The CMA has issued a paper warning the Government about any moves to broaden its powers to intervene in mergers on public interest grounds. This follows suggestions that post-Brexit the Government wishes to have greater powers to intervene in mergers in order to defend sectors strategically important to the UK economy and to review the legal framework for future foreign investment in Britain’s critical infrastructure.
However, as the CMA points out, the UK’s merger control rules already provide for “public interest” intervention by the Secretary of State (“SoS”). Since those rules were introduced in 2003, they have been used ten times, six in relation to national security. In its paper to BIS the CMA has emphasised the importance of having a merger control regime that operates on the basis of clear, consistently applied rules that provide legal certainty and inspires business confidence.
One dimension not touched on by the CMA but which may also relevant to the debate is the impact post-Brexit. Post-Brexit, the Government may feel it has greater scope to intervene in larger merger transactions involving foreign investors given that currently many of those transactions will be reviewed by the European Commission under the EU’s “one-stop-shop” system for merger regulation.
Any radical departure from the generally accepted view that systems of merger control should be primarily based on a transparent competition based assessment by an independent specialist body, with only limited grounds on which Governments may intervene, is likely to raise concerns.
Protection of “legitimate interests” under EU merger control rules
Under the EU Merger Regulation (“EUMR”) mergers involving companies generating significant turnover in at least three EU Member States are subject to what is called the “one-stop-shop” merger clearance procedure with the European Commission. Mergers meeting the relevant EU turnover thresholds only have to be notified to the European Commission for clearance and do not have to be notified for competition clearance under any national rules applied by the 28 EU Member States. Article 21(4) of the EUMR provides that Member States may take appropriate measures to protect “legitimate interests” other competition-related interests. EU Member States have for decades relied on this provision to take measures to protect their legitimate national interests, most notably in the defence, energy and utilities and media sectors.
Article 21(4) specifically recognises public security, plurality of the media and prudential rules as being legitimate interests and allows Member States to communicate others national interests to the European Commission for consideration in the context of any merger it is investigating.
Whilst EU Member States have been afforded a broad discretion as to what they consider to be legitimate interests, the EUMR imposes two important restrictions:
- Member States are not permitted to authorise mergers which the Commission has prohibited under the EUMR; and
- Member States must ensure any prohibitions or restrictions placed on a merger transaction do not amount to discrimination or a disguised restriction on trade between Member States and do not infringe EU general principles of necessity and proportionality (any conditions imposed being limited to the minimum of action necessary to ensure the protection of the legitimate interests in question).
There are many examples of EU Member State governments relying on the legitimate interests provision to seek to protect companies and sectors they deem to be strategically important to their economy. For example, in the mid-1990s, in Lyonnaise des Eaux/Northumbrian Water, the Commission recognized the legitimate interest of the UK authorities in applying certain provisions of the Water Industry Act 1991 to ensure a sufficient number of independent water companies. In that case, the Commission was satisfied that the measures to be taken to ensure the effectiveness of comparative regulation were proportionate and non-discriminatory.
However there have also been cases where the Commission has objected to Member States seeking to intervene to block transactions, most notably in E.ON/Endesa. In that case, after E.ON announced its intention to launch a bid for Endesa in February 2006, the Spanish government adopted new legislative measures aiming to increase the supervisory powers of the Spanish energy regulator and make the bid conditional upon the energy regulator’s approval. The merger was notified to the Commission and cleared in April 2006. A few months later, the Spanish energy regulator adopted a decision making the transaction subject to a large number of conditions. Subsequently, the Commission adopted a decision by which it declared that the energy regulator’s decision breached Article 21(4) of the EUMR and it launched proceedings against Spain in the European Court of Justice, which ultimately confirmed Spain had breached its obligations under the EU Treaty.
Position Post-Brexit under UK merger control rules
Post-Brexit, and assuming the UK is not a member of the EEA, the CMA will have exclusive jurisdiction to consider the impact on competition in the UK of transactions qualifying as “relevant merger situations” under the Enterprise Act 2002 (“EA02”). Transactions meeting the EUMR turnover threshold would still need to be notified to the European Commission for the one-stop-shop assessment for the EU (then minus the UK). However, any impact on competition in the UK and any “public interest” issues would only have to be considered under the UK’s EA02 provisions, and not under the EUMR.
Section 42 of the EA02 provides that the Secretary of State (“SoS”) may issue a Public Interest Intervention Notice (“PIIN”) in cases where a transaction meets the UK jurisdictional thresholds and where the SoS considers that it gives rise to public interest implications, and that the CMA has not referred for a Phase 2 investigation. If the SoS refers a merger on public interest grounds, the SoS also takes the final decision on whether the merger operates or may be expected to operate against the public interest, and on any remedies for identified public interest concerns.
The public interest considerations on which the SoS may issue a PIIN are currently limited to:
- national security (including public security);
- plurality and other considerations relating to newspapers and other media; and
- the stability of the UK financial system.
Importantly though, the EA02 also allows the SoS to intervene on the basis of other considerations where the SoS believes another ought to be specified, which can be introduced retrospectively. This has happened only once, in 2008, during the recent financial crisis when Parliament approved “the stability of the UK financial system” as a new public interest ground, which the SoS then relied on to approve the Lloyds/HBOS banking merger.