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29 April 2020
Regulatory scrutiny is an increasingly important area of focus for buyers and sellers in M&A transactions.(1) From the outset of a deal, the parties will be keen to understand whether regulatory approval is required or recommended to be obtained prior to closing, how long it will take to obtain approval and the ability of the relevant regulator to block the transaction or otherwise impose conditions to closing that may change the commercial terms of the deal (as well as the likelihood of the same). This article looks at the UK merger control regime under the Enterprise Act 2002.
Regardless of the sector in which a target operates, a buyer will need to consider the applicability of merger control to the deal that it is considering. The United Kingdom operates a voluntary merger control regime. However, the European Commission (EC) currently operates a 'one-stop shop' jurisdiction to review the largest and most complex cases on behalf of all EU member states, including the United Kingdom. The combination of a voluntary UK regime and EC jurisdiction over major deals has resulted in the UK antitrust authority, the Competition and Markets Authority (CMA), historically having a lower profile than many other major G20 enforcement authorities.
As the United Kingdom has left the European Union, at the end of the transition period, the United Kingdom will be able to conduct merger reviews in parallel with the EC. In preparations for this, the CMA is seeking to raise its global profile and articulate more explicitly and publicly its enforcement priorities. It has recruited additional personnel (over 200 new staff since the referendum), sought increased government funding and started to apply its discretionary powers more broadly across a range of transactions.
The voluntary UK merger control system was originally designed to reduce the burden on transacting parties. Companies must conduct a self-assessment to determine whether a transaction may potentially be of interest to the CMA. There are no filing deadlines and no penalties apply if a notification is not made to the CMA. In general, most companies opt to engage with the CMA only in cases where there is direct competition potentially resulting in high combined shares in a plausible market.
Although the system is voluntary, the CMA nevertheless has a dedicated and increasingly interventionist merger intelligence unit that monitors the trade press and engages with transacting parties where a notification is not submitted. This allows the CMA to identify transactions of potential interest for review, unless the companies can demonstrate that the transaction falls outside the CMA's jurisdiction. This can be challenging, as the CMA has wide discretion in applying its jurisdictional tests.
In summary, under the Enterprise Act 2002, the CMA has jurisdiction to review anticipated or completed mergers in which:
Lower thresholds apply to mergers in the military and dual-use, multi-purpose computing hardware and quantum-based technology sectors.
In the fiscal year 2018 to 2019, 16 CMA decisions (29% of the total) related to cases 'called in' for review. It is becoming increasingly common to receive letters from the merger intelligence unit, even where the target has only a limited presence in the United Kingdom. There are also no signs of reduced merger intelligence unit activity in the current UK lockdown; the CMA has adapted quickly to remote working conditions and continues to issue information request letters to a wide range of transacting parties. Companies should be wary of the potential for intervention by the CMA late in the deal process, particularly in instances where they do not have a robust account of their reasons for not notifying the deal.
Relatedly, the CMA's interpretation of what categories of transaction fall within its jurisdiction is becoming increasingly expansive. The CMA is able to look closely at acquisitions of minority interests, applying a 'material influence' control test that has enabled it, for example, to scrutinise Amazon's acquisition of a 16% stake in Deliveroo. Similarly, the CMA is applying its 'share of supply' jurisdictional test to analyse not only transactions where the parties are direct competitors, but also transactions where there is potential future competition but no current competition.
Where the CMA reviews a merger, it has a range of measures in its 'toolkit' to prevent pre-clearance integration of the merging parties' businesses. In particular, the CMA is increasingly using initial enforcement orders (IEOs) either to prevent closing or (more often) to impose 'hold separate' obligations on companies post-closing. In the past two years, there have been 11 pre-closing IEOs, compared with only three pre-closing IEOs in the preceding three years.
This increased willingness to intervene pre-closing underlines the importance of conducting a thorough self-assessment before determining whether to engage with the CMA in parallel with antitrust regulators in other major jurisdictions.
The increased use of IEOs has been coupled with fines for companies breaching interim measures. In the 18 months to 31 December 2019, the CMA has imposed five fines, ranging between £120,000 and £300,000. These are a reminder that, although the UK regime is voluntary, the CMA is willing to use its discretionary powers to intervene in potentially problematic mergers and penalise parties for non-compliance with its orders.
Since 2017, the CMA has also demonstrated its willingness to impose financial penalties for non-compliance with disclosure requirements. One striking recent example is the £20,000 fine imposed by the CMA on Sabre in September 2019. The CMA sought to rely on disclosures made by Sabre to the US Department of Justice (DOJ). The DOJ asked Sabre to review approximately 12,000 documents withheld on privilege grounds. More than 6,000 were wrongly classified and ultimately disclosed to the DOJ, with a sub-set also submitted to the CMA.
The CMA determined that the incomplete initial disclosure was a sufficiently serious breach to warrant financial penalty, continuing its recent practice of imposing fines for failure to comply fully with information requests. This penalty is notable because US merger reviews frequently involve the review and production of millions of documents and it is not unusual for parties to revise their privilege logs and remove the claim of privilege from a significant number of documents based on discussions with the US authorities.
Post-Brexit, the CMA estimates that its merger control caseload will increase by approximately 50% to 60%. The majority of these additional cases will be complex, cross-border deals that would previously have fallen within the jurisdiction of the EC, and the CMA has already increased capacity to look at a wider range of transactions than has historically been the case. Transacting parties should be aware of the wide discretion allowed the CMA by its jurisdictional tests and its ability to intervene in transactions with only a limited UK nexus.
CMA Chair Lord Tyrie has also suggested that the United Kingdom should give serious thought to moving to a mandatory notification system, particularly for large mergers. Although such a change is unlikely in the short term, this proposal offers insight into the CMA's determination for UK merger control to be a priority consideration for transacting parties, on a level footing with the established top tier of antitrust regulators elsewhere.
Tyrie has also tabled proposals that would allow the CMA to impose binding remedies in market investigations without first demonstrating an adverse effect on competition. Companies that do not comply with these remedies would be liable to fines. Coupled with this, there are also moves to extend the scope of the CMA's information-gathering powers to compel disclosure even where no formal case file is open. Although it is uncertain whether these proposals will be taken forward, the CMA is clearly giving thought to how to enhance its 'toolkit' so that it can more easily take action against companies that may previously have escaped scrutiny.
For further information on this topic please contact Will Pearce, William Tong, Nicholas Spearing or Matthew Yeowart at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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