Forum Most Recent Post – 5 September 2022

latest post 05/09/2022

Pilfering The Pinions Of Nascent Innovation: Examining Killer Acquisitions Through An International Competition Law Perspective

Bhargavi G Iyer[1] and Ojaswi Bhagat[2]

Innovation is progress in the face of tradition.’

Abstract

The present article is an analysis of the legal framework for killer acquisitions and the protection of nascent enterprises from an the international competition law perspective. The authors seek to examine the potential of bolstering the international competition law regime in order to make it conducive for nascent innovators, by imbibing insights from municipal legal systems.

Introduction

The underlying purpose of competition in the global commercial context is facilitation of innovation and economic growth and progress; thus, nascent enterprises and start-ups are fundamental to any competitive market. Young enterprises foster disruptive innovation and eschew stagnancy in the market.

However, such embryonic enterprises are vulnerable to exclusionary practices and abusive activity. Nascent enterprises are susceptible to adverse impact in the competitive market due to dominant and pre-existing entities, and thus their innovative streak is stifled by early acquisition by dominant players. This gives rise to the need for oversight by antitrust regulators, in order to maintain and further market innovations. Reinforcing this necessity entails analysis of the strategies underlying such purchases. An incumbent may acquire a nascent competitor for various reasons, which may include, firstly, to avoid future competition by acquiring a firm or company before it starts to prosper, and secondly, to continue the nascent enterprise’s  projects without putting its own profits in jeopardy.

The first reason may give rise to a “killer acquisition”. A killer acquisition occurs when an incumbent playeracquires a young (nascent) innovative company in order to hamper the development of its innovations and annihilate future competition from the nascent company. This is referred to as a ‘killer’ since it effectively kills innovation and competition. These are widespread in the pharmaceutical industry, an example being the Federal Trade Commission’s 2019 review of the Bristol-Myers Squibb Company’s acquisition of Celgene Corporation.

The second kind is defined as a prospective “nascent acquisition”, as recurrent in digital marketplaces, wherein incumbents tend to acquire and build upon the technological leverage offered by the nascent enterprise, as recognised in the Report of the United States House Judiciary Committee’s Subcommittee on Antitrust.

  1. Intricacies Of State Regulation Of Nascent Acquisition

Municipal laws across the world seem to be catching up with killer acquisitions. For instance, recently, in the United Kingdom, the government has proposed novel reforms with a view to keep  “killer acquisitions” in check, to be included in the Digital Markets, Competition and Consumer Bill. The Competition and Markets Authority (CMA) is to be vested with the jurisdiction to review transactions in application of thresholds to keep in check anticompetitive elements. Additionally, to ensure that the test is proportionate to the harm sought to be prevented, the government has indicated a United Kingdom nexus requirement for investigated deals.

The current legal framework relating   to the scrutiny in order to detect killer acquisitions in various jurisdictions can be classified into three kinds based on the stage at which scrutiny is effectuated. Given that this classification is time-based, it would be interesting to consider this with the example of a Company Incumbent seeking to acquire a nascent enterprise, Company Nascent.

Firstly, this acquisition may require to adhere to pre-merger monitoring and reporting, such as seen in the European Union, wherein as per the European Commission Merger Regulation issued in 2004, turnover-based thresholds are established; and in the United States of America, wherein the Hart-Scott-Rodino Antitrust Improvements Act of 1976enforced the requirement to file pre-merger notifications.

Secondly, Company Incumbent would need to keep in mind that during an ongoing transaction, the regulator investigates consequential and potential anticompetitive effects of the merger on the market, using a relevant counterfactual or through competitive assessment. Such techniques allow for reliable evaluation of the future impact of a nascent acquisition, as was carried out in the case of the proposed acquisition of Plaid by Visa, wherein recognising the possibility of monopoly and scope of challenge by the nascent competitor, the Department of Justice in the United States sued to block the acquisition. Construction of the counterfactual in the United Kingdom is governed by the Merger Assessment Guidelines, and has been reinforced in several decisions of the CMA.

Thirdly, after Company Incumbent acquires Company Nascent, post-merger analysis may occur, which includes ex-post review and investigation, and possibility of judicial challenge. It enables a regulatory authority to evaluate its decision and its repercussions, enabling them to take corrective measures. For example, in the United Kingdom, the CMA may review a merger until four months post completion, while in the United States of America, it may be reviewed at any time. In the European Union, as per Article 22 read with Article 4 of the Council Regulation, the transaction is subject to transnational review, giving rise to the possibility of ex-post review through reference by national authorities.

  1. Reverse-Killer Acquisition: A Nascent” Issue

Where a nascent acquisition has the effect of harming competition by limiting the acquirer as a potential competitor, it can be termed as a “reverse-killer acquisition”. This can occur in three situations, firstly, wherein the acquirer restricts its own growth and loses its identity upon getting completely absorbed or invested in the nascent competitor’s enterprise; secondly, wherein the acquirer’s innovative effort in the target’s market gets diffused or extinguished, as was seen in the instance of Johnson & Johnson’s proposed but abandoned acquisition of Takeda, wherein the issue of a competing research effort becoming dormant or futile, discouraged the deal; thirdly, where the nascent competitor, in order to eliminate future competition from an incumbent, acquires the incumbent, with the intention of rendering its innovations redundant, thus qualifying to be of the nature of a reverse-nascent acquisition, as observed in the ed-tech industry largely, as suspected in the instance of Byju’s acquisition of Aakash EduTech. Such acquisitions may easily go undetected due to the greater degree of protection and benefit of the doubt afforded to the nascent company in a proposed regime. Thus, it is necessary for an additional international mechanism to ensure ideal regulation without overstepping boundaries, and adoption of a balanced and pro-innovation approach.

  1. Potential International Institutional Framework

The international legal regime for competition law is still in its formative stage, and requires substantial review and effective implementation. Policy differences across jurisdictions and political differences in approach form major reasons as to why international mergers can prove to be particularly difficult to regulate. In such situations, it must be examined whether the respective national decisions and policies can be harmonised or reconciled. Such a necessity has been observed where the European Commission and the United States antitrust authorities expressed differences in the matter of acquisition of McDonnell Douglas by Boeing, with regards to the objection based on the “competitive potential”. In light of such issues arising, it is to be noted that the arena of nascent acquisition poses additional difficulties in the form of threshold barriers and impediments in investigation and implementation of laws. In such clashes, it is ideal to apply the principle of enhanced comity, such that jurisdiction should be allocated to the state whose competition regime is best equipped to enforce any sanctions or remedies.

There is a need to ensure policy convergence; technical assistance and capacity-building; and operational coordination among various international players. Considering that the Organisation for Economic Co-operation and Development (OECD) plays an active role in formulating mechanisms and taking notice of the issue facing nascent acquisitions, as well as the pertinence of the guidelines indicating global best practices as issued by the International Competition Network (ICN), it would be appropriate for these organisations to institute a concrete and agreeable system for merger review in order to keep in check, nascent acquisitions.

  1. Applicable Principles Of International Competition Law

While looking to ideally regulate nascent and killer acquisitions, it would be fitting to adhere to the United Nations Set of Principles and Rules on Competition (UNSPRC). While these principles do provide a general overview of the standards to be followed while assessing anticompetitive practices, they can be specifically employed to keep in check nascent and killer acquisitions. These are enshrined in Part IV of the UNSPRC, and include firstly, general principles providing for multilateral cooperation for appropriate action, secondly, inclusion of the international law principle of equity, thirdly, a principle of cooperation with competent authorities, and fourthly, international principles which include the principle of collaboration at the international level, and the principle of harmonisation of competition law. Fifthly, an addition to these is the principle of preferential treatment of developing countries, which ensures that excessive oversight does not pose a threat to economic development in these nations. The UNSPRC further recommends the communication of appropriate information to the Secretary General of the UNCTAD annually, and setting up of an Intergovernmental Group of Experts on Restrictive Business Practices.

  1. Bolstering The International Regime Through Municipal Law Insights

In the international context, it would be useful to adopt certain measures in parallel to nationally employed mechanisms. For instance, introducing an international ex-ante notification requirement will ensure ample scrutiny and adequate coordination between national authorities of different states. It would also be useful to lay down aggregate threshold values for a transnational acquisition, within the relevant market. Insights can be drawn from Canadian lawwhich establishes three different criteria, based on, firstly, a size-of-transaction threshold, secondly, a size-of-parties threshold, and thirdly, a size-of-equity threshold. In order to supplement the regime, an international counterfactual or prognosis analysis may be adopted. It also is apropos to explore the possibility of monitoring nascent acquisitions through a system with heightened scrutiny of acquisition of a company within the first certain years of its establishment save for specific cause.

Conclusion

Nascent and killer acquisitions are to be averted from the consumer welfare perspective as well as the enterprise encouragement perspective, as nascent enterprises serve choice, and motivate innovation in the international market. Thus, given that nascent acquisitions are growing to be frequent, in the interest of preservation of ideal competition, there is a need to regulate nascent and killer acquisitions internationally.

[1] BA LLB (Hons) student, NMIMS Kirit P Mehta School of Law, Mumbai, India.

[2] BA LLB (Hons) student, NMIMS Kirit P Mehta School of Law, Mumbai, India.