In 2004 I was involved in Convatec/Acordis, an anticipated UK merger, which was referred to a Phase II investigation by the then Competition Commission. The transaction gave rise to a very limited overlap in alginate fibres, but was otherwise without concern.
Instead of continuing with the Phase II reference, the parties modified the transaction. The original agreements were amended so that the alginate fibre business was retained by the Seller. The remainder of the business remained subject to the acquisition.
Faced with these facts, the Competition Commission concluded that it was under an obligation to cancel the reference, which it duly did. This was obviously an attractive alternative for the parties, compared to the cost, delay and uncertainties involved in a potential reference.
Since then a lot of changes have been made to UK merger control regime and this article looks again at whether leaving the problem business behind is a suitable alternative to (i) an uncertain Phase I remedies process; and (ii) a potential Phase II reference.
THE LEGAL FRAMEWORK
For the purpose of this section, we have to assume that the CMA has taken a provisional decision under Section 34 ZA(1)b of the Enterprise Act (as amended). Such a Decision is usually worded as follows:
“On the date of the SLC Decision, the CMA gave notice pursuant to section 34ZA(1)(b) of the Act to the Parties of the SLC Decision. However, the CMA did not refer the Merger for a phase 2 investigation pursuant to section 33(3)(b) on the date of the SLC Decision in order to allow the Parties the opportunity to offer undertakings to the CMA in lieu of such reference for the purposes of section 73(2) of the Act.”
Section 33 provides as follows:
Duty to make references in relation to anticipated mergers
- (1) The OFT shall, subject to subsections (2) and (3), make a reference to the Commission if the OFT believes that it is or may be the case that—
- (a) arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and
- (b) the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.
The important point here is that at the point of the decision under Section 34ZA(1)(b), the reference pursuant to Section 33(3)(b) has not yet been made – but the parties have received notice so that they can propose remedies. Could they modify the transaction instead? What would be the impact of such a modification on the duty to refer under Section 33?
The CMA Guidance CMA 2 on jurisdiction and procedure provides as follows:
“15.2 If an anticipated merger is abandoned during the course of the CMA’s Phase 1 investigation, the CMA can issue a decision finding that its duty to refer does not arise because there is no relevant merger situation. If an anticipated merger is abandoned following a reference to Phase 2, the CMA can cancel the reference and stop the inquiry. The CMA has no power to cancel an investigation of a completed merger.
15.3 Section 37(1) of the Act requires the CMA to cancel a Phase 2 reference if it considers that the proposal to make arrangements of the kind mentioned in the reference has been abandoned. Where it is claimed that the arrangements have been abandoned and new arrangements are proposed or contemplated, the CMA must be satisfied that the arrangements that are described in the terms of reference have, in fact, been abandoned and that the new arrangements are not merely an amended form of the arrangements that were referred. (emphasis added)
15.4 In order to be satisfied that the parties have abandoned the merger (at either Phase 1 or Phase 2), the CMA will require written assurance from the parties to the transaction to that effect. […] ”
As a result of the change to the merger it becomes more difficult for the CMA to prove the second condition of Section 33, because its theory of harm (usually price rises due to horizontal unilateral effects) no longer exists. Indeed, the non-merging of the overlapping business broadly reflects the CMA’s counterfactual (i.e. that business being run separately as a competitor).
In order to deal with that issue, the CMA would have to find that “the Merger” could be expected to lead to a SLC in the retained business. That is an interesting question. Every time a business is acquired from a Group, other parts of that Group are being left behind. Merger control is typically focussed on unilateral, coordinated or sometimes portfolio effects of merging the businesses, but not ordinarily on whether what is left behind will be a less effective competitor. In theory, it is possible that the act of splitting a previously integrated business would weaken the business left behind to such an extent that another player would be able unilaterally, or the other players in the market would be able in coordination, to raise prices. (Interestingly, such a theory of harm may not even require that the buyer would have the ability to raise prices as a result: it could be a third party competitor unconnected to the transaction.) For this to be the case, however, there would have to be strong evidence that the carve-out or “leaving behind” would undermine the competitiveness of the retained business to a sufficient extent (e.g. because of the consequent destruction of economies of scale or scope, or the starving of future investment that it requires), and there would also have to be something special about the retained business that its weakening as a rival would weaken the structure of competition in the market as a whole (e.g. there are very few other credible competitors or if it is a maverick).
Legally, the fact that the SLC arises not directly from the merging of businesses, but instead from the “leaving behind” of a business is unlikely to be a barrier to finding of an SLC under sections 33 (or 35) of the Enterprise Act. After all, even if it is the business “left behind” that is weakened as a competitor (rather than the target or acquiring business) by the merger, it is arguably still “the creation of the relevant merger situation” which “results” in the SLC.
That said, such a “carve out” theory of harm would be an unprecedented step, not just for the CMA. In Case M.4005 Ineos/Innovene, the European Commission allowed BP to retain a carved-out business whose subsequent sale to the same buyer Ineos under put and call options was referred to Phase 2 (although ultimately cleared unconditionally), without questioning whether the carve-out itself weakened the retained business as a competitive force. It would also raise some interesting issues about whether the UK Merger Notice adequately explores such “carve out” effects. It would take a very bold CMA to refer a merger on that basis.
One other option would be for the CMA to make an interim order to preclude pre-emptive action. The Guidance on interim orders can be found here:
- The Guidance provides as follows:
“2.3 As explained in paragraphs C.5 to C.10 of CMA2, the CMA will only exceptionally impose an IEO in relation to a merger which has not yet completed. This is because the circumstances in which the CMA might consider that an IEO is necessary in relation to an anticipated merger (examples of which are provided in paragraph C.9 of CMA2) are, in practice, relatively rare.
2.4 Where the CMA does impose an IEO in relation to an anticipated merger, this will typically not prevent completion of the transaction from taking place (unless there are unusual circumstances which could mean that the act of completion itself would constitute pre-emptive action).5 In other words, during (and in advance of) the CMA’s phase 1 investigation, the CMA is typically concerned with limiting integration (maintaining pre-merger competitive conditions and ensuring that the CMA is able to implement an effective remedy if necessary) rather than preventing completion itself.”
It is plain from the text of the Guidance that an order preventing the closing of the transaction is (a) very rare and exceptional and (b) only intended for circumstances where limiting integration is the concern.
This is also in accordance with the actual text of Section 72 EA:
(8) In this section “pre-emptive action” means action which might prejudice the reference concerned or impede the taking of any action under this Part which may be justified by the CMA’s decisions on the reference.”
In the light of the CMA’s own guidelines it would not be a proper exercise of discretion to adopt an IEO at prohibiting the retention of a business. That would run counter to the CMA’s own counterfactual, and the main rationale of an IEO is to prohibit further integration. Rather, any IEO would have to be directed at prohibiting the merger of the merging business (highly unlikely), or at ensuring that staff or assets etc remain with the seller, sufficient to support the business (highly unlikely).
It has been 14 years since the abandonment decision in Convatec/Acordis. This article concludes that it is still possible to leave behind a business or activity that gives rise to the substantial lessening of competition after the CMA has taken a Decision under Section 34 ZA(1)b.
In such circumstances the CMA would have to show a new SLC arising out of the “carve out”, which would be a difficult step to take within the current merger control framework.
For those who are wondering why all this is still relevant, I will conclude this article with a quote from Patrick Stanley, the CFO of Acordis at the time:
“Another high point for me was solving the problem that arose when the OFT referred the deal to the Competition Commission. The deal was referred over what was actually a pretty insignificant part of the business – most of the value was in a different part of the operation. Whatever people say, the amount of information required during an investigation by these types of authorities is horrendous.”