On 18 September 2008, Lloyds TSB Group plc (“Lloyds TSB”) and HBOS plc (“HBOS”) announced an agreement on the terms of a recommended £12.2 billion acquisition by Lloyds TSB of HBOS. The deal has reportedly been negotiated amid fears that turmoil in financial markets would affect HBOS’s viability. On the same day, the UK’s Secretary of State for Business, Enterprise and Regulatory Reform, Mr John Hutton, issued an Intervention Notice in the Lloyds TSB/HBOS merger. This intervention has led to speculation that the UK merger control regime may be altered or not applied as it would in the ordinary course. We comment below on the particular procedures of merger review involved, the powers of the UK government to intervene, and the future implications for UK merger control.
The transaction may raise competition concerns
Lloyds TSB and HBOS are two of the five leading commercial banks in the UK (the other three are Barclays, Royal Bank of Scotland and HSBC). The combined entity would become the largest financial services business in the UK, with leading market positions in current accounts, mortgages, savings, and loans. The transaction would ordinarily be expected to raise competition issues. In 2001, the UK’s Competition Commission opposed the acquisition by Lloyds TSB of its smaller rival Abbey National plc. The Commission was concerned with the high combined market shares of the four largest banks and the lack of competition in personal and small businesses banking.
The OFT has jurisdiction to review the transaction
In the UK the Office of Fair Trading (“OFT”) is the first-stage competition authority to which merger notifications are made if there is no European Commission jurisdiction. The European Commission would have mandatory jurisdiction if certain turnover (net revenues) thresholds are exceeded. Both Lloyds TSB and HBOS are likely to exceed the EU turnover tests. However, there is an exemption in the case that each of the parties achieves more than two-thirds of its EUwide turnover in one and the same Member State. It appears that Lloyds TSB and HBOS qualify for this exemption as they achieve most of their revenues in the UK.
The OFT decides whether to refer transactions to the Competition Commission for in-depth review. The OFT has jurisdiction to do this if (i) the target’s annual revenues in the UK exceed £70 million or (ii) the transaction creates or enhances a combined share of supply in the UK exceeding 25%. Both thresholds are met by the Lloyds TSB/HBOS merger.
The offer is conditional on merger clearance
A summary of the terms of Lloyds TSB’s offer posted by Lloyds TSB, indicates that the merger is conditional, among other things, on it being established that it is not the intention of the OFT or the Secretary of State to refer the transaction to the Competition Commission. The acquisition will lapse if the transaction is referred to the Commission before the meeting of HBOS’s shareholders.
This condition complies with the UK’s City Code on Takeovers and Mergers. The Code provides that it must be a term of a public offer that the offer will lapse if referred to the Competition Commission for in-depth investigation.
The ability of the OFT to scuttle a deal is normally of considerable significance in a public offer. The OFT has a duty to refer to the Competition Commission any completed or anticipated merger which has resulted, or may be expected to result, in a substantial lessening of competition. It has a discretion to refer if it believes a substantial lessening of competition is less than a 50% prospect but more than “fanciful”. The OFT generally issues its decision within 40 working days from the receipt of a notification. In case of a referral, the Competition Commission generally has 24 weeks (although this may be extended by eight weeks) to conduct its investigation and the transaction is automatically suspended until given clearance by the Commission.
The Secretary of State has issued an Intervention Notice
On 18 September 2008, the Secretary of State, Mr Hutton, issued an Intervention Notice in the Lloyds TSB/HBOS transaction. As a result, the Secretary of State rather than the OFT has taken the power to decide whether to clear the transaction or to refer it to the Competition Commission. Press reports indicate that the UK government believes a reference to the Competition Commission would not be in the public interest.
The UK merger control regime was changed by Enterprise Act 2002 (which entered into force in 2003) making it harder for the UK government to intervene in merger cases. Prior to 2003, the final decision-maker in merger cases had always been the Secretary of State. The Enterprise Act transferred the responsibility for making decisions to the independent competition authorities, the OFT and the Competition Commission. The aim of the legislation was to safeguard merger control from political interference. The Enterprise Act also replaced the previous test for clearance, which referred to whether or not the merger was in the “public interest”, with a more specific test, which asks if the transaction will lead to a “substantial lessening of competition”.
However, the Secretary of State retained the power to issue an Intervention Notice in exceptional cases which involve “public interest considerations”. When an Intervention Notice has been given, the OFT cannot refer the transaction directly to the Competition Commission but must address a report to the Secretary of State dealing with both the competition and the public interest considerations. The Secretary of State then has the power to decide whether or not to refer the transaction to the Competition Commission. The Secretary of State is bound by the OFT’s findings as to competition but may decide to clear the transaction, e.g., if the competition concerns identified by the OFT are outweighed by public interest considerations.
Mr Hutton issued the Intervention Notice on the basis that “the stability of the UK financial system” may be relevant to the review of the Lloyds TSB/HBOS merger. The Secretary of State has indicated he is acting on the advice of the UK Tripartite Authorities, i.e. HM Treasury, Bank of England and the Financial Services Authority (“FSA”). HM Treasury and the FSA have issued statements confirming their view that the merger would enhance stability within the financial markets. Mr. Hutton instructed the OFT to complete its investigation by 24 October 2008.
New legislation is required
Existing legislation enables the Secretary of State to issue an Intervention Notice if he or she believes that public interest considerations apply. The public interest considerations must be specified by legislation. However, at present, the only specified public interest considerations are national security and those relating to newspaper and media mergers. The current legislation does not identify the stability of the UK financial system as a ground for the Secretary of State’s intervention. However, the Enterprise Act allows the Secretary of State to specify by order new public interest considerations, provided that this order is approved by Parliament.
Therefore, even though the Secretary of State has already issued an Intervention Notice, it needs to be finalised by way of affirmative resolution laid before Parliament for its approval. Mr. Hutton has indicated that he would issue such a resolution and lay it before Parliament in the week beginning 6 October 2008, when Parliament resumes after the summer recess.
Conclusion: greater government powers are likely
Previously, since the 2002 legislation was introduced, the Secretary of State had issued only one Intervention Notice. That was on the basis of media and plurality concerns in relation to the acquisition by BSkyB of a stake in ITV (on which Fried Frank has been an adviser to Virgin Media). The government has also intervened on public interest grounds in several defence mergers. Until now, the residual intervention powers of the Secretary of State were thought likely to be exercised to ensure Competition Commission review on “public interest” grounds even if the OFT concluded a merger did not have an adverse effect on competition. The Lloyds TSB/HBOS intervention shows that this assumption cannot safely be made.
The rarity of Intervention Notices has made them inevitably controversial. The terms of the Intervention Notice issued by the Secretary of State in the Lloyds TSB/HBOS transaction will be certainly closely scrutinised by third parties, including banking competitors. Perhaps more importantly, this Notice, if approved by Parliament, will broaden considerably the possibility of government involvement in the merger control process in the future.