The CMA’s draft VABEO Guidance Consultation

Response of Euclid Law Ltd. to the Consultation on the CMA’s Draft Guidance on the Vertical Agreements Block Exemption Order 2022 (CMA154)

We welcome publication of the CMA’s draft guidance on the Vertical Agreements Block Exemption Order 2022 (‘VABEO’) (the ‘Draft Guidance’) and the opportunity to comment on it.

Given the shared heritage of the VABEO and the EU Vertical Agreements Block Exemption Regulation (‘VBER’), as well as the extensive precedent in which the VBER and related principles of EU law have been applied in a UK context, we agree with the CMA’s decision to “broadly reflect” the EU’s Vertical Guidelines (the ‘EU Guidelines’) in the Draft Guidance.

While there are some instances where the application of principles developed with the EU’s single market in mind to a UK-specific context can come across as somewhat strained, we agree that prioritising consistency is the right approach at this time.

To read and download the full Response, click here.

UK consumer watchdog frustrated at lack of bite

CMA left reliant on courts to fulfil role despite government promises to give it more powers two years ago

“The CMA’s main gripe is that it has never had the fining powers and the ability to run a [consumer protection] case through to a final decision with penalties,” said Becket McGrath, competition partner at Euclid Law. “The CMA wants to have the equivalent set of [consumer] powers as its competition powers that it can use to effectively take enforcement action against consumer law practices which evolve at a [fast] rate.”

Follow the link to read the full Financial Times article.

Reforming Competition and Consumer Policy

Response to the Public Consultation by the Department for Business, Energy and Industrial Strategy

Proposals on Markets and Merger Control Jurisdiction

Euclid Law Ltd

We are submitting this paper from the position of practitioners who strongly believe that consumers, businesses and practitioners benefit from rational, predictable and up to date competition and consumer law regimes. The views stated are our own and do not necessarily represent the views of any client of our firm.

While the Government’s reform proposals are extremely wide-ranging, we have focused this response on the two areas where the proposed changes cause us most concern, namely the markets and merger control regimes.

[…] The Government’s consultation looks at strengthening the somewhat unique feature of market investigations. This allows the CMA to impose remedies in markets where there is no evidence of wrongdoing. It is essentially the exercise of a Ministerial power delegated to the CMA, enabling the CMA to regulate parts of the economy without any Ministerial or Parliamentary involvement. Few other competition authorities enjoy such wide-ranging powers. The flipside of that coin is that the process involves a lengthy and rigorous review by independent Panel Members, only at the end of which remedies can be imposed – so-called “Market Investigation References”. The Panel Members are part-time and are independent of the CMA and its Board. It is that independence that is seen as an integral part of the system.

While the CMA has the ability to conduct Market Studies without a full market investigation (and thus without the involvement of independent Panel Members), it lacks the power to impose a binding remedy in such cases. If the CMA wishes to impose remedies, the only option is for the Board of the CMA to refer the matter to an independent Panel for a market investigation. Of course, the CMA already has other options available to it short of imposing remedies, such as seeking voluntary undertakings from market participants in lieu of a reference or making recommendations for others to take action (including other regulatory bodies or Government).

Download and read the full response here.

Can financing transactions be caught by the UK’s new National Security Regime?

by Oliver Bretz, Michael Reiss, Benjamin Yip, Euclid Law

When the National Security and Investment Act 2021 received Royal Assent this year, it had become painfully apparent that its potential scope would be very wide and potentially extend beyond traditional M&A transactions. What few expected was its potential application to financing transactions.

The new notification regime is not yet in force and is not expected to be until later this year. However, the UK government will have the retrospective power to call-in transactions where there is a trigger event that may raise national security concerns.  One of the trigger events is the acquirer being able to exercise material influence over the target’s policy.

 The UK government has indicated its intention to apply the same merger control concept of “material influence” under the NS&I regime.  We will therefore have to examine whether material influence could potentially exist in financing transactions, which will never become subject to any mandatory notification because they do not involve the acquisition of shares.

Material influence in the UK merger context occurs where one party gains a sufficient degree of influence over a target’s management of its business, including its strategic direction and its ability to define and achieve its commercial objectives. The assessment requires a case-by-case analysis of the overall relationship between the acquirer and the target. The key factors considered in the case law include the following:

·     the level of shareholding by the acquirer in the target. Shareholdings of less than 15%, with no board representation or other governance rights, are less likely to give rise to material influence, unless there is clear evidence of other factors that indicate the ability to exercise material influence over policy.

·     whether the acquiring party has the right to block special resolutions and whether it is able to do so in practice. This will be assessed on the basis of the distribution and holders of the remaining shares, the identity of other shareholders, including the status and expertise of the acquirer and its likely influence on other shareholders, the patterns of attendance and voting at recent shareholders’ meetings, the existence of any special voting or veto right attached to the shareholding and any other special provisions in the company’s constitution conferring an ability materially to influence its policy;

·     whether the acquirer has obtained board representation, which either alone or in combination with the shareholding confers on the acquirer the ability to materially influence the policy of the target entity; and

·     any other relevant agreements or arrangements with the company that enable the acquirer to materially influence such policy. For instance, agreements for the provision of consultancy services to the target and other relevant customer/supplier relationships, as well as financial arrangements making one party so dependent on the other that the latter gains material influence over the company’s commercial policy, may confer material influence. Indicatively, material influence could arise where a lender could threaten to withdraw loan facilities if a particular policy is not pursued, or where the loan conditions enable the lender to exercise rights beyond what is necessary to protect its investment (e.g. by options to take control of the company or veto rights over certain strategic decisions).   

From the above list, it seems that it would be highly unlikely that a traditional financing transaction could be called in for National Security Review.  But not so fast!

We have seen Partnership Agreements from specialist funders that give the lender a very significant say over the technology of the Target.  We have also seen Board Appointment rights, where the Board Director has very significant expertise in the relevant sector.  Couple that with some lender protection rights and a potential right to convert to equity at any point in the future, and you can see how one might be approaching material influence threshold.  It is of course open for the Department for Business to develop the material influence concept over time and to take a view that is more stringent than that of the CMA.

Aside from material influence, the regime identifies two other “trigger events” which are potentially relevant to financing transactions and which could result in call-ins by the Department for Business – either on a standalone basis or overlapping with the material influence trigger.  One is where a party obtains the right to control another party’s asset or to direct how it is used.  This could be relevant as at the initial financing transaction or subsequently, such as where collateral is seized on a default by the borrower.  Another “trigger event” is the acquisition of voting rights that “enable or prevent the passage of any class of resolution governing the affairs” of the Target.  The legislation’s reference to “any class of resolution” is broad and could even include lender protection rights against a Target making certain constitutional changes by resolution.  This means any such rights conferred on a lender need to be examined carefully.

They key point is this: financing transactions will not become subject to the mandatory notification regime (when it comes into force) because they do not involve the acquisition of shares (although a subsequent debt-for-equity swap on a borrower’s default could be caught).  However, this makes them potentially more vulnerable to a call-in by the Department for Business at a later stage, as they could involve (a) the exercise of material influence, (b) control over certain assets and/or (c) the lender’s ability to block certain resolutions of the borrower.  The Secretary of State has the power to call-in any transaction which falls within the scope of the regime, regardless of whether it has been notified, to assess its risk to national security within six months of the Secretary of State becoming aware of the transaction, (within a long-stop of five years for non-mandatory notifications). 

Therefore, the only way that this risk can be mitigated is to give notice to the Department of the trigger event, which will then reduce the period for intervention from 5 years to 6 months.

Of course, this would not be appropriate in all instances but should certainly be considered where (i) the target risk or acquiror risk is high; and (ii) the rights go beyond normal commercial lender protections.

The national security Genie is well and truly out of the bottle – and no amount of regret will ever put it back!

UK National Security and Competition: To file or not to file?

With the adoption of the National Security and Investment Act 2021 (NS&I Act), the UK will for the first time require mandatory filing of all transactions in 17 strategic sectors.  The Government will also gain the ability to investigate a wider range of transactions in any sector of the economy if it considers there is a national security risk, including transactions that were completed between November 2020 and when the Act comes into force.  The new regime will not come into force until the Investment Security Unit at the Department for Business (BEIS) is ready and necessary guidance has been published, which will most likely be towards the end of the year.

The NS&I Act will require mandatory notification of any acquisition of shares or voting rights in a company active in these sectors if one of the relevant thresholds of 25%, 50% or 75% is passed, regardless of the nationality or identity of the purchaser or any applicable merger control thresholds.  Only the national security implications of notification transactions will be considered. 

The new national security screening regime will be in direct contrast to the voluntary notification aspect of the general UK merger control rules, which will continue to apply to the competition and other public interest aspects of transactions affecting the UK.  This article pulls together our thoughts on how purchasers and sellers should proceed in the period before the mandatory notification regime comes into effect. 

So where do you start?  Fundamentally, parties should first consider whether there the Competition and Markets Authority (CMA) has jurisdiction to review a merger under the competition regime.  This is most easily established if the UK turnover of the target is above £70m or above £1m in certain sectors with potential national security implications. 

More controversially, the CMA will also have jurisdiction to review any merger where a UK share of supply of 25% or more is being created or increased as a result of the merger.  This is not a market share test and, as confirmed by the UK Competition Appeal Tribunal in the recent Sabre v CMA case, the CMA has a very wide discretion to define supply however it sees fit to establish jurisdiction.  This includes, for example, the ability to take into account UK employment of personnel engaged in pharmaceutical R&D projects or the right of a UK customer to receive services even where no services are in fact provided.  The CMA is able to develop its jurisdictional assessment in an iterative way throughout its investigation and may keep trying different approaches, using information gathered using its compulsory powers, until it has found a definition that it considers is defensible.  In practice, the CMA is able to assert jurisdiction using the share of supply test over almost any merger that it is interested in.

Whether the CMA will be interested in a merger depends on whether it considers that there may be a substantive competition problem.  In the past, this was based on a reasonably predictable assessment based on market shares and the presence of horizontal or vertical overlaps.  In recent years, the CMA’s approach has become more assertive and less predictable, especially with regard to transactions in the tech and pharmaceutic sectors, where there is significant interest in spotting so-called “killer acquisitions”.

So how is this relevant to consideration of wider public interest aspects, which for the remainder of 2021 will include national security?  The short answer is that the Government has the ability to intervene in transactions that raise specified public interest concerns, including (currently) national security, media plurality, the stability of the financial system, and the country’s ability to combat a public health emergency.  In cases where such concerns have been identified, the Government may issue a “public interest intervention notice”.  This has the effect of opening up a parallel track to the competition review to cover public interest aspects and transfers decision-making at key points in the investigation from the CMA to a Secretary of State.  While such intervention is purely at the discretion of ministers, it is worth noting that the CMA must notify the Government of any transaction it is reviewing that it considers raises public interest issues.

In addition to the above, the CMA is pushing for the Government to introduce a new mandatory notification regime specifically for acquisitions by large technology companies.  While legislation to introduce such a regime remains a long way off, if it is passed at all, the CMA has effectively introduced a de facto mandatory regime for such transactions in the meantime, as a result of its intense scrutiny of the sector.

How does one navigate the overlapping regimes, in the absence of mandatory merger control notification?  In principle, this is a complex process that will be very case specific. Summarising the key factors in a very concise way, we would highlight the following factors:

  1. Is there conceivably a substantive competition issue?  If not, it would be unusual to notify or otherwise engage with the CMA, unless the acquirer is a large technology or life sciences company or if there is a clear public interest issue (such cases are usually  easily identifiable).
  2. Is there conceivably a national security issue? If no CMA engagement is proposed, BEIS may be approached informally to discuss mergers with national security risk features, to flush out the risk of an intervention or of a retrospective review once the NS&I Act is in force.  Such cases include mergers where the target produces products, or develops technology, that it sells to the UK Government, that may have military or dual-use applications or that is subject to export control restrictions or where the identity or nationality of the buyer raises concerns.  In practice these elements are intertwined, in that a sensitive technology being acquired by a lower-risk acquiror can be as problematic as a less sensitive technology being acquired by a higher-risk buyer.  When making this assessment, it is relevant to consider whether the transaction will complete before the NS&I Act comes into force.

To notify or not to notify? And to whom?

That is indeed the question.  The answer will be easier to determine once the NS&I regime is in force, since from that point a national security notification must be made if the transaction falls within one of the defined sectors.  The question of whether to make a competition notification will from that point be an entirely separate consideration.  While it is not possible to make an NS&I notification before the regime is active, as set out above it is already possible to seek comfort from BEIS if there is an identifiable national security risk.  As a result, the question of whether to notify the CMA and/or to informally consult with BEIS officials will remain somewhat connected for the time being. 

It is important to note that the receipt of informal comfort from BEIS officials indicating a lack of national security concerns will not remove the obligation to notify the transaction once the new regime comes into force.  Equally, it does not remove the CMA risk, which needs to be considered separately.  A CMA review can be a very drawn-out process, typically including extensive pre-notification discussions, evidence submission and document production.  The CMA also charges substantial fees for reviewing a transaction.  As a result, a CMA notification should not be taken on lightly.  Since a CMA filing remains a voluntary step, many parties decide, quite legitimately, to close the transaction without any CMA engagement.  In such cases, the purchaser takes on the risk of a later CMA review, while hoping that the deal never reaches the attention of the CMA.  Alternatively, the CMA has developed an informal hybrid approach, under which parties can submit a briefing paper to a preliminary review unit to flush out any concerns in advance of closing.

Where all this leads, almost inevitably, is more complex merger agreements, with flexible and convoluted conditions precedent and extended longstop dates to govern what happens between exchange and closing.  Once a transaction is closed, the risk is on the purchaser.  Typically the seller will at that point have taken the sale proceeds and be largely immune from any subsequent scrutiny, since it will be commercially difficult to share that risk through earn-outs or other price adjustments. 

As always, looking at all the possibilities and being prepared for intervention from both the CMA and BEIS will enable purchasers to make an informed assessment.  Many acquisitive companies are preparing the ground by making more frequent informal approaches to the CMA and BEIS in order to establish a good compliance profile, even if their current deal may not merit it.  Who knows, the next one may be more difficult!

To get a copy of the article, click here.

Free enterprise – The Law Gazette

By Marialuisa Taddia

Debates concerning the role and procedures of the Competition Appeal Tribunal mirror the UK’s dilemma post-Brexit

So how do practitioners rate the tribunal? ‘In my view, the CAT is one of the real success stories of the “new” UK competition regime that was put in place by the Competition Act 1998,’ says Becket McGrath, a partner at Euclid Law. ‘It has proved to be an effective and independent tribunal that is prepared to overturn decisions that are insufficiently well reasoned and to pick up material procedural defects, while showing sufficient deference to authorities’ discretion.’

[…]

There are also plenty of examples where CAT has upheld the regulator’s decisions, […] dismissed all of the applicant’s arguments and upheld the CMA merger decision in full’, McGrath notes.  

McGrath says the Penrose report contains ‘a mix of good and bad ideas but the details were largely brushed aside’. […]

To read the full article, click here.

Sarah Long quoted in GCR article: “UK launches Digital Markets Unit”

On 7 April 2021, the CMA launched its much anticipated Digital Markets Unit (DMU) in shadow form, pending legislation.  The new regulator will sit within the Competition and Markets Authority, with the potential to enforce a code of conduct and impose ‘pro-competition interventions’ in digital markets.

Euclid Law partner Sarah Long commented that the clear intention is for the DMU for have teeth.  However, what remains to be seen is the role of the DMU in mergers.  While it is clear that the DMU is expected to work closely with the CMA enforcement teams to scrutinise digital mergers, the extent of its involvement in either identifying and/or reviewing digital mergers, and the division of labour between the DMU and the CMA’s merger case teams remains unclear. 

Long emphasised that “This will be of importance from a practical perspective as the CMA is already expecting a significant increase in its merger control caseload following the end of the Brexit transition period.”

Becket McGrath quoted in GCR article: “CMA proposes regulatory reform to combat big tech”

The UK’s Competition and Markets Authority has called for a new regime to regulate the online economy, after its digital advertising study found the market power of Google and Facebook is causing substantial harm to “society as a whole”.

The enforcer today asked the UK government to create a digital markets unit and empower it to break up big tech companies and enforce a code of conduct among online platforms to resolve competition concerns in that sector. It did not specify if the new unit should function within an existing body or be created as a new standalone regulator.

The EU enforcer launched a public consultation on its proposed market investigations tool in May. EU competition commissioner Margrethe Vestager has cited the CMA’s similar power as an efficient way of tackling competition concerns in fast-moving markets.

Euclid Law partner Becket McGrath, who advised a publisher during the UK enforcer’s market study, said it is understandable why the CMA asked the government to introduce a new regulatory regime. Conduct that is not good for competition does not necessarily infringe antitrust law, but it could be addressed through careful, targeted regulation, he said.

Combating concerns related to the market power of big tech requires difficult public policy trade-offs that extend well beyond competition law, McGrath added. 

“With all these moving pieces, there has to come a point when the CMA, as an independent and unelected agency, hands over to the government,” he said.

McGrath also questioned if the UK could effectively implement some of the CMA’s proposals without aligning with reforms emerging elsewhere, particularly in the EU. “Solutions need to be closely coordinated – it’s not good for businesses if there is too much divergence,” he warned.

To read the full article on GCR website, click here.

Increasing interim measure use stirs consequences debate

Sarah Long commented to PaRR analytics on the increased use of interim measures, cautioning that despite the CMA’s recognition that the tool should be used more, the legal test remains relatively difficult to meet, and interim measures have never been successfully applied in the UK.  The CMA cites the Online Auction Platform case (which Euclid Law advised on) as an example of a successful interim measures case in its 2018/2018 annual report, although the case was closed after commitments were offered so there was no interim measures decision.  You can read Sarah’s article – co-authored with Simon Chisholm (CRA) and Helen Parker (UK Auctioneers Group) – here.

“CMA Policy: UK Competition Authority Asserts itself in Anticipation of Brexit” comments by Sarah Long

Sarah Long was asked to comment on The Capital Forum’s Vol. 7 No. 300 story published on 15 August 2019 entitled “CMA Policy: UK Competition Authority Asserts Itself in Anticipation of Brexit”.In anticipation of the UK’s imminent exit from the EU, the CMA has adopted an aggressive approach in a bid to secure a better outcome for UK consumers. […] The CMA “will now have an element of freedom to look at mergers in a different way,” said Sarah Long, a partner at Euclid Law in London, adding that the CMA could ultimately move away from the European Commission’s approach in some key respects.

To read the full article, click here.