UK merger control – the new normal

September 2020 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

September 2020 Issue

UK merger control is quirky. In most European countries, mergers have to be notified to a competition authority if they meet the relevant thresholds. And until the authority has given its clearance, the transaction cannot close. In the UK, a merger filing is voluntary and, even if the Competition and Markets Authority (CMA) decides to investigate, the transaction can still close.

This means that the vast majority of mergers, which raise no antitrust issues at all, can proceed without the need for a filing or a standstill period. While there are jurisdictional thresholds, they are written in such a way that it can sometimes be difficult to know whether they are met. And the CMA does not have to decide whether they apply until it has finished its investigation.

The UK rules are not new. For the most part, they can be traced back to 1973. But the last two years have seen the CMA explore its powers and assert itself in new ways. Parties to mergers with even a minimal UK-nexus can now find themselves facing a long and intense review. They can be fined for failing to comply with an investigation, even inadvertently. They can face orders to unwind integration steps while the CMA investigates. And the CMA has blocked an unprecedented number of mergers over the last 18 months.

The Brexit factor

At least part of the CMA’s new-found confidence can be attributed to Brexit. Before Brexit, the CMA could not investigate mergers that qualified for review by the European Commission (EC). The EU operates a ‘one-stop-shop’ merger regime: transactions that are notified in Brussels cannot be reviewed at national level in the EU. From the end of the Brexit transition period, this will change. The UK will no longer form part of this one-stop shop, meaning that the CMA will have responsibility for reviewing the UK aspects of all large international mergers. The CMA estimates that this will increase its caseload by at least 40 percent.

The CMA was quick to realise that this gave it an opportunity to step out of the EC’s shadow and show itself to be one of the world’s leading competition agencies. As its chief executive, Andrea Coscelli, has said, the CMA expects to “play an important role in helping the UK to continue, up to and beyond its Exit from the EU, to be a dynamic competitive economy for consumers and businesses”. To fulfil this role, the CMA has secured additional funding, moved to larger, more modern premises in London’s Canary Wharf, opened new offices in Edinburgh, Belfast and Cardiff, and significantly increased its headcount. It now has more employees than the EC’s competition directorate.

Expansive approach to jurisdiction

The CMA is already asserting jurisdiction over cases that have only a limited UK-nexus. Under most merger regimes, companies know if their transaction qualifies for review by applying a bright-line jurisdiction test, typically by reference to the parties’ reported turnover. Parties can quickly work out whether they meet the test or not. In the UK, a transaction qualifies as a ‘relevant merger situation’ if one of two tests is met: either the target’s UK turnover exceeds £70m, or the merging parties’ activities overlap and the transaction would create or increase a 25 percent share of supply or purchases.

While the turnover test is easy to apply, the share of supply test allows the CMA wide discretion to decide how products and services are defined, and how to measure shares. The test can even be met where one of the parties is not currently supplying products or services in the UK. Two recent examples, highlighted below, illustrate this point.

In Roche/Spark, a merger in the biotechnology sector, the CMA was concerned about competition in relation to a particular gene therapy (for haemophilia A). Spark was developing a new treatment but did not have a product on the UK market at the time. Despite this, the CMA found that the share of supply test could be met based on the number of UK-based employees engaged in activities relating to this type of treatment.

In Mastercard/Nets, the target (a Scandinavian company that provides payment services infrastructure), was not supplying any services in the UK. The CMA considered that the share of supply test could still be satisfied because both parties had registered (and therefore ‘offered’) to make their services available to other companies that were bidding for contracts in a UK infrastructure procurement project. The CMA identified between five and eight other suppliers of these services, giving the parties a share of between 20 and 30 percent. The CMA therefore concluded that the share of supply test “is or may be satisfied”.

Formal investigations and fines

Once the CMA opens an investigation, companies can find themselves under strict obligations to provide information, with the threat of fines for failing to do so. Before 2014, UK merger investigations were mostly informal. Parties notified the agency through an ‘informal submission’, documents were requested (and provided) informally, and the initial investigation phase had no formal deadline – only an administrative target of 40 working days. In 2014, the CMA was given more formal powers and the phase 1 period was enshrined in law, but the process was still largely based on voluntary cooperation in practice.

Today, the CMA routinely issues formal information requests, especially when seeking internal documents. In 2019, it published new guidance, which states: “To support the CMA’s ability to carry out its statutory functions, which is dependent, in large part, on being able to rely on the accuracy and comprehensiveness of merging parties’ submissions, the CMA is likely to use section 109 notices [formal requests] as standard in future investigations where internal documents are requested from main parties”.

It is not unusual for the CMA to request thousands, sometimes hundreds of thousands, of internal documents using these powers. Failure to provide all documents within scope of the request (even inadvertently) carries the risk of fines. The recent Sabre/Farelogix case provides one example. Sabre submitted more than 6000 documents in response to formal requests. It withheld some additional documents that it believed to be legally privileged. After a further review, it concluded that not all of them were legally privileged and so provided them to the CMA. This did not prevent the CMA from imposing a fine for the original mistake.

Interim orders

If the CMA decides to investigate a merger that has already completed or is about to complete, it will impose a hold-separate order. The merger can close but the businesses cannot be integrated while the CMA investigates, and the parties have to certify compliance on a regular basis. This allows transactions to complete, while ensuring that the CMA can still impose remedies at the end of its investigation if it needs to.

The CMA has recently begun penalising companies for even minor breaches of these hold-separate orders. Since June 2018, it has imposed fines of between £100,000 and £300,000 on five separate occasions. And in some other cases, it is ordering companies to appoint (and pay for) an independent trustee to monitor and report on their compliance. Moreover, until last year, interim orders were used only to prevent further integration. The CMA is now forcing companies to unwind integration steps that they had already (lawfully) taken before its investigation began as well.

More mergers being blocked

It is relatively rare for mergers to be blocked. Most transactions are unchallenged and where concerns do arise, they can often be addressed with remedies (such as divesting a facility or an overlapping business unit). There are some signs, however, that prohibition is becoming more common. Over the last two years, 12 mergers were blocked or abandoned in the face of CMA objections. By comparison, the CMA blocked just one merger in the previous four years (April 2014 to March 2018). The EC has formally prohibited just six transactions in total since 2014 (although some other cases have been withdrawn rather than face prohibition). While it would be wrong to draw too firm conclusions from these figures, the apparent uptick in prohibitions is consistent with the CMA’s growing confidence and assertiveness in other areas.

A compelling example is the CMA’s 2020 decision to block Sabre/Farelogix. This case involved two US providers of technology solutions to the travel industry. The CMA blocked the transaction, even though Farelogix had limited activities in the UK, because it believed that the merger would reduce Sabre’s incentives to innovate and that absolute prohibition was the only way to address this concern. The US Department of Justice had also sought to block the merger but its challenge was not upheld by the Delaware District Court, meaning that the CMA alone prevented the merger from proceeding.

The new normal

Navigating the UK merger rules has undoubtedly become more burdensome and time-consuming, and the risks of getting it wrong are greater than ever. The CMA has shown that it has the teeth to intervene in cases that have relatively little UK-nexus and is not afraid to block global mergers. After Brexit, when more transactions fall within the CMA’s jurisdiction, dealing with the quirks and challenges of the UK merger regime is likely to become the new normal.

Paul Gilbert is counsel, Courtenay Stock is an international lawyer and Laura Hellwig is a trainee solicitor at Cleary Gottlieb Steen & Hamilton LLP. Mr Gilbert can be contacted on +44 (0)20 7614 2335 or by email: pgilbert@cgsh.com.

Paul Gilbert, Courtenay Stock and Laura Hellwig

Cleary Gottlieb Steen & Hamilton LLP