The Mergers & Acquisitions Review: EU Overview
I OVERVIEW OF M&A ACTIVITY
In 2019, there was a notable fall in deal value across Europe largely attributable to the fall in 'megadeal' activity: while there were 10 deals with values in the double-digit billions in 2018, there were only three such deals in 2019. This included the €75.8 billion acquisition of Allergan by US-based AbbVie and the €19.1 billion acquisition of France-based PSA Peugeot-Citroen by Fiat Chrysler Automobiles. Nevertheless, 2019 was the third-best year for European M&A (by volume) since the financial crisis.
In 2020, levels of dealmaking in the EU have taken a heavy blow as the effects of the covid-19 pandemic continue to be felt. The European Commission has forecast an 8.7 per cent contraction in the region's economy for 2020. Only 2,619 deals took place in H1 2020, down from over 4,000 in both H1 and H2 2019. Aggregate deal value also fell from €317 billion in H1 219 and €345 billion in H2 2019 to €266.6 billion in H1 2020. Most of this can be attributed to Q2, during which buyers and sellers responded cautiously to volatile markets. In fact, Q2 2020 represented the lowest quarterly totals in both volume and value terms since 2009 and the aftermath of the financial crash.
The largest European market in H1 was found in the UK and Ireland, which saw 543 deals worth an aggregate of €87.9 billion, comprising a third of the deal value and a fifth of the volume across the EU over H1 2020. Germany, Austria and Switzerland was the next biggest region, with 463 deals aggregating a total of €67.6 billion, followed by France, Italy and Spain. The latter two, which were among the countries hit hardest by covid-19, each accounted for around 7 per cent of the volume and value of the EU market.
A breakdown of M&A activity by industry shows that the consumer and leisure sectors have been among the hardest hit by covid-19. The consumer sector almost halved in deal value and volume from H1 2019, from 476 deals worth an aggregate of €24.6 billion to 276 deals worth an aggregate of €13.8 billion. By contrast, the aggregate deal value in the financial services and the industrials and chemicals industries recorded increases from H1 2019 figures, though it should be noted that this is mostly attributable to higher levels of activity in Q1 prior to the worst effects of the covid-19 crisis being felt across Europe. The €31.1 billion deal between Aon and Willis Towers Watson also made up the majority of the financial services deal value.
It is expected that two further industries will remain resilient and perhaps even grow in H2 2020.
First, the telecoms, media and technology (TMT) sector, which recorded a fall in aggregate value to €51.2 billion, down just 4.3 per cent on the figures for H1 2019. This is perhaps unsurprising given the widespread reliance on technology during periods of lockdown both for the purposes of working remotely and entertainment. The largest deal in TMT was the mega-merger between Liberty Global's UK-based cable media company Virgin Media and O2 announced in May, with the joint venture company being valued at £31.4 billion.
The pharma, medical and biotech (PMB) sector is also expected to attract a good deal of M&A interest in H2 2020, with rising investment in healthcare infrastructure and covid-19 research. This is despite the numbers for PMB M&A activity in H1 2020 being down in both value and volume terms.
II RECENT EUROPEAN LAW MEASURES RELATING TO CORPORATE LAW
i Brexit update
At the time of writing, there remains significant uncertainty surrounding the negotiation of trade terms between the UK and the EU. The UK left the EU on 31 January 2020, but negotiations on the future UK–EU relationship are ongoing during the transition period, an 11-month phase that started following Brexit day. During this time, the UK continues to follow EU rules, and trade between the two is exactly as it was before 31 January 2020, although with the transition period ending on 31 December 2020 and the deadline for an extension having passed, there is an increasing possibility that no trade deal will be agreed in time and the UK will drop out of the single market and the customs union.
The UK government has published several pieces of secondary legislation to facilitate the effective functioning of the UK's company law framework and the operation of the UK takeovers regime on a freestanding basis outside the EU framework post-Brexit. Until the end of the transition period, the European Union (Withdrawal Agreement) Act 2020 continues the operation of EU law in the UK. Most secondary legislation introduced will come into effect on 31 December 2020.
The European Commission published an updated notice to stakeholders on the withdrawal of the UK from the EU and EU rules on company law in July 2020. The notice highlights the principal consequences of a no-deal Brexit for M&A activity within the EU involving the UK. Primarily, after the transition period, the UK will be a third country and EU company law will no longer apply to it. Once the EU freedom of establishment principle ceases to apply to the UK, EU states will no longer be forced to recognise the limited liability of UK companies, which could result in shareholders of UK companies that have their principal base within the EU losing their limited liability. Cross-border mergers under EU law will no longer be possible with the UK, so national rules for mergers with companies established in third countries will apply following the transition period.
ii General Data Protection Regulation
As discussed in previous editions of The Mergers & Acquisitions Review, the General Data Protection Regulation (GDPR) was published in the Official Journal on 4 May 2016 and, as a regulation, it has had a 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 those that are free of charge) or any organisation that monitors their behaviour. This means that a larger number of overseas businesses are likely to 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.
Although the GDPR will no longer directly apply in the UK following the end of the transition period, the Data Protection Act 2018 (DPA 2018) enacts the GDPR's requirements in UK law. The UK government issued the Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019, a statutory instrument that amends the DPA 2018 to bring it in line with the requirements of the GDPR. There is very little difference between the UK GDPR regime and the EU GDPR.
iii Prospectus Regulation
On 30 June 2017, the New Prospectus Regulation was published in the Official Journal of the European Union; it repeals and replaces the Prospectus Directive. 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. The Regulation also aims at achieving greater harmonisation of prospectus rules across the EU.
One of the key changes that the New Prospective Regulation provides for is a simplified disclosure regime for small and medium-sized enterprises and secondary issuances. For example, the reformed prospectus regime limits the inclusion of risk factors to those that are specific to the issuer of the securities and 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. The increased emphasis on uniformity and materiality should also reduce the cost of accessing European capital markets.
While a handful of changes were implemented earlier, the New Prospectus Regulation came into full force on 21 July 2019. On 31 January 2019, the European Securities and Markets Authority (ESMA) published a new Q&A on the application of the Prospectus Directive and its implementing measures, which includes guidance on how the New Prospectus Regulation will apply in the event that the UK leaves the EU without a deal.
On 4 December 2019, ESMA published a report on the Prospectus RTS Regulation proposing minor amendments to the regulation. This was published in the Official Journal on 14 September 2020 and came into force on 17 September 2020.
As part of the European Commission's covid-19 recovery strategy, it also adopted, on 24 July 2020, a legislative proposal to amend the Prospectus Regulation more substantively. The proposals include the introduction of a temporary simplified prospectus regime for secondary issues where issuers have been listed for at least 18 months, as well as temporarily enhancing the prospectus exemption threshold for certain offers of non-equity securities issued by a credit institution. The draft amending regulation will be sent to the European Parliament and the Council for the EU under the normal legislative procedure, before it enters into force on the 20th day following its publication in the Official Journal.
iv The Fifth Anti-Money Laundering Directive
On 10 January 2020, the EU's Fifth Money Laundering Directive (MLD5) implemented by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 came into force to address gaps in the transparency rules. The Fourth Money Laundering Directive (MLD4) and MLD5 are part of the European Commission's proposal to strengthen the fight against terrorist financing against the backdrop of the Panama Papers revelations in April 2016 and recent terrorist attacks. They apply to a wide range of businesses: in essence, any business deemed at risk of being involved in money laundering or terrorist financing. The aim of the directive is to 'ensure more transparency and help competent authorities to effectively detect criminal and terrorist financing flows'. The proposed amendments, which extend the scope of MLD4 even further, seek, among other things, to address the risks associated with prepaid cards and virtual currencies; broaden access to information on beneficial ownership; and to award further powers to financial intelligence units (FIUs), including a requirement for Member States to establish national central mechanisms allowing FIUs to better identify holders and controllers of bank and payment accounts and safe-deposit boxes.
III RECENT COMPETITION LAW DEVELOPMENTS
i Treatment of mergers by the European Commission
Between January 2019 and the end of August 2020, the Commission received 605 merger notifications under the European Merger Regulation (EUMR). During that period, 551 cases were cleared unconditionally at Phase I. In 20 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 11 Phase II decisions made during the period, one was cleared unconditionally, seven cases were given clearance conditional upon remedies being implemented and three were prohibited.
The three transactions prohibited by the Commission were Siemens' proposed acquisition of Alstom, Wieland's proposed acquisition of Aurubis Rolled Products and Schwermetall and the proposed steel joint venture between Tata Steel and ThyssenKrupp. These decisions have generated considerable debate around whether the EU merger control rules should be reformed to enable the creation of 'European champions' in the face of increasing competition from China and elsewhere. While the Commission has opposed these proposals, it has cited globalisation as one of the factors behind a review of its market definition notice, which sets out some of the key economic principles applied by the Commission in merger control proceedings. The Commission has also flagged several other economic developments that will need to be considered as part of the review, including the trends towards digitisation, the growth of platform and 'free' or data-driven business models, and the emergence of product and service ecosystems.
In terms of substantive assessment, the Commission has continued to focus on the effects of mergers 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 affect innovation, including the pharmaceutical and medical devices, energy and agrochemicals sectors. The Commission is also increasingly focusing on the impact that mergers may have on access to data given its importance in the digital economy.
The trend of requesting significant volumes of internal documents as part of the merger notification has also continued, particularly in respect of more complex cases. The former Director General for Competition, Johannes Laitenberger, has noted that 'internal documents are important, because they can help us understand the plans that companies have for the future and make better decisions'.
The Commission has also continued its strict approach to ensuring compliance with the EU merger control procedures. In April 2019, the Commission imposed a fine of €52 million on General Electric for providing incorrect information about its proposed acquisition of LM Wind. A few months later, the Commission imposed a fine of €28 million on Canon for partially implementing its acquisition of Toshiba Medical Systems Corporation before notification and merger control approval. The Commission held that the warehousing structure used by the parties breached the EUMR's standstill obligation.
In May 2020, the General Court issued its judgment in respect of an appeal against the Commission's 2016 prohibition of the proposed merger between UK mobile network operators O2 and Three. The judgment contains a number of findings that have potentially wide ramifications for future merger cases, including the meaning of a significant impediment to effective competition; the legal standard of proof; and the quality of evidence the Commission must provide to justify its findings. The Commission has appealed against the ruling to the European Court of Justice, meaning that it may be another one to two years before we receive the final verdict on these important issues for EU merger control.
ii Possible reforms to the EUMR
Possible reforms to the EUMR have been under consideration since a public consultation launched in 2017. The consultation sought to explore the potential for further simplification of EU merger control review, streamlining of the referral system between the Commission and European national competition authorities, and the introduction of complementary jurisdictional thresholds based on transaction values. These latter proposals stem from a 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 European Economic Area. The Commission recently announced that it has decided against introducing new transaction value-based thresholds for the time being. Instead, the Commission will encourage referrals from national competition authorities of mergers that they consider should be reviewed at the EU level, even if authorities do not have the power to review the case themselves. The Commission hopes to introduce these changes during 2021 following the publication of guidance around how and when it will accept these referrals.
The Commission has also announced a review of its guidance on best practices on merger proceedings, the notice on the simplified procedure, and the merger implementing regulation. The Commission intends to examine whether it can reduce the amount of information that merging companies have to provide, make it simpler to submit information and implement measures to make merger control procedures faster.
IV RECENT TAX LAW DEVELOPMENTS
The Commission has set an ambitious tax agenda. On 15 July 2020, the Commission published a 25-point 'action plan for fair and simple taxation supporting the recovery strategy'. The central aim is two-fold: tax obstacles to cross-border trade are to be reduced and the enforcement of existing rules and tax compliance improved.
EU cross-border workers may look forward to a clarification of the rules that determine where they are treated as tax resident. The VAT system is to be overhauled with the aim of simplifying procedures and enhancing digital capabilities. Changes to the VAT treatment of financial services are also planned, and an expert group will be formed to develop pragmatic solutions to practical problems posed by transfer pricing practices within the EU.
The Commission has also published a directive proposal, dubbed DAC7, to require online platform operators to report transactions to national tax authorities, and proposes that further action be taken to combat harmful tax practices and promote tax good governance within the EU and beyond. It is envisaged that the Code of Conduct for Business Taxation will be reformed. The operation of the EU list of non-cooperative tax jurisdictions will also be reviewed, in particular with respect to its geographic scope and to ensure that jurisdictions included on that list face negative practical consequences as a result.
In order to enable the delivery of its ambitious agenda, the Commission has stated that 'all existing policy levers have to be activated'. It seems that, where possible, the Commission will make use of provisions that allow tax-related measures to be introduced through the ordinary legislative procedure so as to avoid the need to receive unanimous approval within the Council.
i State aid
Recent setbacks before the General Court do not appear to have dampened the Commission's enthusiasm for challenging tax practices on state aid grounds. In an M&A context, reliance on tax rulings should be scoped out during the due diligence process. One crucial question in assessing the state aid risk in respect of a particular ruling is whether the ruling reflects the law or approves a more advantageous position.
The Commission won in Fiat, but lost in Starbucks and Apple. In its judgment in Apple, the General Court made clear that the mere fact that a ruling may be light on information or methodology does not make it state aid. The Commission has to show that taxable profits went untaxed because of the ruling. This should give some peace of mind to taxpayers who relied on rulings that are less detailed than they could have been.
Commenting on the Commission's defeat in the Apple case, Executive Vice-President Margrethe Vestager said: 'If Member States give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the EU . . . The Commission will continue to look at aggressive tax planning measures under EU state aid rules to assess whether they result in illegal state aid.' Therefore, a reprieve from tax state aid investigations cannot be expected any time soon.
ii Digital taxation
The current debate around digital taxation started back in 2013 with the OECD's Base Erosion Profit Shifting Action 1, which sought to address the tax challenges of the digital economy. Following the publication of an interim report on 16 March 2018, the OECD published a policy note and a public consultation document in early 2019 proposing a two-pillared approach to reforming the international tax system in light of the digitalisation of the economy. The discussion has since centred on these two pillars.
The first pillar addresses the tax challenges of the digital economy. The proposal leaves in place the arm's-length principle of the existing transfer pricing rules, but introduces a new taxing right for market jurisdictions in respect of a share of deemed residual profits. The second pillar, referred to as the Global Anti-Base Erosion (or GloBE) proposal, seeks to ensure that multinationals' profits are subject to a minimum level of effective taxation.
The OECD's aim was to achieve a consensus-based, long-term solution by the end of 2020. This aim will not now be achieved. The OECD's aim was to achieve a consensus-based, long-term solution by the end of 2020. This aim will not now be achieved. On 12 October 2020, the OECD published reports on the blueprints for each of the two pillars alongside a number of other documents, including an economic impact assessment predicting that the implementation of the two-pillared reform would increase global corporate tax revenues, while leading to a 0.1 per cent drop in global GDP. During a meeting on 8 and 9 October 2020, the Inclusive Framework, comprising 137 countries and jurisdictions working together to implement measures to prevent tax avoidance and improve the international tax rules, approved the reports for publication, noting that they provided 'a solid basis for future agreement', which is now intended to be reached by mid-2021.
Reaching agreement at OECD level is considered essential to stem the tide of unilateral measures. A number of European countries have introduced digital services taxes, raising the spectre of an escalating trade war with the US. In respect of the French digital services tax, the US trade representative has already concluded that it discriminates against US businesses and issued a notice that retaliatory tariffs would be introduced, but their application suspended until 6 January 2021. The investigation of the UK's and a number of other countries' digital services taxes is still ongoing.
The Commission has also indicated that it may take action. In her speech at the EU Ambassadors' Conference 2020, Commission President Ursula von der Leyen stated that '[o]ur goal remains a consensus-based solution at the OECD and G20 level on both pillars of the global discussions. But let there be no doubt: should an agreement fall short of a fair tax system, Europe will act. The new deadline of mid-2021 must be the final one.'
iii Acquisition structuring
National tax authorities and courts have started to apply the judgments of the Court of Justice of the European Union (CJEU) in the Danish conduit cases to deny taxpayers the benefit of withholding tax exemptions.
In the Danish conduit cases, the Danish tax authority had denied the exemption in respect of dividend or interest payments from a Danish company to its intermediate parent on the basis that the recipient was merely a conduit and the actual beneficial owners were non-EU entities. The CJEU confirmed that the benefit of the Royalties Directive (IRD) and the Parent and Subsidiary Directive (PSD) must be denied if there is an abuse of rights. This would be the case in respect of structures that meet the formal conditions of the IRD or the PSD, but not its purpose, and which were set up with the intention of claiming the exemption from withholding tax by artificially creating the pre-condition therefor. The factors that the CJEU indicated should be taken into account in determining whether there is an abuse of rights include:
- the circumstances around the set-up of the structure;
- a quick on-payment of payments received;
- the recipient's ability to economically benefit from, and determine how to use, the payments received; and
- the recipient's other activities (if any).
A number of Member States' national courts have considered the Danish conduit cases in the context of their consideration of structures considered abusive by the relevant tax authorities. One particularly thorny issue appears to be the question what amount of other activity (e.g., in addition to the holding of dividend-paying shares in respect of which an exemption from dividend withholding tax is claimed under the PSD) is required at the level of an intermediate holding company to show that its interposition is not wholly artificial. Share ownership in more than 10 other active companies was considered sufficient by a court in the Netherlands, but a Spanish court could not be persuaded that the existence of other investments and sources of income showed that the structure was not wholly artificial. It seems likely that we are only at the start of a long journey before the full impact of the Danish conduit cases can be known. Meanwhile, their application by the Member States' national courts calls for caution when setting up acquisition structures that seek to take advantage of withholding tax exemptions under the IRD or the PSD, or both.
DAC6 is another measure of which the full impact cannot yet be known. As part of the drive to discourage aggressive cross-border tax planning, it requires intermediaries to report cross-border arrangements if they meet certain conditions. These conditions are, however, so widely drawn that they may catch arrangements that would not normally be thought of as aggressive. It was hoped that national implementing legislation and guidance would bring clarity – and, in some sense, it has. It has made clear that the conditions are interpreted differently across the EU and in the UK. For instance, the UK implementing legislation clarifies that the main tax benefit test incorporated in some of the conditions is intended to catch only benefits contrary to the principles of the relevant legislation, but other countries have not taken a similarly sensible approach. Consequently, transactions that are not reportable in one country may well have to be reported in another.
Potential reporting duties should be considered in respect of certain existing and any new acquisition or financing structures. Structures implemented as early as June 2018 may have to be reported. It was originally envisaged that the first reports would have to be made in the summer of 2020. In light of the ongoing covid-19 crisis, Member States and the UK were, however, given the option of deferring the deadline for the first reports until early 2021. While most countries have made use of this option, Germany is a notable exception. The likely result is that transactions will be reported in Germany even though Germany may not be the main jurisdiction involved and the German intermediary may not be best placed to make the report.