UK: Merger Control in the Post-Brexit Landscape

In summary

The past year has seen the UK Competition and Markets Authority (CMA) assume exclusive authority to review transactions falling within the scope of the UK merger control regime. It has published new guidance that provides insight into how its review processes will align with other merger control and regulatory processes, as well as revised guidance on its approach to substantive issues. The digital sector, killer acquisitions and the risk of under enforcement have continued to be priorities for the CMA, while the government has introduced a new stand-alone, comprehensive and far-reaching national security and investment regime.

Discussion points

• CMA’s updated Merger Assessment Guidance and guidance on jurisdiction and procedure
• CMA’s increased willingness to intervene in transactions and enforce the UK regime
• New UK merger control regime for certain transactions in digital markets
• New National Security and Investment Act 2021

Referenced in this article

• UK Competition and Markets Authority
• ME/6891-20, Completed acquisition by Facebook, Inc of Giphy, Inc
• 1366/4/12/20, Facebook, Inc and Facebook UK Limited v CMA
• Facebook v The Competition and Markets Authority, [2021] EWCA Civ 701
• ME/6827/19, Completed acquisition by JD Sports Fashion plc of Footasylum plc
• ME/6836/19 regarding Amazon and Deliveroo, final report
• ME/6868/19 regarding PUG LLC (viagogo) and eBay Inc

Key themes in the CMA’s decision-making: updated Merger Assessment Guidelines

On 18 March 2021, the Competition and Markets Authority (CMA) published updated Merger Assessment Guidelines (the revised MAG). An update to the previous guidelines, which were published in 2010, had been long awaited.

The revised MAG reflect developments in the CMA’s practice and approach to merger control, as well as evolution and rapid change in the markets. Many of the amendments are intended to take account of the CMA’s continuing focus on mergers in digital markets.

The revised MAG took effect from the date of publication and will be applied in new merger cases from this date forwards. Key points to note in the revised MAG are outlined below.

Clarity of the types of mergers that are likely to cause concerns

There is no change to the legal thresholds that must be met for a finding of a substantial lessening of competition (SLC) either at Phase I or at Phase II. However, the revised MAG provides further clarity and examples of mergers that are more likely to raise competition concerns. This includes a non-exhaustive list of examples of the types of transactions that may be more likely to result in SLC finding, such as where the merger involves the market leader and the number of significant competitors would be reduced from four to three, or where the products offered are differentiated between competing firms and the merger firms are close competitors. These are to be considered as examples only and are not meant to indicate safe harbours or thresholds.

The CMA has also included more wording on when a lessening of competition may be considered to be ‘substantial’, noting that: ‘In considering whether a lessening of competition is substantial, the CMA may also take into account whether the market to which it applies is large or is otherwise important to UK customers, or whether there is only limited competition in the market to begin with.’^[1]

The revised MAG also signals greater clarity on the CMA’s willingness to take into account non-price factors of competition, noting that terms such as ‘quality’ should be interpreted broadly (eg, to include the level of privacy offered to users of digital services, the sustainability of a product or service and the ability to enjoy content without being served advertisements).

Focus on dynamic competition

The revised MAG reflects the CMA’s continued focus on the dynamic nature of competition, especially in digital markets, and the difficulty of predicting with a high degree of certainty the ways in which firms and the competition between them may evolve over time.

The revised MAG states that uncertainty in how a market is likely to develop in future does not in itself prevent an SLC finding. For example, where there is evidence of dynamic competition already taking place, uncertainty about the precise outcome of those efforts (eg, whether efforts to enter or expand into a market or launch a new product might ultimately be successful) will not in itself prevent the CMA from finding that a merger may end up damaging that competition. This creates some degree of uncertainty and risk from the perspective of the merging parties.

However, the relevant standard of proof will still need to be met.^[2]

Clarity of the failing firm test

The revised MAG offers some welcome clarity on the operation of the ‘failing firm’ test. One limb of the test, which required consideration of what would have happened to the sales of the target in the event of its exit, has been removed. This is a welcome development as this part of the test was unclear and difficult to apply in practice.

This means that in forming a view on an exiting-firm scenario, the CMA, in both its Phase I and Phase II investigations, will now only consider whether the firm is likely to have exited (through failure or otherwise), and, if so, whether there would not have been an alternative, minus the anticompetitive purchaser for the firm or its assets to the acquirer in question.

Revised CMA Guidance on Jurisdiction and Procedure

In addition to the revised MAG, the CMA also published revised guidance on jurisdiction and procedure^[3] (the Guidance) and on its mergers intelligence function^[4] in December 2020.

The Guidance provides insight into how the CMA review process will align with other merger control and regulatory processes in the new post-Brexit landscape, where a UK CMA review may sit alongside a parallel EU review. It also provides further clarifications on the CMA’s application of the jurisdictional ‘share of supply’ test, taking into account the CMA’s recent decisional practice and flexible approach to application of the test.

The CMA does not regard the test as an economic assessment of the type used in its substantive assessment; the groups of goods or services to which the jurisdictional test is applied need not amount to a relevant economic market.

The new Guidance clarifies that, in applying the test, the CMA will take into account the life cycle of the supplies in question, noting that parties may have a material presence in the UK market by virtue of pipeline products or services.^[5] It also confirms that the CMA may have regard to value, cost, price, quantity, capacity, number of workers employed or any other criterion, or combination of criteria, in determining whether the 25 per cent threshold is met.

Tough stance by the CMA?

The CMA has prohibited, or caused to be abandoned, 10 transactions from 2020 to 2021, an increase from previous years. Moreover, according to the CMA’s published statistics,^[6] approximately 45 per cent of its merger investigations involved it finding a likely competition concern at Phase I, leading to Phase I remedies; applying the de minimis exception; or making a referral for an in-depth Phase II investigation.^[7]

This continues to be a high rate of intervention compared to other competition authorities. For example, of the 450 notifications made to the European Commission from the beginning of 2020 to March 2021, just 5 per cent (23 cases) resulted in Phase I remedies or a Phase II investigation.^[8]

The CMA’s level of intervention reflects that, as a voluntary regime, the CMA will typically investigate fewer transactions, but the transactions it does investigate can often raise potential competition concerns.

From a policy standpoint, the CMA has also referred to the need for rigorous and effective merger enforcement in the face of high levels of concentration across various markets in the United Kingdom; a marked increase in the number of merger reviews involving dynamic and fast-paced markets; and the need for effective merger control where the economy may be weakened, including as a result of the covid-19 pandemic.^[9]

New UK merger control regime for certain transactions in the digital markets

In addition to the changes in the revised MAG to take account of specific factors when assessing transactions in digital markets, the UK government is considering introducing a mandatory merger regime for certain transactions in the digital markets. This proposal stems from recommendations made by the government’s Digital Competition Expert Panel in the Furman Report^[10] and the advice of the CMA’s Digital Markets Taskforce published in December 2020.^[11]

Under the proposal, digital firms that are designated as having strategic market status (SMS) by the newly formed Digital Markets Unit, housed within the CMA, would be subject to a distinct merger control regime.

SMS test

The SMS test would involve an evidence-based economic assessment to determine whether a firm has ‘substantial, entrenched market power in at least one digital activity^[12] , providing the firm with a strategic position’.^[13] This would be the case where the effects of the firm’s market power are particularly widespread or significant, such as where:

• a firm has achieved a very significant size or scale;
• the firm is an important gateway to customers or an important input for a diverse range of other businesses;
• the firm can leverage its activity to extend market power from one activity into a range of other activities or has developed an ecosystem of products protecting its market power; or
• the activity has significant impacts on markets that could have broader social or cultural importance.

The CMA does not expect many digital firms to meet the SMS test, with the focus being on firms with annual UK revenue exceeding £1 billion and annual global revenue exceeding £25 billion.^[14] Furthermore, a firm’s SMS designation is anticipated to be for a fixed period (eg, five years).

Rationale for a separate merger control regime

The Furman Report and the CMA consider that transactions entered into by firms with SMS (SMS firms) should be subject to additional scrutiny given their powerful positions and the increased risk of those transactions having a detrimental effect on consumers.

The current UK merger control thresholds may not be sufficient to enable the CMA to investigate transactions involving SMS firms. The turnover test would not catch transactions involving the acquisition of nascent, potential competitors or firms whose early stage business model is to initially offer free services to consumers generating little or no UK turnover.

Although the share of supply test has, in the past, managed to catch certain acquisitions by SMS firms of nascent competitors,^[15] it cannot catch transactions involving the acquisition of a firm active in adjacent markets (ie, where there are no overlapping activities).

Proposed regime

The CMA wants all SMS firms to be required to report all their transactions to the CMA within a short period after signing. In addition, it wants all SMS firms to be subject to mandatory merger filing requirements where certain ‘clear-cut’ thresholds are met, such as clear-cut acquisitions of control including both de jure and de facto control.

As is the case with other mandatory regimes, the parties would be prohibited from closing a transaction before merger control clearance is obtained, and SMS firms would be fined for failing to comply with this obligation or for failing to file altogether.

Although the exact thresholds are yet to be determined, the CMA has expressed preference for a transaction value test to assess the materiality of a transaction and a ‘UK nexus’ test based on the target’s business in the United Kingdom (eg, turnover, assets or end-users).

The CMA still wants the ability to review acquisitions by SMS firms that fall outside the mandatory regime, either through the existing merger control regime or though some other form of ‘call-in’ power.

Greater enforcement of UK’s voluntary regime

Another major theme of the CMA’s decisions and policy during the past three years has been its focus on enforcing the procedural aspects of the UK merger control regime. This is not only in relation to its powers to investigate transactions that have not been notified to it, but also in terms of its use of initial enforcement orders (IEOs) and interim orders (IOs) and its issuance of fines for failure to comply with requests for information.^[16]

CMA’s substantial use of its power to investigate deals of its own initiative

A key way in which the CMA enforces the UK merger control regime is through its power to investigate transactions of its own initiative (ie, transactions that have not been notified to it) and its monitoring of merger activity to determine whether any unnotified merger should be ‘called in’ for review.

The CMA’s monitoring function is performed by its Mergers Intelligence Committee (MIC). The MIC has continued to be highly active, reviewing between 600 and 700 cases a year. Around a third of all decisions during the period from 31 March 2020 to 31 March 2021 were in respect of mergers called in by the CMA.

Interestingly, in the last 10 Phase II decisions since March 2020, four of those mergers were called in by the CMA (eg, CMA decisions on Amazon’s acquisition of a minority shareholding and certain rights in Deliveroo^[17] and the completed acquisition by Pug LLC (viagogo) of the StubHub business of eBay)^[18] rather than actively notified, which suggests continuing success on the MIC’s part in terms of spotting and identifying transactions that may result in harm to competition.

Stringent application of IEOs

When the CMA calls in a completed merger for review, it will impose a separate IEO on the merging parties as a matter of course at Phase I. The IEO requires, among other things, that the target business is run independently and separately, with the CMA halting (and, on occasion, reversing) any integration of the business. Should the transaction move to Phase II, an IO replaces the IEO.

On a practical level, compliance with an IEO and an IO is becoming increasingly time and resource intensive; if the merging parties require a derogation from the IEO (eg, to implement a change in key staff), they must make a written derogation request to the CMA and receive clearance before taking the activity. There are also continuing reporting requirements and the possibility of the CMA requiring the appointment of a monitoring trustee (typically at Phase II, but increasingly also at Phase I) to oversee compliance.

The CMA issued guidance on those orders in June 2019^[19] and published a further consultation in April 2021^[20] to revise that guidance, primarily to confirm its expectations on the steps that parties should take to ensure compliance with IEOs and IOs (eg, by ensuring that tailored guidance is provided throughout the business and that sufficient internal governance structures are in place to oversee compliance).

The CMA continues to take a stringent approach to the enforcement of IEOs as a matter of public importance. However, it has met some challenge to its approach on IEOs. For example in the context of the Facebook, Inc/Giphy, Inc merger inquiry,^[21] Facebook appealed a CMA decision not to grant certain derogations (which were refused on the grounds that Facebook had not provided sufficient evidence for the CMA to consider and grant the requests).^[22] The Competition Appeal Tribunal (CAT) dismissed the appeal, and on 13 May 2021 the Court of Appeal dismissed Facebook’s appeal against the CAT’s judgment .^[23]

The CMA has also recently imposed a £300,000 penalty related to an alleged breach of an IEO in JD Sports/Footasylum,^[24] although in this case the CMA withdrew its penalty notice in light of issues raised on appeal.

Mergers giving rise to public national security concerns in the UK

On 29 April 2021, the UK government’s long-awaited National Security and Investment Bill received royal assent. The National Security and Investment Act 2021 (the NSI Act) provides for a new stand-alone foreign direct investment regime in the United Kingdom, which will be comprehensive and far-reaching and will have the effect of bringing the United Kingdom into line with regimes in other major jurisdictions around the world. The new regime is scheduled to come into effect later in 2021 (the exact date to be confirmed at the time of writing) and does not apply any materiality thresholds in terms of target turnover, market shares, transaction value.

The new regime will require mandatory notification of certain types of transactions in 17 key sectors that are regarded as being the most sensitive areas of the economy.^[25] The transactions include the acquisition of a shareholding or voting rights of more than 25 per cent.

The government ran a public consultation into the proposed definitions of the mandatory sectors late in 2020, and the final version of those definitions was published in March 2021. The sector definitions are expected to be incorporated into secondary legislation in advance of the commencement of the new regime.

The mandatory notification obligation is combined with an extensive power enabling the government to call in qualifying transactions that fall outside the 17 key sectors, but that it considers may give rise to national security concerns. Such transactions could involve the acquisition of a shareholding or voting rights of as little as (or potentially less than) 15 per cent, as well as the acquisition of control over assets. Acquirers will also have the option to voluntarily notify those transactions to obtain clearance.

The new regime is scheduled to come into effect later this year; however, the government’s call-in power has retrospective effect from 12 November 2020. Although this undoubtedly creates significant uncertainty, the government has a mechanism in place whereby transactions that take place within this interim period can be discussed on an informal basis with the Department for Business, Energy and Industrial Strategy (BEIS) to obtain an indication of the likely application of the regime once it comes into force. Once BEIS has been made aware of a transaction in this way, it will only have up to six months to call the transaction in once the regime becomes active.

Although this process does not result in BEIS giving formal confirmation that it will not call in a transaction once it has the ability to do so, it is a way of obtaining an insight into and potentially some comfort around BEIS’s intentions in relation to an already completed transaction once the regime is applicable.

Notes