UK CMA Provides First Insights into the Application of UK Merger Control Rules to AI Partnerships

The UK Competition & Markets Authority (“CMA”) has published the first in a series of anticipated merger control decisions in the artificial intelligence (“AI”) space, providing insight on its approach to the application of UK merger control rules to AI partnerships. On 17 May 2024, the CMA published a decision announcing that a partnership between Microsoft and Mistral AI ("Mistral”), intended to assist Mistral in developing and deploying AI foundation models (“FMs”), did not qualify for investigation under the UK merger control regime, as the arrangements did not give Microsoft the ability to influence Mistral’s commercial policy. This decision was taken against the backdrop of heightened focus on such partnerships following the CMA’s recent update report on AI foundation models, in which it stated an intent to use its existing merger control powers to investigate such arrangements as part of its current policy of keeping a close eye on the evolution of competition in AI-related sectors.

Background

Like many global enforcers, the CMA has taken a keen interest in the development of competition in AI‑related sectors. It has recently published a number of reports setting out its views on the risks to competition in the AI space, particularly in regards to the role of major tech platforms. In particular, in its recent AI Foundation Models Technical Update Report (the “Update Report”), the CMA observed the prevalence of commercial partnerships between incumbent firms in digital markets and promising model developers and pledged to use its existing merger control powers to investigate these further, both to investigate potentially problematic partnerships, but also to provide guidance to industry players on when such arrangements could fall within the merger control rules.

When Do the UK Merger Control Rules Apply to Commercial Partnerships?

The UK’s merger control regime is highly flexible, giving the CMA the ability to assert jurisdiction over a number of transaction types, including arrangements that do not look like a traditional “merger”. The CMA may find “material influence” where there is evidence that an arrangement could allow one party to acquire the ability “materially” to influence policy relevant to the commercial behaviour of another party in the marketplace. While material influence is typically established based on the acquisition of shares and/or strategic veto rights, it is also possible to meet this test through other arrangements, including through entering into a commercial agreement with the relevant undertaking. Although likely to contribute to a finding of material influence, there is no need for one party to acquire equity in the other: the key question is whether the arrangement in question gives that undertaking some means to influence the key commercial decision making of the other - e.g., through creating a significant degree of economic dependence on one party by the other.

Microsoft/Mistral AI

The arrangements in this case concerned a multi-year partnership intended to enable Mistral to develop and deploy FMs, featuring the provision of access to compute to Mistral through Microsoft’s Azure infrastructure, an agreement to distribute Mistral’s FMs on Microsoft’s Azure platform, as well as a convertible loan and possible future collaboration on R&D for purpose-specific models for select customers.

The CMA examined whether any of these arrangements gave rise to an ability to influence Mistral’s commercial policy to a significant degree and concluded that this was not the case. In particular, the CMA found:

• Microsoft’s potential shareholding on exercise of the convertible loan (at less than 1%) would be immaterial, and it would not have any special voting or veto rights over relevant policy or strategic matters, or a board seat (or other means to influence the board);
• the commercial arrangements did not create any commercial dependency on Microsoft, Mistral’s compute supplier. In particular, there were no exclusivity/ “lock-in” type arrangements or other consent rights which would restrict Mistral’s commercial freedom or ability to engage with other Cloud Service Providers, and Mistral’s FMs would not be exclusively distributed on Microsoft’s Azure platform; and
• the “collaboration and development opportunities” in play did not create any ability for Microsoft to influence Mistral in the absence of other factors.

Implications for Partnerships in the AI Space

In the Update Report, the CMA highlighted as a key risk to the development of competition in FM‑related sectors that commercial partnerships involving key incumbent tech players could “reinforce or extend” existing positions of market power through the AI value chain. In this context, the CMA promised to step up its use of merger control rules to examine these arrangements, sending a warning shot in relation to structures that “may have been structured to seek to avoid” merger control rules. The CMA has also promised to provide more guidance to the market on the nature of partnerships which will be caught. This decision is the first of what is likely to be a series of precedents clarifying the extent of the CMA’s jurisdiction.

In this context, we expect both mergers and commercial agreements touching the AI space to continue to be closely monitored. The CMA is also currently investigating a number of other AI-related partnerships and we expect further guidance in the weeks and months to come as these investigations conclude.

Key Takeaways

• Parties planning to enter into commercial arrangements of any kind in AI-related sectors should undertake a thorough merger control risk assessment – particularly if one party has a high profile in the digital markets space.
• Parties may consider submitting an informal briefing paper to the CMA before completion in order to get clarity on the risk of intervention.
• Strong antitrust compliance principles should be borne in mind when structuring any commercial arrangements touching the AI value chain, including considering fencing of commercially sensitive information where appropriate, as well as analysis of any restrictive provisions such as exclusivity.
• Transaction documentation should take account of the risk of CMA intervention where relevant and allocate risk between the Parties accordingly.