One
would be forgiven for concluding that the only thing that is happening in the
UK is Brexit. However, there are some
interesting ideas being considered, either in the context of Brexit or perhaps
more precisely despite Brexit. The
political paralysis that the country has suffered could come to an end quite
quickly and the inevitable ministerial reshuffle could re-invigorate the
process.
With the appointment (on 20 June 2018) of Andrew Tyrie as Chairman of the Competition and Markets Authority (CMA), the body is now backed by a political heavyweight and those who followed his work as the Chairman of the Treasury Select Committee know that he means business for consumers. Tyrie wasted no time in setting out his agenda in a well-publicised letter to the Secretary of State.
The
core aspect for merger control is that with the increase in mergers after
Brexit, a compulsory notification system with a standstill provision is being
mooted.
The
accompanying CMA document explains as follows:
“Brexit could have important implications for merger control UK, in part because the CMA will need to review a larger number of multi-jurisdictional mergers that would previously have been considered by the European Commission. The existing rules, whereby firms notify the CMA of mergers on a voluntary basis, may need amendment, so that the CMA can work effectively with international counterparts. With this in mind, proposals are made to require mandatory notifications of mergers above a certain threshold, accompanied by a “standstill obligation” designed to prevent parties from proceeding with the transaction prior to the CMA’s approval (page 42 in the letter). It is also proposed that higher or full cost recovery from merging parties be reconsidered (the CMA currently recovers around half the cost of its mergers work from fees paid by merging parties, page 43 in the letter).”
The final statement on merger fees is also interesting in that the UK already has the highest merger fees in Europe. At the moment, the level of fees is based on the turnover of the target, which often has no relationship to the complexity or indeed cost of the review. Any change could have a chilling effect on smaller mergers in concentrated industries – which may of course be part of the CMA’s objective, even if that is not the most appropriate tool.
In the footnotes to the letter you can also find a suggestion that in digital markets the CMA should have a special power to look at the effect of successive acquisitions by the same company in the round rather than individually – and importantly a special regime whereby certain companies have to report acquisitions to the CMA as a matter of course. This latter power is clearly aimed at the digital platforms and has to be read in the context of the conclusions of the Furman report, which can be found here.
In
that report the Digital Competition Expert Panel made a number of far-reaching
recommendations, including:
“Our
recommendations also update merger
policy to protect consumers and innovation, preserving competition for
the market. Central to updating merger policy is ensuring that it can be more
forward-looking and take better account of technological developments. This
will require updated guidance about how to conduct these assessments based on
the latest economic understanding, and updated legislation clarifying the
standards for blocking or conditioning a merger. We believe that the correct
application of economic analysis would result in more merger enforcement. This
would be welcome given that historically there has been little scrutiny and no
blocking of an acquisition by the major digital platforms. This suggests that
previous practice has not had any ‘false positives’, blocking mergers that
should have been allowed, while it may well have had ‘false negatives’,
approving mergers that should not have been allowed.”
We may well see legislative change to deal with forward-looking mergers in technology and in particular so-called “killer-acquisitions”, a phrase coined by Cunningham, Ederer and Ma in their paper looking at pipeline pharmaceutical acquisitions – available here. Although their study was limited to the pharma sector, the principles are now being considered in the context of digital markets and particularly where digital platforms buy up potential competitors before they can potentially become threatening. This would deal with the 400+ acquisitions that digital platforms have made in recent years.
Change is on its way and this one could make the UK merger regime divert very significantly from its EU counterpart – and ironically place more pressure on reforming the latter.
What is apparent is that deal or no deal, there will be a parallel merger control system in the UK, which will have its own features, timings and costs – and most larger mergers will be caught by both. At the moment the UK has a “voluntary” system, but in practice mergers that raise issues in the UK will need to be filed in the UK. The reason for that is very simple: under UK merger control, the CMA can intervene in a merger within 4 months of closing. If it does so, it has the ability to impose stringent hold-separate obligations and it has the power to fine the company if those are not respected. That is a risk that few companies will want to take, especially if there is a prospect of the target being left isolated and rudderless under a hold-separate for extended periods of time. The Phase II process in the UK is particularly drawn out and painful and this is a risk that few purchasers are willing to accept. A second ancillary point is that the UK process is very much driven by third party submissions and complaints, which increases the uncertainties in relation to mergers. Often problems can arise in a very small area (for example in a recent deal that Euclid Law advised on, it was one single bottling line), which can then have significant implications for the rest of the deal.
On
balance, it is often better to include a condition precedent in the deal and to
notify a merger than to take the risk of a post-closing intervention by the
CMA. If the target is hotly contested,
in an auction sale, for example, that may not always be possible, and it is not
uncommon for purchasers to take the competition risk in the transaction where
that is strictly necessary. Early
strategic advice on the options is clearly crucial in this area, as the CMA is
likely to impose hold-separate obligations even where the risk of Phase II is
very low.
One
important aspect of UK merger control is the CMA’s ability to determine when a
merger can be filed by declaring the notification complete. This is different from the EU process, where
the parties can ultimately decide the point of filing and the Commission would
have to declare the notification incomplete after filings. This power gives the CMA the ability to
manage its own caseload. The CMA also
has the power to stop the clock if information requests to the parties are not
complied with and it has used those powers in the recent past.
It is therefore appropriate to conclude that whatever the outcome of Brexit, the CMA will become a leading player in global merger control, probably on a par with other reputable agencies. The Commission will have to adapt to dealing with the CMA as an equal rather than as a subordinated NCA under Regulation 1/2003. This may involve the negotiation of a bilateral agreement, such as the one with Switzerland. However, unlike Switzerland, the UK is unlikely to wait politely for the Commission to take a merger decision first and follow it. Whereas the Commission is likely to be more influenced by the ordoliberal thinking in Germany and France, it is likely that the UK will develop an increasingly “dynamic” view of competition, especially in relation to forward-looking merger control. Divergence is an inevitable consequence of that process.
The CMA will inevitably need to evolve into a regime that is compatible with merger control regimes in the EU and the US. Dialogue with Brussels will be key, as many companies operate a single integrated European business across jurisdictions. This is particularly relevant if the parties need to structure global or EEA-wide remedies.
The human factor in all of this cannot be underestimated as the future relationship between CMA and EU Commission will be shaped by mutual trust (or perhaps distrust) between the key decision makers. The European elections and the new Competition Commissioner could have a significant impact on this dynamic.
Regardless of whether the Brexit date is 29 March 2019 or a later date, any large merger will have to be examined in both regimes on a forward-looking basis. Without a deal, the CMA will become fully competent on Brexit day. With a deal, that process may be delayed. However, the UK merger regime should not be underestimated and a parallel approach in Brussels and London will become the order of the day. Chairman Andrew Tyrie is well aware of the opportunity and will use it to set the political tone. His letter is well worth reading.
Oliver Bretz
