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In what context can a stand-alone licensing agreement trigger the need for a merger control filing? – Company law and corporate law

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Merger control in Cyprus is currently regulated by the
Control of concentrations between undertakings, law 83(I) of 2014. As with any merger control regime, the objective is to identify and prevent the creation of a dominant position of a company in a market which would lead to a substantial lessening or a significant impediment to effective competition. Therefore, effective checks and balances are in place to review mergers and acquisitions. An interesting question that arises and has recently been in the spotlight in some jurisdictions, but not yet in Cyprus, is whether a transaction regarding a standalone licensing agreement can trigger the need for a merger control filing. In addition, whether a license agreement could affect the structure of the market and as such require the relevant regulatory authority to review the transaction before it is implemented. Therefore, the assessment of such a possibility can provide useful insight to the Cyprus Commission for the Protection of Competition and lay a solid foundation for even greater protection of competition in the Cypriot market.

A determining factor in determining whether a transaction will be notifiable is whether the transaction in question results in the acquisition of control of one business by another. According to
Section 6 of the Business Merger Control Act 2014“control is constituted by rights, contracts or any other means which, taken in isolation or in combination and taking into account the factual or legal considerations in question, confer the possibility of exercising decisive influence over a company”.
Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (2008/C95/01)stipulates that control can also be acquired on a contractual basis. To confer control, the contract must lead to similar control of the management and resources of the other enterprise as in the case of an acquisition of shares or assets. Besides, section 3(2) clarifies that control can also be constituted by a right to use the assets of a company, as is also demonstrated by the case of COM/M.2060 – Bosch/Rexrothwhen a contract combined with a commercial lease amounted to a takeover of the business.

A transaction relating to the transfer of a license of intangible assets such as know-how, trademarks, trademarks, patents may constitute a concentration with regard to certain criteria, when:

  1. the business being transferred has a market presence to which revenue can be clearly attributed, i.e. the licenses must transfer the revenue-generating activity;

  2. the license is exclusive; and

  3. it is for a long term duration.

When entering into an exclusive license agreement, which typically involves innovation-driven industries, such as technology or healthcare companies, the licensor grants the licensee the right to use the intellectual property rights (intangible assets) owned by the licensor. Examples of such agreements include granting the right to use a trademark, brand name, patented technology and/or the ability to manufacture and sell goods owned by the licensor. Traditionally, in the eyes of the law, the licensor remained the owner of the goods/products in question and, therefore, a distinction was drawn between transactions that were automatically notifiable, such as mergers and acquisitions, and licensing agreements. .

Nevertheless, applying the definition of control as set out in the relevant statutory provisions, and provided the above criteria are met, licensing as a stand-alone operation may result in the licensee license acquires sufficient control and full exploitation of the intangibles/products in question, thereby triggering the requirement for a merger filing. An additional level of complexity that must be assessed regarding the acquisition of control is whether the licensing agreement is exclusive. To explain further, in cases where the licensee has acquired by the agreement the right to “make, use and sell”, but the licensor retained certain limited manufacturing rights, even if it was for the exclusive use of the licensee, such an agreement was not declarable. Even so, and as the competent authority in the United States (Federal Trade Commission) has recently rightly pointed out, if the licensor has retained limited manufacturing rights, it cannot automatically be concluded that true exclusivity is defeated, and if most of the commercially significant rights have actually been transferred to the licensee, these agreements may still be notifiable.

Crucially, a license agreement will attract the attention of competition regulators when it can lead to a structural change in the market, as the case of
Microsoft/Yahoo! Search Business Case No. COMP/M.5727which involved the acquisition of an exclusive 10-year license to Yahoo’s core search technologies. The Commission found that the agreements involved a concentration on the grounds that (i) the transferred assets constitute all or part of an undertaking, i.e. an undertaking present on the market to which a turnover can be allocated and (ii) there is a change of control over these assets that occurs on a lasting basis.

Therefore, the duration of a license agreement is of great importance, which means that very long-term license agreements are more likely to permanently influence the structure of the market. Although it is difficult to determine whether an agreement is considered long-term, in cases COMP/M.3858 and COMP/M.2632, management agreements with a duration of 10 to 15 years and a management contract duration of 8 years were respectively considered by the court as long duration. It is important to note that while these cases provide useful insight into when an agreement is long-lived, in an age of highly innovative and rapidly changing markets, technology or healthcare agreements with longer durations Shorter runs could lead to a structural change in the market, particularly if they are healthcare technology products/assets, and should therefore be carefully considered whether these could trigger the need for a merger filing.

Similarly, license agreements that are structured for the short term, but with the possibility of renewal, can have lasting effects on the market and should therefore be notified. Importantly, this view is consistent with the new German merger control thresholds on licensing agreements.

Finally, what has also been widely debated as an essential criterion for triggering the deposit requirement is the condition that the acquirer, by obtaining the license, has entered into an existing market position of the seller. Simply put, and as the Federal Supreme Court of Germany decided in National Geographic Ithe granting of a license did not constitute a concentration because the licensors had not yet marketed the German-language magazine and, therefore, there was no existing market position on which the licensee could implant.

Nevertheless, various jurisdictions, including Germany and Austria, have moved away from this position and recognized that, particularly in a research and development context, a transaction must always be notified if the acquirer gains a future position on the market.

All in all, the current reliance on sophisticated but complex transactions leads to a growing need for competent competition authorities to assess and ensure that the protection of competition is preserved. Indeed, stand-alone licensing agreements, subject in Cyprus to the criteria set out above, may constitute a concentration which must be notified in order to be duly examined. Therefore, a balance must be struck between ensuring that the market is properly protected and that managing the merger review process does not add significant layers of complexity and expense to deal-making.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.