Half of the Competition and Markets Authority’s (CMA) current Phase 2 caseload relates to transactions in the software space. While the UK merger control thresholds remain voluntary and non-suspensory, the CMA’s expansive interpretation of the jurisdictional thresholds - largely supported by the Competition Appeal Tribunal - highlights the risks of not notifying the CMA of software deals, even where the transaction has a limited UK nexus or a relatively small enterprise value.
In this article, we explore the top five things investors need to know when contemplating transactions involving software enterprises:
- The CMA is more interventionist in software mergers compared to other antitrust authorities.
- The CMA may go to significant lengths to establish jurisdiction over software deals with very little UK nexus.
- Small transactions will not necessarily escape scrutiny.
- Transactions involving software in sensitive industries are more likely to attract scrutiny.
- CMA processes are unpredictable, convoluted, long, and often expensive, and the CMA may depart from the approach adopted by other authorities even in global markets.
As well as top tips for investors looking at software deals going forward:
- Consider whether the software falls into a sensitive sector.
- Consider overlaps even on seemingly conservative bases or edge cases.
- Consider whether the target provides services to UK businesses or customers, even if small or based on an agreement between the target and non-UK third party.
- Always conduct a merger feasibility analysis – do not rely on the limited size of a transaction or international approvals and consider whether there is a realistic (and commercially acceptable) fix to any problem.
- Consider likelihood of CMA call-in when considering global notification strategy.
- Account for potentially considerable uncertainty, delays, risk allocation and the need for target cooperation in any deal documents.
- Document procompetitive rationale(s) for the acquisition in internal and external analyses, and prepare for the possibility of the CMA questioning directors on the contents of internal documents and their interpretation (Inspired/Novomatic). Ensure that outside counsel have an opportunity to review materials being prepared by external consultants such as BCG, together with press releases and other internal materials before they are finalised.
More generally, the article contains the following reminders:
- The CMA can review acquisitions of “material influence”, which is significantly lower than the EC’s “decisive influence”/“control” standard, and which has been found based on an equity interest of as little as 15% and a single board seat.
- Transactions involving significant multiples may attract greater scrutiny. In PayPal/iZettle, the CMA considered whether the high consideration value for iZettle (almost twice that of a parallel initial public offering valuation) reflected a reduction in competition.
- Remember that the UK’s foreign direct investment (National Security and Investment Act) regime may also apply and be a means through which the CMA learns of a deal. The regime is acquirer-agnostic (it bites foreign and UK acquirers) and can apply even in the absence of a UK subsidiary or assets (i.e. UK sales alone are sufficient).
- The CMA proactively screens for transactions over which it may have jurisdiction and regularly “calls-in” transactions for review.
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