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Microsoft Corp. and Time Warner Inc. have found a winning formula for getting the EU to drop its probe of a deal by bringing in a last-minute third partner, but competition experts warned the strategy may not always work. On Tuesday, Microsoft and Time Warner announced the completion of a deal to bring in French consumer electronics vendor Thomson SA as a third partner in digital rights manager ContentGuard Inc. Shortly after, the European Commission said it has dropped the probe because the case was outside its regulator’s jurisdiction. The companies said the deal will give each of the buyers a 33 percent voting stake in ContentGuard, a Bethesda, Md.-based anti-piracy software maker, and two board seats. Although the companies announced the revised deal in November, the Commission had been obliged to continue its in-depth probe into the original tie-up as notified in July 2004 until the firms withdrew notification of the first deal. Problem was, the firms could not do that until the new deal was completed — which has now happened with less than three weeks to go in the Commission’s probe. “This is one of those unusual situations in which the need of the regulator and need of the business kind of aligned,” said a Microsoft spokesman, who declined to specify why the deal took this long to close. Although the companies insist that they brought in Thomson purely for business reasons, there is no denying that the change removes them from the Commission’s jurisdiction because the new ownership structure is made up of three equal partners. In a statement, the Commission said that under the revised deal, Microsoft will no longer have the ability to impose a licensing policy on ContentGuard that would put its rivals in the fledgling digital rights management market at a competitive disadvantage. Although there have been cases where firms have abandoned mergers amid the threat of the EU blocking a deal, such as when Time Warner and EMI Corp. called off their $20 billion in October 2000, this is believed to be the first time a notification has been withdrawn during a phase-two investigation because of a change in the deal mix. Jean Paul Poitras, a Brussels-based partner with Latham & Watkins, said that restructuring a deal “is always an option” in cases where there are concerns that the target business will be run in an anti-competitive way. “It is a very legitimate way to address Commission concerns in a case,” he said, cautioning that if the revised transaction is simply a way to remove the case from the regulators’ jurisdiction, “this can be a very risky strategy.” He suspects the reconfigured deal was a “legitimate” way to address concerns rather than an attempt to avoid scrutiny. Jane Golding, a partner at Brussels law firm Crosby Renouf, also does not think the Microsoft case will open a Pandora’s box of companies changing partners in the middle of a Commission examination. “If it makes commercial sense, then it’s a solution. That won’t be the case in every merger or joint venture,” she said. The Commission said that while it will not take any further action now that notification has been withdrawn, it will keep a close eye on the digital rights management sector. “It’s not because something falls outside the scope of the merger regulation that it falls outside the scope of the competition rules,” said Commission spokesman Jonathan Todd. “We are continuing to monitor very closely developments as regards DRM and it’s not a complete coincidence we mention the fact that we have the option to take action under antitrust rules.” One legal expert also noted that the companies may not be off the hook yet for notifying the original deal only after it was completed — and face a potential fine. Although that deal fell below the EU’s threshold for reviewing joint ventures and mergers, in joint venture/joint control cases regulators also look at revenue figures of the parent companies in determining the threshold. “This is something that neither Time Warner nor Microsoft spotted,” the expert said. “There are all sorts of morals in this case, including the need for corporates to be very careful in joint control situations.” Regulators opened an in-depth review into the original tie-up in August 2004 amid concerns that it would strengthen Microsoft’s already leading position in digital rights management, used to prevent the illegal copying and distribution of movies, music and sensitive corporate documents over the Internet and mobile networks. The Commission’s investigation focused on Time Warner and Microsoft’s joint acquisition of ContentGuard from Xerox Corp. in April 2004. Terms of that deal were never disclosed, but Xerox has reported an $83 million after-tax gain from the sale of most of its stake. Xerox spun off ContentGuard in 2000. In December, regulators then stopped the clock for two months to gather more information from the companies. Washington did not require an antitrust review as the deal did not cross the jurisdictional threshold. For legal counsel before the EU, Microsoft turned to partner Christian Ahlborn and associate Helen Crossley at Linklaters. Time Warner turned to a team at Herbert Smith led by partner Stephen Kinsella. And Thomson turned to partner Christopher Norall at Morrison & Foerster. Xerox was represented by a team at Howrey Simon Arnold & White led by partner Trevor Soames. Copyright �2005 TDD, LLC. All rights reserved.

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