UK merger control: draft revised guidance indicates CMA’s tough approach set to continue
10 November 2020
UK merger control policy and practice has evolved significantly in recent years.
The Competition and Markets Authority (CMA), gaining a reputation as one of the toughest merger control enforcers in the world, has been at the forefront of developments in merger analysis and processes. The UK is one of the key contributors to the global debate about whether merger control rules should be reformed, for example to better tackle transactions in digital markets. And with the end of the Brexit transition period less than two months away, the CMA is preparing to embark on a “new world” of UK merger control, no longer tied to (or constrained by) the EU merger rules.
As a result of this evolution, the CMA has launched a major review of its merger guidelines. On 6 November it published for consultation draft revised guidelines on its jurisdiction to review mergers and the procedures for those reviews (draft J&P guidance). It is also consulting on draft revised guidance on the operation of its ‘mergers intelligence function’, ie the division within the CMA which decides whether to open an investigation into potentially problematic mergers on its own initiative (draft MIF guidance).
From 1 January 2020 – flying solo
One of the key proposed changes to the guidance is to remove references to the EU merger control rules. From 1 January 2020, when the Brexit transition period will have ended, the EU Merger Regulation will no longer be applicable in the UK, leaving the UK with a fully standalone merger control regime. In practice, this means that a transaction could be reviewed by both the CMA and the European Commission, if the relevant jurisdictional thresholds are met.
For the CMA, this means additional workload. It has predicted that it could review 50 additional transactions a year – an 80% increase on its current tally. For merging parties, an additional merger filing will increase administrative burden as well as the risk of differing outcomes. The CMA is alive to this fact – in its draft J&P guidance, it proposes a new section on multi-jurisdictional mergers. Here, the CMA notes the “substantial benefits (to merging parties and competition authorities, and therefore, in turn, to consumers) from communication and cooperation” between authorities. It will ask parties to confirm whether they have notified (or intend to notify) the transaction in other jurisdictions. If so, the CMA will usually ask parties to grant a waiver to enable it to discuss the case with the other authorities involved. The CMA is particularly keen on aligning the timetables of parallel investigations – it encourages merging parties to engage with it at an early stage to discuss timing and also suggests various ways for parties to help achieve alignment (eg using the fast track mechanism where parties can forgo certain procedural steps in order to move the review along to phase 1 remedies or phase 2 stage).
Interestingly, in both sets of draft revised guidance, the CMA notes that the CMA may decide not to open an investigation on its own initiative where any remedies agreed in merger control proceedings in another jurisdiction are likely to address any UK concerns. This fits with a wider trend for authorities to find international (or even global) remedies to address concerns, ensuring consistency of outcome in multinational transactions. The recent Stryker/Wright Medical case is a good example: the CMA worked closely with the U.S. Federal Trade Commission to align both timing and the remedy package.
An expansive approach to jurisdiction
Notably, the CMA has taken an increasingly expansive approach to jurisdiction over the past couple of years. And the proposed amendments in the draft J&P guidance reflect this. In particular:
- The CMA has shown its willingness to review minority stakes – in both RWE/E.ON and Amazon/Deliveroo it scrutinised acquisitions of around 16% (and in Amazon’s case, went through a full phase 2 review, although ultimately cleared the deal unconditionally). The draft J&P guidance crystallises this approach, stating that the CMA may examine “any shareholding”. Indeed, it notes that “even shareholdings of less than 15% might attract scrutiny” in certain circumstances.
- The CMA has taken a broad approach when applying the “share of supply” test (which allows the CMA to review deals if the parties will, post-merger, create or enhance a share of at least 25% in the supply or acquisition of goods or services of a particular description in the UK or a substantial part of it). This year, for example, it blocked Sabre/Farelogix after establishing jurisdiction on the grounds that the parties both supply “IT solutions to UK airlines for the purpose of airlines providing travel services information to travel agents, to enable travel agents to make bookings” and that Farelogix supplied goods fitting that description to one UK airline, British Airways, in respect of one type of itinerary, interline segments; Sabre’s appeal of the CMA’s assertion of jurisdiction, as well as the CMA’s substantive findings, will be heard at the Competition Appeal Tribunal this month. In Roche/Spark, the CMA again applied the share of supply test flexibly in finding it satisfied on the basis of the number of patents procured by the merger parties. The draft J&P guidance reinforces this flexible and purposive approach, noting that the CMA has a “broad discretion” to identify a specific category of goods or services supplied or procured by the merger parties. In particular, it states that: (i) the group of goods or services need not amount to a relevant economic market and can aggregate intra-group and third party sales even if these might be treated differently in the substantive assessment; and (ii) the CMA will have regard to any reasonable description of a set of goods or services, which may not correspond with a recognised industry standard and may result from overlaps involving pipeline products/services or where there are “sufficient elements of common functionality between the merger parties’ activities”. The CMA will consider the “commercial reality” of the merger parties’ activities, focussing on the “substance rather than the legal form of arrangements”. When it comes to determining whether a 25% share has been met or increased, the draft J&P guidance again notes the CMA’s wide discretion, stating that the CMA may have regard to the value, cost, price, quantity, capacity, number of workers employed or any other criterion or combination of criteria.
A voluntary regime – but with teeth
The UK merger control regime is voluntary – merging parties are under no obligation to notify their transactions before closing, or even at all. But where a deal might raise antitrust concerns, taking a decision not to notify, or to notify after completion, is a risky business. The draft J&P guidance maintains the CMA’s clear position on this: “completing a merger without first obtaining clearance from the CMA carries the risk that the completed transaction may be unwound by disposal of the acquired business (or otherwise remedied by disposal of other businesses or assets)”. The proposed revisions to the guidance include the addition of further examples of relevant cases – there have been a lot in recent years.
In 2018 there was Vanilla/Washstation – the CMA required Vanilla to sell off the target entity after its phase 2 review concluded this was the only way to address its concerns. In 2019, we saw the CMA block two further completed cases (out of three deals prohibited in total): Tobii/Smartbox and Ecolab/Holchem. In both cases the parties appealed the CMA’s decision. In both cases they lost. And in 2020, three out of four prohibited transactions so far involve completed transactions, including JD Sports/Footasylum and, only last week, a completed software merger.
Overall, this amounts to merger enforcement at record-breaking levels. We have seen an exponential increase in intervention by the CMA in the past two years. In 2019, the total number of deals frustrated (ie prohibited or abandoned due to antitrust concerns) in the UK was eight – nearly three times higher than the previous year. In 2020 the CMA has surpassed that tally, with four prohibitions and a further five transactions abandoned. And the year is not yet over.
In addition, the CMA will normally make an initial enforcement order (IEO) in relation to all completed deals. These ‘freeze orders’ seek to prevent integration and other action which might prejudice its investigation or any remedies required and, while the merging parties can request derogations, the CMA will scrutinise all such requests carefully. As far as the CMA is concerned, strict IEO enforcement is vital to ensure the effectiveness of the UK’s voluntary, non-suspensory regime. Indeed, it has notched up a tally of enforcement of those orders, including fines in relation to Paypal/iZettle, Nicholls/DCC, Vanilla/Washstation and Electro Rent/Microlease in 2019 alone. At the Fordham Annual International Antitrust Law and Policy Conference in October, CMA chief executive Andrea Coscelli said that if the result of a pending CAT ruling in Facebook’s challenge of the CMA’s refusal to grant certain derogations to an IEO in relation to its acquisition of Giphy is to require the CMA to spend a lot of time on IEOs, it will make the case with the UK Government for a mandatory, suspensory regime. This would be on top of any recommendation by the Digital Markets Taskforce on a parallel digital markets merger regime for acquisitions by companies with Strategic Market Status – the taskforce’s advice to Government will be delivered at the end of the year.
An aside: national security – changes in the pipeline
The UK has been working on a revised national security regime for some time. It has taken a two-staged approach. First, to introduce “short term” changes to the UK merger control regime, lowering the jurisdictional thresholds for transactions in certain sectors (military/dual-use goods, computer processing units, quantum technology, AI, cryptographic authentication technology and advanced materials). The draft J&P guidance is updated to reflect these legislative amendments. But the real ‘meat’ of the reforms is yet to come. A National Security & Investment Bill, expected to be published by the end of the year, looks set to significantly enhance the UK Government’s powers to scrutinise foreign investment in the UK. We anticipate that it will propose a mandatory notification regime, with powers to fine and even impose prison sentences for non-compliance, which will result in hundreds of deals each year facing an additional level of regulatory scrutiny. Watch this space.
From draft to final guidance…
The consultation on the draft J&P guidance and draft MIF guidance runs until 4 December. The CMA intends to publish final versions by the end of the year – a pretty tight timetable, but one we expect it to be committed to meet.
And more merger guidance consultations are expected. In the coming weeks the CMA will publish its revised substantive merger assessment guidelines, updating the current version (which dates from 2010) with a decade worth of experience and decisional practice. In particular, we expect the CMA to set out its approach to assessment of digital mergers. We will keep you updated.