Tomorrow we'll be 8 days away from "The End",
July 18th 
(although I think that an extension is likely to happen).
Let's see how things are right now and what may happen if the FTC preliminary injunction (PI) is denied and MS/ABK go ahead and try to close over the UK now or later.
1.- Previously on... Antitrust Simulator
If the FTC preliminary injunction (PI) is denied, MS/ABK would still need approvals from:
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Turkey:
there is no cloud gaming there, so an unconditional approval makes the most sense (probably next week).
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Canada: a
letter from the Canadian Competition Bureau dated June 28th 2023, stated that on May 5th, 2023, the Bureau communicated to Microsoft and Activision's Canadian counsel that the Bureau had concluded that the proposed merger is likely to result in a substantial prevention and/or lessening of competition with respect to gaming consoles and multigame subscription services (as well as cloud gaming). The Bureau said that it was continuing to monitor the transaction.
This part makes it sound like they are blocking the acquisition:
"The Bureau had concluded that the proposed merger is likely to result in a substantial prevention and/or lessening of competition...", but officially it hasn't happened yet.
Canada updates the
list of concluded merger reviews on or after the 10th calendar day of each month and nothing has been published there. Next week may be the right moment to get a definitive answer about this because the list should be updated again.
However,
and according to the merger agreement, the merger can be completed if MS/ABK obtain clearance to consummate the transaction or
applicable waiting periods (or any extension thereof) have expired or been terminated in each applicable jurisdiction.
MS said that the waiting period in Canada expired and that the Bureau missed the window to block, therefore that they can close whenever they want.
We'll see if this is how this story ends or we'll get some news next week.
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New Zealand: after 7 delays,
a decision is expected on July 17th. This time it seems for real because they published the
Statement of Issues (SoI) and first and third parties are sending submissions to the SoI.
Right now, New Zealand has concerns about console and cloud gaming. A block from them shouldn't be deal-breaking but could be an extra issue.
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Australia: the review process has been suspended since
September 8th 2022. I read that the Australian Competition and Consumer Commission (ACCC) and the Commerce Commission from New Zealand (CCNZ) usually work together. So, maybe they decided that the decision from New Zealand is going to be valid for both because the markets are very, very similar.
We'll see if we get any update from them during the next days.
In any case, closing over Australia is not unprecedented because it happened in 2021 with the
acquisition of Fitbit by Google.
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UK: the acquisition was blocked on
April 26th 2023 over concerns that the deal would alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers in the next years.
MS/ABK appealed the decision on May 26th to the
Competition Appeal Tribunal (CAT). The main hearing has been listed to commence on
July 28th, with a time estimate of six days.
You can read a lot more about how this process works here.
At the same time,
the CMA published on May 18th a notice of intention to make a final order prohibiting the acquisition. The CMA published a draft of that final order and a
deadline for the imposition of the final order is July 19th.
Obviously, if the FTC PI is denied, the CMA is the real final boss because:
1) they rarely lose an appeal;
2) all the times that they have lost one, they have reached the same decision after reviewing the case again.
2.- Exploring the ways
On June 1st, Mlex published a report,
later corroborated by Bloomberg, explaining that MS was exploring ways to close the deal over the UK. The main scenarios were:
A) Activision exiting the UK for another European country in a bid to remove itself from the CMA's jurisdiction. Its games could continue to be sold via a distributor. Any such decision should be taken by Activision to avoid breaching merger laws that stipulate that merging companies must be managed separately and independently until they actually close.
B) Microsoft extending the remedies given to and accepted by the European Commission to the UK unilaterally, even though they were rejected as insufficient by the CMA.
C) MS actively contesting the CMA's draft order that would give effect to its veto, banning Microsoft from acquiring an interest in Activision for several years, and vice versa, due to the CMA imposing a global ban solely to address concerns relating to the UK market.
D) If modifying the final order fails, Microsoft could challenge the final order in court to seek to narrow its scope, to potentially allow it to close elsewhere in the world.
E) Microsoft closing the transaction and arguing that the order banning them from acquiring an interest in ABK, and vice versa, was illegal in its defense when sued by the CMA.
As you can see,
3 of the main scenarios are related to the final order from the CMA (scenario B indirectly too). The deadline to impose the final order is
July 19th, while the last day to close the merger is
July 18th. :S
Scenario C is very likely already happening becase the
ruling from the CAT refusing an application by the CMA for an adjournment of the main hearing (on June 29th), included this:
There have been a range of other developments in relation to the proceedings which either have already, or will soon, divert significant resources of the CMA away from the preparations for the hearing. These include an increase in the scale of work that will be involved in relation to a consultation procedure on a final order in relation to the CMA's merger decision in this case. (page 7)
Finally, it is suggested that the CMA has much other work to do, including in relation to this matter. Prevett 1/[30]ff indicates that a great deal of time is being spent by the CMA preparing for the final order consequent on the Decision. The Tribunal wrote shortly in response to the CMA's application making clear that it would adjourn of its own motion the final order, which is obviously significantly less material than this application. According to Mr Prevett, the deadline for the imposition of the final order is 19 July 2023. There is no reason why this cannot be extended to, say, the end of August and (if and order of the Tribunal is necessary) that is what the Tribunal would be minded to do. (page 12)
If the CMA has so much work in relation to the consultation procedure of the final order, very likely it's because MS/ABK are actively contesting it. In any case, as you can see the CAT could extend the deadline to impose the final order to the end of August at least, potentially changing the sequence of events.
Personally, I don't think that scenario A is going to happen now or even later. Moving ABK to another European country would take months and the CMA has a wide discretion to claim jurisdiction.
I think that scenarios C, D and E (with B connected to all of them) are going to be the main way: contesting the scope of the draft final order and if that fails challenging the final order in court. I also think that there could be two ways to proceed with this, at least:
Reasonable: MS challenging the final order in court and waiting until a decision is being made (in parallel to the CAT appeal).
Aggressive: MS closing the transaction, unilaterally extending the EC remedies to UK and challenging the final order in court, arguing that it was illegal. A variation of this could be closing the transaction, extending the EC remedies and waiting until the CMA sues them.
One way or another, scenarios C, D and E are thinking about excluding the UK from the transaction (temporarily or permanently), closing in every jurisdiction where there has been clearance or the applicable waiting periods have expired. This means that MS/ABK may be thinking about carving-out the UK.
3.- The wait is over: activate the carve-out procedure
3.1- The basics
Cross-border corporate transactions like this one, often require merger clearance by several competition authorities before they can be implemented (in this case, from 16 jurisdictions).
Sometime the parties are working on a very tight schedule (or the established outside date is simply getting closer and closer) and the necessary approval in just one last jurisdiction is still pending (in this case, potentially the UK). When this happens,
a carve-out of this jurisdiction may be an option in order to be able to implement the rest of the transaction in time.
It's important to remember that this is not the way that things are usually done. This procedure has been rarely used (this is why we don't have a lot of precedents and only a very limited number of published decisions by competition authorities dealing with the subject), and it's difficult to implement in practice. Add to that the fact that the majority of jurisdictions don't have specific legal requirements about carve-outs (Colombia is one exception, for example). Therefore, a carve-out procedure is something very unique.
According to CADE (the Brazilian regulator),
a carve-out is the separation of a business unit (for example, ABK UK) from the structure of a firm (ABK). In this case, the business to be separated is not autonomous (ABK UK). Thus, the carve-out process may require that the assets or personnel are doubled so as to ensure the divested business is viable and competitive (if the carve-out is permanent).
A variation of the procedure is when the parties try to resolve the situation by temporarily carving out from the overall deal the part of the transaction in the country which has yet to issue clearance (ABK UK) and having it held separately by the seller (ABK) pending clearance.
This is a carve-out and hold-separate procedure.
There could be even a third variation of this,
a carve-out and ring-fencing procedure. Although ring-fencing is usually used in finance and for tax purposes, it can be used in M&A too. Although we don't have a standard definition, normally a ring fence is a legal virtual barrier that separates a company's assets (for example, ABK UK from ABK). Usually, it's used to protect a company's core business from the risk of its subsidiary businesses. In M&A is also used to block information sharing between the seller (ABK) and the package of assets to be divested temporarily or permanently (ABK UK). Therefore, it is a separating measure aimed to protect trade secrets or other confidential information regarding the divestiture.
In summary, when in a multi-jurisdictional transaction like this one the outside date is coming really close and fast but the necessary approval in just one last jurisdiction is still pending, the parties may decide to close everywhere and exclude the pending jurisdiction temporarily (while they wait for approval) or permanently (abandoning that market). This can be done through different ways that try to separate the non-autonomous business unit (ABK UK) from the main one (ABK).
3.2.- The risks
Because only a few jurisdictions have specific legal requirements covering carve-outs and the majority of regulators don't accept them by default (South Africa is an exemption, for example) implementing a carve-out procedure is usually classified as (a partial) implementation of the proposed transaction and, therefore, as a breach of the obligation to not close until there is a decision.
This is usually called "gun jumping".
For example,
one of the few decisions about the carve-out procedure is from CADE in Brazil. In 2016, carve-out agreements were analyzed by CADE in the merger review of the purchase of a subsidiary of Cisco Systems, Inc. by Technicolor S.A. During the analysis of the transaction (and without clearance from CADE yet) the regulator became aware of a public announcement of the global closing on Technicolor's website. Three days later, the applicants informed CADE about the global closing and after a month presented the carve-out agreement as a justification, alleging that it would preserve the competitive conditions in the Brazilian market until CADE's approval. CADE decided that there had been a violation since the transaction was implemented before clearance, and that neither the urgency, nor the absence of anticompetitive impact could justify the prior closing of the merger.
CADE and the parties entered into an agreement setting forth a pecuniary contribution of EUR 6.7 million.
The
Illumina/Grail case is another example of gun jumping (Illumina closed the transaction just days before the outside date without approval from the EC),
and a fine up to $450 million is expected.
Another example of carve-out procedure automatically classified as gun jumping was imposed by the
German competition authority in 2008 in the Mars/Nutro case. The regulator imposed a fine of EUR 4.5 million for an unlawful carve-out.
Therefore, in this situation the right way to implement a carve-out procedure is to talk with the regulator affected by it before making any moves (just going nuclear is only going to cause a lot of pain).
3.3.- The merger agreement
Although uncommon,
sometimes the merger/purchase agreement may include provisions to implement a carve-out procedure.
For example, a provision could specify that: if on a particular date (let's say, July 18th 2023) merger control clearances have been granted in at least Y jurisdictions (Y being a specified number of jurisdictions which appears reasonable in view of the scope of the transaction) or in jurisdictions A, B and C (which are of key significance for the transaction as a whole) and the other (non-merger control-related) closing conditions have been met or waived, the transaction may be implemented in respect of these jurisdictions.
In any case, parties often opt not to include any provisions relating to carve-outs in the merger agreement, but rather choose to agree on further actions on an ad hoc basis, as and when they become relevant.
The
MS/ABK merger agreement does not include specific provisions to implement a carve-out procedure, but sometimes the wording seems to leave the door open for something else:
Activision Blizzard and Microsoft have agreed to use their reasonable best efforts to comply with all regulatory filing and notification requirements and obtain all regulatory approvals required or recommended to consummate the merger and the other transactions contemplated by the merger agreement. These approvals include approval under, or notifications pursuant to, the HSR Act and the competition laws of the European Union, the United Kingdom, China and certain other jurisdictions.
In addition, each of Activision Blizzard and Microsoft have agreed to (1) cooperate and coordinate with each other to make such filings; (2) use its reasonable best efforts to supply the other with any information that may be required in order to make such filings; (3) use its reasonable best efforts to supply any additional information that reasonably may be requested to obtain regulatory approvals; (4) use its reasonable best efforts to take all action necessary to obtain regulatory approvals as soon as practicable; and (5) provide notice to the other party if it plans to participate in any meeting or substantive conversation with any governmental authority with respect to the merger.
If and to the extent necessary to obtain regulatory approval of the merger, Microsoft, Sub and, solely to the extent requested by Microsoft, Activision Blizzard will (1) offer, negotiate, commit to and effect, by consent decree, hold separate order or otherwise, (A) the sale, divestiture, license or other disposition of assets (whether tangible or intangible), rights, products or businesses of Activision Blizzard; and (B) any other restrictions on the activities of Activision Blizzard; and (2) contest, defend and appeal any legal proceedings, whether judicial or administrative, challenging the merger agreement or the consummation of the merger.
3.4.- The regulators
Competition authorities which regularly deal with cross-border transactions like this one generally reject carve-outs procedures.
A regulator will take into account if the implementation abroad of the transaction will have any impact on the domestic market (UK, in this case). For example, if the parts of the shares or assets acquired abroad are indirectly capable of improving the acquirer's position in the national market, because a key patent, asset or IP has been acquired, that would be a reason to reject the carve-out.
For example, Colombia permits a carve-out if:
a) The buyer is not able to control nor influence the local business of the target company; (ABK in UK has
studios, manufacturing, distribution and publishing offices).
b) Business secrets relating to the local business of the target company are shielded from the buyer;
c) The carve-out is structured so as to ensure that, should the local competition authority prohibit the transaction, the local business could easily be reintegrated in the seller's business (MS said to the FTC that the ABK implementation would be limited, like the Zenimax one, easy to unwind then).
The
EC rejected in 2011, in SC Johnson/Sara Lee's, a carve-out procedure because SC Johnson had failed to prove that the negative financial effects caused by the delay would have exceeded the consequences normally caused by the suspension obligation during the merger control procedure.
The case in Brazil in 2016 was rejected because CADE ruled that the Brazilian part of the business had not been sufficiently isolated, arguing, in particular, that the markets affected by the transaction were international (cloud gaming being the main SLC could mean that it's easy and hard to isolate, so depending on the interpretation it could be a good or bad thing).
In any case, sometimes carve-outs have been implemented.
For example, t
he EC in 2006, and in the in the context of the acquisition of Dyno by Orica, approved a carve-out due to the exceptionally serious consequences to be expected if the transaction were to be further delayed.
In South Africa and in 2005, the A.P. Møller-Mærsk and Royal P&O Nedlloyd merger was implemented early in Europe while the South African part was carved out for the duration of the South African proceedings and implemented separately at a later date.
The
Indian competition authority accepted a carve-out in the Holcim/Lafarge merger. The deal was implemented at a global level before clearance had been issued in India.
Even the
CMA has accepted a carve-out,
in 2017 in the Diebold/Wincor Nixdorf case. In 2020, Meta tried to carve-out Giphy and the CMA was at least ready to listen to it but Meta did not provide sufficient information to allow the CMA to decide on the requested derogations (for example, narrowing the scope of the initial enforcement order). Therefore, the carve-out was rejected and Meta fined for repeated breaches.
As you can see, although there are some general rules, carve-out procedures are studied case by case and only the parties really know if they are possible and the best way to proceed.
4.- Conclusions
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I think that if the FTC PI is denied, the CMA becomes the main obstacle to close the acquisition and that MS is going to try to find a way around them, now or later.
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The implementation of the CMA final order prohibiting the acquisition is probably a key event for the next days/weeks. From the feedback that the CMA provided to the CAT by the end of June, it sounds like MS is seriously challenging the draft published in May.
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My guess is that MS is trying to close everywhere on time (July 18th) while trying to "negotiate/discuss/settle" with the CMA a carve-out for UK in the final order (expected in July 19th), while they let the CAT appeal proceed and see what happens.
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I think that a (short) extension of the merger agreement is hard to avoid, because unless there is some kind of miracle, all the most likely scenarios to close need more time to deal with the CMA.
- If the FTC PI is denied and the CMA final order remains the same, therefore the CMA rejects a possible carve-out now,
I think that the merger agreement will be extended for a short time to see what happens with the CAT appeal and that MS won't close in the rest of the world (too much risk and if they are willing to do it, they could try it post CAT ruling). Although MS will likely challenge the final order in court.
Anyway, we are at peak uncertainty and this is just my best try to guess what may happen during the next 8 - 10 days. But there are so many variables and we don't have all the info, that it's very hard to make a prediction
So, let's see what happens and enjoy the ride
www.gov.uk
