UK merger control: increased intervention poses greater risks for international acquisitions

August 2020  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2020 Issue

In March 2020, Andrea Coscelli, chief executive of the UK’s Competition and Markets Authority (CMA), confirmed that the CMA is using a “wider and more sophisticated range of evidence” in its merger control investigations, which is expected to “lead to more competition concerns being identified and more merger interventions in general”.

It is therefore unsurprising that the CMA has recently identified competition concerns in an unprecedented number of transactions, contributing to a significant proportion being abandoned. Of those transactions that were subject to an in-depth Phase 2 CMA investigation, from 1 January 2019 to 31 May 2020, only four were cleared unconditionally, with five prohibited, and five cleared subject to remedies.

It has also not been unusual for the CMA to identify UK-specific concerns in international transactions cleared in other jurisdictions. Examples include the anticipated acquisition by Sabre of Farelogix, cleared in the US in April 2020, but prohibited in the UK that same month, and Amazon’s anticipated investment in Deliveroo, cleared in Germany in July 2019, but still subject to an ongoing UK investigation in June 2020.

With the CMA’s approach broadly unchanged by the coronavirus outbreak, and with Brexit empowering the CMA from the end of the transition period to investigate transactions that would previously have been examined by the European Commission, merger parties should ensure that the UK merger control regime is considered carefully, even if the link between a transaction and the UK appears limited.

Against this background, this article considers key aspects of the UK merger control regime.

Risk to the acquirer: completing without clearance

Notification under the UK merger control regime is voluntary, meaning that there is no requirement to obtain clearance before completing a transaction, in contrast to the majority of merger control regimes worldwide.

Consequently, where an acquirer completes a transaction without obtaining clearance, it does so ‘at risk’. However, if the acquirer has not fully assessed the application of the UK merger control regime, it may underestimate this risk.

When a transaction completes without clearance, the CMA can open an investigation within four months of the material facts of the transaction being publicised, or being brought to the CMA’s attention. The CMA is generally responsible for Phase 1 and Phase 2 investigations in the UK, and actively monitors transactions, seeking to identify candidates for investigation.

When the CMA investigates a completed transaction, it typically imposes interim measures to prevent the parties taking pre-emptive action that could prejudice the outcome of its investigation. The CMA can also require the reversal of any pre-emptive action already taken. Addressees can expect financial penalties if they fail to comply with interim measures without reasonable excuse.

If the CMA identifies competition concerns in relation to a completed transaction, the burden is upon the acquirer to address these concerns either voluntarily (e.g., by offering to divest part of the acquired business at the end of a Phase 1 investigation), or as the CMA may ultimately order at the end of a Phase 2 investigation.

However, either outcome is likely to result in a ‘fire sale’, with the acquirer divesting part (or all) of the acquired business at a substantially lower price than it paid.

Breadth of the CMA’s jurisdiction: minority shareholding acquisitions

The UK merger control regime applies to completed and anticipated transactions, where two or more businesses have ceased or will cease to be distinct, meaning that they are brought under common ownership or control.

The concept of control is broadly construed, enabling the CMA to investigate transactions where the acquirer obtains either de facto or legal control, or the ability to exercise material influence over the target. With regard to this latter threshold, the CMA focuses upon the acquirer’s ability to materially influence the target’s policy regarding its conduct on the market (e.g., the target’s strategic direction and commercial objectives).

Significantly, this means that acquisitions of minority shareholdings can be investigated under the UK merger control regime, and the CMA will generally consider the acquisition of a shareholding of more than 25 percent to confer material influence. The CMA will also assess whether a shareholding of at least 15 percent – and, exceptionally, of less than 15 percent – may confer material influence, having regard to the commercial reality of the transaction.

For example, the CMA has provisionally concluded that Amazon's anticipated acquisition of a minority shareholding in Deliveroo would enable it to exercise material influence. Among other aspects, the CMA has considered evidence of how other shareholders – and Deliveroo's management – perceive Amazon as a special investor, and as a potential future purchaser of Deliveroo, which has expertise directly relevant to Deliveroo. The CMA found it was therefore likely that Amazon's views would be given material weight, with the investment consequently conferring material influence.

Flexibility of the CMA’s jurisdiction: the ‘share of supply test’

Where two or more businesses are (or will be) brought under common ownership or control, as a general rule the CMA can investigate within the relevant time period if either: (i) the target’s annual UK turnover exceeds £70m (turnover test); or (ii) the businesses ceasing to be distinct both supply or procure goods or services of a particular description and, post-transaction, will supply or procure at least 25 percent of all of those goods or services in the UK, or in a substantial part of the UK, with the transaction resulting in an increment in that share of supply or procurement (share of supply test).

Therefore, if the turnover test is not met, the CMA can still investigate where it believes that the share of supply test is, or may be, satisfied. In seeking to prevent mergers that could harm UK consumers, the CMA has demonstrated its willingness to use the share of supply test to investigate international transactions with a comparatively limited UK nexus.

The CMA has a wide discretion in applying the share of supply test. In particular, the CMA is able to decide how to describe the particular goods or services supplied or procured by the merger parties by which the 25 percent threshold is to be assessed. Importantly, the share of supply test is not a market share test, and although the CMA will consider any reasonable description of a set of goods or services, this need not be an economic market. In recent cases, the merger parties have expressed concerns that the CMA has used narrow and artificially selective descriptions of their activities, with the consequence that the 25 percent threshold has necessarily been satisfied by reference to these descriptions, with the CMA then able to investigate.

In addition, when considering whether the 25 percent threshold is satisfied, the CMA has the discretion to apply whatever measures it considers appropriate, and there is no requirement for a minimum increment. In most cases, the CMA has considered the 25 percent threshold by reference to the value or volume of sales or purchases. However, the CMA has recently considered the threshold to be satisfied by measures including the merger parties’ number of UK-based employees, and the number of UK patents obtained by the merger parties.

The application of the share of supply test is presently subject to an appeal before the UK’s Competition Appeal Tribunal (CAT). Sabre is challenging the lawfulness of the CMA’s approach following its prohibition of Sabre’s anticipated acquisition of Farelogix, where the CMA used the share of supply test to establish jurisdiction. However, given the discretion afforded to the CMA by the relevant legislation, and the standard of judicial review to be undertaken by the CAT, this challenge may face difficulties.

Substantive assessment: evidence considered by the CMA

When undertaking a substantive assessment of the competitive impact of a transaction, the CMA’s approach is cautious and evidence-based, with merger parties’ submissions robustly tested.

In addition to considering a range of economic evidence, including survey evidence where available, the CMA is increasingly focusing upon the internal documents of the merger parties and third parties, as well as transaction valuations.

For example, the CMA has relied upon the merger parties’ internal documents to evidence that they were close competitors, and that the transaction would remove a significant competitive constraint. In so doing, the CMA rejected submissions that the transaction could not raise competition concerns because it resulted in only a limited market share increment – less than 10 percent – on the basis that: (i) market shares did not adequately capture how closely the merger parties competed with each other; and (ii) even a small increment can raise competition concerns where the merger parties are close competitors.

The CMA has also relied upon the merger parties’ internal documents, and those of competitors, to assess how dynamic markets are expected to evolve, and whether the merger parties could be expected to become closer competitors in the absence of the transaction. In this context, the CMA rejected submissions that the merger parties’ offerings were complementary, and therefore in different product markets. This was as the merger parties’ documents indicated, their existing competitive relationship, and the expectation that this would intensify in the absence of the transaction as the sector evolved. In addition, the CMA considers that valuation models can provide insights into acquirers' expectations in dynamic markets, and the CMA can conduct formal interviews with key businesspeople to gather further evidence.

Therefore, where it is necessary to plan a route to clearance (i.e., as it appears likely that the CMA could assert jurisdiction), merger parties and their advisers should ensure that the contemporaneous evidence base is consistent, with internal documents and valuation models, among other aspects, aligning to support credible submissions that the transaction does not give rise to competition concerns.

Samuel R. Beighton is a partner at Gowling WLG (UK) LLP. He can be contacted on +44 (0)20 3636 7972 or by email: samuel.beighton@gowlingwlg.com.

© Financier Worldwide

BY

Samuel R. Beighton

Gowling WLG (UK) LLP

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