10 key trends in transition M&A

Getting M&A over the antitrust hurdle primarily requires demonstrating positive externalities (a climate benefit) that offsets harms to competition.

Anticipating and navigating an ever more complex antitrust and foreign investment landscape is crucial to securing regulatory clearance for transformational transactions.

The interface between the green agenda and increasing regulation of M&A necessitates a detailed understanding of existing regimes, regulators’ attitudes and enforcement priorities, and how climate-related initiatives are perceived.

In the antitrust context, a number of competition authorities (including in the EU, the UK, the Netherlands, Australia, Japan, New Zealand and Singapore) have published tailored guidance or have adopted decisions that are helping businesses to pursue their sustainability goals while staying on the right side of antitrust laws when cooperating with competitors. (See our analysis of the EU, the UK, Japan and Singapore.)

Such guidance presages that some competition authorities may consider tangible environmental-related benefits in individual cases to offset harms to competition – though such balancing tests often place a significant evidentiary burden on parties making the environmental claim.

There is less of an opening in the US, where several states have raised antitrust concerns with sustainability initiatives, and both Federal Trade Commission Chair Lina Khan and DOJ Assistant Attorney General Jonathan Kanter have stated that collusive activities even within the ESG context would not be exempted from the application of the antitrust laws.9

As such, even with openings in certain jurisdictions, antitrust rules can be expected to frustrate some efforts to consolidate, even if the latter are grounded in a climate- or sustainability-based rationale, says Philip Morgan, Freshfields Partner and head of the firm’s energy and natural resources practice in Asia.

'If engaging in M&A to further environmental aims, the difficulty in getting over the antitrust hurdle primarily lies in demonstrating that positive externalities – in this case, a climate benefit – offset harms to competition.

Such ‘efficiency defences’ are hard to concretise, even more so in the climate context. Unlike other economic benefits, climate and other types of sustainability efficiencies may extend to wider society, may be achieved well in the future, and are difficult to quantify, as opposed to being limited to customers or consumers in the markets affected by the transaction.

It remains to be seen whether and to what extent competition authorities will be willing to consider different kinds of benefits beyond the affected markets involved in a transaction. (We recently conducted a debate on antitrust and sustainability.)

There have been (isolated) openings, however. In 2023, for example, the Australian ACCC authorised the Brookfield/Origin Energy merger on the basis that the claimed environmental benefits would outweigh the identified competition concerns, despite long-standing concerns with vertical integration in the energy sector.

The Australian ACCC determined that the transaction would benefit Origin’s customers and Australians more broadly by accelerating renewable generation and storage build-out and reducing greenhouse gas emissions in Australia, which was a material public benefit.

The Australian ACCC still imposed remedies to mitigate the merger’s perceived detriment to competition.

This important decision could serve as inspiration for other competition authorities to take account of sustainability benefits in future merger reviews. (The antitrust and sustainability section of our Antitrust in 2024: 10 Key Themes report has more information on this.)

At a more substantive level, competition authorities have recognised that sustainability considerations can form an important parameter of competition, potentially complicating climate or sustainability-driven M&A further. (See, for instance, the European Commission’s revised Market Definition Notice.) For example, consumer preferences for ‘green’ products can lead to potentially narrower market definitions.

In a proposed merger of two Korean shipbuilders, the European Commission considered innovative vessel technologies, including those enabling lower fuel consumption, as a factor in product differentiation.

Furthermore, transactions’ potential restrictive effects on future sustainability-driven innovation have become of particular interest to competition authorities, leading to remedies.

In the GE/Alstom merger, the European Commission raised a concern over reduced sustainability innovation, fearing that certain Alstom gas turbine models would not be commercialised after the proposed merger. To address this concern, the parties offered to divest the relevant gas turbine business and committed to ongoing technology development.

Likewise, in the Norsk Hydro/Alumetal merger, the European Commission conducted an in-depth investigation to ensure that the transaction would ‘not have a negative impact on the competitive landscape for certain aluminium markets and in particular green aluminium products for European automotive customers.’

Beyond competition, rising geopolitical tensions and the increasing focus on energy supply security are driving governments worldwide to tighten their grip on foreign investments in the energy sector.

Notably, the UK's National Security and Investment Act designates energy as one of the 17 ‘sensitive areas’. (The Act specifies transactions involving upstream oil and gas, downstream oil and gas and electricity.)

Similarly, the US identifies clean energy technology and climate adaptation technology as ‘fundamental’ to national security and directs the Committee on Foreign Investment in the US to examine relevant transactions’ effect on supply chain resilience and security.

It is difficult to see how these objectives would be set aside even in the event of a clearly net-positive acquisition by a buyer who raises national or supply security concerns, says Philip Morgan. 'At the same time, with a global subsidy race unfolding, an overarching concern in the energy M&A scene is whether foreign subsidies could give rise to undue competitive advantages in domestic markets.'

To address this issue, the EU has introduced the Foreign Subsidies Regulation (FSR), which establishes an additional mandatory and suspensory obligation on parties meeting certain thresholds to notify financial contributions received from non-EU states.

The US has also proposed amendments to the Hart-Scott-Rodino notification form, requiring parties to identify subsidies received from a ‘foreign entity or government of concern’.

In the UK, subsidies in sensitive sectors, such as production of electricity, would need to be referred to authorities for evaluation if applicable thresholds are exceeded. (See statutory guidance for the UK Subsidy Control Regime.)

In short, prior multi-dimensional risk assessment is important in navigating the increasingly intricate web of parallel regulatory regimes.

From a deal execution perspective, it is crucial to allow for sufficient time for potentially lengthy reviews, to ensure that deal and other documents fully accord with the stated deal rationale – including its environmental benefits – and that such benefits are clearly articulated and quantified.

From a national security perspective, knowing the sensitivities and priorities of regulators is important to address, and possibly even pre-empt concerns, for example from a supply stability standpoint.

Finally, keeping an overview of various financing streams and how these are utilised will be important to counter any claims of unfair or distortive subsidies.