Antitrust and Brexit – where do we stand?
Partner Co-Head Antitrust
Partner – Brussels/London
18 February 2020
As an EU Member State, however, where a deal met EU merger control thresholds the CMA – in most cases – lost its jurisdiction to apply the UK merger control rules. The same was true where the European Commission (EC) investigated potentially anti-competitive conduct which impacted trade between EU Member States.
Now, more than three years after the EU Referendum, the UK has left the EU. In this article we explore what Brexit means for merger control, antitrust investigations and enforcement and state aid, and look at how this is likely to impact business. In short, during the transition period (ie until 31 December 2020 if not extended) there will be no change – the Withdrawal Agreement provides that the UK will be treated as a Member State. After the transition period, it will be a different story: there will be parallel regimes, with the CMA having the ability to review transactions and behaviour alongside the EC.
Merger control: increased burden and uncertainty to come?
During the transition period it will be business as usual for the CMA’s merger division. Where a deal meets the UK merger control thresholds, the CMA can review it for its impact on competition in the UK. However, if a transaction falls within the scope of the EU merger rules, the EC has jurisdiction and the CMA loses the ability to look at its impact on competition (but may still review on limited public interest grounds – including national security). This is known as the ‘one-stop-shop’ principle. The referrals mechanism – under which requests can be made for transactions to be referred from the CMA to the EC and vice versa – will also continue to apply.
After the end of the transition period, the one-stop-shop principle will fall away, and the EU merger rules will no longer apply in the UK. Merging parties whose deals meet the thresholds in both the EU and the UK will be subject to both regimes. A transaction could therefore be looked at by both the EC and the CMA.
For the CMA, this means additional workload. It has predicted that it will review 50% more mergers each year – a significant increase (it reviewed 56 deals in FY18/19). The CMA has been on a recruitment drive in preparation.
For merging parties, having to consider an additional merger filing will likely increase their administrative burden. It may also give rise to greater uncertainty: there will be another review process to take into account, and this gives rise to the risk that the CMA and the EC may reach different outcomes in relation to the same deal. This risk may be low – the CMA has stated that it “will endeavour to coordinate merger reviews relating to the same or related cases with the…Commission (and other competition authorities)” – but it cannot be ruled out, in particular where the relevant markets are national or regional/local.
Parties should also bear in mind that the CMA is adopting an increasingly tough stance. In 2019 it was the standout merger control enforcer, blocking three deals and causing a further five to be abandoned. It has also significantly increased the proportion of transactions sent for an in-depth (phase 2) review, and ramped up enforcement of procedural merger rules. A parallel UK and EC merger review for a strategic deal raising antitrust concerns, therefore, is unlikely to be straightforward.
What about EC merger reviews which are ongoing at the end of the transition period?
Under the terms of the Withdrawal Agreement, the EC has jurisdiction over any transaction which is formally notified to it (or in relation to which it has accepted a referral request) before the end of the transition period. It retains this jurisdiction until it reaches a final decision – even if this is after the end of 2020.
The CMA has recently published guidance which gives details of how it will act towards the end of the transition period. Parties are encouraged to approach the CMA to discuss whether it might be useful to begin pre-notification discussions in the UK. This is particularly relevant for anticipated deals (whether or not already in pre-notification discussions at EUlevel) where there is a risk that they may not be formally notified to the EC before the end of the transition period. Doing this, says the CMA, is “likely to help with the expedient investigation of the case” – in other words, it enables the CMA (and the parties) to get a head-start before the CMA’s formal power to review the deal kicks in.
Given that the UK merger regime is voluntary, however, merging parties will be under no obligation to notify their deal to the CMA after the end of the transition period. But not notifying carries a risk – the CMA could subsequently investigate and either prohibit the deal or require remedies to resolve any antitrust concerns it identifies. In fact, the CMA has noted that from early autumn 2020 it will actively monitor cases which are in pre-notification with the EC, and may approach merging parties or conduct its own preliminary analysis. It is therefore unlikely that any mergers notified in Brussels with a significant impact on competition in the UK will fly under the CMA’s radar. The safest course of action, therefore, may well be to proactively start discussions with the CMA well before the end of 2020.
Antitrust and cartels: appetite for more enforcement?
Like merger control, antitrust investigations and enforcement will continue as normal during the transition period. The EC has the power to enforce the EU rules prohibiting anti-competitive agreements and abuse of dominance in the UK. And where the EC has formally initiated a probe, the CMA is not able to investigate. The EC will retain jurisdiction over proceedings it has formally initiated during the transition period until it concludes the investigation, even if this is after the end of 2020.
Post-transition period the EC will no longer be able to apply the EU antitrust rules in the UK. This means suspected infringement with effects in both the UK and EU can be investigated by the CMA (and the sector regulators) in parallel with the EC.
Clearly this could lead to the CMA bringing more enforcement action. It opens up the possibility for it to investigate large cross-border cartels with some UK nexus or, for example, the unilateral conduct of businesses suspected of being ‘dominant’ in their markets. And this fits with the CMA’s desire to, for example, increase its scrutiny of conduct in digital markets. But it will all depend on resource. This type of enforcement action is discretionary, unlike the CMA’s review of mergers, which it has a statutory duty to undertake. And while the CMA recognises the “need to be ready for new and significant work from January 2021” it will be very interesting to see whether there is any immediate shift in enforcement activity, or whether any uptick takes a little more time.
Benefit of block exemptions will remain
Under the EU rules, there are a set of regulations which exempt certain types of conduct, if criteria are satisfied, from the prohibition on anti-competitive agreements (the so-called ‘Block Exemption Regulations’). They cover, for example, vertical agreements, research and development and technology transfer. These Regulations will continue to apply during the transition period and, after the end of that period, will be adopted into UK law. This is vital for the businesses which rely on them. Existing agreements will continue to benefit, and new arrangements can be structured to fall within the scope of the relevant safe harbour. And while there is a chance that the Government will seek to amend the scope or application of the Regulations in the future, as yet there have been no indications that this is high on the agenda.
Damages actions: little difference in practice?
EC decisions made before the end of the transition period will continue to have binding effect for the purposes of private damages actions. This is the case even for claims lodged after the end of 2020 (provided they are brought within the relevant limitation periods). But EC decisions relating to investigations initiated and concluded after the transition period will no longer be binding. Claimants will therefore need to prove the infringement from scratch, using the infringement decision as evidence.
This sounds like a major change. In practice, however, we may see little difference. On balance, our view is that the UK courts are likely to accept an EC infringement decision as discharging the evidential burden of proof to establish an infringement (even if that is no longer automatic). CMA infringement decisions will also continue to be binding. For these reasons we expect that the UK courts will continue to be a forum of choice for potential claimants, especially with the option of class actions on the table.
State aid: a whole new regime?
The position vis-à-vis state aid is less certain. During the transition period the status quo is preserved: only the EC has jurisdiction to review state aid applications from the UK. In fact, under the Withdrawal Agreement the EC retains the ability to investigate aid granted by the UK before the end of the transition period for up to four years after the period ends.
Post-transition period, the UK Government intends to establish a new UK state aid regime.
However, there are a lot of details still to be ironed out – the Government published a draft statutory instrument (SI) in early 2019 setting out the bones of the new regime. In brief, the SI provides for the EU state aid rules to be adopted wholesale into UK law with the CMA likely taking on the job of enforcement authority. The CMA would have powers similar to the EC in terms of investigation and enforcement, and the process would mirror the EU regime. But, to date, the SI and related CMA guidance remain in draft, and we have had no further update on their likely adoption or any potential amendments.
What is clear is that the post-Brexit state aid position is likely to play a key part in negotiations between the EU and the UK over the future trade arrangements. The EU wants the UK to continue to be bound by EU state aid rules – the EC in particular has set out that “[t]he envisaged partnership should ensure the application of Union State aid rules to and in the United Kingdom”. Prime Minister Boris Johnson, on the other hand, has stated that “[t]here is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies…any more than the EU should be obliged to accept UK rules” but that the UK “will maintain the highest standards in these areas”. And to add an additional layer of complexity, in the event that no trade agreement is reached by the end of the transition period, the Northern Ireland protocol to the Withdrawal Agreement binds the UK to EU state aid rules where any aid affects trade between Northern Ireland and the EU. It will be fascinating to see how all of this unfolds as the negotiations get underway.
Will UK antitrust policy diverge from the EU?
The short answer is: most likely, at least over time. We have already discussed state aid. In terms of merger control and antitrust, at the moment the UK’s regimes very closely mirror the EU system. The extent to which this remains the case after the transition period will depend on the nature of the future relationship agreed between the EU and UK. The UK Government is clear that it wants to “develop separate and independent policies in areas such as…competition and subsidy policy” and that it will “not agree to measures in these areas which go beyond those typically included in a comprehensive free trade agreement”. In other words, it will commit to upholding high standards in antitrust and merger control enforcement (and potentially state aid), but does not want to be held to the EU’s policies and agenda.
And we have already seen the types of changes that may be on the horizon. Early last year CMA Chair Lord Tyrie sent an open letter to the Government outlining a wide-ranging set of proposals designed to strengthen the UK regime. In merger control, for example, Tyrie made the case for supplementing the current voluntary process with a mandatory regime for mergers above a certain (unspecified) threshold. Plus, being no longer bound by restrictions on the ability of EU Member States to review on public interest grounds deals already being reviewed in Brussels on competition grounds, the UK will have more freedom to set policies around national security, including foreign investment controls. Decisional practice in antitrust cases, too, may diverge – CEO of the CMA Andrea Coscelli has publicly commented on the post-Brexit landscape, stating “the upside is that you take back control – genuinely – of the decisions”.
Much will hinge on the path the negotiations take over the coming ten months.
If you are interested in learning more about the impact of Brexit on your business, please refer to the Brexit publications section of our website.