Until recently few believed that Brexit could ever actually happen. But, as the 2015 General Election made clear, public opinion in Britain is hard to predict. Given that Britain experienced a white-knuckle referendum on Scottish independence, we take this opportunity to consider the ramifications of a “leave” vote from a competition law perspective.
A clean break?
No Member State has ever left the EU and so there is no precedent for Brexit1. However, following the entry into force of the Lisbon Treaty in 2009, there is a specific clause in the Treaty on the European Union (the TEU)2 covering Member State withdrawal. Article 50 TEU provides that “any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements”; and furthermore that the “Union shall conclude an agreement with that state” (emphasis added).
The TEU goes on to say that this agreement shall be negotiated in accordance with the other founding treaty, the Treaty on the Functioning of the European Union (the TFEU); in particular Article 218(3) TFEU, which governs agreements between the Union and third countries as well as international agreements.
Article 50(3) TEU states that the Treaties will cease to apply to the departing Member State only once the agreement is concluded, but in any event after two years from the notification of intention to withdraw. Any withdrawal agreement would not only require approval by the Council and the consent of the European Parliament, but potentially could require ratification by individual Member States as well as the UK’s Parliament. Given the complexity and time it takes for the EU to negotiate and ratify free-trade agreements3, the withdrawal of the UK from EU legal regime could easily take years not months.
How then is a business with exposure to both UK and EU competition regimes supposed to plan in the intervening period? To answer this question we now consider Brexit in two ways:
- How the competition regimes in the UK and EU currently overlap.
- What the potential alternative arrangements are if Brexit does occur.
The two areas of competition law most commonly relevant to businesses operating across European borders are anti-trust and merger control.
In the area of anti-trust the UK aligned its competition law with that of the EU following the enactment of the Competition Act 1998 (the CA). Chapters I and II of the CA mirror Articles 101 and 102 TFEU and are applied by English courts in a manner that is consistent with EU law. Similarly, most other Member States (particularly those with active national competition authorities) have adopted EU law within their domestic competition legislation.
The central difference between national and EU competition law is on the purpose of the legislation. The EU prioritises the “single market imperative”, while Member States are concerned with economic effects felt at a more local level. EU anti-trust law may only apply where there is an “appreciable effect” on trade between Member States. Accordingly the European Commission’s relationship with the competition authorities of Member States is one of delegation: the European Commission concentrates on the most serious cases of abuse, such as international cartels and other hardcore international infringements, and Member States focus on domestic cases, efficient markets and consumer protection.
From a competition law perspective, the consequences of Brexit would, therefore, be minor at least in the short-term. Behaviour that is currently illegal under EU law would generally continue to be illegal under English law. A substantial body of English case law already exists on the basis of the CA, that has been interpreted according to the consistency principle and so mirrors EU jurisprudence. Any change from this case law would need to happen either by gradual judicial evolution or by an Act of Parliament that no major political party currently advocates. Of course it is possible that export bans preventing exports from the UK to the EU, or vice versa, would no longer be unlawful, unless the UK continued to be part of the European single market.
Merger control regime
The position is slightly different for the merger control regime. The UK has its own voluntary notification process embodied in the Enterprise Act 2002 (as amended by the Enterprise and Regulatory Reform Act 2013). This operates alongside the EU’s compulsory regime for concentrations having a “Community dimension”. There is, however, a “one stop-shop” principle which avoids concentrations and mergers having to be notified at both national and EU levels. This process operates on the basis of turnover thresholds calculated on an EU-wide basis. Were Brexit to occur it is possible, depending on the alternative arrangement for Britain’s relationship with Europe, that this system would cease to apply and an extra layer of red-tape would be imposed on mergers that are caught by the competition regime in both jurisdictions.
The key question for any business is therefore will it be necessary for me to engage with two sets of competition authorities? The answer will depend on the nature of the UK withdrawal agreement that is signed after negotiations. There are two clear front-runners for this.
Option 1: European Economic Area (EEA)
This would be the simplest option for the UK to adopt, as presumably it would be relatively easy to negotiate given that Norway, Iceland and Liechtenstein already use this model for their relations with the EU. Membership of the EEA would give the UK access to the single market, which most commentators agree is a good thing.
However, accession to the EEA is by no means instantaneous. Britain would first have to enter into a treaty to join the European Free Trade Association (EFTA) and then separately join the EEA.
There are also considerable disadvantages. The EEA has its own legal framework, which entails the primacy of the EFTA Surveillance Authority and the EFTA Court, which have similar roles to the EU Commission and Court of Justice of the European Union (CJEU) respectively.
Moreover, EEA members are obliged to comply with EU secondary legislation, but have very limited influence in the decision making process. Accession to the EEA also brings with it the obligation to interpret EEA provisions that reflect EU legislation in accordance with EU case law. EEA membership could easily be considered “EU rule by the backdoor”.
In terms of competition law, the rules would be substantively similar to those currently in place. The EEA Agreement mirrors provisions on anti-competitive agreements and abuse of dominance in the TFEU. Under this Agreement the EU Commission has authority to act wherever trade between Member States is affected. Although EEA-EFTA members are not in the European Competition Network (ECN), the relationship between their national regimes and the EFTA Surveillance Authority mirrors the current one in place between the UK’s Competition and Markets Authority (CMA) and the EU Commission.
Similarly, for the merger control process, the EU regime would continue to apply to the largest transactions. The EEA-EFTA countries have an agreement with the EU whereby once the turnover thresholds under the EU merger legislation are met, the Commission will take over the case from the EFTA Surveillance Authority. In all likelihood the “one-stop shop” principle would not be lost.
Option 2: Bilateral arrangements
Britain could choose to enter into a series of agreements covering different regulatory areas, including one for the competition regime. This would clearly be a more complex route to pursue, but bilateral arrangements would entail at least potential freedom from EU institutions. Whether this option could become reality would depend on the bargaining power of the parties during negotiations.
For example, Switzerland is not obligated to apply EU law generally, but in certain circumstances follows EU legislation. On the one hand this model gives Switzerland the sovereignty that it desires, but it requires a complex network of agreements to govern the relationship.
The content of any future bilateral agreement is thus highly speculative. However, for the merger process businesses could, at least initially, have to make dual merger notifications where there is a “Community dimension” to the concentration. This would lead to increased red tape and cost and potentially there is the risk of inconsistent decisions from the two competition authorities.
Similarly, anti-trust investigations might have to be carried on in both jurisdictions. This would increase the workload of the UK authorities and also potentially could deprive litigants in follow-on actions (namely private claims against undertakings found guilty of an infringement of competition law) of a key means of proof. This is because findings by the EU Commission in the form of infringement decisions could potentially no longer be binding on national courts once Britain leaves the EU.
Directives vs. Regulations
The effect of Brexit on competition legislation and on specific industries will depend on the regulatory framework in place. EU Directives, such as in the area of public procurement, require implementing legislation in order to have effect at domestic level. This is because Directives are not directly effective in Member States, but aim to achieve a specific goal that Member States must implement through their own legislation. The result is that industries or sectors with EU Directives in place may have UK legislation enacted that will continue in force regardless of Brexit. By contrast, EU Regulations, such as block (automatic) exemptions from the prohibition of anti-competitive agreements, are directly effective in EU Member States without domestic legislation. Perhaps ironically then, sectors and areas that have felt more centralised control from Brussels in the form of Regulations are the ones where there will be a more immediate regulatory gap should Brexit occur, as there is no domestic legislation in place to fill the gap once European law ceases to apply.
Following Brexit the EU State aid regime may cease to apply. However, it is likely that under any continuing free trade agreement, control of State aid by the UK Government would continue to apply in some form.
It is clear that full EU withdrawal would take some time. However, there are some noteworthy considerations for the short-term should a vote for Brexit occur:
- Firms active in all sectors should perform some due diligence to consider what the regulatory impact would be of Brexit. The starting point would be to consider whether there are any key EU Regulations in force which may no longer have effect should Brexit occur. If there are, it would be wise to consider contingency planning.
- Given that the UK competition authorities may see a large increase in their case-load in a post-Brexit environment, companies may experience delays in receiving clearance of transactions, although this need not hold up completion given that the UK merger regime is voluntary and potentially retrospective.
- For anti-competitive agreements/abuse of dominance, the same point on delays holds true. In addition, those considering bringing follow-on actions in the UK, on the basis of EU Commission and EU Court decisions, would similarly be minded to do so sooner rather than later, as it is possible that these decisions on competition infringements would cease to be binding proof on UK courts in follow-on actions, given that the Anti-trust Regulation4 and EU case law could cease to apply. Similarly, the disclosure provisions of the soon-to-be implemented Damages Directive would not be effective and claimants could not obtain disclosure of factual evidence held by the Commission in these cases.
- Companies under investigation by the EU Commission should be mindful that their communications with external lawyers are still governed by privilege, bearing in mind that under EU law only communications with external counsel registered in the EEA are privileged5. It could be sensible for those companies to ensure their law firms have solicitors that are registered in the EEA, for example in Brussels.
Companies and their advisors should be aware of the potential implications of Brexit when managing their legal workload (particularly within the UK) and ensure that if Brexit does happen in due course, they have taken appropriate steps.