Private equity under the microscope of competition authorities

Bas Braeken & Lara Elzas
05 Mar 2024

In a recent radio interview with BNR, chairman of the ACM Martijn Snoep explicitly expressed its concerns regarding roll-up acquisitions, whereby private investment companies (“private equity firms”) successively acquire several smaller companies within a given sector. For a long time, competition authorities paid little attention to private equity firms. That has changed. Both the ACM and other national competition authorities announced that they will take a (more) critical look at the role of private equity firms in acquisitions. Apart from merger control, private equity firms must also take into account important developments including foreign direct investment (“FDI”)-screening legislation, foreign subsidies and public and private liability for cartel violations of portfolio companies.

In this blog, we dive into four recent competition law and regulatory developments that private equity firms and institutional investors should consider, namely:

Tighter scrutiny of roll-up acquisitions and gun-jumping

Roll-up acquisitions

Recently, competition authorities have focused their attention on private equity firms that sequentially acquire small firms within a specific sector. According to the authorities, these roll-up acquisitions can create or reinforce (local) dominant positions, which can lead to higher prices and/or a decrease in quality or consumer choice. In the Netherlands, there have been some concerns about a consolidation trend by private equity firms in the areas of childcare, veterinary clinics and specialised clinics in the healthcare sector (see for example the Parliamentary questions on the growing role of private equity in healthcare and childcare).

Although the ACM wishes to act against roll-up takeovers, its enforcement options are rather limited for the time being. Dutch merger control offers little or no relief. Many acquisitions by private equity firms do not fall under the notification obligation because they do not meet the Dutch turnover thresholds. The ACM does theoretically have the possibility to refer transactions that are not subject to notification in the Netherlands to the European Commission (“Commission”). Under a relatively recently introduced Commission policy on the application of Article 22 EU Merger Regulation (“EUMR”), one or more national competition authorities may refer a concentration to the Commission for examination where the transaction (i) affects trade between Member States, and (ii) threatens to significantly impede competition in the territory of the Member State(s) submitting the request.

In practice, however, Article 22 EUMR offers limited scope for the ACM to tackle roll-up acquisitions. This is because many of the companies acquired in a roll-up only operate on local markets. If the buyer and target are furthermore not active around border areas, the transaction will thus usually not affect trade between Member States. Such acquisitions would then not be eligible for referral. Yet, even if there would be a (potential) cross-border element, it remains to be seen whether the Commission is willing to assess such (generally rather small) transactions. The Commission has previously indicated that a referral under Article 22 EUMR is particularly intended for acquisitions of promising start-ups where the turnover of the start-up does not accurately reflect the current or future potential of the company. So far, the Commission also seems mainly interested in referrals of transactions in the pharma industry and digital markets. Therefore, it is relatively unlikely that the Commission will assess small and (very) local roll-up acquisitions under Article 22 EUMR. This also seems to be in line with the ACM’s position. For instance, the ACM’s board chairman said in a speech last year: “At the moment we cannot do anything about small transactions that fall below the notification thresholds, but that do lead to local competition issues (…) we cannot send a merger-to-monopoly in a small town to Brussels.” (freely translated)

At this moment, private equity firms engaging in small acquisitions do not yet have much to fear from the ACM. However, this may soon change with two legislative changes the ACM seems to be pushing for:

  • Removal of Article 24(2) Dutch Competition Act (“Mw”). In the Towercast-judgment, the Court of Justice of the European Union (“CJEU”) ruled that a non-notifiable concentration can constitute an abuse of a dominant position. At present, the Dutch Competition Act still provides that bringing about a concentration cannot be regarded as an abuse of a dominant position (Article 24(2) Mw). This deviates from European case law, which is likely to result in an amendment to the Dutch Competition Act.
  • Introducing a ‘call-in power’. In addition, the ACM argues for the introduction of a so-called ‘call-in power’, providing the ACM the power to indicate, within a certain period of time, that an acquisition must be notified despite the fact that the turnover thresholds are not met. Competition authorities in Sweden, Iceland, Norway, Italy and Ireland already have such a power. This legislative change is a lot more far-reaching and controversial than the first mentioned legislative change and is therefore unlikely to take place in the short term.

Gun-jumping by private equity

Concentrations that exceed certain turnover thresholds may only be implemented after approval is obtained from the ACM. Competition authorities have in recent years strictly enforced violations of the notification- and standstill obligations laid down in (European) merger control rules, so-called ‘gun-jumping’. Based on the latest case law, private equity firms should take into account the following points (for a detailed overview, see also our blog on gun jumping):

  • If a takeover is notifiable, parties may only exercise control over the target company upon the ACM’s approval. However, the buyer and seller may enter into agreements necessary to protect the value of the target. Recently, telecom company Altice did not comply with these rules and was fined € 124.5 million by the Commission. It established that, before the Commission’s approval, Altice already exercised decisive influence over PT Portugal as it was given certain veto rights regarding the appointment of senior management at PT Portugal, pricing policy and several key contracts. The fine was later upheld by the CJEU.
  • A so-called warehousing structure can entail significant competition risks. A warehousing structure involves temporarily ‘parking’ the target company with an interim buyer with a view to resell to the ultimate buyer once the relevant competition authority has given its approval. Warehousing structures are regularly used by private equity firms to minimise the time between signing and closing. Canon for example used such a warehousing structure in its acquisition of TMSC (a subsidiary of Toshiba). According to the Commission, both steps constituted one concentration within the meaning of European competition law. The implementation of the first step of the warehousing structure therefore already led to the partial realisation of the concentration. According to the Commission, this violated the standstill obligation under the Merger Regulation. Canon was fined EUR 28 million, which was upheld by the General Court.
  • Gaining de facto control also triggers a notification and standstill obligation. The Commission for example fined Norwegian salmon farm Marine Harvest for carrying out a concentration without prior approval. Marine Harvest acquired a 48.5% stake in Morpol. Marine Harvest then made a public offer for the remaining shares in Morpol and notified the transaction to the Commission. However, the Commission found that in acquiring a 48.5% stake, Marine Harvest had already acquired de facto control. Given the fragmentation of the remaining shares and attendance figures at previous shareholder meetings, Marine Harvest already gained a majority at those meetings, the Commission said. Marine Harvest was fined EUR 20 million, which was upheld by the CJEU.

Private equity firms operating in the healthcare sector should also bear in mind that, pursuant to Article 49a (1) of the Health Care Market Regulation Act, there is an obligation to report to the Dutch Healthcare Authority (“NZa”) if the concentration involves a company that employs or contracts at least 50 healthcare providers. In November 2023, a number of companies of the Dutch Pharmaceutical Pharmacy Fund were fined by the NZa for failing to report several concentrations.

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Increased FDI-screening

Over the years, more and more states have introduced specific FDI-legislation. On 1 June 2023, the Dutch FDI Screening Act (Wet Veiligheidstoets investeringen, fusies en overnames (“Vifo Act”)) entered into force. This law introduces a security test for investments, mergers and acquisitions that may pose a risk to national security. Below, we provide a brief explanation of what the Vifo Act’s implications are for private equity firms and other investors (for a more detailed description of the Vifo Act, see this blog).

On the basis of the Vifo Act, there is an obligation to report to the Bureau for Verification of Investments (Bureau Toetsing InvesteringenBTI”), part of the Ministry of Economic Affairs and Climate Policy, any acquisition activity in vital providers, managers of corporate campuses and undertakings active in the field of sensitive technology. This also applies when the acquirer is based in the Netherlands.

If a notification requirement applies, the BTI examines whether the acquisition activity leads to undesirable strategic dependencies, an impairment of the continuity of vital processes or an impairment of the integrity and exclusivity of knowledge and information. The BTI’s investigation focuses not only on the (direct) acquirer but also on the ownership structure and relationships with other parties. If a private equity firm is involved in a transaction covered by a notification obligation, the BTI specifically asks for detailed information on limited partners (whose involvement in an investment is often limited to providing capital to the company). The BTI wants to ascertain what the influence of these limited partners is and what their actual motives are. Sometimes it turns out that limited partners have greater influence than usual and, for example, that they have a strategic intent to combine the technologies of various companies in which they hold an interest. The BTI takes this into account in its assessment.

The BTI will then decide whether the acquisition activity poses a risk to national security. If such is the case, it may impose certain conditions or, as an ultimate measure, even ban the acquisition activity altogether.

The Vifo Act has a major impact on private equity firms, including venture capital investors, because it is in particular among companies developing innovative technologies that there is a high demand for venture capital, which is often provided by private equity and venture capitalists. The Vifo Act applies when acquiring or increasing significant influence over companies operating in the field of ‘highly sensitive technology’. The Scope of Application of Sensitive Technology Decree of 4 May 2023 qualifies as highly sensitive technologies certain specific dual-use and military products, in addition to quantum technology, photonics technology, semiconductor technology and High Assurance products (e.g. information security software). Significant influence already exists if the acquiring party can cast 10% of the votes in the general meeting and/or it can influence the appointment/dismissal of board members. Moreover, (another) subsequent notification must be made if the voting rights of the acquiring parties increase to 20% and to 25% of the votes. In short, only a relatively small investment in, for instance, a start-up or scale-up operating in the field of highly sensitive technology, can already trigger a notification obligation under the Vifo Act.

When making investment decisions, private equity firms should therefore consider the following points:

  • Check in advance whether the obligation to notify under the Vifo Act applies. It is not always obvious (at first glance) whether a duty to notify exists and this sometimes requires a more extensive analysis. It is important to seek advice on this in advance. Parties that fail to report a transaction risk a fine of € 900,000 or a fine of 10% of the annual turnover.
  • Be prepared for longer timelines for implementing the proposed transaction/investment. A transaction may be delayed up to nine months due to a BTI investigation. The transaction may not be implemented until approval is obtained. Private equity firms (as well as targets) will have to take these timeframes into account when choosing a long stop date in their transaction documents.
  • The outcome of the BTI’s investigation is generally difficult to predict. The BTI’s assessment does not include strictly defined investigative questions and is also influenced by (geo)political considerations. Parties should take into account that an extensive investigation may take place with the final verdict that the transaction may only take place under certain conditions or even be prohibited altogether.

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Notification obligation for foreign subsidies

In addition to merger control rules and FDI legislation, private equity firms must from 12 October 2023 onwards also take into account the obligation to notify concentrations or participations in public procurement procedures in light of previous funding from non-European governments (“third countries”). This notification obligation is laid down in the Foreign Subsidies Regulation (“FSR”), and applies if certain financial thresholds are met (for a detailed discussion of the FSR, see our blog). For private equity firms, the following thresholds are relevant:

  1. at least one of the merging parties (in case of mergers), the target company (in case of acquisitions), or the joint venture is based in the European Union and has a total EU turnover of at least € 500 million;
  2. the undertakings concerned have collectively received more than € 50 million in financial contributions from third countries during the three years preceding the conclusion of the agreement. For mergers, the undertakings concerned include the merging parties; for acquisitions, both the buyer(s) and the target; and for joint ventures, the joint venture partners and the joint venture itself.

In addition to these specific ‘triggers’, the Commission also has an ex officio power to examine certain foreign financial contributions (read more here).

Private equity firms would therefore do well to consider the following points:

  • While most FSR notifications will not be problematic and are approved in the first phase of a Commission investigation, private equity firms should be aware that the FSR may delay the proposed merger. For mergers, the Commission has 25 working days after the notification to decide whether to launch an in-depth investigation. This investigation can take 90 working days (which can be extended by 15 working days). The M&A process can therefore be delayed by 130 working days in some cases.
  • It is a lot of work to collect all information on foreign contributions and assess whether a notification is required. It is therefore advisable for companies to get their financial records in order so that it can be quickly assessed whether a notification is required and the required information for notifications can be gathered quickly. Foreign financial contributions are defined broadly and even include the supply or purchase of goods or services to third countries.
  • If a notification requirement applies under the FSR, provisions relating to Commission’s approval procedure will also need to be included in the purchase agreement.

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Public and private liability of private equity firms for cartel violations

Private equity firms are not only subject to ex ante merger control supervision and FDI-legislation, but may also increasingly face both public and private liability for cartel violations by portfolio companies.

Public liability

It has long been established that a parent company can be held liable for a cartel infringement by its subsidiary even if the parent company was not involved in the cartel (doctrine of attribution). For instance, in its 2009 Akzo-Nobel judgment, the CJEU ruled that there is a presumption of (indirect) decisive influence of a parent company over a subsidiary and thus liability for a cartel infringement of its wholly-owned subsidiary. However, it was unclear for a long time whether investment companies and private equity firms could also be held liable for a cartel violation of a portfolio company. In many cases, private equity firms are relatively distant from the (day-to-day) operations of portfolio companies. In 2021, the CJEU confirmed in the Goldman Sachs judgment that the doctrine of a parent company’s liability for a subsidiary’s antitrust infringement also applies in full to investments made through an investment fund (and thus also to private equity).

According to the CJEU in the Goldman Sachs judgment, a company that holds all the voting rights of the subsidiary’s shares is in a similar position to a company that holds (almost) 100% of the share capital. In both cases, there is a presumption that the parent company can exercise decisive influence over the subsidiary, the CJEU ruled. US investment bank Goldman Sachs held 100% of the voting rights in an indirect portfolio company that had participated in the so-called powercable cartel. At the start of the cartel infringement, Goldman Sachs initially held 100% of the share capital, but during the infringement period its stake eventually fell to just 33%. Even during the period that Goldman Sachs held only 33% of the share capital, it continued to exercise decisive influence over the subsidiary given its 100% voting rights, according to the CJEU. To reach that conclusion, the CJEU considered it important that the parent company could appoint and dismiss the board and convene the shareholders’ meeting. The Commission imposed a fine of € 37 million.

In the Netherlands, the attribution doctrine has been applied to investment companies before. In 2017, the Rotterdam District Court upheld a fine imposed on private equity investor Bencis for the participation of its subsidiary in the so-called flour cartel.

Private cartel damages claims

The extension of the attribution doctrine affects not only the liability of the parent company in the context of public enforcement (i.e. liability for a cartel fine) but also liability for private cartel damages claims. In the Skanska-judgment, the CJEU ruled that a subsidiary can, under certain conditions, be held liable for damages resulting from a cartel infringement committed by its parent company. This means that a private equity firm that is part of an undertaking held liable under an infringement decision of the Commission (or a national competition authority) can also be held civilly liable in follow-on cartel damages proceedings.

Key take aways liability private equity for cartel infringement

In light of this attribution doctrine, private equity firms would do well to specifically examine whether the target might be (or have been) involved in a competition infringement during its due diligence investigation However, it is not unlikely that infringements will not (directly) come to light when performing a due diligence investigation. It is therefore always advisable to include sufficient warranties and indemnities in the purchase agreement. Since both the competition authority and private parties have some discretion as to which entity to address for an infringement and can also choose to fine the buyer, even when it was not exercising control (yet) at the time of the infringement period, it is wise to take this into account when formulating any indemnities.

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Final remarks

Private equity firms are fully in the crosshairs of competition authorities. Key developments in merger control, FDI-legislation, foreign subsidies and private equity firms’ liability for cartel violations highlight the importance for private equity firms to take into account the competition rules when deciding on an investment. Although the ACM still has few options under the current merger control rules to review roll-up acquisitions, it is lobbying for legislative reforms that may bring about some fundamental (jurisdictional) changes rather soon. In addition, FDI-screening laws force private equity firms to take into account (additional) disclosure obligations and strategic risks when investing in critical sectors. Recent case law confirms that private equity firms can be held liable for cartel violations by portfolio companies.

In view of these developments, it is advisable for private equity firms to thoroughly investigate whether the proposed investment triggers any notification obligation under merger control, FDI rules and/or the FSR, and to investigate competition risks, including appropriate warranties and indemnities in the transaction documents.