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Fintech M&A – A New Challenge for Competition Authorities

Leave a Comment / Competition Law, Mergers & Acquisitions / CBCL

[By Lavanya Gupta] The author is a student at the Symbiosis Law School, Pune. Background The financial services industry, with its innate technology, has been a significant sector of economies across the globe, and this fact is supported by the existence of payment processing mechanisms, ATMs, etc. However, of late, a separate industry that exclusively focuses on the development of newer technologies for the financial services sector has been rising, i.e., the fintech industry. In other words, while the financial services industry develops products for consumers, the fintech industry develops the technology that ensures extensive and widespread use of such products by leveraging the worldwide adoption of mobiles and smartphones, and the ubiquitous internet. The speed of M&A between the players of the financial services industry and the fintech industry has recently seen an upswing since mergers and acquisitions (“M&A”) present an opportunity for fintech companies, which are mostly start-ups, to advance their capabilities and expand their reach. Additionally, the fintech industry is characterized by high growth and recurring revenue and is thus an attractive industry for private equity and venture capitalists alike. Concomitantly, as per a 2019 report, fintech M&A has seen a five-fold growth over the past decade. With such a growth profile, it is perhaps apparent that fintech M&A is moving from “too small to care” to “too big to ignore” and in the same line, it is attracting the interest of multiple stakeholders. Amidst the heightened attention, scrutiny by antitrust regulators was obviously to follow, and cases like Visa/Plaid and Mastercard/Nets are paving the way. This article looks at the approaches of various competition authorities across jurisdictions during their assessment of notable fintech M&A deals, and the probable course that fintech M&A is going to take in the near future. Fintech M&A’s Antitrust Scrutiny in the United Kingdom and the United States United Kingdom’s (“UK”) competition regulator, the Competition and Markets Authority (“CMA”), and the United States’ (“US”) Department of Justice (“DOJ”) have reviewed many fintech deals in the recent past. While the CMA has time and again asserted itself as the chief antitrust review agency for fintech deals, the DOJ has been vigilant of fintech M&A that may hurt the American market and consumers. A case in point is the Visa/Plaid merger: In January 2020, Visa decided to merge one of its subsidiaries with Plaid that would lead Visa to gain indirect control over Plaid. It is pertinent to mention that Visa is a well-established global player for electronic consumer-to-business (“C2B”) payments. On the other hand, Plaid (established in 2013) provides services like aggregation of consumers’ account information and signaling businesses about payments made by customers. Hence, there is a notable overlap in the entities’ C2B payment services. In other words, Plaid is a new entrant in a market where Visa already enjoys significant market power. Since the pre-merger and post-merger shares of the two parties breached CMA’s “share of supply” threshold, the transaction attracted antitrust scrutiny by the CMA which concluded in August 2020 after a 2-month long inquiry by the regulator. Though the CMA observed that the merger would dilute competition in the market, the transaction was given a green signal by the CMA since it was also observed that multiple other PIS providers were existing in strong competition in the UK. On the other side of the globe, the reaction to the proposed transaction was quite the opposite. Unlike its English counterpart that cleared the deal, the DOJ filed a civil antitrust suit to stop the acquisition. The DOJ’s suit was based on the fact that the “strategic” acquisition of a nascent competitor by Visa is a sham to eliminate upcoming competition in the market that Visa operates in. Principally, DOJ objected to the “killer acquisition” being proposed by Visa. Following the DOJ’s suit that was pending trial, Visa terminated its acquisition plan in January 2021, which was welcomed by the DOJ. In the same month when DOJ sued Visa, the American competition regulator cleared Mastercard’s acquisition of Finicity (a start-up that provided an open-banking platform). Some have argued that with such contrasting decisions surrounding fintech M&A, the DOJ’s stance on the whole issue seems unclear. However, it must be noted that the DOJ blocked the Visa/Plaid transaction since the two parties were in competing business, but in Mastercard/Finicity the two parties had complementary technology, and hence, the deal was given clearance. Additionally, according to the DOJ, Visa’s acquisition of Plaid for $5.3 billion was 50x the market price, and thus Visa was essentially paying to preserve its dominance. On the other hand, since the price was deemed correctly calculated in the Mastercard/Finicity transaction by the DOJ, the deal was not stopped. Hence, within fintech M&A, while there has been an increased deal activity in the sub-sectors of point-of-sale services and merchant payments, competition watchdogs have been active and have modified their review processes to understand the typical workings of the dynamic fintech industry as a whole. From the numerous orders on various fintech M&A transactions, it can be understood that antitrust agencies are keen on exercising a fastidious assessment to capture and understand business strategies and identify “killer acquisitions” or “reverse killer acquisitions”. For instance, a primary consideration in antitrust scrutiny of fintech M&A is the valuation analysis. The identification of a deal premium, which is usually discussed and explained in the internal documents relating to the transaction, can be a potential red flag and could indicate a “killer acquisition” intention, as was the case in the Visa/Plaid transaction. The Indian Antitrust Approach to Fintech M&A India’s Competition Commission of India (“CCI”) had a chance to review a fintech M&A transaction when it was notified of Visa’s acquisition of 13% stake in IndiaIdeas. While assessing the merger, CCI noted Visa’s affiliation with various Indian banks for the issue of credit cards and debit cards. On the other hand, it was observed that IndiaIdeas provided a host of services like payment services, voucher distribution, biller network, authentication services, etc. to businesses.

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Break Fee Agreements in M&A: Regulatory Challenges

[By Aniket Singh and Pranav Mihir Kandada] The authors are students at NALSAR University of Law, Hyderabad. Introduction In M&A transactions, a “break fee” agreement is an arrangement between the target company and the potential acquirer. In this arrangement, the target company promises to pay a certain fee to the potential acquirer in case the offer from the acquirer does not go through for any given reason. Such agreements are often looked upon favorably as beneficial deal-protection devices. However, the quantum of the break fee is regulated in several jurisdictions through varying approaches. This article seeks to explain the concerns associated with break fee arrangements and examine how various jurisdictions regulate it. Uses and Concerns For target companies and stockholders, a break fee arrangement can induce competition between the bidders. By assuring potential acquirers that they will be compensated for various costs undertaken prior to effectuating a transaction (identification and assessment of the target, fees for due diligence, etc.), a break fee would encourage bidders to spend on such assessments and make better bids. As potential acquirers are now assured of compensation for their efforts, more of them can enter the fray thereby increasing competition and providing better options to the shareholders. In this manner, break fees facilitate M&A transactions. However, break fees are deal protection devices that invariably function by preferring one bidder over the other. Although a break fee’s impact on the net asset base of the company is negligible, it could potentially wipe out the annual revenue of the target. This would make the target less attractive to subsequent bidders. Hence, a high break fee could serve to reduce competition. Further, a high break fee amount could constrain shareholder choices. Shareholders are coerced when they are forced to vote for transactions backed by the management. A vote would be structurally coercive when the directors “have created a situation where a vote may be said to be in avoidance of a detriment created by the structure of the transaction … rather than a free choice to accept or reject the proposition voted on.” When a high break fee amount assured by the management is disclosed to the shareholders, the shareholders get to know the exact cost to be borne if the merger does not go through. Voting against such a proposition becomes unviable and costly for the shareholder. Thus, a higher break fee empowers the company’s management to influence voting. Despite this influence, it is contentious whether a break fee arrangement is structurally coercive. In Brazen v. Bell Atlantic Corp., the Delaware Supreme Court stated that mere knowledge that voting against the merger would result in activation of the fee does not by itself constitute shareholder coercion. Further, the arrangement would not be coercive, as the shareholders would only vote against the merger in favour of a better price from another bidder. In the Indian context, however, this reasoning may not be applicable given the minority shareholders who would remain in the company with diminished value due to activation of the break fee. How US Deals With Break Fees A characteristic feature of the shareholding in US is its dispersed nature. Due to this feature, the board and management act as agents for the shareholders and are empowered to take various decisions, which determine the outcome of an offer. They have to make these decisions in light of the interest of the company and owe duties of care and loyalty to the shareholders. The Delaware jurisdiction has especially favoured the exercise of such powers by the management. Further regulation has also been developed in such a manner. The various standards of review in the US should not be readily applied in other jurisdictions because the nature shareholding in many jurisdictions is concentrated and not dispersed (e.g., the jurisdictions of India, Japan, Korea, Singapore, and China). These jurisdictions have adopted the rule of Board Neutrality, which finds its origin in the UK. The Board Neutrality Rule makes the shareholders and not the management of the primary decision-makers regarding an offer. The management has little to no leeway to enter into deal protection devices once an offer is made. Only with prior approval of the shareholders, can the management undertake any such act. A judgment rule, which is predicated on management’s freedom and power to take decisions without shareholder approval, would hardly make sense in these jurisdictions. How the UK and Most Asian Countries deal with Break Fee The UK in furtherance of its board neutrality rule provides for a de minimis limit to deal with break fees. A de minimis limit is the standard percentage value of transaction value against which all break fees are adjudged (1% in the case of UK). Apart from the UK, de minimis limits are now an accepted standard in jurisdictions of Australia, Hong Kong, etc. However, de minimis limits have multiple issues. Firstly, they favor rigidity and certainty over flexibility. Even though certainty leads to a more predictable market, flexibility allows managers to structure the fee to custom-fit the specific conditions their companies face. Secondly, given the dual nature of break fees as inductive as well as anti-competitive, the quantitative standard of a de minimis limit would not be ideal to distinguish and adjudge the permissibility of such arrangement. These concerns have been raised in multiple jurisdictions. The Australian Business Community has argued that a target might have to go beyond a de minimis limit considering the various specific circumstances an enterprise might face. The reason for not using a de minimis limit in the US was held to be along the same lines. The Delaware Chancery Court in In re IXC Communications, Inc. Shareholders Litigation held that a break fee arrangement must be judged by evaluation of the entire agreement and the terms of negotiation that brought it about. Regulation in Asia Importing de minimis limits to Asia would be contrary to the purpose for which they were introduced in the UK. The de minimis limit is part of the larger