Court confirms long reach of UK merger control jurisdiction
27 May 2021
Background to the case
In order for the CMA to have jurisdiction in respect of a transaction, either the "turnover test" or the "share of supply test" must be met. The turnover test is straightforward to apply and similar to financial thresholds used in many other jurisdictions: the test is met if the target has UK turnover exceeding £70m (or £1m in certain sensitive sectors where lower threshold apply to facilitate intervention on national security grounds). The share of supply test presents greater difficulties: it requires that the transaction results in the merged entity having a share of the supply or acquisition of goods or services "of any description" in the United Kingdom of at least 25% (or further increases its share above this level). This requires there to be an increment resulting from the transaction – i.e. the parties must both supply or acquire goods or services of the relevant description (again, subject to an exception for certain sensitive sectors). The application of this test was at the heart of the Sabre/Farelogix appeal.
The CMA’s approach to the share of supply test
It is uncontroversial that the legislation gives the CMA significant leeway in how it applies the share of supply test: the CMA is explicitly permitted to use such criteria as it "considers appropriate in the circumstances of the case" to decide whether goods or services are of the same description (rather than having to identify a relevant market based on economic principles of the kind used to calculate market shares for the substantive assessment of mergers). Moreover, in determining whether the 25% threshold is met, the CMA can pick whatever measurement criterion it deems appropriate: the CMA "shall apply such criterion (whether value, cost, price, quantity, capacity, number of workers employed or some other criterion, of whatever nature), or such combination of criteria, as the [CMA] considers appropriate". However, recent cases have seen the CMA taking what has been perceived as a particularly flexible approach. For example, in a merger in the biotechnology sector (Roche/Spark), the CMA asserted jurisdiction even though the target had no existing supply in the UK, by identifying a pipeline treatment which the CMA found would compete with a treatment already commercialised by Roche and determining that the 25% threshold was met based on number of UK employees engaged in activities in the relevant area, or alternatively their share of procurement of relevant patents. As that transaction was cleared on substance, there was no appeal to test the merits of this approach.
How the CMA asserted jurisdiction in Sabre/Farelogix
By contrast, in Sabre/Farelogix, the CMA not only took an assertive approach to jurisdiction but prohibited the transaction outright, creating the impetus for an important test case for the CMA's jurisdiction. The transaction involved a merger between two companies active in the provision of IT solutions to airlines which helped them to sell flight tickets and add-ons (e.g. extra legroom) via travel agents. The acquirer, Sabre, supplied services to UK airlines, but as the target, Farelogix, had no direct UK airline customers and no UK turnover, the turnover test was not met and, at first sight, it appeared questionable how the share of supply test could be met, given the need for an overlap in the supply of goods or services in the UK. However, the CMA found that Farelogix could be deemed to have supply in the UK, as a result of an arrangement allowing British Airways to use certain services provided by Farelogix to American Airlines (with which British Airways had an interlining arrangement). The CMA concluded that the share of supply test was thus met based on a description of goods/services comprising "the supply of IT solutions to airlines for the purpose of airlines providing travel services information to travel agents to enable travel agents to make bookings". (This was arguably a less striking conclusion than that reached at Phase 1, where the CMA had found the share of supply test might be met on the basis that the parties accounted for more than 25% of supply to British Airways specifically (rather than airlines generally), noting that British Airways represented a substantial share of UK airline bookings and was the flag carrier airline of the UK.)
A further complication was the nature of any increment resulting from the transaction: while Sabre's existing share of supply was above 25% measured in terms of actual UK revenue, Farelogix had not actually received any revenue from British Airways. However, the CMA found it was sufficient that (i) Farelogix derived value from its arrangement with British Airways in that where American Airlines used Farelogix’s services to sell a ticket which incorporated an interline segment with British Airways, part of the fee paid by American Airlines to Farelogix was intended to cover the services provided by Farelogix in relation to the British Airways interline segment (even though these fees were paid by American Airlines, Farelogix had no recourse against British Airways, and the payments were minimal with only 62 such tickets sold in 2018); and (ii) Farelogix had a right to payments by British Airways even though these were not invoiced or enforced, and doing so would have been uneconomic. As such, the CMA concluded that the transaction would result in an increment to Sabre's existing share of supply above 25%, measured in terms of revenues received and receivable, even though the size of the increment could not be identified as a specific figure.
The grounds of appeal
On appeal to the CAT, Sabre raised four grounds of appeal which argued essentially that: (i) the CMA had erred by grouping two highly disparate services into a single "Relevant Description of Services" without any underlying rationale; (ii) the CMA had erred in finding that Farelogix supplied services "in the UK" by conflating supply to American Airlines with direct supply to British Airways; (iii) the CMA had erred in identifying an increment which was "both hypothetical and vanishingly small" and based on inconsistent methodologies; and (iv) that the CMA had erred by excluding supply by certain third parties from its calculations.
The CAT’s judgment
The CAT rejected each of these grounds, in a detailed and lengthy judgment. As an overarching point, the judgment confirms that the CMA's application of the share of supply test is a matter for its judgment and discretion and will be reviewed on standard public law principles (i.e. the CAT will ask whether the CMA erred in law or reached a decision which was irrational, rather than whether it reached the "right" decision). Turning to the specific grounds of appeal, the CAT: (i) endorsed the CMA's approach of grouping services together based on shared functionality; (ii) agreed that Farelogix could be regarded as supplying British Airways in the UK; (iii) held that the CMA's approach to identifying an increment was not irrational, and that the increment did not need to be framed in terms of a specific numerical value; and (iv) held that while it had some concerns regarding aspects of the CMA's reasoning for excluding certain third parties, the CMA's approach was not irrational.
What this means for parties to global transactions
Overall, the judgment provides strong confirmation of the broad and flexible nature of the CMA's jurisdiction to review mergers on the basis of the share of supply test, and it has unsurprisingly been welcomed by the CMA. In a press release, the CMA described it as an "important judgment" and noted that "the Tribunal confirmed that the application of the share of supply test is a matter of judgment for the CMA and it has a broad discretion in determining the criteria used." The judgment is likely to encourage the CMA to continue to take an assertive approach to jurisdiction wherever it suspects a transaction may harm competition and consumers in the UK. Parties to global transactions will therefore need to consider carefully whether their deals are at risk of being called in for review by the CMA, even where the nexus to the UK is limited.