The Enterprise Act 2002 (the "Enterprise Act") provides the primary legislative basis for the UK merger control regime. The Competition and Markets Authority (CMA) is the investigating authority and decision-maker under the general UK merger control regime (see 1.3 Enforcement Authorities).
The CMA has issued a range of guidance, which is available on its website. Two key guidance documents are "Mergers: Guidance on the CMA’s jurisdiction and procedure (CMA2)" (the "J&P Guidance"), and "Merger assessment guidelines (CC2/OFT1254)" (the "Merger Assessment Guidelines").
For completeness, following the UK's departure from the EU on 31 January 2020, and the stated intention of the UK government for the Brexit Transition Period to end on 31 December 2020, the application of the European Union Merger Regulation (Regulation 139/2004) in the context of the UK is not considered further.
At present, there is no merger control legislation in the UK which specifically addresses foreign investment in the UK. However, the UK government has announced its intention to introduce a UK-specific regime addressing foreign direct investment (see 9.1 Recent Changes or Impending Legislation).
The Enterprise Act establishes a general merger control regime in the UK (see 2.5 Jurisdictional Thresholds). The Enterprise Act also includes specific jurisdictional and procedural provisions in relation to:
Specific issues in relation to Relevant Enterprise mergers, public interest mergers, and special public interest mergers are considered further below. Further guidance in relation to these types of merger is available from the websites of the CMA, and the Department for Business, Energy and Industrial Strategy (BEIS).
Under the general UK merger control regime, the CMA is the investigating authority and decision-maker, and is responsible for undertaking both Phase 1 investigations, and in-depth Phase 2 investigations (see 3.8 Review Process).
In the context of Relevant Enterprise mergers and public interest mergers, the Secretary of State is able to intervene on behalf of the UK government and replace the CMA as the decision-maker. In addition, in relation to special public interest mergers, the Secretary of State is able to intervene to act as the decision-maker (see 2.5 Jurisdictional Thresholds).
Notification is voluntary, and there is no general requirement for the parties to obtain clearance before completing a transaction.
However, where a transaction is completed without clearance, the CMA remains able to investigate, and the Secretary of State remains able to intervene (see 1.3 Enforcement Authorities).
The CMA has a dedicated mergers intelligence function, which monitors merger activity, and identifies candidate transactions for possible investigation. The CMA will decide to investigate a transaction if it believes there is a reasonable chance that it would satisfy the test for a reference to a Phase 2 investigation (see 4.1 Substantive Test).
The CMA also has an obligation to inform the Secretary of State if it is investigating a transaction at Phase 1 that the CMA believes gives rise to material public interest concerns.
Where the parties anticipate that the CMA (or the Secretary of State) would have jurisdiction to investigate the transaction, and the transaction may be expected to give rise to prima facie competition concerns (or public interest concerns), they can include UK merger clearance as a condition precedent for completion, and proceed to engage in the process of formally notifying the transaction (see 3.9 Pre-notification Discussions with Authorities and 3.5 Information Included in a Filing).
Informal Briefing Note
If the parties do not intend to obtain clearance, but wish to bring the transaction to the CMA's attention (eg, so as to seek to avoid the CMA commencing an investigation based upon publicly available information, see 3.5 Information Included in a Filing), the parties can submit a short briefing note to the CMA.
Briefing notes should not exceed five pages in length, and are typically submitted by parties to explain that the CMA does not have jurisdiction to investigate a transaction; and/or the transaction does not give rise to competition concerns in any event.
As a general rule, the CMA will only consider a briefing note once the parties have entered into an agreement in respect of the transaction. This means that the parties are required to have self-assessed the application of the UK merger control regime to the transaction before entering into the transaction agreement.
Having received a briefing note, the CMA may request additional information to determine whether to investigate. If the CMA does not investigate the transaction upon receipt of a briefing note, the CMA remains able to investigate subsequently, provided that it does so within the relevant four-month statutory time limit (see 2.2 Failure to Notify). Further guidance is available in the "Guidance on the CMA’s mergers intelligence function (CMA56)".
As notification is voluntary, there are no financial penalties for failing to notify the CMA.
However, completing a transaction without clearance is "at risk", as the CMA remains able to investigate (and the Secretary of State remains able to intervene), and could ultimately require a completed transaction to be undone (see 5.1 Authorities' Ability to Prohibit or Interfere with Transactions).
In addition, when investigating both anticipated and completed transactions, the CMA is able to impose interim measures, which can have significant consequences for the parties (see 2.12 Requirement for Clearance Before Implementation).
In addition to the acquisition of a target business, the types of transaction that are capable of investigation include:
In this context, the CMA is able to investigate a “relevant merger situation”, which arises when:
Concept of an "Enterprise"
Under the Enterprise Act, an “enterprise” is defined as “the activities, or part of the activities, of a business”. On this basis, the acquisition of certain assets of a business (ie, rather than the acquisition of the share capital of the business) could constitute the acquisition of an enterprise. Further, there is no requirement for the business or assets to be trading in order to constitute an enterprise.
When assessing whether assets constitute an enterprise, the CMA will consider whether there is "economic continuity", whereby:
In doing so, the CMA will examine the facts of the case in their totality, and have regard to the following considerations:
The concept of "control" under the UK merger control regime is not limited to legal and de facto control, but also includes the ability to exercise material influence over the target.
The CMA will assess on a case-by-case basis the acquirer's ability to materially influence the policy of the target business in relation to its conduct on the market (eg, the strategic direction and commercial objectives of the target business). Such an ability may arise as a result of shareholdings in the target business, board representation, and/or any contractual, financial or other arrangements. The CMA will have regard to the commercial reality of the transaction, including the overall relationship between the acquirer and the target business.
As a general rule, the CMA will view a shareholding exceeding 25% as enabling the acquirer to exercise material influence. The CMA will also consider whether a shareholding of 15% or more (and exceptionally, less than 15%) may confer material influence (see, for example, Amazon/Deliveroo (ME/6836/19), and RWE/E.On (ME/6800/19), in which the CMA considered that the anticipated acquisition by RWE of a 16.67% minority shareholding would enable it to exercise material influence).
Increasing Control in Stages
A transaction resulting in an increase in the acquirer's level of control (eg, increasing from material influence to de facto control, or from de facto control to legal control) may give rise to a new relevant merger situation (see, for example, Hunter Douglas/247 Home Furnishings (ME/6867/19)).
Where an acquisition takes place in stages, and control is acquired over a number of transactions or events in a single two-year period, the CMA has the discretion to treat these as occurring on the date of the last transaction. In so doing, the CMA can also take into account transactions that are in contemplation.
General Merger Control Regime
Under the general merger control regime, there are two alternative jurisdictional thresholds – the Turnover Test, and the Share of Supply Test.
The Turnover Test
The Turnover Test is satisfied if the UK turnover of the target enterprise exceeded GBP70 million in its financial year preceding either:
"Turnover" for these purposes is the amount achieved by the target enterprise in the relevant financial year from the sale of products and/or the provision of services in the ordinary course of business in the UK (net of any sales rebate, value added tax and other taxes directly related to that turnover). Turnover may be adjusted if the CMA considers it appropriate to do so (eg, an acquisition or divestment since the end of the financial year has had a material impact upon the turnover value).
Specific provisions apply in relation to what constitutes "turnover" where enterprises are (in whole or in part) credit institutions, financial institutions, or insurance undertakings. These specifit provisions are set out within the J&P Guidance.
Turnover value to be applied
The relevant value of the turnover to be used in the Turnover Test is determined by:
For example, if an acquirer obtains control over a target business, the Turnover Test would be assessed by reference to the UK turnover of the target business (ie, as the acquirer will remain under the same ownership and control post-transaction). Similarly, where two parties create a joint venture and contribute to this aspects of their respective businesses, the Turnover Test would be assessed by reference to the total UK turnover of the contributed businesses (ie, as each of the two parties will remain under the same ownership and control post-transaction).
If no enterprise remains under the same ownership or control post-transaction, the UK turnover of the enterprise with the highest value in the UK should be deducted.
For example, if two parties were to create a joint venture and contribute to this the entirety of their respective businesses (ie, so that neither party would remain under the same ownership and control post-transaction), then the Turnover Test would be assessed by reference to the UK turnover of the enterprise with the lowest value UK turnover.
The Share of Supply Test
The Share of Supply Test is satisfied where:
Significantly, neither enterprise is required to have any turnover in the UK for the Share of Supply Test to be satisfied (see, for example, Roche/Spark (ME/6831/19)), and there is no requirement for a minimum increment in the share of supply or procurement (see, for example, Sabre/Farelogix (ME/6806/19)).
In essence, the Share of Supply Test comprises three key elements:
For the product element, the CMA has a broad discretion to describe the goods or services supplied or procured by the parties. Significantly, the Share of Supply Test is not a market share test, and while the CMA will have regard to any "reasonable description" of a set of goods or services, this is not required to constitute a relevant economic market.
For the geographic element, the CMA has a broad discretion to determine what constitutes a substantial part of the UK. The CMA will take into account factors including the size, population, and economic significance of an area.
For the quantitative element, the CMA has a broad discretion to apply whatever measure it considers appropriate to determine the parties' combined share of supply or procurement, and whether this satisfies the 25% threshold. While the CMA generally considers the share of supply or procurement in the UK (or a substantial part of it) by reference to the value or volume of the parties' sales or purchases, it has previously applied measures including the number of UK-based staff employed by the parties, and the number of UK patents obtained by the parties (see Roche/Spark (ME/6831/19)).
Consequently, the Share of Supply Test affords the CMA a considerable discretion to assert jurisdiction.
Sector-specific Jurisdictional Thresholds
Relevant Enterprise mergers
See 1.2 Legislation Relating to Particular Sectors.
The jurisdictional thresholds for a Relevant Enterprise merger are satisfied if:
Secretary of State intervention
In addition to the possibility of the CMA investigating on competition grounds, the Secretary of State is also able to intervene in Relevant Enterprise mergers where it:
However, if the CMA has already referred the transaction for a Phase 2 investigation, or accepted UILs in respect of the transaction (see 5.4 Typical Remedies), the Secretary of State is unable to intervene.
If the Secretary of State intervenes, it will issue a public interest intervention notice (PIIN), and the CMA will prepare a report for the Secretary of State addressing jurisdictional and competition issues in relation to the transaction.
Public interest mergers
See 1.2 Legislation Relating to Particular Sectors.
For public interest mergers, the jurisdictional thresholds under the general merger control regime are applicable.
In addition to the possibility of the CMA investigating on competition grounds, the Secretary of State is also able to intervene where it:
However, if the CMA has already referred the transaction for a Phase 2 investigation, or accepted UILs in respect of the transaction (see 5.4 Typical Remedies), the Secretary of State is unable to intervene.
If the Secretary of State intervenes, it will issue a PIIN (see, above), and the CMA will prepare a report for the Secretary of State addressing jurisdictional and competition issues in relation to the transaction.
Special public interest mergers
See 1.2 Legislation Relating to Particular Sectors.
For special public interest mergers, the Secretary of State is able to intervene where it has reasonable grounds to suspect that it is, or may be, the case that a special merger situation has been, or will be, created, whereby:
If the Secretary of State intervenes, it will issue a special public interest intervention notice (SPIIN), and the CMA will prepare a report in relation to whether the transaction gives rise to a special merger situation.
See 2.5 Jurisdictional Thresholds.
See 2.5 Jurisdictional Thresholds.
The jurisdictional thresholds are applicable by reference to the parties' activities in the UK, irrespective of whether the parties are UK entities (see 2.5 Jurisdictional Thresholds).
There is no market share jurisdictional threshold test in the UK. The Share of Supply Test is not a market share test, and affords the CMA a broad discretion to assert jurisdiction to investigate a transaction (see 2.5 Jurisdictional Thresholds).
The creation of a joint venture, or a change in ownership or control of an existing joint venture, would be capable of investigation under the UK merger control regime where it gives rise to a relevant merger situation (see 2.5 Jurisdictional Thresholds).
The CMA has a period of four months from a completed transaction being publicised or notified to the CMA within which to commence a Phase 1 investigation and make its Phase 2 reference decision. Following the expiry of this time period, the CMA is unable to investigate the transaction. This principle also applies in relation to interventions by the Secretary of State (see 3.8 Review Process).
The CMA will consider that a transaction has been publicised by the acquirer where:
Conversely, where the acquirer only informs the customers of the target business, this will not constitute publicising the transaction (see, Bottomline Technologies/Certain assets of Experian (ME/6830/19)).
Where the transaction is neither publicised, nor notified to the CMA, the four-month period does not start to run. As a result, if a transaction is only publicised or notified to the CMA several years after completion, the four-month period starts to run from the earlier of the time that the completed transaction is publicised or notified to the CMA (see, for example, Tesco/Brian Ford (ME/3827/08), and Hunter Douglas/247 Home Furnishings (ME/6867/19)).
As notification is voluntary, there is no general requirement for parties to obtain clearance before completing a transaction.
However, when investigating anticipated and completed transactions, the CMA is able to impose interim measures to prevent pre-emptive action being taken by the parties, and/or require any pre-emptive action already taken to be undone.
In the context of the UK merger control regime, pre-emptive action is action which might prejudice the outcome of a Phase 2 investigation, or impede appropriate remedial action being taken (see 5.1 Authorities' Ability to Prohibit or Interfere with Transactions).
The CMA considers that pre-emptive action could include the parties:
Phase 1 Investigations
At Phase 1, the CMA can impose an initial enforcement order (IEO) to prevent, and/or undo, pre-emptive action (see, for example, Bottomline/Experian (ME/6830/19)). When imposing IEOs, the CMA will generally use its standard IEO template (available from its website). The CMA frequently imposes IEOs in relation to completed transactions, and increasingly imposes IEOs in the context of anticipated transactions (see, for example, the anticipated acquisition by Breedon Group plc of certain assets of Cemex Investments Limited).
Following receipt of written requests from the parties, the CMA may grant derogations from IEOs, and thereby consent to the parties undertaking specific actions that would otherwise be prohibited by IEOs (see 2.14 Exceptions to Suspensive Effect).
In relation to anticipated transactions, the CMA is also able to prevent the completion of the transaction if this in itself could result in pre-emptive action (see, for example, Gardner Aerospace/Northern Aerospace (ME/6763/18)).
The CMA's guidance provides examples of where the act of completion would:
However, the CMA does not typically prevent completion where it imposes an IEO in the context of an anticipated transaction.
Phase 2 Investigations
If the transaction is referred for a Phase 2 investigation, the IEO will remain in force unless the CMA imposes an interim order at Phase 2 (IO), or accepts interim undertakings from the parties at Phase 2.
In any event, even in the absence of interim measures, where a reference is made for a Phase 2 investigation, the Enterprise Act prevents the parties:
Compliance with Interim Measures
To ensure compliance with interim measures, the CMA will generally require the CEOs of the acquirer and the target business to each provide a compliance statement on a fortnightly basis, confirming that the relevant business has complied with the interim measures over that period. While non-confidential versions of interim measures and related derogations are published by the CMA upon its website, compliance statements are not.
The CMA may also require the appointment (at the parties' cost) of a monitoring trustee, and/or a hold-separate manager, to ensure compliance, and is able to impose penalties in the event of breaches (see 2.13 Penalties for the Implementation of a Transaction Before Clearance).
See 2.12 Requirement for Clearance Before Implementation.
If an addressee fails to comply with any interim measures without reasonable excuse, the CMA may impose a penalty of up to 5% of the total value of the worldwide turnover of the enterprises owned or controlled by the addressee.
As at 30 June 2020, the largest single penalty imposed by the CMA for a failure to comply with interim measures was GBP250,000, which was imposed upon Paypal for breaching an IEO without reasonable excuse (see PayPal Holdings/iZettle (ME/6766/18)). The CMA has made clear that it will impose larger penalties in future cases where this is necessary to achieve deterrence.
Details of penalties imposed on parties, and the CMA's analysis of the relevant breach(es), are published on the CMA's website. The CMA may also issue press releases, further publicising the penalties imposed upon the conduct in question.
Following receipt of written requests from the parties, the CMA may grant derogations from interim measures, and thereby consent to the parties undertaking actions that would otherwise be prohibited (see 2.12 Requirement for Clearance Before Implementation).
Derogations will not be granted retrospectively (eg, to permit acts that have already occurred) and parties should therefore engage as early as possible with the CMA to discuss any derogation requests they consider to be urgent and necessary, including requests to enable the integration of non-UK aspects of a transaction.
The CMA is more likely to grant requested derogations where these are fully specified, reasoned, and supported by relevant evidence, including explaining:
Where the CMA has received appropriately reasoned and evidenced requests, it has previously granted derogations to enable the acquirer to:
However, any request for a derogation will be carefully examined on a case-by-case basis, and the CMA will err on the side of caution in deciding whether to grant a requested derogation.
See 2.12 Requirement for Clearance Before Implementation.
There is no mandatory notification requirement and, therefore, no deadline for notification.
There is no requirement for the parties to have entered in a transaction agreement prior to formally notifying a transaction. However, the CMA will generally need to be satisfied that there is a good faith intention to proceed with the transaction.
If the parties submit an informal briefing note to the CMA for consideration, the CMA will generally only consider this once the parties have entered into an agreement in respect of the transaction (see 2.1 Notification).
As a general rule, a merger fee is payable when the CMA reaches a Phase 2 reference decision (irrespective of whether the transaction is notified by the parties to the CMA, or is investigated by the CMA on its own initiative).
For cases in which UILs are accepted by the CMA (see 5.4 Typical Remedies) the merger fee is payable upon the CMA’s acceptance of those UILs.
In relation to Relevant Enterprise mergers and public interest mergers decided by the Secretary of State, the merger fee is payable to the CMA when the Secretary of State publishes its decision regarding whether to refer the transaction for a Phase 2 investigation. A merger fee is not payable in the context of special public interest mergers.
Current Merger Fees
Merger fees vary by reference to the UK turnover of the target enterprise in its financial year preceding the transaction. At present, merger fees payable are:
A merger fee is to be paid within 30 days of the date of the CMA's invoice.
A merger fee is not payable if a transaction is notified, but is found not to constitute a relevant merger situation.
A merger fee is also not payable where the acquirer and its group is a small or medium-sized enterprise (as defined under the Companies Act 2006).
In addition, no fee is payable in relation to the submission of an informal briefing note (see 2.1 Notification).
A so-called "merger notice" may be submitted to the CMA by any person carrying on an enterprise to which the notified transaction relates. However, in practice, a merger notice is generally submitted by the acquirer, who will usually prepare this with the co-operation of the seller and/or the target business, with each party responsible for the accuracy and completeness of their information.
The CMA's template merger notice (available from its website) sets out the categories of information to be provided by the parties when notifying a transaction to the CMA. However, the specific information necessary to assess a given transaction will depend upon the facts of that transaction (including, for example, the parties' activities and the extent to which these overlap).
The CMA therefore asks that the parties prepare and submit a draft merger notice for the purpose of pre-notification discussions (see 3.9 Pre-notification Discussions with Authorities), with this draft including:
The parties may also include submissions in relation to the application of the de minimis exception, so as to enable the CMA to consider whether the case is a possible "de minimis" candidate (see 4.1 Substantive Test).
Requesting Further Information
The CMA is able to request further information from the parties, including information going beyond what is included within the merger notice template, and the CMA will generally make a number of requests for further information during the course of pre-notification discussions.
By way of an overview, while dependent upon the relevant transaction, a satisfactory merger notice would generally include detailed information in relation to:
In addition, a satisfactory merger notice would generally be accompanied by copies of:
Merger notices must also include a declaration, signed by a duly authorised person (or persons, where the transaction is yet to take place):
Satisfactory Merger Notice
For a merger notice to be accepted by the CMA as satisfactory (such that the CMA's Phase 1 investigation may commence), the merger notice must include the prescribed information, and confirm that any anticipated transaction has been made public.
Merger notices should be provided in English, and the CMA has issued guidance addressing how documents should be submitted (see "Providing documents to the CMA", November 2017).
CMA's Own Initiative Investigations
If the parties choose not to notify the transaction, and the CMA instead investigates on its own initiative (eg, on the basis of publicly available information, and/or customer complaints), the CMA will generally seek information by issuing one or more notices under Section 109 of the Enterprise Act (each, a "Section 109 Notice") to obtain the information it requires to progress its investigation.
Provision of evidence
Section 109 of the Enterprise Act empowers the CMA to give notice to any persons requiring them to provide documents, information, or witness evidence (including by formal interview) by a set deadline (see, for example, Amazon/Deliveroo (ME/6836/19)). All documents that are responsive to a Section 109 Notice must be submitted to the CMA. Where a party does not meet the stated deadline to respond, the CMA is able to extend the statutory timetable for its review of the transaction (see 3.8 Review Process).
If the CMA investigates on its own initiative, parties may still make submissions regarding the de minimis exception, so as to enable the CMA to consider whether the case is a possible "de minimis" candidate (see 4.1 Substantive Test).
Penalties are not imposed where parties submit an incomplete draft merger notice. However, the CMA's Phase 1 investigation will not begin until after the CMA has confirmed that it has received a satisfactory merger notice.
It is a criminal offence for an individual to:
Upon conviction on indictment, an individual would be liable for a term of imprisonment of up to two years, or a financial penalty, or both.
The CMA can impose administrative penalties in certain circumstances, including where parties fail intentionally or without reasonable excuse to comply with the requirements of a Section 109 Notice (see 3.5 Information Included in a Filing).
The CMA can impose an administrative penalty of up to:
The CMA has imposed a number of administrative penalties for failures to comply with Section 109 Notices without reasonable excuse, including:
There are two formal phases of investigation, Phase 1 and Phase 2.
In addition, prior to the commencement of a Phase 1 investigation, the parties will generally engage in pre-notification discussions with the CMA (see 3.9 Pre-Notification Discussions with Authorities).
In a Phase 1 investigation, the CMA has a statutory time period of 40 working days from the commencement of its investigation within which to decide whether its duty to refer the transaction for a Phase 2 investigation is met (see 4.1 Substantive Test). During this time, the CMA will seek comments from interested third parties to inform its investigation (see 7.1 Third-Party Rights). The CMA is able to extend the statutory time period for its Phase 1 investigation in certain circumstances, including where the parties fail to respond to a Section 109 Notice by the stated deadline (see 3.5 Information Included in a Filing). In the CMA's financial year ending 31 March 2020, the average length of a Phase 1 investigation was around 37 working days, with 38 cases cleared unconditionally by the CMA at Phase 1 over this period (out of 62 Phase 1 case decisions).
This 40 working day statutory time period does not apply to decisions to be taken by the Secretary of State in relation to whether to refer a transaction for a Phase 2 investigation having issued a PIIN or a SPIIN (see 2.5 Jurisdictional Thresholds). For example, if a PIIN is issued, the CMA will provide its report addressing jurisdictional and competition issues to the Secretary of State by the deadline specified within the PIIN, and the Secretary of State will then decide whether to refer the transaction for a Phase 2 investigation. Where the transaction has completed, the Secretary of State is required to make its Phase 2 reference decision not more than four months after completion, unless completion of the transaction took place without being publicised or the CMA being notified, in which case the four-month period starts from the earlier of date that completion was publicised, or the CMA was notified (see, Lebedev Holdings & Another v Secretary of State for Digital, Culture, Media and Sport  CAT 21).
In a Phase 2 investigation, the CMA has a statutory time period of up to 24 weeks to conclude its investigation. This time period can be extended, once, by up to eight weeks if there are special reasons why the investigation cannot be completed within this time period. In addition, this time period can be extended where parties fail to respond to a Section 109 Notice by the stated deadline.
The relevant time period differs in a Phase 2 investigation under a PIIN or a SPIIN. For example, where a transaction is referred for a Phase 2 investigation by the Secretary of State under a PIIN, the CMA has a statutory time period of up to 24 weeks (capable of extension once, by up to eight weeks) in which to provide its report to the Secretary of State. Following receipt of the CMA's report, the Secretary of State then must make and publish its decision within 30 working days.
In practice, parties are generally expected to engage in pre-notification discussions where they intend to submit a merger notice to the CMA. Pre-notification discussions are not time limited, and can last for a number of months in certain transactions. The average length of pre-notification discussions was 37 working days during the period 1 April 2019 to 29 February 2020.
The content of pre-notification discussions is confidential. However, where a transaction has already been publicised by the parties, the CMA may wish to begin informal market testing during pre-notification discussions (ie, before the start of its Phase 1 investigation) (see, for example, the anticipated acquisition by Ardonagh Group Limited of Bennetts Motorcycling Services Limited).
Case Team Allocation
Parties that wish to engage in pre-notification discussions should submit to the CMA a Case Team Allocation Form (available from the CMA’s website), and the CMA will aim to allocate a case team for the transaction within five working days.
Once allocated, the case team will review a draft of the merger notice, and identify any areas where it considers that additional information is required. In practice, it is extremely rare for an initial draft merger notice to be considered complete by a case team, and it is not uncommon for the parties to receive two or three separate rounds of questions before a merger notice is considered to be satisfactory, enabling the CMA's Phase 1 investigation to commence (see 3.5 Information Included in a Filing).
Separate to the pre-notification discussions outlined above, where a confidential, anticipated transaction is a potential candidate for a Phase 2 investigation, the parties may seek confidential, informal advice from the CMA (eg, in relation to the likelihood of the transaction being referred for a Phase 2 investigation).
However, where the CMA is willing to provide such advice, this is based upon the limited information received by the CMA in the context of the parties' application, and this would not prevent the CMA subsequently investigating the transaction in question (eg, where material new information was received by the CMA).
Public Interest Concerns
In addition, where a transaction raises potential public interest concerns (see 1.2 Legislation Relating to Particular Sectors), parties are generally encouraged to engage with the relevant government departments as early as possible.
Before the start of the Phase 1 investigation (ie, the 40 working day statutory time period), parties are required to provide a substantial volume of information and evidence to the CMA, irrespective of whether transactions are notified by using a merger notice, or investigated by the CMA on its own initiative (see 3.5 Information Included in a Filing).
Despite this, it is not uncommon for the parties to receive detailed requests for information during a Phase 1 investigation, particularly if third parties raise credible competition concerns in relation to a transaction (see 7.1 Third-Party Rights).
During a Phase 2 investigation, in addition to relying upon relevant information received during its Phase 1 investigation, the CMA will request a significant amount of additional information and evidence from the parties.
Where a transaction is subject to other regulatory processes (eg, the City Code on Takeovers and Mergers, or merger control regimes in other jurisdictions), the parties can inform the CMA of any timing constraints, and request that the CMA exercises its discretion to make its decision in advance of the relevant statutory deadline. The CMA is then able to decide whether to exercise its discretion to consent to, or refuse, this request.
Exceptionally, following a request by the parties to do so, the CMA may decide to "fast-track" a transaction from a Phase 1 investigation into a Phase 2 investigation (see, for example, J Sainsbury's/Asda (ME/6752-18)).
Candidate transactions for a "fast-track" reference are those where:
CMA - Phase 1
At Phase 1, subject to limited discretionary exceptions outlined below, the CMA is required to refer transactions for a Phase 2 investigation where it forms a reasonable belief, objectively justified by the relevant facts, that it is or may be the case:
While the Enterprise Act does not define the meaning of a “substantial lessening of competition”, the Competition Appeal Tribunal (CAT) has held that “substantial” does not mean that there needs to be a “large” lessening of competition (see, Global Radio Holdings v Competition Commission  CAT 26).
Further on the basis of the "is or may be the case" standard, the CMA must make a Phase 2 reference where it believes that a transaction is likely to result in an SLC (ie, a 50% likelihood), and the CMA is required to exercise its judgment to decide whether to make a Phase 2 reference when the likelihood of a transaction resulting in an SLC is below 50%, but greater than fanciful. However, the CMA is able to exercise its discretion not to make a Phase 2 reference where it believes that:
In relation to relevant customer benefits, in order to exercise its discretion not to make a Phase 2 reference on this ground, the CMA would need to believe that a transaction would benefit customers overall, despite its belief that there is a realistic prospect that the transaction will result in an SLC.
Consequently, the application of this ground has been limited, although it has been relied upon in transactions involving National Health Service (NHS) entities. As at 30 June 2020, the CMA has relied upon this ground in only two cases, both of which involved NHS Foundation Trusts (see, for example, Derby Teaching Hospitals NHS Foundation Trust/Burton Hospitals NHS Foundation Trust (ME/6726-17)).
Where a transaction involves one or more NHS Foundation Trusts, the sector regulator, NHS Improvement (NHSI) is required to advise the CMA of any benefits expected to result from the transaction for people who use NHS health services. While the CMA is not bound by NHSI's advice, the CMA will afford it significant weight when making its decision.
Further guidance on these discretionary exceptions is available at "Mergers: Exceptions to the duty to refer (CMA64)".
In the event that these discretionary exceptions are not applicable, it may still be possible for the parties to offer UILs to the CMA, whereby the CMA will not make a Phase 2 reference if it ultimately accepts the offered UILs (see 5.4 Typical Remedies).
CMA - Phase 2
At Phase 2, the CMA is required to decide on the balance of probabilities whether it is more likely than not:
If relevant, the CMA must then decide:
Secretary of State
Where the Secretary of State intervenes by issuing a PIIN (see 2.5 Jurisdictional Thresholds), the Secretary of State may refer the transaction for a Phase 2 investigation where it believes that it is, or may be, the case that:
At Phase 2, the Secretary of State will decide whether it is the case that this test is satisfied.
If the Secretary of State intervenes by issuing a SPIIN (see 2.5 Jurisdictional Thresholds), the Secretary of State may refer the transaction for a Phase 2 investigation where it believes that it is, or may be, the case that:
At Phase 2, the Secretary of State will then decide whether it is the case that this test is satisfied.
The CMA uses market definition as a framework for assessing the competitive effects of a transaction. For this purpose, a relevant market will typically comprise both a product dimension, and a geographic dimension.
At Phase 1, the CMA may undertake an initial analysis of the boundaries of the relevant market without necessarily reaching a conclusion. At Phase 2, the CMA will usually reach a conclusion upon the boundaries of the relevant market.
However, the boundaries of the relevant market are not determinative of the outcome of the CMA's competitive assessment. In particular, the CMA recognises that it may need to consider constraints imposed from outside of the relevant market, or as a result of segmentation within the relevant market, or other ways in which certain constraints may be more important.
The relevant product market will include the most significant competitive alternatives available to the customers of the parties to the transaction. For the purposes of this assessment, the CMA will generally consider evidence including:
As a starting point, in a horizontal merger (ie, where the parties are competitors), the CMA will focus upon the parties' overlapping products in the narrowest plausible candidate product frame of reference. In a non-horizontal merger (ie, where the parties are either active at different levels of the supply chain ("vertical mergers"), or at the same level of the supply chain but without competing ("conglomerate mergers")), the CMA will take at least one party's product as its starting point.
The CMA will then consider whether this product frame of reference can be widened, generally on the basis of demand-side substitution (eg, how the parties' customers would respond to a small, but significant and permanent, increase in product prices (eg, a 5% increase)), although the CMA may also consider aspects including supply-side substitution (eg, how existing competitors would respond to a small, but significant and permanent, increase in product prices) (see, for example, Danspin/Certain assets and goodwill of LY Realisations (ME/6870/19)).
In addition, where competition concerns may arise in relation to non-price aspects (eg, product quality, and levels of innovation), the CMA may assess evidence in relation to non-price considerations (see, for example, Illumina/Pacific Biosciences of California (ME/6795/18)).
The CMA may also have regard to ongoing dynamics when considering a product frame of reference in which competitive conditions are expected to evolve. In this context, the CMA will seek to ensure that the relevant market captures the most significant competitive constraints that currently exist, as well as those that are expected to exist in the future (see, for example, Sabre/Farelogix (ME/6806/19)).
The relevant geographic market will include the geographic area in which customers of the parties can obtain the most significant competitive alternatives available to them (see, for example, Iconex/Hansol Denmark and R+S Group (ME/6798/19)). For the purposes of this assessment, the CMA will generally consider evidence relevant to demand-side substitution.
Further guidance on the CMA's approach to market definition is provided in the Merger Assessment Guidelines (see 1.1 Merger Control Legislation).
While the CMA may consider case law and decisional practice in the context of a merger investigation, this would not constrain the CMA's approach.
Moreover, as the CMA's assessment is case-specific, and dependent upon the particular circumstances of the transaction and affected markets, the CMA's decision will be based upon the available evidence, meaning that it is not required to follow its own previous decisions (see Roche/Spark (ME/6831/19)).
A transaction gives rise to an SLC where it has a significant effect on rivalry, reducing competitive pressures upon firms to improve their offerings to customers, or to become more innovative or efficient over time. An SLC will therefore be expected to lead to an adverse outcome for customers.
In broad terms, there are three main types of competition concerns that may result in an SLC.
These may arise in horizontal mergers where the transaction removes or reduces the rivalry between the parties (or will remove or reduce expected future rivalry), thereby enabling the combined entity to profitably increase prices, or worsen non-price aspects of competition.
The CMA is increasingly focussing upon the how closely the parties compete (or would be expected to compete in the future in the absence of the transaction) when assessing unilateral effects (see, for example, Paypal/iZettle (ME/6766/18), and Illumina/Pacific Biosciences of California (ME/6795/18)).
Significantly, where parties are considered to be close competitors, that even small increments in market shares as a result of a transaction can give rise to material competition concerns (see, for example, JD Sports/Footasylum (ME/6827/19)).
These may arise in horizontal mergers, as well as non-horizontal mergers, where the transaction either enables firms, or increases the ability of firms, to profitably align or co-ordinate their behaviour tacitly (see, for example, J Sainsbury's/Asda (ME/6752-18)).
Vertical or Conglomerate Effects
These may primarily arise in non-horizontal mergers, where the transaction creates or strengthens the combined entity's ability and incentive to use its market power in at least one relevant market to reduce rivalry (see, for example, Google/Looker (ME/6839/19) in relation to a vertical effects theory of harm, and Danone/Harrogate Waters (ME/6884/20) in relation to a conglomerate effects theory of harm).
As noted at 3.10 Requests for Information During Review Process, the CMA will obtain a substantial volume of evidence during its investigation.
In addition to economic evidence (including customer survey evidence and economic modelling), the CMA is increasingly focussing its analysis in relation to competition concerns upon:
Further guidance on the CMA's approach in relation to the assessment of competition concerns is provided in the Merger Assessment Guidelines (see 1.1 Merger Control Legislation).
The CMA is able to consider transaction-specific economic efficiencies in its substantive assessment. Where efficiencies are claimed, the parties will need to provide compelling evidence that these are:
These criteria are also applicable to the CMA's possible assessment of whether relevant customer benefits outweigh an SLC (which may enable the CMA to exercise its discretion not to make a Phase 2 reference, see 4.1 Substantive Test).
The types of efficiencies the CMA generally expects to consider can broadly be categorised as:
Where parties intend to claim efficiencies, they are encouraged to engage with the CMA as early as possible in relation to these aspects.
Under the general merger regime, the assessment of a transaction is undertaken on competition grounds.
In relation to Relevant Enterprise mergers and public interest mergers, where the Secretary of State intervenes, a transaction will then be assessed on the basis of public interest considerations (in addition to competition grounds) (see 2.5 Jurisdictional Thresholds).
Where the Secretary of State intervenes in relation to special public interest mergers, these are assessed on the basis of public interest considerations only, and not on competition grounds (see 2.5 Jurisdictional Thresholds).
The CMA does not apply special considerations in the context of the substantive review of joint ventures under the UK merger control regime.
At the end of a Phase 2 investigation, if the CMA considers that a transaction results in an SLC (see 4.1 Substantive Test), it will seek to identify remedies which effectively address the SLC and its adverse effects. The CMA is then able to impose the least intrusive and costly remedy which it considers to be effective, and will seek to ensure that this remedy is not disproportionate.
In practice, the CMA is ultimately able to impose remedies including:
Where the Secretary of State has intervened (see 2.5 Jurisdictional Thresholds), it is also ultimately able to impose remedies at the end of a Phase 2 investigation in relation to Relevant Enterprise mergers, public interest mergers, and special public interest mergers (see 4.1 Substantive Test).
Parties are able to offer remedies to address competition concerns in the context of Phase 1 and Phase 2 investigations, as well as during pre-notification discussions (see 5.4 Typical Remedies).
In practice, parties are unable to negotiate remedies with the CMA, and it is for the CMA to decide whether to accept any remedies offered by the parties. Similarly, parties are also unable to negotiate remedies with the Secretary of State (if the Secretary of State was to intervene, see 2.5 Jurisdictional Thresholds).
Where a given transaction is expected to give rise to competition concerns, parties will typically consider at an early stage the extent of the possible remedies that they would be required to offer (eg to avoid reference for a Phase 2 investigation), and how these remedies would affect the commercial viability of the transaction.
When determining a remedy, the CMA is required to have regard to the need to achieve as comprehensive a solution as is reasonable and practicable for the purpose of remedying, preventing or mitigating the SLC and any adverse effects resulting from it.
If a transaction satisfies the test for a Phase 2 reference, the CMA is able to exercise its discretion to accept undertakings in lieu of such a Phase 2 reference (UILs) offered by the parties where these are appropriate to remedy, mitigate, or prevent the SLC. Importantly, the CMA cannot impose UILs upon the parties.
To be able to accept offered UILs, the CMA needs to be sufficiently confident that the identified competition concerns would be resolved by the UILs. This is because once UILs are accepted by the CMA, it will cease to be able to refer the transaction for a Phase 2 reference.
Offered UILs must therefore be capable of timely implementation, and be "clear-cut", meaning that:
The CMA's starting point is to seek to ensure that offered UILs would restore competition to the level that would have existed in the absence of the transaction.
On this basis, the CMA's preference is for UILs to take the form of structural remedies (ie, divestments), and the CMA is generally unlikely at Phase 1 to consider behavioural UILs to be sufficiently clear-cut.
In relation to divestments, the CMA will generally expect these to address the acquired business so as to remedy its concerns, but the CMA will consider the divestment of aspects of the acquirer's business if this does not present a greater risk in relation to addressing the SLC. In determining the scope of the divestment, the CMA will generally seek to identify the smallest viable, standalone business which can compete successfully on an ongoing basis. Depending upon the transaction, this could be for example a single site, or a number of sites, or a business division, or a subsidiary.
The CMA will also generally seek to approve an "upfront buyer" (unless the CMA considers there are reasonable grounds for not doing so), whereby an appropriate purchaser approved by the CMA will contractually commit to purchase the divestment business.
In cases following intervention by the Secretary of State (see 4.1 Substantive Test), UILs may be offered by the parties at Phase 1, and these UILs may address non-competition issues.
At Phase 2, the CMA's preference is also for structural remedies. The parties may offer remedies, but the CMA is ultimately able to impose remedies at Phase 2 (see, Ecolab, Inc. v CMA  CAT 12).
In addition, following intervention by the Secretary of State (see 4.1 Substantive Test), remedies at Phase 2 may address non-competition issues.
Further guidance in relation to remedies is available at "Merger Remedies (CMA87)".
See 5.2 Parties’ Ability to Negotiate Remedies and 5.4 Typical Remedies.
Before offering UILs, the parties will generally wish to consider the CMA's reasons for identifying an SLC (the "SLC decision").
The parties have up to five working days after receipt of the SLC decision to offer UILs to the address the SLC. Offered UILs, together with the parties' proposed draft text of the offered UILs, should be formally submitted using the CMA’s Remedies Form for Offers of UILs, and the CMA’s UILs template (available from the CMA's website).
If UILs are offered, the CMA then has until the tenth working day after the parties received the SLC decision to decide whether the offer (or a modified version) might be acceptable.
Where the CMA proposes a modified version of the offer, it will ask the parties if they agree to this, and the parties will have a short period of time to confirm whether or not they wish to offer the modified UILs.
If the CMA decides that the offered UILs might be acceptable, it will inform the parties, and publish a non-confidential version of its decision that the UILs may be acceptable in principle.
The CMA will then undertake a detailed assessment of the offed UILs, and must decide whether to accept the offered UILs within 50 working days of the SLC decision (with this time period capable of extension by up to 40 working days if the CMA considers there are special reasons for doing so, including in the context of an upfront buyer).
During this period, the CMA must undertake a public consultation upon the offered UILs, and provide interested third parties with a period of not less than 15 calendar days in which to provide comments. If the offered UILs are modified, a second public consultation of not less than seven days will be required (unless the modifications are immaterial).
If the offered UILs are considered acceptable following the public consultation(s), the CMA will request that the parties sign the UILs, after which they will be accepted by the CMA.
The CMA will announce its acceptance of the UILs, and publish these upon its website.
If the CMA reaches a provisional finding of an SLC, it will consult on possible remedies, and will consider remedies proposed by the parties and third parties, in addition to its own proposals.
Following this consultation process, the CMA will prepare a remedies working paper, which assesses different options and sets out the CMA’s provisional decision on remedies.
The parties will receive the remedies working paper, and will generally have at least five working days to respond to this. The CMA may also consult third parties in relation to the proposed scope of remedies. In a minority of cases where the CMA deems public consultation necessary, the CMA may publish the remedies working paper on its website.
Following this engagement on the remedies working paper, the CMA will make its final decision on the competition issues, and any remedies, which is published in a final report with supporting reasons and evidence on its website.
Following publication of the final report, the CMA may choose to implement remedies by accepting undertakings, or by making an order, and the intended form of the remedies will be subject to consultation.
The CMA has a statutory deadline of 12 weeks following its final report to either accept undertakings, or to make an order (with this time period capable of extension by up to six weeks if the CMA considers there are special reasons for doing so).
See 5.4 Typical Remedies and 5.5 Negotiating Remedies with Authorities.
In divestments involving an "upfront buyer", the acquisition of the divestment business by a purchaser approved by the CMA will be conditional upon the CMA's acceptance of UILs, or undertakings at Phase 2.
In the context of "non-upfront buyer" divestments, following the CMA's acceptance of UILs or undertakings at Phase 2, the parties will be required to:
The parties will generally be required to conclude the sale agreement within a relatively short time period (eg three months), which will be set out in the context of the remedy.
If the parties are unable to identify an appropriate purchaser within this time period, the CMA will generally be able to appoint a monitoring trustee to sell the divestment business at no minimum price.
Interim Measures or Undertakings
Where interim measures or undertakings are in place (or the transaction has been referred for a Phase 2 investigation), provided that the parties are able to obtain the CMA's consent (see 2.12 Requirement for Clearance Before Implementation), then it would be possible for a transaction to be completed while the divestment process is ongoing (see, for example, Origin/Bunn Fertiliser (ME/6667/17)).
If a party breaches any remedies, the CMA's ultimate recourse is to commence civil proceedings to enforce the remedies in question (eg, by seeking an injunction). Affected third parties would also be able to commence civil proceedings.
A formal, confidential version of the CMA's merger decision (at Phase 1 and/or Phase 2) is provided to the parties, with third parties' commercially sensitive information removed from this decision by the CMA.
In addition, a formal, non-confidential version of the CMA's merger decision (from which the parties' and third parties' commercially sensitive information will be removed by the CMA) will be published on the CMA's website, and announced via the Regulatory News Service (RNS).
The CMA does not distinguish between transactions concerning only UK-based entities, and foreign-to-foreign transactions. The CMA is therefore able to impose remedies and prohibit foreign-to-foreign transactions. For example, the CMA prohibited Sabre Corporation's anticipated acquisition of Farelogix, Inc (both being US entities), despite this transaction having been cleared under the US merger control regime (see, Sabre/Farelogix merger inquiry).
As a general rule, the CMA will not consider whether a transaction-related restriction constitutes an ancillary restraint, on the basis that the merger parties are able to undertake this assessment for themselves.
The CMA actively seeks comments from third parties when investigating a transaction, including in the context of remedies (see 5.5 Negotiating Remedies with Authorities).
For example, at Phase 1, the CMA will issue a general invitation to comment upon the transaction in question (via its website, and the RNS), and will typically send targeted questions to the parties' customers, competitors, and suppliers (with relevant contact details to be provided by the parties, see 3.5 Information Included in a Filing). At Phase 2, third party responses play a key role in the assessment of the transaction.
In terms of the evidential weight afforded to third parties' responses, where a third party advances an argument which the CMA would expect to be evidenced by its internal documents, the CMA may be more cautious where such evidence is not available. Where it is implausible that such evidence is not available, the CMA may dismiss the argument as lacking credibility.
The CMA is able to use its information gathering powers under Section 109 of the Enterprise Act to seek to obtain evidence from third parties (see 3.5 Information Included in a Filing). However, the CMA's starting point would generally be to request evidence from third parties on an informal basis.
See 7.1 Third-party Rights.
Where the parties submit a merger notice, they are required to confirm that any anticipated transaction has been publicised before the merger notice can be accepted by the CMA as satisfactory (see 3.5 Information Included in a Filing). Further, during the course of an investigation, the CMA will actively publicise the existence of a transaction (see 7.1 Third-party Rights).
However, the parties are able to request that commercially sensitive information remains confidential, and the CMA will provide the parties with an opportunity to request the excision of sensitive information from a range of documents published by the CMA, including IEOs and derogations (see 2.12 Requirement for Clearance Before Implementation), merger decisions (see 5.7 Issuance of Decisions), and UILs decisions (see 5.5 Negotiating Remedies with Authorities).
Where the CMA is investigating a transaction that is also subject to investigation in more than one jurisdiction, the CMA will generally seek to cooperate with other investigating competition authorities.
However, the Enterprise Act places certain restrictions upon the CMA's ability to exchange confidential information with other competition authorities, and the CMA would therefore be expected to obtain the parties' consent to exchange such information.
Pursuant to section 120 of the Enterprise Act, a party aggrieved by a decision of the CMA or the Secretary of State in relation to a reference or a possible reference can apply to the CAT for a review of that decision. There is no exhaustive list of the type of decision that the CAT may review.
The CAT's review is limited to applying the same principles as would be applied by a court on an application for judicial review. This means that the CAT's examination is confined to the lawfulness of the decision.
On this basis, the CAT cannot substitute its own decision on the merits of the case, but can either dismiss the application or quash the decision (in whole or in part. If the CAT quashes the decision, it will refer the matter back to the original decision-maker with a direction to reconsider and make a new decision, as directed by the CAT.
Parties wishing to appeal a point of law arising from the CAT’s judgment should apply to the Court of Appeal of England and Wales, with the permission of either the CAT or the appellate court.
Any application for review by the CAT must be made within four weeks of the earlier of (i) the date on which the applicant was notified of the decision; or (ii) the date on which the decision was published.
The CAT’s review is not bound by a fixed timetable. However, the CAT will generally regard applications to review a decision relating to a merger as meriting a high degree of urgency. For example, in Tobii v CMA, the application for review was filed on 13 September 2019, and the CAT gave its judgment on 10 January 2020 (see, Tobii AB v CMA  CAT 1).
Aggrieved third parties can challenge clearance decisions (see, for example, IBA Health v OFT  CAT 27).
The UK does not currently have a specific legislative regime addressing foreign direct investment. However, the UK government has signalled its intention to introduce such a regime, with the National Security and Investment Bill announced in December 2019, and expected to be brought before Parliament in 2020.
In the absence of mandatory filing requirements, financial penalties are not imposed under the UK merger control regime where transaction are not notified (see 2.2 Failure to Notify).
However, the CMA can and will take enforcement action in relation to procedural breaches, including for example, breaches of interim measures (see 2.13 Penalties for the Implementation of a Transaction Before Clearance), and failures to comply with the requirements of a Section 109 Notice (see 3.5 Information Included in a Filing).
In terms of the CMA's record with regard to prohibiting transactions and imposing remedies, in recent years the CMA has referred a comparatively larger number of transactions for a Phase 2 investigation. This has resulted in a greater number of transactions being abandoned by the parties, as well as more transactions being subject to the imposition of remedies.
The CMA has recently sought to apply the Share of Supply Test to assert jurisdiction in relation to transactions with a comparatively limited nexus to the UK (see, for example Sabre/Farelogix (ME/6806/19), in relation to which the CMA's decision to establish jurisdiction is currently being challenged before the CAT (see, Sabre Corporation v CMA (1345/4/12/20)).
In addition, the CMA has recently identified competition concerns in a larger number of its Phase 1 investigations, including in the context of technology and pharmaceutical sectors, as a result of an increased focus upon:
evidence contained within the parties' internal documents, as well as the internal documents of third parties;
evidence of the acquirer's methodology for valuing the target business; and
evidence addressing the anticipated evolution of dynamic markets, and the parties' expected positions in the absence of the transaction (see 4.4 Competition Concerns)
In April 2020, the CMA published its guidance "Merger assessments during the Coronavirus (COVID-19) pandemic".
While this guidance outlines certain procedural adjustments in relation to the CMA's approach, it confirms that the COVID-19 pandemic has "not brought about any relaxation of the standards by which mergers are assessed or the CMA’s investigational standards", and the CMA will therefore continue to apply its rigorous, evidenced-based approach to the substantive assessment of a given transaction.
To the extent that the parties can credibly evidence the specific impact of the COVID-19 pandemic upon a given transaction, the CMA will consider this evidence in the context of its assessment, including in relation to any alternative counterfactual positioned by the parties (eg, an "exiting firm" scenario) (see 3.5 Information Included in a Filing).
Trends and Developments in UK Merger Control, 2020
Merger control in the UK is primarily carried out by the Competition and Markets Authority (CMA), an independent authority that performs a range of competition law functions and has a primary duty to promote competition for the benefit of consumers. Over the past year, the CMA has cemented its reputation as an active, interventionist agency in the field of merger control, asserting jurisdiction over transactions that might previously have escaped UK merger control, challenging a number of transactions that might in the past have been approved unconditionally, and penalising procedural violations. In parallel, the CMA has prepared for the UK’s exit from the EU (it moved to larger premises and increased its headcount by 40%), so that, as explained by the CMA’s Chief Executive, Dr Andrea Coscelli, it may “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.”
Impact of UK exit from the European Union
Following the UK’s departure from the EU on 31 January 2020, the UK entered a transition period due to end on 31 December 2020. EU competition law continues to apply in the UK until the transition period ends (and to mergers notified to the European Commission before the end of that period), meaning that the European Commission continues to have exclusive jurisdiction over transactions with an EU dimension, including those impacting UK markets.
The UK Government has said that it will not request an extension of the transition period beyond 2020 (although that could change). Accordingly, as of January 2021, the CMA expects to have jurisdiction over transactions currently subject to exclusive review by the European Commission, provided they meet the UK thresholds as well. As Dr Coscelli, has noted, “[t]he upside [of leaving the EU] is that you take back control — genuinely — of the decisions”.
The CMA expects a 40-50% increase in its annual mergers workload – an additional 30-50 Phase 1 investigations and around six more Phase 2 investigations. As the CMA’s Head of Enforcement, Dr Michael Grenfell, has said: “Post-Brexit, the Competition and Markets Authority can be expected to take responsibility for a swathe of competition cases affecting the UK that previously would have been reserved to the European Commission”.
Expansive approach to jurisdiction
The CMA can review mergers where the target’s UK revenue exceeds GBP70 million the merging parties’ activities overlap and they have a combined UK share of supply or purchases of at least 25%. Lower thresholds apply in some sectors that raise possible issues of national security. In recent years, the CMA has adopted an increasingly expansive and creative approach in the way it applies the "share of supply" test, particularly in digital markets.
The CMA’s Executive Director for Markets and Mergers, Andrea Gomes da Silva, has stated that the share of supply test gives the CMA “a degree of freedom and flexibility that is not the case in other jurisdictions”.
In Sabre/Farelogix, the target had no customers or revenue in the UK. The CMA nevertheless found that the share of supply test was satisfied because
The CMA therefore asserted jurisdiction on the ground that both parties provided IT solutions to UK airlines.
In Roche/Spark, the CMA asserted jurisdiction over a transaction where the target did not offer any products that competed with Roche but was in the process of developing a gene therapy expected to compete with Roche in future. The CMA asserted jurisdiction based on the companies’ share of UK-based employees engaged in activities relating to the relevant gene therapy.
In Mastercard/Nets, although the target had no assets or business activities in the UK, the CMA asserted that the transaction met the share of supply test because VocaLink (a subsidiary of Mastercard) and Nets had both registered to make their services available to prime bidders for part of a procurement project (providing infrastructure services related to the UK’s New Payment Architecture), and there were only five to eight other suppliers of these services (giving the combined parties a share of supply of 20-30%).
By using broad categories of "products" or "services", and by placing greater importance on potential competition, the CMA has been testing the boundaries of its jurisdictional powers. If unchecked by the courts, this approach will enable the CMA to assert jurisdiction over transactions that would previously have been expected to fall outside the scope of UK merger control.
Interventionist approach to merger control
The CMA has taken an increasingly interventionist approach to merger control. Over the last decade, the CMA referred, on average around 13% of Phase 1 merger cases to an in-depth Phase 2 investigation. This has increased in recent years; in 2019, the CMA referred over 20% of Phase 1 mergers to Phase 2.
Likewise, over the last decade, around one third of mergers referred to Phase 2 were prohibited or abandoned. In 2019, however, more than 50% of mergers referred to Phase 2 were prohibited or abandoned. The CMA has been particularly aggressive when reviewing deals involving technology companies or online platforms.
As Dr Coscelli recently explained, “The argument that companies were making seven or eight years ago was that it was very difficult to predict how it was going to play out. We now realise that there are strong barriers to entry and expansion. When we look at the current deals we have a higher degree of scepticism”. In 2019, the CMA completed ten Phase 2 merger investigations, prohibiting three of those ten transactions.
In Sainsbury’s/Asda, the CMA blocked the proposed merger of two of the UK’s four national supermarket retailers, finding that the transaction would lead to higher prices in stores, online, and at many petrol stations. The CMA extended its usual practice of assessing retail mergers at local level to include novel theories of harm at a national level. It also rejected the merging parties’ argument that discounters (such as Aldi and Lidl) and online retailers would pose a sufficient competitive constraint post-merger.
In Ecolab/Holchem, the CMA blocked a completed merger in which the parties’ combined market share was below 40%, finding that the transaction would reduce competition in the market for the supply of cleaning products to food and beverage customers. The CMA rejected the parties proposed divestment remedy and instead ordered Ecolab to divest substantially all of the Holchem group.
In Tobii/Smartbox, the CMA blocked a completed merger between suppliers of technology that enable people with complex speech and language needs to communicate. The CMA concluded that the merger would lead to higher prices and/or lower quality for these products, as well as upstream and downstream foreclosure of competitors. The CMA rejected Tobii’s offer of a partial divestment combined with behavioural commitments, deciding that only a full divestiture of the target would remedy the substantial lessening of competition. Given the relatively low value of the transaction (approximately GBP11 million), this prohibition shows the CMA’s continued willingness to intervene even in very small technology transactions.
In Prosafe/Floatel, the CMA investigated an anticipated merger between two suppliers of semi-submersible Accommodation Support Vessels, which are floating structures that provide accommodation and support services to offshore oil and gas operators. The CMA provisionally found that the parties were the two largest, and each other’s closest, competitors in the market, and that the merger would likely lead to a substantial lessening of competition in the form of higher prices, reduced service quality, and/or reduced product range.
The parties decided to abandon the merger following the CMA’s provisional findings.
In April 2020, the CMA blocked Sabre/Farelogix, an anticipated acquisition involving suppliers of software solutions to facilitate airline travel. Sabre offered a system that travel agents use to search for and sell airline tickets, and Farelogix offered IT solutions to airlines enabling them to connect directly to travel agents and offer customers in-flight extras. The CMA concluded that the deal would result in a substantial lessening of competition (SLC) manifested in reduced innovation, which would lead to less customer choice, fewer new features, and upgrades being released more slowly.
The CMA found that partial divestiture would not be an effective remedy because it would be difficult to identify the staff and assets needed to be divested to remedy each SLC.
Finally, in May 2020, the CMA blocked JD Sports/Footasylum, a completed acquisition involving retailers of sports-inspired casual footwear and apparel. The CMA concluded that the parties were close competitors on the basis of their internal documents, two customer surveys, the similarity of their offerings, and economic analysis indicating that entry by Footasylum was associated with a fall in nearby JD Sports store revenues. The CMA considered that the constraint posed by other retailers was “modest at best” and would not prevent an SLC.
It concluded that the merger would result in an SLC in the markets for sports-inspired casual footwear and apparel, and that no remedy other than a full divestiture would be effective. The CMA considered the impact of COVID-19 on the industry but found that it did not change its assessment of the transaction because the parties were not advancing a "failing firm" argument, and there was no other evidence to suggest that either of them would be “hit harder” by COVID-19 than any other retailers.
Appeals to the Competition Appeal Tribunal
CMA merger decisions are subject to appeal to the Competition Appeal Tribunal (CAT) on judicial review grounds. Accordingly, the CAT cannot re-assess the merits of a case, but can decide only whether the CMA’s decision was unlawful, irrational or procedurally unfair. The CAT’s review of CMA merger decisions shows a high degree of deference to the CMA’s factual and economic assessment.
Two of the prohibition decisions taken in 2019, Ecolab/Holchem and Tobii/Smartbox, were appealed to the CAT. In both cases, the CAT upheld almost every aspect of the CMA’s decisions, finding that the only effective way of addressing the SLC resulting from the mergers was to effectively block them. In Tobii/Smartbox, although the CAT overturned one strand of the CMA’s substantive conclusions, it commented that “as long as there was some evidence on which to base its decisions, it was for the CMA to weigh up the totality of the evidence it had and to reach conclusions that were supported by evidence of some probative value.”
Increased use of hold-separate orders
The CMA may impose hold-separate orders (referred to as initial enforcement orders (IEOs)), at any stage of an investigation, provided it has reasonable grounds for suspecting that “arrangements are in progress or in contemplation” which, if carried into effect, will result in two or more enterprises ceasing to be distinct.
The CMA’s standard practice is to impose IEOs on all completed mergers, as well as on anticipated mergers in which it determines that there is a risk of the companies taking steps that would be prohibited if a standard IEO were in place. If the CMA considers that the merging companies lack the ability or willingness to comply with its IEO, it may appoint a monitoring trustee to monitor and prepare regular reports on compliance. A failure to comply with an IEO can result in fines of up to 5% of total global group turnover.
Over the past 18 months, the CMA has for the first time penalised companies for breaching IEOs (by, among other things, appointing unauthorised staff and engaging in joint marketing). Since June 2018, the CMA has fined Ausurus, JLA, Nicholls’ (Fuel Oils), PayPal, and Electro Rent (two separate fines), between GBP100,000 and GBP300,000 each.
Extensive requests for internal documents.
Unlike in the United States, where the federal agencies routinely issue broad "Second Requests" that require the disclosure of significant numbers, often many thousands, of documents, the CMA has historically assessed transactions largely on the basis of written submissions from merging companies and other industry participants. That is changing. Last year, the CMA issued new guidance on requests for internal documents.
The guidance states that the CMA may—at any stage of its investigation—request any document in the merging parties’ possession that has been prepared, sent, or received by an officer or employee (including emails, internal analysis, instant messages, and handwritten notes).
Since the publication of its guidance, the CMA has made increasingly burdensome document requests at early stages of its merger investigations (including during pre-notification). It is now common to receive requests for internal emails and draft documents, often extending to thousands of pages, and sometimes hundreds of thousands. This can be challenging, particularly given the CMA’s tight deadlines for responding, and the fact that mergers are often subject to parallel—and rarely identical—requests for information from different competition authorities.
Penalties for failing to provide internal documents or respond to information requests.
The CMA is making greater use of its statutory power to issue formal information requests under Section 109 of the Enterprise Act 2002. In its recent guidance, the CMA made clear that it intends to shift from making informal requests to using Section 109 notices, which compel companies to respond within a prescribed deadline. The CMA may "stop the clock", effectively extending the statutory deadline for completing its investigation, if it determines that a company has failed to provide a complete response.
Companies that fail to provide complete responses to Section 109 notices without a reasonable excuse may be subject to a fixed fine of up to GBP30,000 and/or daily fines of up to GBP15,000.
Over the past three years, the CMA has for the first time imposed penalties on companies that failed to comply with formal information requests. The fines have ranged from GBP15,000 to GBP27,000, all for failures to provide full responses to information requests by the CMA’s deadline. The CMA has, thus far, pursued cases in which it sees a pattern of non-compliance.
In many cases, the CMA has "stopped the clock" pending the production of a response.
Interim orders to unwind completed mergers.
Last year, the CMA exercised for the first time its power to require parties to unwind steps taken to implement a merger while the CMA carried out its investigation. In March 2019, the CMA imposed an unwinding order on Tobii/Smartbox requiring the parties to terminate a reseller agreement and Smartbox to reinstate its R&D projects and resume the sale of discontinued products. In August 2019, the CMA imposed an unwinding order before the Phase 1 process had begun in Bottomline/Experian, requiring Bottomline to segregate all Experian confidential information and refrain from using any commercially sensitive information relating to the Experian business to solicit customers.
Response to COVID-19
On 22 April 2020, the CMA published new guidance on its approach to merger investigations during the COVID-19 pandemic. It explained that its binding statutory deadlines, as well as its substantive assessment standards, have not changed. It noted, however, that the timing of merger investigations may be extended if the CMA encounters difficulties in engaging with third parties during the pre-notification process (which may lead the CMA to postpone the date on which it starts the statutory 40-working-day clock), and where businesses encounter difficulties in responding to statutory information requests (which allows the CMA to "stop the clock").
In relation to derogation requests to hold-separate orders, the CMA will continue to address each request on a case-by-case basis and grant derogations where merging parties demonstrate that they are necessary to ensure the viability of their business and appropriate safeguards are put in place to protect the CMA’s ability to take appropriate action to protect UK consumers.
The CMA is soon likely to have jurisdiction over some of the largest global mergers. Its expansive approach to jurisdiction, increasingly interventionist approach, extensive requests for information, and strict procedures may be expected to increase the costs and burden on companies engaging in transactions subject to global merger control. The COVID-19 pandemic may extend the timeline of merger investigations in cases where merging parties or other industry participants have difficulty in producing timely responses to the CMA’s requests for information.
Longer term, the CMA will continue its drive to become one of the leading competition authorities in the world.