Control of Mergers
The Enterprise Act 2002 is the basis of control of mergers in the United Kingdom. The same substantive rules were retained under the Enterprise and Regulatory Reform Act 2013, with some revisions in relation to merger investigations. On 1 April 2014, the Competition and Markets Authority (CMA) took over the functions of the Office of Fair trading and the Competition Commission. The functions are undertaken by the markets and mergers directorate of the authority.
The CMA has published guidance on its procedures and powers. These largely reflect the earlier guidance published by the Office of Fair Trading and the Competition Commission.
Formerly the Secretary of State had a role in most merger. The Secretary of State mow retains a role in three types of public interest mergers only, namely those involving
- public security/national security issues
- media ownership; where plurality and similar considerations arise
- where issues affecting financial stability arise
These are mergers with a public interest intervention notice.
The Competition and Markets Authority is responsible for general mergers control under Part III of the Enterprise Act 2002. There are prospectively two phases in a mergers reference. In the phase 1, the CMA makes an assessment as to whether the competition issues are serious enough to warrant a second phase investigation.
If this is so, it is referred to the CMA panel enquiry group. This is an independent group of experts chosen from a panel appointed by the Secretary of State which compiles phase 2 investigation report. The enquiry group is obliged to take action to remedy the adverse effects on competition identified in its report. It advises on the remedies and their implementation.
Phase 1 assessment
The CMA considers mergers above the statutory threshold. It must generally make a decision within 40 days of a merger notice by the parties or confirmation that it has sufficient information to allow it to commence its investigations.
It considers whether EU competition law applies, in which event there is no jurisdiction for UK merger control. EU competition/mergers law applies to a merger with a Community dimension. The relevant criteria are defined under European Union law.
Two or more enterprises must cease to be distinct enterprises. The value of the turnover in the United Kingdom of the enterprise being taken over must exceed either £70 million or 25% of the relevant market share.
An enterprise comprises the activities of a business. There may be a merger where a distinct block of assets comprising an undertaking are transferred. Enterprises cease to be distinct when they are brought under common control. This may occur by acquisition of actual control by the ability directly or indirectly to control policy or materially influence policy.
The market share test may be satisfied with reference to the market in goods and services of the relevant kind. It may also be satisfied where one of the enterprises already supplies or uses 25% of goods of that type and that is thereby increased by the merger.
Key Test
The key test in competition law for mergers is whether there is a substantial lessening of competition. There is a duty to refer mergers where it has resulted or may be expected to result in a substantial lessening of competition in any goods or services within the United Kingdom. This is the key criteria for reference.
In deciding whether there has been or may be a substantial lessening of competition, the Competition and Markets Authority undertake a definition of the market to consider the operation of competition on the merged entity. It examines the extent to which competition and competitive rivalry is likely to be reduced as a result of the merger and the consequent detriment to consumers.
The totality of the circumstances is relevant. All things being, equal mergers by parties at the same level in the market previously in direct competition are relatively more problematic from a competition perspective, than vertical mergers. However, in many contexts vertical mergers between participants at different levels in the market may pose very significant risks to competition.
The CMA considers the risk of coordinated action or other anti-competitive effects arising from the merger. It will consider
- existing purchaser power
- the possibility of new entrants or the expansion of other parties in the market
- the effect of efficiencies.
Where there is or may be a substantial lessening of competition, the CMA is under a duty to refer the merger. Where there are further are real risks and issues in relation to a substantial lessening of competition, a reference should be made.
Mergers assessment guidelines have been published and are revised from time to time to assist in assessing whether there is or may be a substantial lessening of competition. It contemplates that there be a realistic prospect of a substantial lessening of competition. This is not only a prospect that is more than a 50% chance of occurring but also a that is prospect that is not fanciful but has less than a 50% chance of occurring.
Clearance
In effect the non-referral of the proposed merger to phase 2 amounts to a competition clearance in the context of the acquisition/merger transaction.
The duty to refer does not apply where
- the process is insufficiently advanced to warrant a reference
- where the market concerned is too small or of insufficient import to warrant further investigation: where the aggregate turnover of the parties is less than £10 million
- where the relevant customer benefits outweigh the adverse competition consequences through lower prices, better quality choice service or innovation.
The vast majority of mergers are cleared. Where issues are raised, a more formal approach is taken. The parties may be requested to clarify certain matters. A meeting may be requested.
It may happen that the reference effectively causes the proposed merger to be abandoned. The commercial reality may not allow continued commitment to the merger/acquisition process in the context of a prospectively prolonged investigation.
Undertakings
The legislation permits undertakings to be given by the parties to the Competition and Markets Authority in place of a reference. The authority may decide that if particular undertakings are given, the concern regarding the substantial lessening of competition will not apply.
An undertaking in this context is a binding commitment given by the parties to a merger. This may for example involve
- the division of units
- offloading of shareholdings or
- transfer of assets/undertakings.
There may be consultation on the undertakings. The normal timetable for a reference may be extended to allow the negotiation of the undertakings.
Notification
There is no system of mandatory notification. The Competition and Markets Authority in practice encourages parties to discuss the potential application the statutory process. It may be willing to give advice. The advice may be formal or informal. Mergers notice is a formal written notification.
In principle the Competition and Markets Authority may take steps in respect of a completed merger. This creates significant risks for the parties so that there is a strong incentive to have informal discussions in the context of proposed mergers. Their advice would be on the basis of the information furnished.
There is provision for a formal merger notice. This requires detailed information in relation the merger to be furnished to the Competition and Markets Authority. It must respond within 40 days. If it does not do so, no merger reference is permissible.
Phase 2 Enquiry & Report
Following the 2013 reforms, the phase 2 inquiry and report are undertaken by the Competition and Markets Authority’s panel enquiry groups. The enquiry group comprises independent experts chosen from a panel
The enquiry group undertakes an investigation. It decides whether there is a qualifying merger and whether the merger may (or has) resulted in a substantial lessening of competition. The group is to complete its report within 24 weeks of the reference. This may be extended by up to a further eight weeks.
The enquiry group follows its own procedures and methodology. It may
- gather information
- verify information
- hear witnesses
- produce an issue statement for response
- consider responses
- notify provisional findings proposals for remedies
- consider responses
- consider whether disclosure should be limited
- publish its report,
The enquiry group will usually publish its report on its website. It will request interested parties including third party competitors and consumer organisations to express their view on the proposed merger. It may seek views from a variety of sources and bodies to include relevant expertise.
Interim undertakings may be sought and taken. If there has been a merger already, steps may be taken to ensure that the merger/integration does not proceed further
If the final report concludes that there is no substantial lessening of competition, this determines and is the end of the matter. If it finds that there is or may be a substantial lessening of competition, then it will consult in relation to the terms of its decision and remedies. After this consultation process, it will issue its final report. The Competition and Markets Authority implement the remedies.
In the second phase the Competition and Markets Authority decides whether the merger is more likely than not to lead to a substantial lessening of competition. The mergers assessment guidelines assist the process.
The enquiry group considers the position with and without the merger. This involves identification of the relevant market and assessment of the increased market power that may arise from the merger. It will look at the existing market shares and concentration and structural and other factors in the market. It will consider other constraints on competition in the market, the possibility of purchaser power and new entrants et cetera, which might offset the anti-competitive effects.
Action and Review
The Competition and Markets Authority determines what action is required. It may make orders and may accept undertakings. Remedies may include
- refusal of consent
- requirements that part of the business or assets or undertaking be transferred
- requirements hat patents or know-how be licensed or shared
- requirements that specific behaviour or actions be prohibited
- that prices be limited
The Competition and Markets Authority takes account of prospective benefits to consumers in terms of prices and quality. The Competition and Markets Authority has adopted guidance on mergers remedies previously used by the competition commission
A judicial review of the decision by the Competition and Markets Authority may be taken to the Competition Appeal Tribunal. There is a further appeal to the Court of Appeal.
The Competition Appeal Tribunal considers whether
- the decision is reasonable and supportable;
- that material considerations have been taken into account and immaterial considerations have not been taken into account.
Accordingly, as with judicial review generally, a significant margin of appeal is allowed in the Competition and Markets Authority decision. The parties who may prospectively take judicial review are those with an interest in the matter
The Competition Appeal Tribunal can overturn the determinations of the Competition and Markets Authority and refer the matter back to it. Other remedies are possible.
