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Facebook Giphy merger stays on ice after failed challenge to UK competition regulator

Problem was of social network's own making, says unimpressed judge

Facebook has failed to neutralise an order from Britain's competition regulator freezing its buyout of Giphy after having "sat on its hands" and failed to answer questions, the Court of Appeal has found.

Judge Sir Geoffrey Vos said "the central problem in this case was entirely of Facebook's own making" as he dismissed its attempt to overturn an Initial Enforcement Order (IEO) made by Britain's Competition and Markets Authority (CMA) last year.

That IEO blocked the Mark Zuckerberg-owned social network from finishing off its $400m buyout of Giphy, a supplier of web tracking beacons cunningly disguised as funny little animated images used to spice up online chats and comment sections.

The CMA thought the Giphy buyout could negatively affect competition in the market for the supply of web tracking beacons/funny GIFs to multinational social networking websites, and therefore wanted to pause the deal before Giphy was fully absorbed into the Zuckerborg empire. Among other things, the CMA can order a merger to be halted and reversed – and IEOs can be issued to stop overzealous companies from taking "pre-emptive action" intended to make regulatory diktats pointless or unenforceable.

Explaining this, the Court of Appeal said:

The acquirer may quickly take steps to consolidate its investment by removing the parts of its own business that compete with the target. If the CMA were prevented from making orders that impinged on the acquirer's existing business, divestiture at the end of a relatively lengthy process would, by itself, be incapable of either restoring the status quo at the time of the merger or protecting competition in the relevant market.

Facebook appealed against the CMA's order to the Competition Appeal Tribunal. That body said the CMA had done nothing legally wrong and upheld the IEO. Unsatisfied, Facebook went a step up the legal ladder to the Court of Appeal, complaining that the IEO was "inappropriate and impractical" because it applied worldwide and that the CMA had ignored Facebook's proposals to carve exemptions into the order for its non-UK operations.

Why wouldn't the CMA accept carve-outs in the IEO so Facebook could carry on without having to worry about the worldwide compliance burden imposed by it? asked the social networking site's lawyers.

Vos, chancellor of the High Court and one of Britain's most senior judges, responded: "Facebook's submissions are based, in my judgment, on a number of misapprehensions… As the Tribunal found, Facebook did not properly engage with the CMA. It put in its Carve-Out Requests and then sat on its hands, refusing to answer the CMA's questions."

By not answering the CMA's questions about the merger, Facebook left the agency backed into a corner, said the court. The point of the CMA pausing the merger was to ask questions about it: if those questions went unanswered then the case for keeping the merger on ice became stronger.

"Ultimately, in my judgment, the flaw in Facebook's argument is that it is founded on the proposition that the CMA has no power to make orders affecting the acquirer's business, beyond ordering divestiture of the target corporation. That is too narrow a view of the legislation," said Vos, with whom Sir Julian Flaux and Lord Justice Phillips agreed.

The Giphy merger remains on hold until the CMA finishes its prognostications. The Court of Appeal's 17-page judgment can be read on the judiciary website. ®

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