an impact on market confidence. The extent to which this will continue into the second half of the year is unclear. However, with the European Commission (the Commission) forecasting increased growth, and as companies learn to navigate an uncertain Europe, it is hoped that market participants will feel confident enough to return to dealmaking.
II RECENT EUROPEAN LAW MEASURES RELATING TO CORPORATE LAW
In 2011, the 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 an 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 previous editions of The Mergers & Acquisitions Review, several of these proposals started to make slow but steady progress into law. Updates on the progress of some of the proposals were set out in the eighth and ninth editions. The Commission continues to work on its company law and corporate governance package, announcing a consultation on, for example, EU company law rules on digital solutions and efficient cross-border operations that closes on 6 August 2017.
i Codification of company law directives
As noted in the 10th edition of The Mergers & Acquisitions Review, on 3 December 2015 the Commission published a proposal to repeal and codify the following six company law directives:
- a Sixth Company Law Directive on the division of public limited liability companies;
- b Eleventh Company Law Directive on disclosure requirements in respect of branches;
- c Cross-Border Mergers Directive;
- d Directive 2009/101/EC on coordination of safeguards;
- e Third Company Law Directive on mergers of public limited liability companies; and
- f Second Company Law Directive on the formation of public limited companies and the alteration and maintenance of their capital.
On 29 and 30 May 2017, the Competitiveness Council adopted a directive of the European Parliament that codifies the above six directives. 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’.15 The previous law has been left unchanged by this codification exercise.
ii General Data Protection Regulation (GDPR)
The GDPR was published in the Official Journal on 4 May 2016 and, as a regulation, it will have direct effect in all EU Member States from 25 May 2018. The aim of the GDPR is to harmonise the data protection regime across the EU, replacing existing national laws based on the Data Protection Directive of 1995 (which is implemented in the UK through the Data Protection Act 1998). Under the GDPR, the territorial scope of the EU data protection regime will be significantly expanded to apply to any organisation that offers goods and services to individuals in the EU (including free of charge), or any organisation that monitors their behaviour. This means that a larger number of overseas businesses will likely be affected. The GDPR also brings with it greater enforcement powers, and sanctions for non-compliance may lead to fines of up to 4 per cent of annual worldwide turnover or €20 million (whichever is greater). As under the current law, the GDPR will regulate the transfer of personal data to countries or companies outside the EU, providing formal mechanisms to permit international data flows.
The UK government has confirmed that the UK’s decision to leave the EU will not affect the application of the GDPR to the UK in May 2018,16 as this pre-dates any future exit date. The Information Commissioner’s Office, the UK’s data protection regulator, has also stressed that all businesses should prepare to comply with the GDPR,17 a potentially significant compliance exercise in light of the GDPR’s additional obligations. Upon formally exiting the EU, the GDPR is likely to continue to apply to the UK, because the UK intends to enact EU legislative provisions directly into domestic legislation to prevent uncertainty about the status of EU law after Brexit.
iii New Prospectus Regulation
On 16 May 2017, the Council of the EU adopted the proposed new Prospectus Regulation, which will repeal and replace the Prospectus Directive and the existing Prospectus Regulation. The stated aim is to lower one of the main regulatory hurdles that companies face when issuing equity and debt securities, by simplifying administrative obligations related to the publication of prospectuses but in a manner that still ensures that investors are well informed.18
Under the new rules, issuers will not need to publish a prospectus where they are admitting to trading less than 20 per cent of the number of securities of the same class that are already admitted to trading on a regulated market. This increases the exception to the prospectus requirement from the current threshold of 10 per cent, making it easier to conduct smaller secondary capital raisings. These changes will come into force 20 days after publication of the regulation in the Official Journal, which, at the time of writing, is expected to be during June or July 2017.
The reformed prospectus regime also limits the inclusion of risk factors to those that are specific to the issuer or the securities and that are material to making an informed decision. Risk factors will be divided into a limited number of categories and, within each category, the most material risk factor will need to be mentioned first. The summary of the prospectus will now be limited to seven sides of A4 paper when printed, and the requirement for the format to consist of five tables has been removed. While the new rules still require the summary to have a uniform format, it is less prescriptive both in terms of content and structure. These provisions will come into force later than the above changes, namely two years and 20 days after publication in the Official Journal.
iv Cross-border insolvency
The EC Regulation on Insolvency Proceedings19 (ECIR) aims to facilitate the efficient conduct of cross-border insolvencies by, inter alia, allocating jurisdiction between Member States (excluding Denmark, which has opted out), and providing that there will only be one main insolvency proceeding. As discussed in the previous edition of The Mergers & Acquisitions Review, on 20 May 2015 the European Parliament approved a recast version of the ECIR (Recast Insolvency Regulation). Most of its provisions came into force on 26 June 2017, but insolvencies commenced before this date will continue to be regulated by the original ECIR. The Recast Insolvency Regulation has been extended to rescue proceedings, including debtor-led pre-insolvency proceedings. It applies to proceedings that are based on a law relating to insolvency. However, it does 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 and the introduction of a concept of ‘group coordination proceedings’, where a ‘group coordinator’ is appointed to oversee the insolvency or restructuring of a group of companies. The impact of the Recast Insolvency Regulation on acquisitions from or of insolvent companies remains to be seen.
III RECENT COMPETITION LAW DEVELOPMENTS
i Treatment of mergers by the European Commission
Between January 2016 and the end of April 2017, the Commission received 491 merger notifications under the European Merger Regulation (EUMR). During that period, 438 cases were cleared unconditionally at Phase I. In 24 cases, Phase I clearance was conditional on certain remedies being implemented, while eight cases were referred to Phase II for in-depth consideration. Of the 12 Phase II decisions made during the period, one case was cleared unconditionally, eight cases were given clearance conditional upon remedies being implemented and three cases were prohibited (marking the first prohibitions since 2013).
The Commission continues to be rigorous in its approach to remedies and to prefer structural solutions. Between 2011 and 2016, the Commission approved 95 cases with remedies, of which 71 per cent involved a divestment remedy. Out of the remaining cases, 7 per cent involved remedies aimed at removing links with competitors and 22 per cent mostly involved access remedies, usually to counter foreclosure concerns but also, exceptionally, to facilitate market entry and eliminate horizontal issues.20 In each of the three recent prohibition cases (HeidelbergCement/Schwenk/Cemex Croatia, Deutsche Börse/London Stock Exchange and Hutchison 3G UK/Telefonica UK), the remedies offered by the parties were not sufficient to resolve the Commission’s concerns.
In terms of substantive assessment, the Commission has in several recent cases focused on the effects of the merger on longer-term innovation and competition. The Commission has identified concerns in various industries where a transaction would remove a player with significant pipeline products or R&D capabilities, or both, or where it would otherwise negatively impact innovation, including the pharmaceutical and medical devices, energy and agrochemicals sectors. In a recent speech, the Deputy Director of General Mergers, Carles Esteva Mosso, emphasised that ‘fostering innovation and productivity growth is one of the most pressing issues today within the EU. You can therefore expect that the Commission will continue to pursue these issues in the context of merger assessment.’21
The Commission has also recently demonstrated that it takes a strict approach towards merger parties’ compliance with their procedural obligations under the EU merger rules. On 18 May 2017, the Commission announced that it had imposed a €110 million fine on Facebook for providing misleading information in relation to its takeover of WhatsApp. On the same day, the Commission issued a statement of objections to Altice SA, a Portuguese telecoms company, alleging that it had breached the ‘standstill’ obligation in the EUMR by implementing its acquisition of PT Portugal SGPS SA prior to gaining the Commission’s approval. The Competition Commissioner, Margrethe Vestager, has indicated that other instances of possible violation of the procedural rules are currently being investigated.
ii Possible reforms to the EUMR
In October 2016, the Commission launched a new public consultation on the ongoing evaluation of selected procedural and jurisdictional aspects of EU merger control. The consultation sought to explore the potential for further simplification of EU merger control review, and the possible streamlining of the referral system between the Commission and European national competition authorities. This builds on the results of the 2014 public consultation on the Commission’s White Paper, ‘Towards more effective EU merger control’, which proposes 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.22
The 2016 consultation also focuses on whether the current purely turnover-based EUMR thresholds need to be adapted to reflect new business models and, if so, the possibility of introducing complementary jurisdictional thresholds, based for instance on the transaction value.23 These proposals stem from an ongoing debate about the effectiveness of the turnover-based jurisdictional thresholds in the context of some high-value transactions (particularly in the digital economy) involving target companies with limited or no turnover, which were not notifiable under the EUMR but may have had significant competitive effects in the EEA.
The outcome of the consultation will inform the type of follow-up, including any potential proposals for legislative changes.
The Commission’s White Paper, ‘Towards more effective EU merger control’, 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’). However, respondents to the 2014 public consultation expressed doubts about the proportionality of the proposal, in particular in view of the perceived limited scope of the problem identified.24 Commissioner Vestager noted in March 2016 that she was, at that point, not convinced that this is ‘a change we absolutely have to make to our system’.25 In October 2016, the Commission published the results of a study it had commissioned to obtain further information on this topic. The study found that the number of acquisitions of non-controlling minority interests raising competition concerns is ‘very low’, but that ‘there may be some merit’ in the Commission being able to review such acquisitions. It still remains to be seen whether the Commission will propose any legislative changes in this area.
IV RECENT TAX LAW DEVELOPMENTS
i Base erosion and profit shifting (BEPS)
For some time, the OECD’s BEPS project has clearly been the hottest topic in international tax. Although BEPS has recently been somewhat overshadowed by the proposal to introduce a border-adjusted cash flow tax in the US, the EU is powering on with it.
In order to implement some of the BEPS measures, the Commission had presented a draft Anti-Tax Avoidance Directive (ATAD) in January 2016. After difficult discussions in the ECOFIN Council during May and June 2016, an amended ATAD was adopted on 19 July 2016. The amended ATAD dropped a so-called ‘switch-over’ clause, and a provision targeting hybrid mismatches arising between Member States and third countries. However, it retained:
- a a limitation on interest deductions;
- b a general anti-abuse rule;
- c an obligation to counteract hybrid mismatches between Member States;
- d rules on controlled foreign companies; and
- e a system of exit taxation that is triggered by the transfer of assets or tax residence from a Member State to another Member State or a third country.
The Commission has also replaced its original proposal for a common consolidated corporate tax case (CCCTB) with a new corporate tax reform package. This was published on 15 October 2016 and includes proposals on:
- a hybrid mismatches arising between Member States and third countries: on 29 May 2017, the Competitiveness Council formally adopted a directive amending ATAD to cover these mismatches;
- b double taxation dispute resolution: a draft directive is scheduled to be considered by the European Parliament in July 2017; and
- c introducing the CCCTB in two stages: the Commission sees consolidation as the more complicated part of the CCCTB, so the new proposal aims to agree the common corporate tax base and consolidation separately. At the time of writing, we are awaiting the publication of the opinion of the European Parliament on both aspects.
On 7 June 2017, 68 states, including all EU Member States other than Estonia, signed a multilateral instrument (MLI) incorporating the treaty changes required by BEPS into existing bilateral treaties between the signatories of the MLI.
In respect of country-by-country reporting (as required by BEPS Action 13), the Commission had published a directive amending the Accounting Directive26 to require certain multinationals to disclose publicly in a specific report the income tax they pay together with other relevant information. On 12 June 2017, the Committee on Economic and Monetary Affairs and the Committee on Legal Affairs of the European Parliament approved a draft report to allow multinationals to apply to the authorities in the relevant Member State for exemptions to protect commercially sensitive information. The next step is for this draft report to be considered in a plenary sitting of the European Parliament.
ii Withholding tax
On 13 July 2016, the Court of Justice of the European Union ruled, in Brisal,27 that it was contrary to the EU freedoms for a Member State that taxes banks resident in that Member State on their net profits (after deducting financing costs and other expenses) to impose withholding tax on gross interest paid to banks resident in another Member State without allowing a deduction for financing costs and other expenses.
While the decision was made in respect of withholding tax on interest imposed in Portugal, it is arguable that the principle applies equally to other Member States and other withholding taxes, for instance withholding taxes on royalties. Businesses that have suffered withholding tax on interest or royalties paid within the EU may wish to consider whether to file claims for a repayment of the tax withheld.
iii State aid
After having found that the Dutch and Luxembourg authorities had granted illegal state aid to, respectively, Starbucks and Fiat, the Commission has more recently ruled that the Irish authorities have granted illegal state aid to Apple. The non-confidential version of the decision was published on 19 December 2016. The ruling concerns the profit allocation between different entities in the Apple group, which the Commission found to be devoid of any factual or economic justification. Both the Republic of Ireland and Apple have announced that they intend to appeal against the Commission’s decision.
It is recommended that companies keep under review any tax rulings and special regimes from which they currently benefit or are seeking to benefit. In an M&A context, warranty protection should be sought.
iv Financial transactions tax
At a meeting on 6 December 2016, the ECOFIN Council discussed the proposal for a financial transactions tax (FTT), which the following 10 Member States aim to introduce by way of the enhanced cooperation procedure: Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
The President of the Council called for a draft legal text to be prepared for discussion by national experts to reflect recent progress. He noted that the result must be satisfactory to all Member States, including those not participating in the FTT.
1 Mark Zerdin is a partner at Slaughter and May. The author would like to thank Nicholas Schaffer for his assistance in preparing this chapter.
2 Mergermarket, Deal Drivers EMEA 2016.
3 EY, UK Attractiveness Survey 2017, Executive Summary.
4 Footnote 2.
6 ‘Hungry U.S. Companies Turn to European Targets as Home Deals Lag’, Bloomberg, 4 April 2017.
7 Footnote 2.
8 Mergermarket, Global and Regional M&A: Q1 2017.
9 Footnote 2.
10 ‘Qualcomm buys NXP for $47bn in Europe’s largest tech deal’, Financial Times, 27 October 2016.
11 Footnote 2.
12 ‘By 2020, More Than Half of Major New Business Processes and Systems Will Incorporate Some Element of the Internet of Things’, Gartner, 14 January 2016 .
13 ‘Internet of Things Market to Reach $267B by 2020’, Forbes, 29 January 2017.
14 Footnote 2.
16 Information Commissioner’s Office website: ‘Overview of the GDPR’.
18 Council of the European Union press release 260/17, ‘Capital markets union: new prospectus rules adopted’, 16 May 2017.
19 No. 1346/2000.
20 Merger enforcement: getting the priorities right (speech by Carles Esteva Mosso at Kings College, Brussels), 19 May 2017.
22 Refining the EU merger control system (speech by Commissioner Vestager at Studienvereinigung Kartellrecht, Brussels), 10 March 2016.
23 A similar debate has been occurring at national level in the EU. Notably, the German and Austrian governments have recently voted in favour of legislation introducing an additional jurisdictional threshold relating to the transaction value, which will apply as an alternative to the existing turnover-based criteria.
24 Commission Staff Working Document, accompanying the European Commission’s Report on Competition Policy 2016, published on 31 May 2017.
25 Refining the EU merger control system (speech by Commissioner Vestager at Studienvereinigung Kartellrecht, Brussels), 10 March 2016.
27 Case C-18/15.