Nonprofit Health Care Mergers – Introduction: With Complexity Comes Opportunity
In the evolving health care landscape, mergers between nonprofit health care organizations are becoming increasingly common. Mergers are often driven by a combination of economic factors, the need to improve quality and efficiency of care, and the desire to create value for patients and communities. As the first post in our nonprofit merger series, we will explore why nonprofit health care entities may consider a merger, analyze the economic pressures influencing such decisions, and discuss the structures of nonprofit transactions, including the differences between member substitutions and true mergers. Forthcoming posts in this series will examine the unique due diligence concerns, regulatory approvals, and financing arrangements involved in nonprofit health care mergers.
The Economic Drivers of Nonprofit Health Care Mergers
1. Cost Efficiency and Scale Economies
It is not unusual to find multiple nonprofit health care organizations serving the same or similar patient community in a given market or region. Although competition within a for-profit industry may be seen as beneficial for consumers, most nonprofit health care organizations are competing for the same sources of government funding and/or charitable donations for their capital needs, which can weaken or inhibit the impact of their work both individually and in the aggregate.
As a result, overlapping nonprofits may realize significant economies of scale and make a substantially greater impact by joining forces and centralizing their efforts through a merger. By combining their operations, two organizations can reduce duplicative costs in areas such as administration, technology, and supply chain management. For example, by consolidating back-office functions such as human resources, billing, and procurement, a merged entity can lower its operational expenses and redirect those savings into improving patient care and expanding services. For smaller entities in particular, the cost of implementing advanced medical technology or transitioning to new electronic health record (EHR) systems can be prohibitive. By merging, organizations may be better equipped to absorb these costs and ensure their long-term financial sustainability.
2. Increased Bargaining Power with Payers and Third Parties
Another economic factor is the increased leverage that a larger health care organization has when negotiating with insurance companies and other payors. Together, a merged organization can exercise more market power and negotiate better reimbursement rates than any of the parties could on their own. Higher reimbursement can significantly improve the financial outlook for a nonprofit health care organization, which must carefully balance its mission with its financial health. Before proceeding with a merger, the parties will often engage a third-party consultant to analyze their current payor arrangements and identify opportunities for improvement.
3. Access to Capital
Nonprofit health care organizations, unlike their for-profit counterparts, do not have access to equity markets to raise capital. Mergers can offer a solution to this challenge. By merging, two organizations can improve their creditworthiness, making it easier to obtain loans and other forms of debt financing for future expansion, facility improvements, or technology upgrades. This is particularly important as health care organizations seek to invest in value-based care models that require significant upfront investment in care coordination, population health management, and IT infrastructure. Lending arrangements for nonprofits are typically quite challenging due to concerns about maintaining tax status, use of funds, and restrictions associated with both. It is not uncommon for organizations to restructure their lending arrangements and partners during a merger process or immediately thereafter.
Improving Delivery of Care
1. Enhancing Quality of Care
One of the key motivations for a nonprofit merger is to improve quality and continuity of care. Smaller health care organizations, particularly those in rural areas, may struggle to provide specialized services or maintain high clinical practice standards due to more limited resources. A merger allows the parties to pool their resources and share best practices to build a more efficient and effective care delivery system, thereby improving patient outcomes and practitioner recruitment efforts.
Additionally, mergers can help organizations streamline care pathways. For instance, a health care system with multiple facilities may create better-integrated care models, improving coordination between primary care, specialty care, and hospital services. This enhances patient outcomes by reducing duplication of services, minimizing delays in care, and ensuring that patients receive the appropriate care in the most efficient setting.
2. Expanding Access to Care
For many nonprofit health care organizations, expanding access to care — especially for underserved populations — is a central part of their mission. Mergers can help organizations achieve this goal by expanding their geographic reach and the range of services that they can provide. For example, a small community hospital may merge with a larger regional health system to provide its patients with access to specialized services that were previously unavailable locally, such as oncology or cardiology.
Furthermore, mergers may enable organizations to better address social determinants of health, which is increasingly recognized as critical to improving population health. For example, a Federally Qualified Health Center (FQHC) with a strong primary care practice may consider merging with a nonprofit community-based behavior health clinic to create an integrated preventative care network specific to the medical and behavioral health needs of its community. The larger, more financially stable merged organization may then be able to invest additional resources in community health initiatives, such as housing support and food security programs.
3. Investing in Innovation
Health care providers, and particularly nonprofits, may find it difficult to keep up with the rapid pace of innovation in the health care sector. Merged organizations are often better positioned to invest in these innovations, particularly in areas like telemedicine, data analytics, precision medicine, and value-based care models. By combining resources and patient base data, nonprofit health care organizations can become more responsive to the health care needs of their patient community, contributing to improved clinical outcomes and, in turn, a more financially stable future.
Value Creation Beyond Economics and Care Delivery
1. Mission Alignment
Nonprofit health care organizations are mission-driven, with the goal of serving their communities and improving health outcomes. When two nonprofit organizations merge, they typically seek to align their missions and values. This alignment is essential for ensuring the new entity remains focused on its core objective — whether that is serving a particular patient population, improving community health, or promoting medical research and education.
This often creates a situation where the two parties to the proposed merger are forced to negotiate a revised set of bylaws better suited for the combined entity post-closing. Important in this negotiation is understanding the terms around board structure, committees, executive officers, and general governance post-closing. It is not uncommon to see an expanded board or some combination of the two boards along with a realignment in officer positions. This is often an area of significant negotiation during the merger process.
2. Organizational Culture and Leadership Stability
In the nonprofit health care sector, where mission and values are paramount, ensuring that the two organizations’ cultures are compatible is essential. A well-executed merger offers a unique opportunity to bring fresh perspectives into leadership while preserving and building upon the parties’ existing strengths. By integrating their boards and leadership teams, merged organizations may foster the environment for more innovative and effective strategies for fulfilling a unified mission.
Structures of Nonprofit Health Care Transactions
Nonprofit health care mergers utilize unique transaction structures, primarily because they do not have shareholders and are organized for charitable purposes. Two common structures for combining nonprofit health care organizations include a member substitution and a true merger per state law.
1. Member Substitution
In a member substitution transaction, one nonprofit organization becomes the controlling member of another nonprofit without the two organizations dissolving or fully integrating into a single entity. The sole member (usually the parent organization) gains the authority to appoint the board members of the other organization and effectively controls its governance and operations. Note that a member substitution may not be viable in some states where nonprofit entities are not required or permitted to have members.
Benefits: Member substitution is often viewed as a less disruptive approach compared to a true merger. With a member substitution, the controlled entity retains its legal identity, which can help preserve relationships with donors, the community, and key stakeholders. This structure can also be advantageous for organizations wanting to maintain some degree of autonomy, particularly if they have a strong local presence or identity. Also important is that this structure still maintains separation of liabilities between each entity, i.e., liabilities of the nonprofit relinquishing control do not become the liabilities of the controlling member. A merger between a large health system and a smaller, local hospital may elect this structure in order to minimize disruption to the controlled entity’s local operations.
Challenges: The drawback of a member substitution is that it may not achieve the full benefits of integration, such as cost savings or streamlined operations. There may also be governance challenges if the controlled entity’s leadership or board resists the level of oversight imposed by the parent organization. Administratively, a member substitution can also be challenging because of the multiple levels of board governance.
2. True Merger
In a true merger, two or more nonprofit health care organizations combine into a single legal entity. The merged organization typically has a unified governance structure, leadership team, and operational model. This type of merger represents full integration and can provide the most significant opportunities for cost savings, operational efficiencies, and strategic growth.
Benefits: A true merger allows for complete consolidation of assets, liabilities, and operations. The merged organization can realize the maximum potential for economies of scale, enhanced bargaining power, and operational integration. Additionally, a true merger simplifies governance by creating a single board of directors and a unified executive leadership team.
Challenges: A true merger is more complex and may require regulatory approvals, including from the state attorney general or other regulatory bodies overseeing nonprofit or health care entities. The process can be time-consuming and may involve significant costs associated with legal, financial, and operational integration. A true merger also means that the surviving entity inherits the liabilities of the merged entity, which can result in unforeseen liability and risks for the surviving entity.
Conclusion
Mergers among nonprofit health care organizations are driven by a combination of economic pressures, the need to improve care delivery, and the desire to create long-term value for patients and communities. Whether through a member substitution or a true merger, these transactions can help organizations achieve financial stability, enhance quality of care, and expand access to services. However, nonprofit mergers require careful planning, particularly around governance, cultural integration, and mission alignment, to ensure that the merged organization remains focused on its charitable objectives and continues to serve its community effectively.
For nonprofit health care organizations considering a merger, it is essential to weigh both the financial and operational benefits, as well as the impact on the mission, before moving forward. With the right strategic approach, a merger can both strengthen the financial position of the parties and enhance their ability to serve their patients and communities.
The Personal Side of M&A: Helping Business Owners Turn Vision into Legacy
For many business owners, their company is far more than a financial asset or something they list on a personal financial statement. It’s the product of their years of hard work, risk, and dedication. In many cases, it is even a family legacy. As an M&A lawyer, I have had the privilege of counseling many business owners through one of the most significant chapters in their lives: the sale of their business.
The Emotional Aspect of Selling a Business
Selling a business isn’t simply a transaction; it’s a transition from one phase of life to the next. For entrepreneurs, a company is more than just an income stream. It embodies their vision, the long days and late nights they worked to build it, and the sacrifices they made to keep it growing.
For me, as an M&A lawyer representing the seller’s side, guiding owners through this emotional journey is a more worthwhile experience than the sale itself. While the numbers and legal terms are critical, equally important are the personal goals and aspirations of my clients. For some, selling a business marks the beginning of retirement or a well-earned sabbatical. For others, it’s an opportunity to invest in a new venture and reignite their entrepreneurial spark. Understanding why they are selling and what’s next for them is as essential as negotiating the deal itself.
Aligning Personal Goals with Strategy
Each seller’s situation is unique. Some business owners want to maximize value to secure their family’s future, while others prioritize finding the right buyer to preserve the culture and legacy they’ve built. I view my role as more than just structuring a deal—it’s about helping clients achieve their personal definition of success.
For instance, when an entrepreneur tells me they want to ensure their employees are taken care of following the sale, I weave that commitment into the negotiation process along with the other material deal terms. When an owner envisions using the proceeds to pursue philanthropic endeavors, I help ensure that the practical financial outcome supports that goal.
Celebrating the Entrepreneurial Spirit
Entrepreneurs are remarkable individuals. They start with an idea, take risks others might avoid, and build a legacy that positively impacts their lives and the lives of their employees. I’ve always admired the entrepreneurial spirit and it’s incredibly rewarding to be part of their journey at such a transformative moment.
One of the most fulfilling aspects of my work is seeing business owners realize what they’ve built. In many ways, a successful sale is a celebration of their achievements. It’s an acknowledgment that their vision and effort created something enduring—a business that now has new opportunities for growth under new leadership.
Why the Right Counsel Matters
The sale process can be complex and overwhelming, especially when emotions run high. Having the right M&A counsel means having someone who not only understands the legal and financial nuances, but also appreciates the personal stakes. My approach is to bring clarity, confidence, and care to every step of the process. Sellers need someone who can advocate for their best interests while respecting the legacy they’re entrusting to the next owner.
Final Thoughts
The sale of a business is more than a transaction; it’s the culmination of a dream. Representing sellers has given me a front-row seat to some truly inspiring entrepreneurial stories, and I feel privileged to help business owners achieve their goals—both professional and personal. Whether it’s unlocking new opportunities, securing a family’s future, or ensuring the continued success of a legacy, my mission is to make the process as smooth, successful, and meaningful as possible.
California: AB 1415 and Expanded OHCA Oversight — What Providers, MSOs, and Investors Need to Know
On February 21, 2025, California introduced AB 1415, a bill aimed at expanding the regulatory oversight of the Office of Health Care Affordability (OHCA). As discussed in our previous blog, certain health care entities are required to provide written notice to OHCA of any proposed merger, acquisition, corporate affiliation, or other transaction that will result in a material change to the ownership, operations, or governance structure of a health care entity. AB 1415 seeks to expand the types of entities required to provide notice to OHCA by:
Expanding the definition of a “health care entity” to include management services organizations (MSOs).
Imposing notification requirements on private equity groups, hedge funds, and newly formed business entities involved in certain transactions.
Broadening the definition of “provider” to include health systems and entities that own, operate, or control a provider.
Inclusion of Management Services Organizations
Currently, the OHCA statutes and regulations define a “health care entity” as a payor, provider, or a fully integrated delivery system. AB 1415 would expand this definition to specifically include MSOs within the definition of a health care entity directly regulated by the statute. An MSO is defined in AB 1415 as “an entity that provides administrative services or support for a provider, not including the direct provision of health care services.” The bill specifies that administrative services may include, but are not limited to, functions such as utilization management, billing and collections, customer service, provider rate negotiation, and network development.
This broad definition could capture a broader scope of administrative service providers that have not been traditionally considered an MSO. For example, a business that exclusively provides billing and collections services to health care organizations may be included within the definition of an “MSO,” even though they are not engaged in the management of a health care practice. While these functions align with typical MSO activities, AB 1415’s use of open-ended language in the definition could extend OHCA’s oversight to other intermediaries that support providers but do not exert managerial control over them, such as third-party administrators (TPAs) and health care technology firms.
If interpreted broadly, AB 1415 could impose unintended compliance burdens on entities that offer administrative services without directly influencing health care delivery, potentially increasing regulatory complexity for non-clinical service providers.
Notification Requirements for Private Equity and Hedge Funds
AB 1415 would establish a notification requirement for private equity groups, hedge funds, and newly formed business entities involved in transactions with health care entities. These entities would be required to provide written notice to OHCA before entering into agreements that:
Sell, transfer, lease, or otherwise dispose of a material amount of a health care entity’s assets to another entity.
Transfer control, responsibility, or governance over a material portion of the health care entity’s operations or assets.
Notably, the definition of a “private equity group” in AB 1415 is broader than the definition of that same phrase in the recently proposed SB 351. SB 351 similarly targets private equity and hedge fund involvement with management arrangements of medical and dental practices in California.
If enacted, California would be among the first states to require private equity groups to report such transactions, and the only state to explicitly include hedge funds in its health care transaction review law.
Expanded Definition of “Provider”
AB 1415 proposes expanding the definition of “provider” to include both private and public health care providers, health systems, and any entity that owns, operates, or controls a provider.
The current OHCA statute and regulations apply to nearly all health systems in California, because the definition of a “provider” includes acute care hospitals and several other types of provider organizations that comprise a “health system.” AB 1415 would separate “health systems” into their own category of a “provider,” which would encompass both for-profit and nonprofit health systems, and combinations of hospitals and other physician organizations or health care service plans. It is not entirely clear whether the addition of “health systems” to the definition of “providers” will further expand the scope of OHCA’s applicability.
In addition, by expanding the definition of “provider” to include entities that own, operate, or control a provider, AB 1415 would extend regulatory oversight beyond direct care providers to financial and management entities, including holding companies, parent corporations, and private equity-backed groups.
Takeaways
AB 1415 represents a potential significant expansion of regulatory oversight in California’s health care market. By broadening the scope of health care entities required to notify OHCA of material transactions, the bill seeks to increase transparency, prevent unchecked consolidation, and include oversight extending beyond direct care providers. However, the bill’s proposed broad definitions may capture more entities than intended, increase compliance burdens, and slow down transactions in an already complex regulatory environment.
Stay tuned for further updates as AB 1415 moves through the legislative process. For now, health care providers, investors, and management entities should closely monitor its progress. If passed, the bill will create new compliance obligations that could significantly impact future health care transactions and corporate ownership structures.
LINCARE GOES DOWN!: Home Respiratory Care Company Crushed With TCPA Class Action Certification Ruling After Making Calls to Customers of Predecessor Company
Here’s another big one folks.
One company buys another company and then sends marketing messages to the form company’s customers.
Seems ok, right?
Nope and Lincare just found that out the hard way.
In Morris v. Lincare, Inc. 2025 WL 605616 (M.D. Fl. Feb. 25, 2025) a court certified a TCPA class action involving Lincare’s prerecorded messages to consumers who had consented to receive contact from a predecessor company.
In Morris the class members had all signed express written consent agreements with American HomePatient, Inc. However, Lincare apparently purchased the company and absorbed it various assets–including its contact list.
Lincare began sending prerecorded messages to the Plaintiff after the transition took place and Plaintiff sued arguing it had consented to calls from API, but not from Lincare.
While the Court in Morris did not answer the ultimate substantive question of whether or not the consent was valid it did certify the case as a class action finding that the issue of consent–amongst others–was common across the entire class. As such the court certified the case as a class action.
The result is that Lincare must now face suit over calls made to over 1,800 people and faces millions in potential damages– for doing nothing more than calling people that had consented to receive calls from a company it purchased.
This is an important case for folks considering as part of due diligence for an asset purchase or company acquisition. Troutman Amin, LLP commonly gets brought in a part of diligence reviews for mergers and acquisitions where TCPA issues are apparent. But many M&A teams completely miss TCPA risk– as Morris really highlights the need to pay attention to these issues and to understand the limits on using consent forms naming different entities.
Tired of #biglaw firms billing you like crazy and then trying to get you to settle TCPA class actions for millions?
How the New US Antitrust Enforcement Priorities Are Shaping Up
We still have a limited sample—Andrew Ferguson has only been in the FTC Chair role a month, and Gail Slater, Trump’s nominee to head the DOJ Antitrust Division, is just nearing the end of her confirmation process. That said, each is starting to give indications about where enforcement policies and priorities may shift relative to the outgoing leadership at the antitrust agencies—a continued focus on “Big Tech” adding censorship as a competitive harm, more predictability to promote business certainty, and a case-by-case approach to labor market (e.g., non-compete) enforcement. Here’s what we know so far.
Andrew Ferguson – FTC Chair
Andrew Ferguson became FTC Chair immediately after inauguration on Jan. 20, 2025. He was able to assume the role without a confirmation because he was already a sitting Commissioner confirmed by Congress in the spring of 2024. Before joining the FTC, Ferguson served as a solicitor general of Virginia, chief counsel to Sen. Mitch McConnell, and Republican counsel for the Senate Judiciary Committee. He also worked in private practice after clerking for Judge Karen L. Henderson of the D.C. Circuit and U.S. Supreme Court Justice Clarence Thomas.
As Commissioner, Ferguson authored several strong dissents, critical of what he perceived as overstep by the prior FTC majority. On Feb. 20, Chair Ferguson gave a window into his priorities during an interview with Fox Business. From that several themes emerged.
Focus on Big Tech, Consolidation, & Censorship. During his interview, Chair Ferguson was critical of companies with “economic power” that enabled abuses in “social and political ways, like with censorship.” He said he will look to prevent those conditions and confront abuses of such power in the future. Along these lines, Chair Ferguson expressed opinions that Section 230 of the Communications Decency Act, which provides certain immunity to online platforms for third-party content or its removal, was originally intended to promote nascent business but is now used by large platforms to “mistreat ordinary Americans,” and the courts or Congress should address that. When it came to “Big Tech” specifically, he commented that pending FTC cases will continue and “all of Big Tech is going to remain under the microscope” as the authorities hold “Big Tech’s feet to the fire.”
Emphasis on Business Certainty—Especially in Merger Reviews. Chair Ferguson made clear that promoting a “vibrant, innovative economy” is a priority and he sees his part in that as providing clarity and certainty to the business community. Consistent with this statement, Ferguson also issued a memo to FTC Staff on Feb. 18 affirming that the joint FTC and DOJ Merger Guidelines issued in 2023 will continue to guide agency merger analysis. During his interview he stated that the guidelines are “not perfect” and they “push the envelope a bit.” However, he wants to hold off on any changes and base them on future working experience because the Guidelines are generally “consistent with older guidelines” and “case law” in his view. If revisions to the Guidelines are needed, he said they will be done in an “iterative transparent revision process” but he would not “rescind them wholesale.”
Protecting Labor But Still Against the 2024 Non-Compete Ban. Chair Ferguson reiterated his criticism of the FTC’s rule broadly banning non-compete agreements, the validity of which remains the subject of litigation in Ryan LLC v. Federal Trade Commission, No. 24-10951 (5th Cir. Jan. 2, 2025) and Properties of the Villages, Inc. v. Federal Trade Commission, No. 24-13101 (11th Cir. June 21, 2024). (Many commentators have opined they expect the administration to drop its defense of the FTC ban. But even once a third Republican Commissioner is confirmed, defense of the rule in the courts may continue to preserve questions about the FTC’s rulemaking authority for the Supreme Court.) Despite his opposition to the non-compete rule, however, Ferguson said that the FTC’s job is, in part, to “protect workers” because the antitrust laws “protect labor markets.” Favoring case-by-case enforcement, Ferguson emphasized he will be “focusing very intently on attacking anticompetitive conduct that hurts America’s workers” and will look across industries for no poach, no hire, and non-compete agreements that are unlawful under the Sherman Act.
Gail Slater – Nominee to Lead DOJ Antitrust Division
Gail Slater is the President’s nominee for assistant attorney general of the DOJ Antitrust Division. She most recently served as then-Senator JD Vance’s economic policy adviser, and during the last Trump administration she was an advisor on technology issues for the National Economic Council. Slater worked at the FTC for a decade and also worked in-house, including for an internet trade association. On Feb. 12, 2025, the Senate Judiciary Committee held a hearing on Slater’s nomination, giving a first window into what her approach at DOJ might entail.
Tech Focus – Though Current Cases Could be Narrowed. As her background suggests, technology will remain a focus for Slater. She testified that she “will bring a deep understanding of technology markets to the Department as the common thread in my private sector work was technology.” She views antitrust law as playing a key role in fostering innovation and economic freedom. However, she emphasized that enforcement should be a “scalpel” and “requires evidence of anticompetitive conduct and harm to consumers.” Regarding pending DOJ cases against major tech firms, she committed to reviewing the files but noted that “resources are of course a very important consideration in antitrust litigation and taking cases further . . . . It’s very complex civil litigation . . . and costly.”
AI: Traditional Analysis of Component Concentration But Open to More Merger Remedies Generally. Slater seemed undecided about AI technology’s impact on competition, but she did commit to looking at “concentration in the AI technology stack.” During her testimony she also noted there is a “critical need to prevent the monopolization of digital markets,” though in another statement she signaled that under her leadership the Division may be more open to settlements in merger cases when “effective and robust structural remedies can be implemented without excessively burdening the Antitrust Division’s resources.”
Censorship as a Monopolization & Collusion Issue. Like Chair Ferguson, Slater also touched on potential enforcement around censorship. She expressed concern that in highly concentrated markets “anybody’s viewpoint can be quickly throttled or suppressed.” However, Slater also suggested that group boycotts may also be pursued; she noted a recent House Judiciary Committee report describing a trade association’s alleged facilitation of national brands (representing an estimated 90% of domestic ad expenditures) selectively withholding advertising dollars from certain companies.
Non-Competes as a Potential Abuse of Monopoly Power. Slater said she wanted to “depoliticize” the harms from non-compete agreements. She said “this is a growing concern in many parts of the country. It prevents workers from switching jobs easily, which is particularly problematic in highly concentrated markets.”
As the antitrust landscape in the U.S. evolves under new leadership, businesses across industries should stay alert to shifting enforcement priorities and their potential implications.
America First Investment Policy: U.S. Foreign Investment Policy Evolves under Trump 2.0
Last week, the White House issued a National Security Presidential Memorandum (“NSPM”) intended to address current national security threats while preserving an open environment for international investment.
Key Takeaways: The NSPM outlines further restrictions on investment and M&A activity from foreign adversaries while proposing more favorable treatment for U.S. allies and those firms who distance themselves from these adversaries—in particular, the People’s Republic of China (“PRC”). Going forward, investors and other transaction parties should be aware of three key takeaways from the NSPM:
Further Restrictions on Chinese Investment in the U.S. The NSPM outlines further restrictions on investments (both inbound and outbound) from U.S. adversaries, continuing the policies of Trump 1.0 and the Biden Administration, with a few added wrinkles—namely, explicitly restricting Chinese investment in several key sectors and industries, including technology, critical infrastructure, and healthcare;
New “Fast Track” Process for U.S. Allies. Contemplating a “Fast Track” process for key U.S. allies and recognizing the increasing burdens posed on these allies by the mitigation agreement framework typically relied on by the Committee on Foreign Investment in the United States (“CFIUS”); and
No Greenfield Exception. The NSPM proposes eliminating the “greenfield” exception long relied on by startups and new ventures to bypass CFIUS review for investments in new businesses.
Critically, the NSPM itself does not adopt any regulations or propose a timeline for doing so; we expect CFIUS to potentially initiate a new rulemaking process to implement these objectives in the near term.
Specific Changes to Current CFIUS Framework: The NSPM articulates a multi-pronged approach to foster foreign investment in the United States:
Contours of the New “Fast Track” Process. The NSPM calls for an expedited “fast-track” process, using objective standards to facilitate more investment from allied countries and partner sources in U.S. businesses involved with advanced technology and other important sectors. Several key questions remain. For example, it is unclear how this “Fast Track” would align with the “Excepted Investor” framework for Five Eyes nations, which currently requires entities to satisfy an exhaustive list of criteria—unless CFIUS were to consider some kind of carve-out or preclearance process for these investments. Moreover, it’s possible CFIUS requires transaction parties seeking to utilize this Fast Track process to demonstrate no commercial relationships with U.S. adversaries—something that may be difficult for investment funds with global operations.
Mitigation Agreement Streamlining. The NSPM calls for simplified mitigation agreements that provide clear, actionable steps for compliance, reducing the bureaucratic burden on investors and transaction parties. Although investors from U.S. allies are often frustrated by the breadth and duration of current mitigation agreements, it is not clear if the implementation of the NSPM would provide concrete relief: it is possible a new approach could take the form of simply preventing investors from maintaining relationships with U.S. adversaries (as noted above) and/or outright prohibiting these investments.
Passive Investments. The NSPM continues to encourage truly passive foreign investments (e.g., those investments that do not include certain governance or key information rights), although these investments could attract scrutiny if from foreign adversaries.
Restrictions on Adversarial Investments: The NSPM also outlines several measures to safeguard U.S. national security from investments from key U.S. adversaries:
Restrictions Governing U.S. Companies and Investors. The Secretary of the Treasury, in consultation with the heads of other executive departments as deemed necessary, is directed to establish new rules to prevent U.S. companies and investors from investing in industries that advance the PRC’s national Military-Civil Fusion strategy and prevent PRC-affiliated persons from buying up critical American businesses and assets. As part of the broader review, the Trump Administration (“Administration”) will consider applying restrictions on certain outbound investment types—including private equity, venture capital, greenfield investments, corporate expansions, and investments in publicly traded securities—in the PRC, especially in high technology sectors such as semiconductors, artificial intelligence, and biotechnology.
Further Review of Real Estate Transactions. The Administration plans to further utilize CFIUS to safeguard specific critical American assets, including strategic technology and infrastructure, as well as farmland and real estate near sensitive government facilities, from investment by foreign adversaries.
No Greenfield Exception. The Administration is also committed to strengthening CFIUS authority over “greenfield” investments to restrict foreign adversary access to domestic sensitive technologies, including artificial intelligence. Transaction parties should be aware that eliminating this exception would significantly expand CFIUS’ jurisdiction and expose many more transactions to CFIUS review—including angel and early-stage startup investments.
M&A Playbook for Acquiring AI-Powered Companies
As artificial intelligence (AI) continues to transform the business world, acquirors need to prepare for a deep dive when evaluating companies that use AI to enable their businesses or create proprietary AI. Key considerations for buyers targeting AI-driven companies include understanding how AI is being used, assessing the risks associated with AI creation and use, being mindful of protecting proprietary AI technology, ensuring cybersecurity and data privacy, and complying with the regulatory landscape.
Risk Allocation
When acquiring a company that utilizes AI, it is vital to assess the potential risks associated with the AI technologies and their outputs. Buyers should review the target’s third-party contracts to understand how risks are allocated, including warranties, limitations of liability, and indemnification obligations. Buyers should also evaluate potential liabilities by considering where AI-generated content might infringe on copyrights or where AI malfunctions could lead to breaches of commitments or cause harm. Finally, buyers should analyze the target’s insurance coverage to ensure the company has adequate policies in place to cover potential third-party claims related to AI usage.
Protection of Proprietary AI Technology
For companies that have developed proprietary AI technologies, understanding how these assets are protected is essential. Buyers can take steps to mitigate liabilities associated with this area by reviewing the target’s intellectual property strategies. This can include a review of the target’s approach to protecting AI technologies, including patents, copyrights, and trade secrets. Additionally, the target’s security measures should be thoroughly analyzed so the buyer can confirm that reasonable measures are in place to maintain the secrecy of AI models, such as robust information security policies and nondisclosure agreements.
Cybersecurity and Data Privacy
If the target company uses personal or sensitive data in their AI technologies, buyers need to take a closer look at the target’s data protection practices. For example, buyers should assess the target’s compliance with applicable privacy laws and regulations, as well as conduct an evaluation of the target’s compliance measures with respect to data-transfer requirements in applicable jurisdictions. Further, the target’s third-party vendor contracts must include appropriate obligations for data privacy and cybersecurity.
Compliance Support and Regulatory Landscape
Finally, a rapidly evolving regulatory environment around AI requires M&A buyers to ensure that target companies can adapt to new regulations. Buyers can examine the target’s systems for overseeing AI use and addressing regulatory challenges, such as minimizing bias and ensuring transparency. Organizational support is also essential, and the buyer should consider what resources the target company has in place to address compliance issues related to AI that may arise.
Implications for M&A Buyers
As AI continues to advance and integrate into various sectors, M&A buyers need to stay ahead of the game when it comes to the unique challenges of acquiring AI-driven companies. By conducting thorough due diligence in the areas addressed above, buyers can better assess potential liabilities and ensure a smoother integration process. By focusing on and understanding these key areas, buyers not only mitigate risk but also position themselves to capitalize on the strategic advantages of AI technologies. In turn, buyers can make informed decisions that protect their investments and leverage AI for future growth.
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M&A in the EU Market: Essential Factors for Investors to Consider
Investing in Europe: Is it a good time to do so? Opinions differ. The EU financial sector has experienced significant growth in recent years, driven by technological advancements and evolving consumer preferences, but there is also heavy regulation. Despite the downsides of a high degree of regulation, such as increased costs, inflexibility, many internal guidelines, and a higher number of employees, it also has a positive effect on the overall market and economic opportunities.
Financial regulation ensures stability, transparency, and consumer protection. Especially in the financial industry, these are key aspects customers look at, considering the major failures we have seen in the fintech market in recent years. Against this background, the EU financial market presents a unique landscape for mergers and acquisitions (M&A), characterized by stringent regulations, evolving market dynamics, and emerging trends.
Understanding the key considerations for transactions in the financial industry is crucial for investors looking to navigate this complex environment. This article outlines essential factors to review when investing in entities regulated in the European Union. It also highlights the differences from investments in other jurisdictions and industries, discusses the expected timing, and explores current trends in EU FinTech investments.
Investing in the EU financial industry differs from investments in other jurisdictions and industries in several ways, including:
Regulatory Scrutiny: The financial industry is subject to higher regulatory scrutiny compared to other sectors. This means investors must navigate complex regulatory frameworks and ensure compliance with stringent requirements.
Systemic Risk: Financial institutions are interconnected and play a critical role in the economy. As such, they are exposed to systemic risks that can have widespread implications. Investors must assess the target entity’s risk exposure and mitigation strategies.
Capital Requirements: Financial institutions are required to maintain certain capital levels to ensure solvency and stability. Investors must evaluate the target entity’s capital adequacy and its ability to meet regulatory requirements.
Key pre-deal considerations
Conducting thorough due diligence is paramount. It is crucial to ensure that the target entity is appropriately regulated. Investing in an entity that is not regulated but should be can lead to significant legal and financial risks. Supervisory authorities may take enforcement actions against both the entity and the acquirer, including fines, sanctions, and even the revocation of licenses.
Due Diligence
When preparing for and evaluating an acquisition in the financial sector, particularly in the EU, it is important to carefully determine, as part of the due diligence, whether the target complies with the applicable financial supervisory law. In particular, does the target have the license required for its type of business or does it need a license at all?
If a license is required, it is also essential to determine whether the target consistently fulfills the requirements necessary for the license, in particular with regard to risk management, money laundering, reporting, and liquidity and equity. However, on 17 January 2025, it also became necessary to determine whether the requirements for cybersecurity and operational resilience under the Digital Operational Resilience Act are being met, especially with regards to outsourcing.
The legal consequences of noncompliance with the requirements are far-reaching and can not only affect profitability but also lead to a complete ban on business activities, the exclusion of management, severe fines, and a restriction of new business, especially if anti-money laundering (AML) and risk management are not sufficiently set up. Measures taken against a licensed company are always published by the financial supervisory authority, along with the respective deficiencies. This ‘naming and shaming’ leads to a loss of trust in the market, which in turn can lead to a loss of customers.
Does this mean that when it comes to investments, it is better to steer clear of the EU financial sector? With so many regulations, it is challenging to always comply with the numerous requirements, let alone check compliance as part of a due diligence process.
As always, a risk assessment must be convened on the basis of appropriate information. It is neither possible nor necessary to check every single violation and every facet of regulatory compliance in each individual case. This would also exceed any reasonable level of financial investment prior to the transaction. But experienced advice that provides an overview of compliance and potential red flags with regards to the most important parameters and showstoppers is essential.
For example, for many regulations, rectification is possible and sufficient following a notice of noncompliance from the financial supervisory authority. However, a distinction must be made: what are the showstoppers and where can we go along without seeing a major risk.
On that basis, key points to consider in the due diligence process are:
The target’s business model and the necessary licenses in each jurisdiction.
Ongoing proceedings, orders, or enforcements of the competent supervisory authority.
The target’s compliance with key regulatory requirements and whether the necessary structures are in place, particularly with regard to capital requirements, AML compliance, reporting obligations, and risk management.
Deal phase: Owner control proceeding
An owner control proceeding is triggered when an investor intends to acquire a significant stake in a licensed EU entity (i.e., more than 10% of the equity or voting rights in the target entity, alone or together with other parties). This threshold is set to ensure that any significant influence over the management and operations of the entity is subject to regulatory scrutiny. The goal is to maintain the stability and integrity of the financial system by ensuring that only fit and proper persons can exert control over regulated entities.
What happens in an owner control proceeding?
The owner control proceeding involves a comprehensive assessment by the relevant supervisory authorities, such as the European Central Bank, or national competent authorities such as BaFin in Germany. The key requirements include:
Notification: The proposed acquirer must notify the relevant authority of their intention to acquire a qualifying holding. Intention means the obligation to notify may arise already pre-signing (e.g., when the necessary shareholder resolutions to the acquisition are passed). This notification needs to include detailed information about the acquirer, the acquirer’s shareholding structure, the transaction, and the target entity.
Documentation: The acquirer must provide extensive documentation, including financial statements, business plans, and information about the acquirer’s background and reputation. Additionally, financing and origin of the funds used to finance the transaction need to be filed with the competent authority. This will help the authorities assess the financial soundness and integrity of the acquirer.
Fit and proper test: The authorities will conduct a fit and proper test to evaluate the suitability of the acquirer and its managing directors. Documentation to be provided also includes extensive information on the managing directors and board members of the acquirer and its shareholders (e.g., cover letters, certificates of good conduct, and letters of recommendation).
Impact assessment: The acquirer must demonstrate how the acquisition will impact the target entity and its group structure. This includes assessing the potential effects on the entity’s governance, risk management, and overall stability. It is, therefore, necessary to file a three-year business plan for the target company to prove the ongoing financial and economic stability.
Important to navigate smoothly through the process
Navigating the owner control proceeding smoothly requires careful preparation and attention to detail. Here are some key tips:
Early engagement: Engage with the supervisory authorities early in the process. This helps in understanding their expectations and addressing any concerns proactively.
Comprehensive documentation: Ensure all required documents are complete, accurate, up to date, and translated, if necessary. Not all authorities accept English-language documentation. Also, incomplete or inaccurate documentation can lead to massive delays. Some of the necessary documents take time to be obtained, especially if further national authorities are required for such documents.
Clear communication: Maintain clear and transparent communication with the authorities.
Professional advice: Seek early-stage professional advice from legal and financial professionals who focus on regulatory compliance. The process is complex and the risk that authorities will delay or reject the transaction is high. Experienced advice helps to navigate smoothly through the process and understand the key parameters in regulatory proceedings.
What kicks you out?
Several factors can lead to the rejection of an owner control application, especially if the acquirer is unable to demonstrate financial stability and soundness or if the acquirer fails the fit and proper test due to issues related to integrity, competence, or reputation. If the acquisition is deemed to have a negative impact on the target entity’s stability, the application will be denied as well.
Special SPA provisions
The Share Purchase Agreement (SPA) must also take into account the regulatory particularities. Any findings or uncertainties arising from the due diligence can be covered by corresponding representations and warranties, provided that they are not absolute showstoppers.
Successful completion of the ownership control procedure should be included as a closing condition. If the parties agree to a long stop date, it is important to take into account the usual processing times based on experience with the competent supervisory authority.
To the extent necessary, arrangements regarding equity and liquidity must be made with the seller side to ensure that all requirements are met upon closing. This applies, in particular, if equity has previously been secured through financing measures by the parent company.
Depending on the regulation and jurisdiction, managing directors and board members in the target company may also only be able to take up office after the individuals have been approved by the supervisory authority.
Expected timeline
The timeline for completing an M&A transaction in the EU financial market can vary depending on several factors. The main timing issue, which is different from non-regulated deals, is the duration of the owner control proceeding. Even though EU regulators have deadlines within which they need to respond and decide, they usually find ways to stretch these deadlines if necessary, especially by requiring further information.
We typically advise to plan an additional three to nine months for an owner control proceeding, depending on the jurisdiction and individual license, business model, and whether the investor is already active in the financial market or already has other licensed shareholdings in the EU. Other timing aspects are comparable to other deals. Due diligence and decision-making might take longer because of regulatory and equity factors, which might be more extensive, but this depends on the particular deal.
Outlook
Investing in the EU financial market through M&A offers significant opportunities but requires careful consideration of regulatory, financial, and operational factors. By understanding the unique aspects of the financial industry, conducting thorough due diligence, and staying informed of market trends, investors can navigate this complex landscape and achieve successful outcomes.
New Thresholds for Merger Filings in the UAE: An Overview
In February 2024, we shared an update on the UAE’s competition landscape in which we summarised the changes brought by Federal Decree-Law No. 36 of 2023 on the Regulation of Competition (the New Law).
Notably, in the update we highlighted that the New Law did not specify the thresholds that would require a potential transaction to be notified to the Ministry of Economy (the MOE) so that the MOE can provide the required clearance.
Published in the Official Gazette on 30 January 2025, the UAE Cabinet of Ministers issued Ministerial Decree No. 3 of 2025 (the Decree) provides the actual thresholds that will be applied.
Notification Thresholds
Under the Decree, there are two thresholds which, if reached by a potential transaction, would trigger a mandatory merger control filing with the MOE. The thresholds set by the Decree are:
Turnover Threshold: where, during the last financial year, total annual sales of the parties to a transaction in the “relevant market” in the UAE exceeds AED 300 million (approximately $81.7 million); or
Market Share Threshold: where, during the last financial year, the total market share of the parties to the transaction exceeds 40 percent of the total sales in the “relevant market” in the UAE.
A “relevant market” is defined under the New Law as comprising of two elements:
relevant product market: products and services that, by virtue of their price, characteristics and intended use, are considered interchangeable to meet particular consumer needs; and
relevant geographic market: the physical or digital place where supply and demand for products or services come together and where competition conditions are similar.
Dominant Position Threshold
Whilst holding a “dominant position” is not prohibited under the New Law nor under the Decree, if a company is found to hold a dominant position they are restricted from carrying out practices that may result in anticompetitive harm. The Decree has now established the threshold for determining whether a company holds a “dominant position” in the market.
Consequently, a “dominant position” is found to exist where a business holds a market share exceeding 40 percent of total sales in the “relevant market” (this is whether acting by itself or with other businesses).
The introduction of the turnover thresholds is a welcomed and important update to the UAE’s competition framework. The result will most likely be more filings made with the MOE for UAE-centric transactions which brings the UAE’s competition landscape into alignment with international practices.
As a final observation, it should be noted that the New Law’s implementing regulations are still awaited, and it remains to be seen what further changes may be made to this landscape.
HSR Overhaul Takes Effect: A New Era For Dealmakers
On 10 February 2025, the Federal Trade Commission’s (FTC) overhaul of the rules implementing the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (HSR) became effective. The new rules now apply to all reportable transactions. As explained in our prior alert, the new HSR rules (Rules) transform the premerger notification process, requiring parties to provide several new categories of documents and information in their filings. For many transactions, the new Rules will significantly increase the cost and time required to prepare HSR filings. While there are several pathways through which the Rules could be challenged, they are likely here to stay for the foreseeable future. This alert discusses the outlook for the new Rules and provides updates on how they are being implemented.
REGULATORY FREEZE ISSUED BY PRESIDENT TRUMP
On 20 January 2025, President Trump issued a regulatory freeze ordering all executive departments and agencies to consider postponing for 60 days the effective date of any final rules that were published in the Federal Register but had not yet taken effect. Similar requests have been made by recent administrations and have usually been followed by the agencies. Here, the FTC commissioners did not vote to toll the effective date of the new Rules, and the Rules went live on 10 February 2025.
WILL THE NEW HSR RULES SURVIVE?
Now that the Rules are live, there are three main pathways through which they could be struck down or modified: (1) agency action, (2) litigation, or (3) an act of Congress. Although it is difficult to predict outcomes as the Trump administration floods the zone, it seems unlikely that the Rules will be nullified through these channels, at least for the foreseeable future.
Agency Action
The FTC commissioners could vote to rescind or modify the new Rules, then go through a lengthy, formal rulemaking process to change them. This seems unlikely for several reasons.
First, the FTC approved the final Rules by a unanimous, bipartisan 5-0 vote, following efforts to address concerns from the Republican commissioners and commenters to the proposed rules NPRM. In a concurring statement accompanying the announcement of the final Rules, Republican Commissioner (and current FTC Chair) Andrew Ferguson called the Rules “a lawful improvement over the status quo,” adding that while “[t]he Final Rule is not perfect, nor is it the rule I would have written if the decision were mine alone … it addresses important shortcomings … and is ‘necessary and appropriate’ to enable the Antitrust Agencies to determine whether proposed mergers may violate the antitrust laws.” Voting to rescind or significantly alter the Rules would involve backtracking on such public statements.
Second, on 11 February 2025, Chair Ferguson took to social media to give a resounding endorsement of the new Rules, noting on X that “updates were long overdue,” and that the new Rules are a “win-win” that will “ensure that parties provide the appropriate information so law enforcement can fulfill Congress’s mandate and prevent unlawful deals from slipping through the cracks.” These statements make an about-face by the FTC even less likely. Along similar lines, in a memorandum to FTC staff issued on 18 February 2025, Chair Ferguson stated unambiguously that the agencies’ 2023 Merger Guidelines will remain in place, representing “the framework for [the FTC’s] agency’s merger-review analysis.” He characterized the guidelines as “a restatement of prior iterations … and a reflection of what can be found in case law” and emphasized the importance of stability and reliance, warning that “if merger guidelines change with every new administration, they will become largely worthless to businesses and the courts.”
Third, former Chair Lina Khan has not yet exited the FTC, leaving a continuing 3-2 Democrat majority that is unlikely to undo its own regulations. Even after Commissioner Khan leaves, there will be a 2-2 Democrat-Republican deadlock that could hamstring votes on any new rulemaking until her replacement is confirmed.
Litigation
On 10 January 2025, the US Chamber of Commerce (Chamber) and a coalition of business groups sued the FTC and then-Chair Khan in federal district court alleging that the Rules violate the Administrative Procedure Act (APA) and should be struck down. The Chamber’s main allegations are that (1) the FTC exceeded its statutory authority under the HSR Act by requiring information that is beyond “necessary and appropriate” to enable the agencies to determine, during the initial 30-day waiting period, whether a transaction may harm competition; (2) the FTC failed to engage in proper cost-benefit analysis; and (3) the agency failed to identify a problem with the prior rules that would justify a departure from the status quo. While the Chamber’s claims are well-argued and the case is before a Trump-appointed judge, the FTC took great pains in the several-hundred-page final Rule to lay a foundation to anticipate and fend off an APA challenge. So far, the Chamber has not sought a temporary restraining order or preliminary injunction to halt the Rules while the litigation is pending, and the docket has been quiet.
Act of Congress
The Congressional Review Act (CRA) requires agencies to submit final rules to Congress and the Government Accountability Office before they take effect. Once a rule is submitted, any member can introduce a joint resolution disapproving the rule. A simple majority vote in both houses of Congress is required to move the measure to the president’s desk. If the president signs off (subject to veto by a two-thirds majority vote in both chambers), the rule is nullified, and the agency is prohibited from reissuing the same or a substantially similar regulation. The CRA has a look-back mechanism that allows Congress to review the new Rules even though they have already gone into effect. On 11 February 2025, Congressman Scott Fitzgerald (R-WI) introduced a CRA resolution of disapproval to repeal the new Rules. It is unclear whether the resolution will see the light of day given other legislative priorities and Congress’s narrow window of opportunity under a unified Republican government. Moreover, the CRA has seldom been successfully used to void regulations. Members have introduced over 200 joint resolutions of disapproval for more than 125 rules since the CRA’s enactment in 1996 and only 19 rules have been overturned.
IS THERE A SILVER LINING FOR DEALMAKERS?
On the bright side, the rollout of the new Rules has been accompanied by steady guidance and engagement from the FTC Premerger Notification Office (PNO), a departure from its general approach under the Biden administration. Moreover, early termination of the 30-calendar-day HSR waiting period is back on the table. It is also worth noting that the PNO received a deluge of filings just before the new Rules took effect. According to Chair Ferguson, the PNO “typically sees between 35 and 50 transactions per week. But during the last week under the old notification rules, the PNO received 394 filings accounting for about 200 transactions.”
WHAT SHOULD I DO NOW?
The new Rules are in effect, govern all HSR filings, and are unlikely to be nullified for the foreseeable future. As such, dealmakers should:
Continue to work with counsel to understand the new requirements.
Consider budget, timing, and the potential for increased visibility into business operations.
Consider the new regime in determining deal timetables and negotiating transaction agreements, particularly for deals involving horizontal overlaps or vertical supply relationships, which trigger additional filing requirements.
Conduct internal training for relevant personnel regarding document creation best practices and implement document-management protocols to limit exposure and filing burdens.
Victoria S. Duarte contributed to this article.
Nevada Bill Would Expressly Allow Directors To Approve Documents In “Preliminary Form”
Almost one year ago, Chancellor Kathaleen St. J. McCormick ruled that a board of directors of a Delaware corporation must at a “bare minimum” approve an “essentially complete” version of the merger agreement. Sjunde AP-Fonden v. Activision Blizzard, Inc., 2024 WL 863290 (Del. Ch. Feb. 29, 2024). See What Exactly Must A Board Approve When It Approves A Merger?
Within months, the Delaware legislature responded by adding Section 147 to the Delaware General Corporation Law. That statute establishes a final or “substantially final” standard for board approval (emphasis added):
Whenever this chapter expressly requires the board of directors to approve or take other action with respect to any agreement, instrument or document, such agreement, instrument or document may be approved by the board of directors in final form or in substantially final form. If the board of directors shall have acted to approve or take other action with respect to an agreement, instrument or document that is required by this chapter to be filed with the Secretary of State or referenced in any certificate so filed, the board of directors may, at any time after providing such approval or taking such other action and prior to the effectiveness of such filing with the Secretary of State, adopt a resolution ratifying the agreement, instrument or document. A ratification under this section shall be deemed to be effective as of the time of the original approval or other action by the board of directors and to satisfy any requirement under this chapter that the board of directors approve or take other action with respect to such agreement, instrument or document in a specific manner or sequence. Ratification under this section shall not be deemed to be the exclusive means of ratifying an agreement, instrument or document approved by the board of directors pursuant to this section, but shall be in addition to any ratification or validation that may be available under §§ 204 and 205 of this title or under the common law.
Now, the Nevada legislature ins considering adoption of a seemingly looser standard (emphasis added):
Whenever this title expressly requires the board of directors to approve or take other action with respect to any agreement, instrument, certificate or other document, including, without limitation, any agreement, instrument, certificate or other document required to be filed with the Secretary of State, the directors may approve, adopt or otherwise act upon such agreement, instrument, certificate or other document in final form or such preliminary form as the directors deem appropriate in their business judgment.
AB 239. I have not found any Delaware cases that apply the “substantially final” standard. However, this standard would appear to require the court to compare the final form of a document with the form approved by the board. That comparison would identify any differences, but the court would still need to answer the question of whether those differences are “substantial”. This approach is consistent with Delaware’s general approach to corporate law as it invites litigation over the meaning of “substantially”. Invariably, the result will be a mountain of fact-specific and nuanced decisions from the courts.
Nevada’s standard in contrast would defer to the directors’ business judgment. Presumably, that would allow directors to approve a preliminary form of a document or agreement even when the final form differs substantially from the form approved by the directors. Nevada’s proposed standard is much less likely to foment litigation because plaintiffs will have to overcome the much more difficult hurdle of establishing that the approval of a preliminary form was not a proper exercise of the board’s business judgment.
Ch-ch-ch-ch-changes… for the UK Competition and Markets Authority
By repeating “ch-ch-ch-ch-changes” in his famous song, David Bowie was reportedly trying to mirror the stuttered steps of growth. January 2025 was a month full of changes for the UK Competition and Markets Authority (CMA). As with any changes, it is difficult to predict their effect precisely, only time will tell. Although we do not have a crystal ball, however, our longstanding and in-depth experience in UK competition law gives us unique insights on what to expect and most importantly how to adapt. In this update, we will cover some of these key changes including:
The entry into force of the Digital Markets, Competition and Consumers Act (DMCCA) and related updated guidance.
An anticipated reform of the UK concurrency regime to extend to consumer protection.
The exercise by the CMA of its new DMCCA powers to designate companies with Strategic Market Status (SMS).
Last but not least, perhaps the changes that grabbed the headlines the most: the CMA has a new interim Chairperson and the UK government’s “steer” to the CMA’s CEO.
The underlying theme of all these changes is a drive towards growth… In the CMA’s own words, the “new regime provides a unique opportunity to encourage the benefits of investment and innovation from the largest digital firms, while ensuring a level playing-field for the many start-ups and scale-ups across the UK tech sector.” Hopefully, not a stuttered growth, only time will tell.
DMCCA and New Guidance
With the entry into force of the DMCCA on 1 January 2025, the CMA published updated guidance on its merger control and antitrust procedures. We have previously written our summary of the DMCCA and the main changes introduced to the updated CMA guidance, compared to the previous guidance, to reflect the DMCCA is available is available in this rider.
Concurrency Regime
The CMA also published a report entitled a ‘review of the competition concurrency arrangements’ which sets outs its findings and recommendations following its consultation seeking opinions on the effectiveness of the current competition concurrency arrangements. These arrangements have so far referred to the concurrent powers of the CMA and various sector regulators to apply UK competition law in their respective sectors – e.g. the CMA and Ofcom in the electronic communications sector. With the DMCCA, the concurrency arrangements now extend also to consumer protection law. Therefore, the CMA’s report recommends that: “In light of the reforms in the DMCC Act [DMCCA], we think there is merit in a more in-depth review of the effectiveness of existing consumer concurrency arrangements, and how the CMA works with the sector regulators to fulfil their consumer protection roles in the regulated sectors.”
SMS Designations
The CMA has already launched three investigations under the DMCCA for new SMS designations:
The first will consider whether Google has SMS in the provision of search and search advertising services.
The second and third will consider whether Google and Apple have SMS in their respective ‘mobile ecosystems’ which include app stores, the operating systems and browsers that operate on mobile devices.
The CMA’s CEO said the probes will have a “significant impact” not just on companies selected for designation but “also the stakeholders,” and therefore it is necessary to have a “lot of engagement.” Moreover, the CMA has also provisionally found in the on-going cloud services market investigation that it intends to recommend to the CMA board to designate Amazon Web Services (AWS) and Microsoft with SMS in the provision of cloud services.
New CMA Chairperson
After an unsatisfactory meeting in Downing Street, with the UK government citing a fundamental ‘difference of approach’ in how best to drive growth and investment, the then chair of the CMA, Marcus Bokkerink, resigned and Doug Gurr – a former head of Amazon UK and Amazon China – was appointed as Interim Chair, sparking controversy. In a letter to the Financial Times, Doug Gurr confirmed an immediate review of the CMA’s work, so as to ensure that it makes “[g]ood decisions, clear decisions, rapid decisions — that’s what you tell us you need and that’s on us to deliver.”
This change at the helm of the CMA coincided with news that the authority had overspent on its budget, resulting in the launch of a redundancy program that is expected to affect up to 10% of its workforce. However, the CMA has confirmed that the Digital Markets Unit (DMU) in charge of enforcing the new SMS regime introduced by the DMCCA will be ring-fenced, as well as the unit in charge of mergers, meaning cuts in other parts of the authority staff.
Both Doug Gurr and Sarah Cardell, the CMA’s current CEO, emphasised that the change in direction will not impact the core of the CMA’s work (i.e., antitrust, cartels and consumer protection). However, it cannot be excluded that the substantial reduction in the CMA’s workforce (outside the DMU and mergers), and the prioritisation of smarter and faster merger reviews, will affect the capacity of these other functions.
The Government’s “steer” to the CMA’s CEO
Pressure from the government to be less risk averse and more pragmatic has spurred the CMA to pledge to “drive growth and investment” and speed up its decisions. Sarah Cardell has stated that the regulator would judge mergers to make sure they “enhance business and investor confidence” whilst also ensuring to protect “effective competition for the benefit of UK businesses and consumers”. Jonathan Reynolds (Secretary of State for Business and Trade) has suggested the UK in fact has too many regulators and has called on the competition watchdog to be “more agile”.
The government’s draft “strategic steer” for the CMA further enhances the upheaval in the competition sphere.
The government sends a clear message, that is, the CMA’s approach must in fact reflect the need to enhance the UK as hotspot for international investment. The CMA’s approach must contribute to the “overriding national priority” of economic growth.
Additionally, this draft instructs the CMA to take into account the actions of other regulators…globally. The CMA, “where appropriate, [should] seek to ensure parallel regulatory action is timely, coherent and avoids duplication”.
Sarah Cardell has hence stated that, “[w]e have today set out a programme of rapid, meaningful changes to our mergers process, which will enhance business and investor confidence and enable us to continue protecting effective competition for the benefit of UK businesses and consumers.”
The CMA has said that it would complete a pre-notification phase on its investigations within 40 working days. This is a drastic reduction from the current 65 working days (approximately). Additionally, the CMA plans to reduce the timings for a “straightforward phase 1” investigation to 25 working days from 35 working days. Sarah Cardell stated, “[w]e know speed of decision making is vital to reduce uncertainty and costs for businesses”. This move also stems from comments made by Sir Keir Starmer who has stated previously that the government would “make sure that every regulator in this country, especially our economic and competition regulators, takes growth as seriously as this room does”.
There appears to be further changes in the near future. The CMA’s review of remedies will be starting in March 2025 and this brings about the chance for large changes. The review will include looking at an increased openness to behavioural remedies, the role of “relevant customer benefits” to offset anti-competitive effects and the scope for remedies to play a role in “locking-in” pro-competitive efficiencies (as already shown in the recent Vodafone/Three conditional approval decision).
Conclusion
The dust is still settling from the events of January and yet there may be more changes to come. It is unclear whether Doug Gurr will be confirmed as the permanent Chair (there still needs to be a process, of course). The 10% workforce reduction is likely to curtail activity outside merger control and digital market regulation. The drive towards growth could mean a more lenient approach to mergers, especially when it comes to considering behavioural remedies. Additionally, it remains unclear whether the CMA will open new SMS investigations beyond those already commenced against Apple and Google, although the provisional findings in the CMA cloud services market investigation indicate that the CMA is minded doing so.