Regulatory Crackdowns - Here to Stay?
As the world locked down and masked up, regulators around the world remained active. COVID-19 accelerated the expansion of regulatory powers from the traditional mandate of assessing the impact of a deal on market power and consumer benefit and into concerns such as national interest, data privacy, and the impact of future competition. Focusing on Europe and Asia, this article hopes to provide an overview of some of the key regulatory crackdowns of 2021 and the regulatory outlook for 2022.
Europe
With the boom in tech M&A activity, the digital platforms have come into the spotlight for multiple reasons, including antitrust, data privacy and national security. Regulatory activity (in particular, in antitrust) in 2022 is likely to be even more eventful. Here are three key developments to look out for.
First, the EU’s Digital Markets Act (DMA) will be adopted, likely before mid-2022. In response to the growing consensus that the traditional competition law assessments (e.g., evaluations on market definition and market shares) do not work effectively on the dynamic digital economy, the DMA is designed to regulate large digital platforms that are considered “gatekeepers.” Some of the DMA’s provisions are relatively non-controversial, such as the rule against “gatekeepers” using businesses’ non-public data to compete against them. Others are far-reaching, novel and rigid. For example, the draft DMA includes a rule requiring gatekeeper search services to share Europeans’ search data with potentially unlimited rival search services.[1] The penalties for non-compliance are also severe: minimum level of fines of 4% and up to 20% of the gatekeeper’s total annual global revenue.[2] On announcing the DMA, EU Commission Margrethe Vestager explained:
“We’ve come to a point where we have to take action. A point where the power of digital businesses – especially the biggest gatekeepers – threatens our freedoms, our opportunities, even our democracy . . . So for the world’s biggest gatekeepers, things are going to have to change.”[3]
Secondly, traditional antitrust will continue to focus on Big Tech. Regulators are reviewing and revisiting deals more aggressively for antitrust concerns and, beyond the DMA, have been incorporating more novel approaches into its competition assessments. For example, the European General Court has recently ruled that Google abused its market power by providing an unfair advantage to shopping services over other competing services (Google Shopping Case: Google lost appeal against €2.4bn shopping fine), marking the first time a European court has ruled on an antitrust issue against Google.[4] Moreover, the European Commission has opened an investigation on whether Facebook’s (now Meta) use of advertising data aggregated from its advertisers is anti-competitive.[5] Data privacy is another growing area of concern among regulators. Questions of who owns the data and what companies are going to do with the data surface have surfaced in many proposed tech deals.[6]
Last but not least, in the UK, the National Security and Investment Act (NSI) 2021 came into force on 4 January 2022.[7] The Act allows for extensive scrutiny of cross-border deals in 17 sensitive industries (energy, transport, communications, defence, AI and other tech-related sector) on national security grounds in the UK. This Act is against a backdrop of tightening of foreign direct investment (FDI) regimes globally on the grounds of public interest.[8] The new regime is far-reaching and it is clear that it will require parties to transactions in a much wider range of situations to engage with a potential national security review.
Asia
After a dramatic year for the global economy, economic activity, cross-border M&A activity and international trade rebounded strongly in 2021.[9] Nonetheless, China remains in the limelight for regulatory action. Beyond the technology sector, China’s unprecedented blitz of education, property and gaming regulations in 2021 have triggered a cascade of knock-on effects in global markets.
China’s intense and sudden rein on technology companies in 2021 have forced global investors to flee from China’s best stocks, including leading technology companies, erasing more than USD$1 tln in market value by some estimates.[10] The crackdown appears to have begun with the suspension of Ant Group’s highly-anticipated $34.5bn IPO in November 2020, before snowballing into headlining actions, including: slapping a $2.8bn antitrust fine on Alibaba in an anti-monopoly probe; penalising ride-hailing giant Didi Global just 2 days after its NYSE listing after a cybersecurity probe; and fining food delivery platform Meituan about $1bn for allegedly abusing its dominant market position. Such regulatory measures are very much in line with the shift in approach adopted by other economies, including the US and the EU, that are taking active steps to address concerns about monopolistic power and data security. But the sudden, unprecedented manner in which the Chinese government launched its investigations against tech giants leaves room for improvement.[11]
With regards to China’s education crackdown, the private tutoring sector in China was banned in July 2021 from taking foreign investment, going public, or even making a profit. The government was concerned poorer children were at a disadvantage, and that private tutoring was putting a financial strain on parents.[12] Education stocks like New Oriental and TAL Education were crushed by the changes, both stocks falling by around 87% in the past year.[13] With China’s state media criticising the gaming industry, video games were next on the crackdown list. China posted extremely harsh rules in November 2021, disallowing under 18-year-olds from playing more than 3 hours per week. Share prices of Chinese game companies all fell after the announcement, with Netease falling 6% and Tencent falling nearly 2%.[14]
Perhaps the sector most impacted by China’s regulatory crackdown is the real estate property market. Under China’s ‘Common Prosperity’ campaign, regulators have opened unyielding investigations into the reckless borrowing habits of property developers. China’s new ‘three red lines’ loan rules for the property sector (the thresholds on borrowings are: 70% ceiling on liabilities to assets; 100% cap on net debt to equity; and, cash to short-term borrowing ratio of at least one) has left numerous property giants in distress.[15] For instance, industry giant China Evergrande Group crossed all three lines. The world’s most indebted property developer eventually defaulted at the end of 2021 and now faces a massive restructuring. While the three red lines policy is not the only contributing factor to the Evergrande crisis and the general decline of China’s giant housing market, as 2022 began, distress was still spreading in China’s $870 billion offshore bond market as more property firms missed payments and record refinancing costs effectively blocked them from rolling over borrowings.[16]
Chinese firms have lost over USD$1 tln in value from the crackdown this year. Regardless of whether one supports or opposes the heightened scrutiny into companies’ business activities, China’s widening clampdown, which ranges from anti-competitive practices to data security, is expected to extend into 2022.[17]
[1] https://www.clearygottlieb.com/news-and-insights/publication-listing/us-eu-antitrust-developments-and-outlook-in-2022
[2] https://www.europarl.europa.eu/news/en/press-room/20211118IPR17636/digital-markets-act-ending-unfair-practices-of-big-online-platforms
[3] https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-executive-vice-president-margrethe-vestager-building-trust-technology_en
[4] https://www.ft.com/content/3e8e45e6-54b4-4b0f-8bda-69ab1389eabd
[5] https://www.rosenblatt-law.co.uk/media/eu-commission-opens-up-competition-investigation-over-facebooks-use-of-advertiser-data/
[6] See e.g., Google’s $2.1bn acquisition of Fitbit.
[7] https://www.gov.uk/government/collections/national-security-and-investment-act
[8] For example, Oliver Dowden, the UK Digital Secretary, issued investigations into the $40bn proposed takeover of ARM Limited by NVIDIA Corporation (https://www.gov.uk/government/news/digital-secretary-instructs-cma-to-look-into-nvidias-takeover-of-arm). Citing the COVID-19 crisis, the German government had also approved new powers to veto hostile foreign takeover bids for healthcare companies (https://www.reuters.com/article/us-health-coronavirus-germany-m-a-idUSKBN22W14J).
[9] https://www.reuters.com/article/asia-m-a-idUSKBN26L26H
[10] https://www.scmp.com/week-asia/opinion/article/3144146/ant-didi-and-private-education-firms-china-stock-rout-mess-its
[11] https://www.scmp.com/week-asia/opinion/article/3144146/ant-didi-and-private-education-firms-china-stock-rout-mess-its
[12] https://morningwrap.com/2021/07/26/cracking-down-the-education-sector/
[13]https://email.morningwrap.com/t/ViewEmail/t/29A380C7AF4B8A182540EF23F30FEDED/0CA2E52A5FDAA5A09E794568BD214575?alternativeLink=False
[14] https://www.reuters.com/world/china/china-rolls-out-new-rules-minors-online-gaming-xinhua-2021-08-30/
[15] https://www.ft.com/content/d5803d64-5cc5-46f0-bed0-1bc207440f9c
[16] https://www.bloombergquint.com/global-economics/what-china-s-three-red-lines-mean-for-property-firms-quicktake
[17] https://www.reuters.com/markets/us/china-expected-extend-regulatory-crackdowns-into-2022-2021-12-20/
