A regulatory nightmare?

Today we are deviating from our usual pattern. Instead of dealing with a current case or political developments, I want to tell a short fictional story (roughly comparable to the ones I read to my children in the evening). The story has it all: a long-standing business relationship, great expectations and surprising twists.

Once upon a time

It is the year 2024. Anita runs a mid-sized US medical equipment company, named A-Health. It came to her attention, that one of A-Health’s competitors, German medical equipment company Z-Health was up for sale. Since she wanted to expand her activities to the European market and knew that Z-Health produced very sophisticated products, she reached out to Z-Health and at the same time contacted Joe, her trusted US-lawyer for many decades. Joe told her that he was happy to bring the deal over the finish line, but that he had heard that regulatory hurdles in Europe „were somewhat high“ recently. This was acknowledged by Anita, who had grown A-Health in particular via several acquisitions in the past years.

And so the story began

Some weeks after the initial conversation, Joe reached out to Anita and told her that the SPA was about to be signed. However, the transaction had to be notified to and cleared by the German Bundeskartellamt (FCO) and the German Ministry of Economics (BMWK) before closing could occur.

Looking in Anita’s shocked eyes, Joe started to explain: Whilst the FCO examines whether a merger, which exceeds certain turnover thresholds, restricts competition the BMWK looks into investments in companies which operate in certain critical areas determined by law and assesses whether the investment conflicts with public security interests of Germany.  Annita’s face slowly took on color again. From experience, the FCO could be dealt with and “public security interests” in the medical equipment sector?

Joe also had some additional news: Fortunately, they did not have to notify the transaction to the European Commission under a newly introduced regime called Foreign Subsidies Regulation, which is aimed at combating “distortions of competition” on the EU internal market caused by foreign subsidies. This was because the combined foreign financial contributions the parties had received from outside the EU were below EUR 50 million and thus the threshold for a notification requirement was not met. Or so they thought.

In any case, lawyers in Europe were quite relaxed, because there were only limited overlaps between the parties and the filing to the BMWK should, at least for a mid-sized US company from California, be a mere formality. Clearances were expected within the next two to four months.

Shortly before signing Joe called Anita again. Unfortunately, there had been a mix up with the list of subsidies A-Health operated (if one could speak of a list at all). Some subsidies had not been included in it, although he had told A-Health to prepare such a list months ago (when he had received a very good briefing re Foreign Subsidies from a specialized German law firm). To cut a long story short: A Foreign Subsidies Filing to the European Commission was also required.

Only two weeks after this, Joe reached out to Anita concerning an additional matter that came up. The regulatory process in Germany did not run as smoothly as expected. While the FCO seemed not so much interested in the case, the BMWK had issued a couple of questions, revolving around the products of Z-Health, which were key to the diagnoses of highly infectious diseases. According to Joe, it was not unlikely that the case would move into the so-called Phase 2, adding at least another four months to the review (and consequently also to the deal timetable).

Two days later, Joe was on the phone with Anita again. This time, the European Commission had raised an issue. Apparently, A-Health received several subsidies (inter alia) by non-EU governments. The European Commission was about to investigate potential distortions into the internal market.  So, it is fair to say that up until this point things weren`t going as initially expected.

And what happened next?

Anita was starting to worry about the transaction. It had never been this difficult before. Joe remained confident. After lengthy pre-notification discussions the European Commission had allowed A-Health to submit its Foreign Subsidies filing and lawyers were hoping for a clearance within Phase I (25 working days). Similar good news came from the FDI workstream – according to the lawyer the BMWK was set to clear the transaction in due course.  

Unfortunately, Joe got back to Anita shortly thereafter with bad news: Some customers – alarmed by various press articles about the European Commission proceedings – had complained to the Federal Cartel Office about the transaction, which had referred the case to Phase 2. Although there were only minor overlaps between Z-Health and A-Health, both companies were very strong in one particular product area. Lawyers in Europe had even advised that Anita should prepare to sell the corresponding business activities of A-Health.

Now two months had passed since signing. And again, Joe came with more trouble on the run: Unfortunately, he had been a bit too optimistic about the regulatory filings. If after 6 months not all regulatory approvals were available, the target could terminate the deal –  and A-Health would then even owe a break-up fee to Z-Health. There were some discussions about who messed up the data collection for the Foreign Subsidies filing, but in case the FCO did not clear the deal, this was subject to competition law concerns and thus anyway not related to the European Commission filing. Two days after Anita and Joe had the corresponding conversation, Joe announced that the BMWK had now heard that Z-Health was one of the major suppliers for the German army and had even developed some products together with the German army. Thus, it had referred the deal to Phase 2.

All just a dream?

Anita woke up in a cold sweat. What a dream. But had she only dreamed it all? Then the phone rang. It was Joe….

Picture from Stefano Pollio on Unsplash