On 1 April 2014 the Office of Fair Trading (OFT) and Competition Commission formally amalgamated their roles into a single new UK competition watchdog – the Competition and Markets Authority (CMA).
This alert summarises the key changes that have been introduced to the UK’s merger control regime and their impact on businesses. Changes have also been introduced to other aspects of the UK’s competition landscape (such as the antitrust and markets regimes), but those amendments are not the subject of this update.
Overview of changes
Many key elements of the UK merger control regime will remain the same. Notably, filings remain voluntary and will potentially be subject to the same two-stage review process. The substantive test for determining whether a merger will lead to a substantial lessening of competition remains intact, as does the test for determining whether to subject a merger to in-depth scrutiny at Phase 2.
The level of fees payable for notifications also remains unchanged, having recently risen to between £40,000 and £160,000, depending on the turnover of the target.
Key changes include the introduction of a standardised merger notification form; the removal of the informal notification procedure (often the forum of choice for notifying mergers); and the introduction of a statutory 40 working day timetable at Phase 1. There is also a new procedure for offering undertakings at Phase 1 with a view to avoiding a Phase 2 reference.
These changes are discussed in further detail below, as well as a number of developments in relation to the CMA’s information gathering powers and its power to make interim orders. Buried in the raft of changes is the possibility for businesses to benefit from greater access to Phase 1 decision makers in complex cases.
Pre-notification has always been seen as a vital cog in the merger control wheel as it enables the authorities to familiarise themselves with the transaction and to identify the information they will need, all before the review clock begins to tick. For merger parties, pre-notification represents an opportunity to test the water, ie to gauge the authorities’ preliminary (albeit non-binding) views on the transaction. Under the new regime, the pre-notification phase remains, but given the CMA’s statutory timetable it
is likely that pre-notification will be a more protracted process, with the CMA unwilling to accept notifications as complete until they are completely satisfied with responses to pre-notification queries.
Mirroring the procedure in the EU, a new “case team allocation” form must be submitted as part of the initial contact with the CMA, enabling the CMA to allocate within five working days a specific case officer to handle the transaction.
All merger notifications must now be made using a prescribed Merger Notice. Given the CMA’s enhanced powers in respect of hold separate orders (see further below), it is to be expected that more transactions will be pre-conditional on UK clearance as buyers may not want to take the risk of having to unscramble a completed transaction, potentially at a substantial cost.
Parties will no longer have the option of making informal submissions, though the CMA will still be able to review drafts of the submission before accepting a final “completed” notification. Only following formal notification will the review clock start to tick.
Changes to the review timetable At Phase 1, the CMA will have an initial 40 working days in which to consider the transaction. This replaces the OFT’s previous, shorter, timeframe of 20 working days (extendable by up to 10 working days) which applied under the optional formal notification process.
If the transaction is sent for a Phase 2 review, the parties may ask the CMA to suspend its investigation if it is possible that the transaction will be abandoned. The CMA can apply a suspension for a maximum of three weeks.
The previous Phase 2 timetable of 24 weeks, extendable by up to eight weeks, still applies.
The CMA will now have the power to require information to be provided by any person, including third parties. Fines can be imposed for failing to comply, but it remains to be seen in practice how the CMA will deploy its new powers vis-à-vis third parties.
The CMA will also have enhanced powers to adopt interim measures (and impose hold separate orders) at Phase 1, both in relation to anticipated and completed mergers. Essentially, interim measures are used by the authorities to prevent merger parties from beginning (or further enhancing) integration during the lifetime of the regulatory review.
The risk of pre-emptive action is greater in respect of completed mergers, where post- merger integration is more likely to have commenced. In such cases, it is expected that interim orders suspending integration – and/or preventing further integration – will be commonly deployed. The position as regards anticipated mergers is more nuanced, since in those types of case the risks of pre-emptive action are lower.
Echoing that reality, the CMA’s guidance makes clear that it expects to make interim orders only in those rare cases where it is concerned about pre-emptive action (ie integration) that would be difficult or costly to reverse and that interim orders will be tailored and focussed.
Whereas previously the OFT’s established practice was to impose interim orders only where interim undertakings could not be agreed, the new powers are likely to precipitate an increased use by the CMA of interim orders.
This is especially so given that the threshold for intervention is lower than under the previous regime, with the CMA able to make interim orders as soon as it has reasonable grounds for suspecting a merger has taken place or that such arrangements are in progress or contemplation, including during pre-notification. The use of orders also provides less opportunity for merger parties to continue integration, as compared to the process for negotiating undertakings.
Again, failure to comply can lead to significant financial penalties.
Undertakings in lieu of reference (UILs)
The process of offering undertakings in order to avoid a Phase 2 review has changed significantly. Parties will have five working days from the date of the Phase 1 decision to formally offer UILs – although it is strongly recommended that such discussions are commenced at an earlier stage. The UIL procedure could last as long as 50 working days, or 90 working days in exceptional circumstances – but UILs must be offered within the five working day period identified above.
The new merger control regime has been in place since 1 April 2014. As a rule of thumb, all mergers will be dealt with under the new rules and guidance, with the exception of ongoing Phase 1 investigations and any Phase 2 investigations in which the CC has published a final report, but has not yet made its final order or where no undertakings have been given. If an existing Phase 1 investigation is now sent to Phase 2, the new regime will apply.
The final word…
Businesses will welcome one significant change – namely that, in complex cases, the Phase 1 decision maker will attend issues meetings with the parties. Previously, parties did not have the opportunity to meet face-to-face with the person who would ultimately decide the fate of their merger transaction, but the new system should allow businesses to put their case directly to the key decision-maker at Phase 1. However, it remains to be seen whether the changes overall will result in more businesses applying a more cautious approach to the “voluntary” nature of the UK regime, in effect resulting in “prior notification by the back door”.