The Bundeskartellamt concluded that Microsoft's hiring of almost all of Inflection AI's employees, along with licence agreements, constitutes a ‘concentration’ under German competition law, although not subject to control due to notification thresholds. This case reflects the challenges of digital transactions, such as the hiring of strategic teams, which can influence competition and be subject to merger control, raising questions about the willingness of employees and the distinction between exclusionary strategies (‘killer acquisitions’) and talent acquisitions (‘acqui-hires’).
On 29 November 2024, the Bundeskartellamt (German competition authority, BKartA) announced the outcome of its investigation into the hiring of employees of Inflection AI, Inc. (Inflection) by Microsoft Corporation (Microsoft).
The BKartA concluded that the hiring of almost all of Inflection’s employees by Microsoft, together with the conclusion of licensing agreements giving the latter access to the Inflection’s intellectual property rights, constituted a "concentration" within the meaning of the German merger control regime. It was not subject to such control simply because it did not meet the notification thresholds set out therein.
The Microsoft/Inflection case, which has already given rise to concurring analyses by the European Commission and the United Kingdom Competition & Markets Authority (CMA), illustrates the challenges of the new M&A realities in the digital sector. Some of these challenges relate to the hiring of highly skilled and strategic employees of a target company and the fact that such a transaction may be subject to merger control if it appears to be central to the development of an activity in the relevant market.
It is therefore necessary for companies to assess whether the hiring of employees from other companies falls within the scope of recent precedents and whether the notification thresholds of the applicable merger control regimes may be met. If this is the case, it may be necessary to consider whether such hires can be implemented before they have been approved by the relevant competition authorities, as otherwise they may breach the relevant notification and suspension obligations and companies may be subject to very high fines (in principle, up to 10% of the global annual consolidated turnover of the group to which the acquiring company belongs).
The Microsoft/Inflection transaction
Microsoft is a global technology company, including in the field of Artificial Intelligence, where it has a partnership with OpenAI. Inflection develops generative Artificial Intelligence (AI) models and is also active in the development and marketing of chatbots and other conversational tools for consumers worldwide.
In March 2024, Microsoft announced the hiring of several Inflection employees, including two of its co-founders. In addition to hiring this group of employees with significant know-how, Microsoft also entered into a series of side agreements relating to Inflection’s intellectual property rights.
Taking into account the material and functional concept of an undertaking for competition law purposes, the BKartA concluded that the transfer of “assets” necessary to acquire the capacity to develop an activity could fall within the concept of a “concentration”.
The approach of the European competition authorities
The BKartA’s conclusions of November 2024 are in line with the CMA’s decision of 4 September 2024, also in the sense that the notion of an undertaking may correspond to a group of employees and their know-how, if this makes it possible to pursue a particular commercial activity. This could often be the case in digital markets, given the importance of know-how and specialisation in the field of AI, in particular in the development of general-purpose AI models and the provision of downstream AI applications (such as chatbots).
Previously, the European Commission had also concluded that the Microsoft/Inflection transaction fell within the definition of a concentration under the EC Merger Regulation (EUMR). However, in view of the fact that the notification thresholds set out in the EUMR were not met, the Commission invited Member States to submit a request for referral under and for the purposes of Article 22 of the EUMR. However, following the judgment of the Court of Justice of 3 September in the Illumina v Commission,1 the Member States decided to withdraw their referral requests, thus preventing further analysis.
Competition and labor markets: an increasingly important link, including in merger control
As a highly skilled workforce is one of the essential inputs in various digital markets, the hiring of strategic employees with relevant know-how and experience is crucial to compete in the market.
The importance of competition, including in labour markets, and the recent focus on restrictive practices that hinder labour mobility and limit competition between companies as employers – i.e. as buyers of labour – is moving towards the possibility that some behaviours and transactions may fall under both the prohibition of restrictive practices and merger control.
Among the new challenges for the application of the merger control regime are strategies to recruit entire teams or strategic employees from emerging or potentially disruptive companies, usually carried out by technology giants, which could be associated with an abuse of a dominant position or an act of unfair competition. In particular, and in the light of recent developments, it has been suggested that certain transactions of this type may be based on a strategy of excluding nascent companies from the market, if the aim is to eliminate the (potentially) competing product or service (killer acquisitions).
In any event, and in view of the case at hand, such transactions could also constitute a concentration. The de facto change of control from the emerging company (acquired company, through the hiring of key personnel) to the contracting company (acquirer) makes it possible to subject the transaction to the national and/or European merger control regime.
Importance for the future application of the European merger control regime
The conclusions of the European Commission, the CMA and now the BKartA in the Microsoft/Inflection case raise questions and doubts that are relevant for understanding the scope of the merger control regime, including the conditions under which the hiring of personnel could constitute a concentration.
From the case in question and other recent developments in competition law, it appears that it is necessary to limit the scope to (i) strategic employees who are truly crucial for the development of an activity in the relevant markets, and/or (ii) the contract of (almost) all of another company’s teams. In Microsoft’s case, the combination of hiring and the signing of parallel intellectual property agreements that allow the teams to continue developing the products seems to be a key factor that cannot be overlooked.
For the future, there are doubts about the role to be given to professional freedom and the will of the employees concerned. If a contract is found to be subject to merger control, what will be the impact of the employees’ willingness to be hired by the buyer? Will their employment be dependent on a clearance decision by the competent competition authority?
There are also other issues, such as the distinction between killer-acquisitions and acqui-hires, as well as the discussion about a possible reform of the national and European merger control regimes to ensure that this type of transaction is covered.
In this respect, in addition to the German-Austrian model, which is based on the value of the transaction as a notification threshold, other Member States have introduced call-in powers, which allow national competition authorities, under certain conditions, to examine a concentration ex post. The doubts and reservations that still exist justify close monitoring of decision-making practice.
