On 15 January 2019, the UK Competition & Markets Authority ("CMA") published its final guidance on requests for internal documents in merger investigations. The guidance is intended to help merging parties provide complete and accurate responses to document requests that the CMA may issue as part of its merger review process. More specifically, the guidance provides clarifications in relation to: (i) the circumstances in which the CMA will request internal documents; (ii) the format and likely scope of such requests; (iii) the CMA’s expectations as to how the response should be prepared (including, in particular, the approach to IT issues); and (iv) the extent to which the CMA will be prepared to engage with businesses in the preparation of their responses.
The guidance provides for a general tightening and formalisation of the CMA’s approach towards internal document requests, and in practice it is likely to impose an increased burden on parties in the context of merger reviews. At the same time, the CMA has stated that it will carefully consider the appropriate scope and nature of a document request in light of the circumstances of the case, to ensure that its requests are proportionate. In addition, the CMA recognises that, although the principles set out in the guidelines apply to document requests in Phase I and in-depth Phase II investigations, there will likely be differences in the extent and type of information requested in each phase. This is a welcome clarification from the draft guidance, which did not make a clear distinction between the proportionality of document requests for complex Phase II cases, compared to Phase I reviews.
In the context of merger investigations, the CMA will ask parties to provide internal documents to inform its investigation. Some internal documents are typically required by the Merger Notice itself (i.e. documents relating to the deal, competitive analyses of the relevant markets etc.), whilst supplementary categories may specifically be requested by the CMA (e.g. emails from officers or employees that may be relevant to the merger investigation). The CMA can issue such a request informally or pursuant to the powers provided by section 109 of the Enterprise Act 2002. In the latter case, the request is mandatory and the CMA will typically set a binding deadline by which the parties are expected to produce the requested documents.
The issuance of the final guidance follows a consultation procedure on draft guidance published on 28 March 2018. The consultation was fuelled by CMA concerns that, in a number of merger cases, the parties had failed to provide all information requested or it was provided too late in the merger review process. Indeed, in December 2017, the CMA, for the first time, imposed an administrative penalty (of £20,000) on a company for failing to provide relevant documents in response to an information request received in the context of a merger review. This demonstrates the tougher stance likely to be adopted by the CMA going forward in relation to responses to requests for internal documents, and the need to comply with the guidelines.
In what circumstances will the CMA request additional internal documents?
In a welcome departure from the draft guidelines, the final guidance recognises there is a difference between Phase I and Phase II investigations. In an in-depth Phase II review, the CMA will typically issue a broad document request at the start of its investigation and follow up with more specific document requests that are relevant to the matters under investigation. In Phase I, the CMA will, on the contrary, typically only issue requests for additional documents (which may include emails) beyond those to be submitted with the Merger Notice in one of the following scenarios:
(a) the documents provided with the Merger Notice do not appear to fully capture the merging parties’ analysis of the merger or their assessments of competitive conditions within the markets at issue (e.g. where internal reporting takes place via email);
(b) the documents provided with the Merger Notice refer to other documents that the CMA considers may be material to its investigation;
(c) the merging parties submit that one of the parties would exit the market absent the deal, in which case this may have to be substantiated by internal documents; or
(d) there is an evidence ‘gap’ in relation to one or more issues that is material to the CMA’s Phase I investigation (e.g. in case the parties’ submissions or evidence provided are inconsistent or incomplete).
What procedure will the CMA follow?
The CMA’s practice of requesting internal documents using informal or statutory requests has varied in the past, although section 109 notices have been more commonly used in Phase II inquiries. The guidance provides that, going forward, the CMA is likely to use formal section 109 notices as standard in merger investigations rather than informal requests, at both Phase I and Phase II.1
While the content of document requests will vary on a case-by-case basis, requests will typically include standard questions intended to verify the approach adopted to document collection, search, and review (which will include the need to provide detailed explanations of the methodology used by merging parties to search for, and identify, relevant documents). The CMA may request a party’s proposed response to the methodology questions to be submitted in draft before responsive documents are produced, allowing for a discussion with the parties on whether the proposed approach is sensible and practical.
Whilst the CMA has often asked parties to explain the methodology used in locating internal documents in the past, the formalisation of the requirement to provide a detailed methodology description will undoubtedly add to the workload of parties. Nevertheless, the CMA helpfully recognises that the standard methodology question should not be taken to suggest that an extensive document review should be undertaken to respond to all requests. In particular, in some cases (e.g. for smaller companies or where the information sought is less material to the matters that the CMA is investigating), it might be appropriate for a party simply to state that certain business people ‘self-selected’ potentially responsive documents (e.g. based on searching their own email folders).
Where practicable and appropriate, the CMA will share a draft document request with parties before issuing a formal section 109 notice. It will do so in particular when the document request is complex or extensive, and may impose a material burden on the parties. This practice (which has been adopted by the CMA in the past), allows the parties to identify any questions or other parameters of the request that are likely to be irrelevant and assess the likely volume of responsive documents (which may in turn prompt the CMA to narrow the scope of the request).
What will be the likely scope of an internal document request?
The CMA may in principle request any potentially relevant document, but the guidance notes that the CMA will consider the appropriate scope and nature of a document request in light of the circumstances of each case in order to ensure that such a request is proportionate. The following general principles apply:
(a) the relevant custodians within the scope of the requests will be driven by the involvement in or influence over commercial decision-making in relation to the matters under investigation;
(b) the period for which internal documents are requested will vary depending on, in particular, on the history of the market. In most cases, the period covered by the request would run from no earlier than three years before the date of the request;
(c) the type of documents covered by the request can be very broad. In practice, the scope of documents requested will be driven by the way in which the parties conduct their commercial operations. Most requests will relate to specific categories of emails (including the files attached to those emails) and internal analyses (e.g. presentations, spreadsheets etc.), but in some circumstances, the request may extend to handwritten notes and/or chats on instant messaging systems.
How will the CMA deal with IT issues?
In its guidance, the CMA recognises that the technology used by businesses in their day-to-day work and the technology used in document review and production processes tends to evolve rapidly. The CMA’s approach to technical issues may therefore vary on a case-by-case basis to reflect these developments and the nature of the parties’ IT systems. That said, the guidance provides general principles that the parties should apply in preparing their response. This includes that responses should cover all of a custodian's IT environment where relevant documents might be stored (which may, in some circumstances, be so broad as to include instant messaging facilities), appropriate measures should be taken to ensure that potentially responsive documents remain available for production, and that documents produced should be text-searchable etc. The CMA also notes that “in most cases” the CMA is likely to require the merging parties to provide the metadata for responsive documents and that “family items” (e.g. all email attachments or embedded files) “will typically be considered as being responsive” to a document request.
What are the consequences of not complying with the CMA’s request?
In case of non-compliance with a section 109 request, the CMA has a variety of options, including: (i) ‘stopping the clock’ and extending the statutory timetables for reviewing the merger; (ii) rejecting the entire Merger Notice; and/or (iii) imposing an administrative penalty. Furthermore, it is a criminal offence to intentionally alter, suppress, or destroy any information that the CMA has required to be produced, to knowingly or recklessly supply false or misleading information to the CMA, or to give false or misleading information to any third party knowing that they will then supply it to the CMA.
In this regard, the CMA may include a request for the CEO or General Counsel to sign a ‘compliance statement’ confirming that the business has complied with the section 109 notice when it provides its response to the document request. The CMA notes that this is particularly important because the obligation to respond fully to a section 109 notice falls on the business and not on external advisers.
Conclusion and comments
Internal documents are playing an ever-increasing role as a source of evidence in merger investigations in the UK and other jurisdictions; the European Commission is also currently consulting on best practice guidance for submitting internal documents in EU merger control proceedings. In line with this development, requests for internal documents are becoming ever more extensive. Complying with such requests can be a huge exercise which needs to be handled carefully and, in most cases, under time pressure. As such, it is imperative for businesses involved in mergers to prepare for such a request early on in the process. Parties should also bear in mind that, unless legally privileged, all internal documents are in principle disclosable to the regulators (whether transaction-related or not).
The CMA’s guidance is welcome in that it provides clarifications on document requests issued by the CMA in future merger investigations and provides some certainty in relation to already established practices. That said, the procedures and consequences of non-compliance set out in the guidance represent a strict approach and place a significant burden on the parties involved in the transaction. The technical requirements such as the need to provide metadata and “family” documents are likely to make instruction of external document platform providers a necessity for most merger control processes, which will likely add to the cost of the overall merger process, which in the UK is already high relative to average transaction size.
The CMA is aware of the balance to be struck as it recognises and emphasises the principle of proportionality in its guidance, and the fact that there is likely to be a distinction between Phase I and Phase II cases. Crucially, however, it remains to be seen whether a pragmatic approach to the provision of internal documents is adopted in practice, and whether practice is broadly coherent and consistent across cases.