Killer Acquisitions– Brief overview on concept

We mentioned the concept “killer acquisitions” in a previous article. The topic raises great interest at the moment at international level due to the impact that it may have on competition in emerging product markets (especially technology related ones).[1]

Let’s clarify: ”Killer acquisitions” refer to cases where incumbent companies with important market shares acquire start-ups or smaller players with significant business potential in terms of the products or services that they provide with the purpose to “discontinue the development of the targets’ innovation projects and pre-empt future competition”.[2]

As shown by research,[3] the extent to which a potential acquisition may be qualified as a “killer acquisition” most times escapes the scrutiny of competition authorities, because the parties involved in such acquisitions do not meet the turnover thresholds for merger clearance (by assumption, the thresholds are not met, because the acquired company is new to the market and/or has a market share well below the relevant thresholds).

In this case, the questions arise: how can competition authorities identify “killer acquisitions” and, moreover, how can it be proven from the onset (i.e. from the acquisition date) that the intention of the acquirer is to “kill” the future competitor or its product, when the result of the acquisition can actually be seen some time after its completion?

The answers to these questions appear to be yet under discussion amongst competition law experts. For the time being, however, it appears that a post-factum review would be the only tool available for competition authorities. This idea appears to be supported by a recent opinion expressed by the Advocate General with the European Court of Justice (of which we have written here). For sure this topic will gain ground as more start-ups launch into innovation and efficiencies which would benefit consumer and competition, thus attracting the appetite for acquisitions of established players.

[1] The OECD allocated a whole panel to the topic in 2020 - https://www.oecd.org/daf/competition/start-ups-killer-acquisitions-and-merger-control.htm. Also, other sources have recently evoked this concept - see: https://insights.som.yale.edu/insights/wave-of-acquisitions-may-have-shielded-big-tech-from-competition [2] Cunningham, C., Ma, S. and F. Ederer (2018). “Killer Acquisitions,” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3241707, cited in OECD (2020), Start-ups, Killer Acquisitions and Merger Control www.oecd.org/daf/competition/start-ups-killer-acquisitions-and-merger-control-2020.pdf [3] OECD (2020), Start-ups, Killer Acquisitions and Merger Control, www.oecd.org/daf/competition/start-ups-killer-acquisitions-and-merger-control-2020.pdf

Concentration Analysis pre-M&A to Involve Abuse of Dominance Conditions Assessment?

In Case C‑449/21 (“Towercast”) (currently pending), the European Court of Justice (the “ECJ”) was required to assess and rule upon a preliminary question of whether a concentration which does not meet the relevant turnover-related thresholds of Regulation (EC) No 139/2004 (the “Merger Regulation”) and national merger control law and, as a result, did not undergo ex ante assessment with any national or European authority can be reevaluated following its completion in view of Article 102 from the Treaty on the Functioning of the European Union (the “TFEU””) on abuse of dominance.

In other words, the question raised by the inquiring national court (in this case, the Court of Appeals in Paris, France) opened the discussion as to whether a concentration which, at first sight does not even raise the issue of clearance (by not meeting the legal notification thresholds), may trigger additional ex post review based on legal grounds concerning abuse of dominance.

Advocate General Kokott issued their opinion in this case[1] and their conclusion is that indeed, such review could take place. The arguments brought forward in this regard are in brief the following:

1. applying national law provisions or the Merger Regulation with respect to clearance requirements for mergers does not preclude the application of Article 102 on abuse of dominance following the completion of the concentration, given the prevalence of treaty provisions. However, to the extent that a concentration meeting the thresholds for notification has been declared compatible with the internal market, “could not as such be qualified (any longer) as an abuse of a dominant position within the meaning of Article 102 TFEU, unless the undertaking concerned has engaged in conduct which goes beyond that and could be found to constitute such an abuse.”[2]

2. subsequent control under Article 102 TFEU can only concern concentrations carried out by an undertaking with a dominant position.[3]

3. legislation on merger clearance establishes a rebuttable presumption that, in case certain thresholds are met, a proposed concentration may raise competition concerns and, hence, require the preliminary review of competition authorities. However, lack of reaching such thresholds (and absence of the presumption) does not preclude Article 102 from applying and the relevant competition authority from assessing post concentration completion if abuse of dominance occurred.

4. in order to effectively protect competition, especially in acquisitions in highly concentrated markets, competition authorities should be able to use the tool made available by Article 102, where the aim of such acquisitions is to eliminate competitors (the so-called killer acquisitions - more on the concept here).

The case is still pending and the ECJ is yet to rule on it. However, if the Court's judgment follows AG Kokott's opinion and reasoning, it would probably require a partial reconfiguration of how some purchases will be dealt with, in the context of which the notification thresholds are not met:

• the standard assessment of notification thresholds carried out before any deal is signed will have to be followed by an assessment of the potential abuse of dominance resulting from the concentration. The absence of such extensive assessment could lead to negative consequences after the completion of the M&A in the form of fines or the retroactive dismantling of the transaction. In her Opinion, AG Kokott suggest that the adequate sanction would not be the dismantling of the transaction (given the primacy of behavioral remedies and the principle of proportionality), but “only” the imposition of fines[4]; and

• the agreements that give effect to the acquisitions (sale purchase agreements (SPAs)) will either have to contain warranties as to the absence of grounds of post-closing abuse of dominance, to the extent that a finding of such abuse would result in the dismantling/termination of the transaction.

Article to be continued based on the expected ECJ decision.

[1]https://curia.europa.eu/juris/document/document.jsf?text=&docid=267143&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=44949 [2] Paragraph 60 of the Opinion of Advocate Kokott delivered on 13 October 2022 in the “Towercast” case (the Opinion). [3] Paragraph 62 of the Opinion. [4] Paragraph 63 of the Opinion.

Convertible notes under Romanian law: a financing possibility for companies

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The English term "convertible notes" is quite common in foreign jurisdictions, especially common law jurisdictions, and refers to "a debt security that contains an option that the instrument will be converted into a predefined amount of the issuer's shares".[1] In other words, a convertible note is a debt instrument (somewhat similar to a bond) whereby a company raises finance from an investor, who in turn earns the right to repayment of the loan plus interest or conversion of the loan into equity, i.e. shares in that company at a (pre-)valued subscription value.

The concept as such is unknown to company law in Romania. However, an adaptation of this instrument can be made in the light of the framework of Company Law 31/1990 ("Company Law") and the general provisions of the Romanian Civil Code.

In practice, it is common for a loan agreement to be signed whereby the lender (investor) agrees to grant a loan to a company with the following options for repayment or extinguishment: (i) the loan would be repaid in kind, as in the case of any other ordinary loan agreement; or (ii) the loan would be converted into shares issued by the company and, where appropriate, into a share premium in the context of a capital increase made in respect of the company. In the latter case, the involvement of the company's shareholders being required for the approval of the share capital increase.

Such a contractual construction relies to a large extent on good faith in the development of business relationships, and on the willingness of the company (and its shareholders) to use the financing to fuel its business and perhaps expansion plans. Enforcing the loan-to-equity conversion provisions through the court system is, however, an approach that we consider relatively optimistic, given that the courts would be faced with an exceptional case (exceptionality being more of a disadvantage when it comes to litigation in Romania), requiring them to compensate the shareholders for their willingness to increase share capital, most likely with a share premium.

However, these convertible notes, through their flexibility - given that they alternatively allow either repayment of the loan or - often in a future round of financing that increases the market value of the company - conversion to equity at a pre-defined valuation, have established themselves as a common financing model, especially in the early life cycles of companies.

[1] Source of definition: https://www.investopedia.com/terms/s/senior-convertible-note.asp