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Brexit and implications for UK Merger Control – Part 2/3: Implications for the CMA’s workload and what not to do

The Competition Bulletin is pleased to welcome the second in a three-part series of blogs on Brexit and merger control by Ben Forbes and Mat Hughes of AlixPartners.  Ben and Mat are (with others) co-authors of the new Sweet & Maxwell book, “UK Merger Control: Law and Practice”.

Part one focused on the voluntary nature of UK merger control and can be found here.

Introduction – the CMA’s mergers workload will increase

At present, UK mergers that meet certain turnover thresholds fall exclusively under the jurisdiction of EU Merger Regulation[1]. However, Brexit is likely to end this “one-stop” merger control regime for UK companies, leading to more mergers being caught by UK merger control.

To put this in context, the Competition and Markets Authority (CMA) published 72 decisions concerning qualifying mergers in 2014/15, and 60 such decisions in 2015/16.  Even 20 or 30 more UK merger decisions would therefore represent a very substantial increase in the CMA’s workload, and large-scale European mergers may impact multiple UK markets.  The CMA’s workload will further increase as Brexit will also mean that the UK authorities acquire sole responsibility for enforcing all competition law in the UK.

This part of our blog series focuses specifically on two particularly poor, but often-discussed, options for reducing the CMA’s mergers workload (i.e. what not to do):

  • Removing the ‘share of supply’ test; and
  • Integrating the CMA’s Phase 1 and Phase 2 review teams.

The reason for this starting point is that the UK merger control regime has been subject to extensive fine-tuning in recent years, and it is important to ensure that future changes do not compromise the efficacy of the regime.

The third part of this blog series will focus on much more sensible options for adjusting UK merger control.

Should the CMA look at fewer mergers, and is the ‘share of supply’ test an appropriate jurisdictional threshold?

As set out in the first part of this blog, the CMA focuses more of its investigations on anti-competitive mergers than under the EU Merger Regulation. Nevertheless, another distinctive feature of UK merger control is that mergers may qualify for investigation where the merger creates (or enhances) a market share of 25% or more in the UK, or a “substantial part” of the UK (the so-called “share of supply” test). They may also qualify where the UK turnover of the target firm exceeds £70 million (the “turnover test”).

The share of supply test can be applied very narrowly at both:

  • The product level – This is because the share of supply test is based on the “description” of goods and services. These descriptions can be very narrow and do not need to correspond to economic markets; and
  • The geographic level Small parts of the UK (such as Slough), which the CMA considers to be a “substantial” part of the UK.

The share of supply test often creates uncertainty for the parties. Often they do not know the products and geographic area over which the CMA will apply the test. They may also not know their competitors’ sales, making market shares difficult to calculate.  It is therefore legitimate to question whether the share of supply is an appropriate jurisdictional threshold.

However, we believe there are two good reasons for retaining the share of supply test.  First, the share of supply test captures effectively mergers that may be problematic. From 1 April 2010 to 30 September 2016, 56% (53 cases) of the 95 Phase 1 merger cases that were either cleared subject to undertakings in lieu of reference or referred only qualified for investigation under the share of supply test.  Abandoning the share of supply test would therefore grant a “free pass” to these mergers – unless the turnover test is reduced.

The jurisdictional basis of Phase 1 merger cases either cleared subject to undertakings in lieu of reference or referred

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Source: AlixPartners analysis

Second, the share of supply test is a highly effective and focussed way of enabling the CMA to investigate mergers that may lead to a SLC.  In particular, UK merger control focuses on mergers that create or enhance high market shares, or that reduce the number of competitors from four to three (or fewer). Between 1 April 2010 and 31 March 2016, 94% of Phase 1 mergers where undertakings in lieu were accepted or the merger was referred, involved horizontal mergers between competitors where:

  • The merger created or enhanced high market shares of 40 per cent or more;
  • The merger reduced the number of competitors from four to three (or fewer), or where the merged undertaking’s market share exceeded 35% (calculated on various different bases).[2]

Should the CMA be fully integrated such that there is no distinction between the review teams at Phase 1 and Phase 2?

Creating the CMA as a single, integrated competition authority was intended to yield various synergies. In particular, the CMA has responsibility for both Phase 1 merger review (previously carried out by the Office of Fair Trading) and Phase 2 merger review (previously carried out by the Competition Commission).  However, a clear distinction between Phase 1 and Phase 2 has been retained.  In contrast to most other competition authorities, at Phase 2, a new case team is appointed, with largely separate staff to Phase 1 and the decision makers at Phase 1 are not involved at Phase 2.  The purpose of this structure was to retain the independence of the decision makers at Phase 2, with the CMA Panel making the final decisions at Phase 2.

The particular concern is that an integrated Phase 1 and 2 process would suffer from “confirmation bias”, namely a case team finding a competition problem at Phase 1 may be predisposed to follow suit at Phase 2.

The CMAs’ costs, and possibly those of the parties, could be reduced to some degree by dispensing with the separation of the Phase 2 and Phase 1.  However, as the government indicated when it created the CMA, the independence and impartiality of the Phase 2 regime is a particular strength of UK merger control.  Whilst the government consulted in May 2016 on the precise structure, identity and number of CMA panel members, there are strong arguments for retaining the independence and impartiality of the CMA panel.

Conclusions

Notwithstanding the inevitable increase in the CMA’s workload we would not recommend either:

  • Abandoning the share of supply test. This test is a strength of the UK regime as it focuses UK merger control on mergers that experience suggests are most likely to lead to competition concerns; or
  • Changing materially the independent and impartial nature of the CMA in relation to its investigation of Phase 1 and Phase 2 mergers.

Part three of this blog series considers, in our view, much more sensible adjustments to UK merger control to reduce the CMA’s workload without compromising its effectiveness.

[1]    There are provisions for mergers to be referred down to individual member states and up to the Commission from member states.

[2]    See further s.6-009 of “UK Merger Control: Law and Practice”, Parr, Finbow and Hughes, Third Edition, Sweet & Maxwell, November 2016.

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Brexit and implications for UK Merger Control – Part 1/3: Should UK merger control filings be mandatory?

The Competition Bulletin is pleased to welcome the first in a three-part series of blogs on Brexit and merger control by Ben Forbes and Mat Hughes of AlixPartners.  Ben and Mat are (with others) co-authors of the new Sweet & Maxwell book, “UK Merger Control: Law and Practice”. They can be contacted on bforbes@alixpartners.com and mhughes@alixpartners.com.

Introduction

Brexit will have wide-ranging impacts on the UK economy and society, including on merger control in the UK.

The focus of this blog is the voluntary nature of UK merger control.  Our subsequent blogs will consider the UK Competition and Markets Authority’s (CMA) workload post-Brexit, and the appropriate mitigating steps to manage the likely increase in workload.

Why are merger filings voluntary in the UK when they are mandatory from Albania to Uruguay?

In contrast to most other countries’ merger control regimes, including the EU Merger Regulation, UK merger control is “voluntary”. This means there is no requirement for mergers to be notified to the CMA prior to completion or at all. Whilst this is not a new issue, it is appropriate to revisit this point as post-Brexit the CMA will have sole responsibility to assess mergers that affect UK markets, which raises the question of whether the UK system should be made mandatory, as it is in most countries.

One important issue is whether UK merger control would be more efficient or effective if UK merger filings were mandatory prior to completion.

Mandatory regimes are not efficient – finding needles in haystacks

Considering first efficiency, it is highly unlikely that anyone wishing to reduce the CMA’s workload would propose mandatory filings. This is because mandatory regimes require the parties to file – and the competition authority to investigate – regardless of whether the merger raises any real competition issues that warrant investigation.[1]

However, just how inefficient would a mandatory regime be? Over the last five years, only 7.0% of the mergers notified to the European Commission were either cleared subject to commitments at Phase 1 or subject to Phase 2 review.[2]

By contrast, over a similar period,[3] 30.4% of the CMA’s Phase 1 decisions relating to qualifying UK mergers were either: (a) clearances subject to undertakings in lieu of reference; (b) clearances on de minimis grounds (which is not a basis for clearing mergers under the EU Merger Regulation – covered in part three of this series); (c) or subject to Phase 2 review. Moreover, over this period, 40.5% of qualifying UK mergers were subject to a case review meeting (such meetings are called by the CMA in relation to all mergers that may warrant detailed Phase 2 investigation).

These figures indicate that the UK merger control regime, with its voluntary filing rule, is far more focussed on investigating mergers that may be anti-competitive, rather than finding needles in haystacks.

Mandatory regimes may fail to capture all anti-competitive mergers – keeping it (jurisdiction) simple may be stupid

Another difficulty with mandatory regimes is that, because notification is mandatory, in order to make the system business-friendly the jurisdictional criteria tend to be relatively simple. Accordingly, mandatory regimes typically apply to certain types of merger transactions and depend on the turnover of the parties.[4]  However, there are trade-offs between the simplicity of these criteria (and legal certainty), failing to capture anti-competitive mergers, and inefficiently investigating and delaying mergers that are not problematic.

For example, the European Commission has consulted on extending the EU Merger Regulation to the acquisition of minority stakes in rivals or firms active in related markets, even where the firm has not acquired “control”.[5]  Similarly, the European Commission has consulted on whether the EU’s turnover thresholds should be expanded by adding more thresholds.  In 2016, the Commission observed that turnover based jurisdictional thresholds may be particularly problematic “in certain sectors, such as the digital and pharmaceutical industries, where the acquired company, while having generated little turnover as yet, may play a competitive role, hold commercially valuable data, or have a considerable market potential for other reasons.”[6]  In both instances, the concern is that anti-competitive mergers may be escaping scrutiny under EU merger control.

Whatever the precise scale and seriousness of any enforcement gaps in EU merger control, any such gaps are smaller in relation to UK merger control. In large part this reflects the more subjective nature of the jurisdictional tests applied. For example, UK merger control applies where firms acquire “material influence” over another firm, which is less than “control” under the EU Merger Regulation.  Similarly, UK merger control is not limited to a turnover based threshold. This is because a merger may also qualify if market shares of 25% or more are created or enhanced in the supply or acquisition of particular goods or services, whether in the UK as a whole or a substantial part of the UK. Accordingly, the CMA can investigate the acquisition of small competitors with low turnovers where the so called “share of supply” test is satisfied.

The downsides of voluntary filings are low

There are two potential downsides of voluntary filings. First, the CMA may fail to investigate some anti-competitive mergers that were not voluntarily notified. While this is possible, this is likely to be rare. In particular, from 1 April 2015 to 8 March 2016, the CMA’s Merger Intelligence Committee (MIC) reviewed more than 550 transactions to assess whether they warranted investigation. Ultimately, the CMA only investigated a small minority of these mergers, but approximately 20% of the CMA’s decisions over this period resulted from MIC investigations into non-notified mergers.[7]

In short, the parties to anti-competitive mergers, even in small markets, should not assume that by not notifying they can “fly under the radar” and avoid investigation.  It is particularly unlikely that large UK mergers that currently fall for consideration under the EU Merger Regulation will escape scrutiny from the CMA.

A second potential downside is that, after merger integration, it may be difficult for the CMA to re-create two independent firms. However, this issue is largely addressed by the CMA’s power to impose “hold separate orders” in relation to completed mergers that prevent merger integration pending the CMA’s final decision.  The CMA routinely exercises this power, but it may revoke the order earlier if it becomes clear that there are no issues.

Conclusions

The voluntary nature of UK merger control is unusual compared to most merger control regimes. Brexit naturally raises questions as to whether this should persist as the UK CMA is likely to acquire sole responsibility to investigate mergers affecting the UK.  However, in our view, there is not a good case for the UK to impose a mandatory regime on either efficiency or efficacy grounds.  This is particularly the case in light of the likely increase in the CMA’s mergers workload post-Brexit, which is the focus of our next two blogs.

[1]    In 2011, the UK government considered and rejected both mandatory pre-notification for mergers, and a hybrid system that would require mandatory filings above the current UK turnover threshold of £70 million.

[2]    These figures do not consider the impact of merger cases that were referred to and from member states.

[3]    The UK statistics cover the period from 1 April 2012 to 31 December 2016.

[4]    This is obviously a simplification, and some countries’ jurisdictional thresholds are highly complex. A good review of merger control in 50 countries is set out in “The International Comparative Legal Guide to: Merger Control 2017”.

[5] See further the Competition Law Forum’s discussion of these issues, available at http://www.biicl.org/documents/346_the_clf_response_to_the_european_commissions_consultation_towards_more_effective_eu_merger_control.pdf?showdocument=1

[6]    European Commission, “Consultation on Evaluation of procedural and jurisdictional aspects of EU merger control”.

[7]    https://events.lawsociety.org.uk/uploads/files/0a14983f-fb2f-4297-9884-aa9382c52b90.pdf

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