Legislation and jurisdictionRelevant legislation and regulators
What is the relevant legislation and who enforces it?
The primary legal basis for merger control in the United Kingdom is the Enterprise Act 2002 (EA), which came into force on 20 June 2003. In April 2014, the EA was significantly amended by the Enterprise and Regulatory Reform Act 2013. In particular, the Office of Fair Trading (OFT) and Competition Commission (CC) were merged into a single authority, the Competition and Markets Authority (CMA). The CMA’s primary duty is to seek to promote competition, both within and outside the UK for the benefit of consumers. Published guidance explains how the provisions work in practice and secondary legislation implements some of the provisions.
The EA establishes an administrative procedure for merger control, which is now solely implemented by the CMA. In limited cases, raising defined public interest issues, the Secretaries of State for Business, Energy and Industrial Strategy (BEIS) or Culture, Media and Sport may also be involved in the decision-making process. Under the general EA merger regime:
- the CMA has a duty to refer mergers (anticipated or completed) for a Phase II review where it believes that there is, or may be, a relevant merger situation that has resulted or may be expected to result in a substantial lessening of competition (SLC) in the UK. Exceptions to the duty to refer exist in certain circumstances;
- following a reference for a Phase II investigation, the CMA conducts a more detailed analysis to decide whether a relevant merger situation has been or will be created and, if so, whether the situation results, or may be expected to result, in an SLC within any markets within the UK. If the CMA decides that there is an SLC, it must go on to determine how to remedy, mitigate or prevent the adverse effects; and
- different rules are in place for public interest, special public interest and water merger cases.
What kinds of mergers are caught?
The EA applies to a ‘relevant merger situation’, which may be a completed or anticipated merger. The CMA must make a reference for a Phase II review where it believes that there is or may be a relevant merger situation that has resulted or may be expected to result in an SLC. An ‘anticipated merger’ may be a merger that has been signed but not yet completed, or it may be a merger in contemplation. Where these conditions are met, a reference for a Phase II review must be made unless one of the exceptions to the duty to refer applies or, where appropriate, it may seek and accept undertakings in lieu of a reference from the merging parties.
A relevant merger situation will arise when the following conditions are satisfied:
- two or more enterprises cease to be distinct, that is, are brought under common ownership or control or there are arrangements in progress or in contemplation that will lead to enterprises ceasing to be distinct. Control is not limited to legal control;
- either the merger has not yet taken place, or the merger has taken place not more than four months before the reference is made, unless the merger took place without having been made public and without the CMA being informed of it (in which case, the four-month period starts from the announcement or at the time the CMA is told); and
- the transaction meets certain jurisdictional thresholds (the share of supply or turnover tests).
The EA defines an ‘enterprise’ as the ‘activities, or part of the activities, of a business’ that are carried out for gain or reward (it need not therefore be a separate legal entity). CMA Guidance (see Mergers: Guidance on the CMA’s jurisdiction and procedure and the Merger Assessment Guidelines) indicates that an enterprise may comprise any number of components, including the assets and records needed to carry on the business and the employees working in the business, together with the benefit of existing contracts or goodwill, or both. A business need not currently be trading to constitute an enterprise. In June 2014, the CMA found, following a legal challenge, that it did have jurisdiction over Groupe Eurotunnel’s acquisition of three ferries and related assets previously belonging to SeaFrance (now liquidated). The CMA found considerable continuity between the former SeaFrance services and Groupe Eurotunnel’s new services on the same route. The assets in question were considered to form a business that was already geared up to run a ferry service; the situation was thus distinct from buying mere assets in the market. The Supreme Court upheld the CMA’s decision regarding the definition of ‘enterprise’ for the purposes of UK merger control in December 2015.
What types of joint ventures are caught?
The creation of a new joint venture, or a shift in control or influence over an existing joint venture, may give rise to a relevant merger situation, provided that the share of supply test or the turnover test is met.
Is there a definition of ‘control’ and are minority and other interests less than control caught?
The CMA documents, Mergers: Guidance on the CMA’s jurisdiction and procedure and Merger Assessment Guidelines, provide guidance on the meaning of control. Control can comprise any of the following:
- material influence – which arises on the basis of an ability materially to influence another enterprise’s policy. This can arise at relatively low levels of shareholding, perhaps as low as 10 to 15 per cent. Other factors such as board representation, industry standing and contractual relationships between the enterprises involved may also be taken into account. The Court of Appeal upheld a finding that BSkyB’s acquisition of a 17.9 per cent stake in ITV gave rise to material influence in the circumstances of the case. This concept can therefore clearly catch transactions that would not be caught by the EU Merger Regulation (EUMR). For example, the OFT referred Ryanair’s acquisition of a 29.82 per cent shareholding in Aer Lingus Group plc (the European Commission having concluded that it did not have the power to require Ryanair to divest itself of the minority stake under EU merger rules) to the CC in June 2012. The CC reached its decision in July 2013, requiring Ryanair to reduce its shareholding in Aer Lingus to 5 per cent. Its conclusion that the 29.82 per cent shareholding gave material influence was based on a range of factors including, in particular, Ryanair’s ability to block special resolutions and the sale of Heathrow slots under the articles of association. This conclusion was reiterated by the CMA in its final decision in June 2015 following an application by Ryanair to the CMA to reconsider its decision based on material changes to circumstances. Following the CMA’s final decision, in October 2015, Ryanair withdrew its application before the Court of Appeal regarding the same issue. In 2019, the CMA took jurisdiction over Amazon’s intended acquisition of a minority stake (of undisclosed scale, but later announced as 16 per cent) in Deliveroo, which entitled Amazon to appoint one out of eight of Deliveroo’s directors and certain other rights. In its Phase 1 decision to refer the case to an in-depth investigation, the CMA considered that Amazon would acquire material influence over Deliveroo as a result of a number of ‘mutually reinforcing’ factors, including Amazon’s particular industry knowledge and expertise as a shareholder;
- de facto control – the ability to control policy, which may arise on the acquisition of a higher level of shareholding, such as 30 per cent of voting rights; or
- legal control – a controlling interest, unlikely to arise unless one enterprise holds more than 50 per cent of the shares carrying voting rights in the other. In some (exceptional) cases, acquisition of a shareholding in excess of 50 per cent may not give rise to legal control where an agreement with the other shareholders circumscribes the majority owner’s rights (see, for example, Coca-Cola Company/Fresh Trading Limited, where a shareholding increase from around 20 per cent to above 50 per cent did not give rise to legal control, as the acquirer obtained no additional voting rights (either in the shareholders’ meeting or at board meetings)).
A change from material influence to de facto control or legal control, or from de facto control to legal control, can constitute a new relevant merger situation.Thresholds, triggers and approvals
What are the jurisdictional thresholds for notification and are there circumstances in which transactions falling below these thresholds may be investigated?
The EA provides alternative thresholds based respectively on the share of supply and turnover:
- the ‘share of supply’ test is satisfied only when the merger itself creates or enhances a 25 per cent share of supply or purchases of any goods or services in the UK (or in a substantial part of it). This is not a market share test and allows a wide discretion in describing the goods or services, which need not amount to relevant economic markets. In 2019, the CMA asserted jurisdiction over the Roche group's acquisition of Spark Therapeutics even though Spark had generated no sales in the UK. Instead, the CMA’s finding of jurisdiction was based on the parties’ combined numbers of UK-based employees engaged in research and development activities, as well as the number of UK patents procured from an administrative patent authority;
- the turnover in the UK of the enterprise over which control is being acquired exceeds £70 million. This is determined by aggregating the total value of the turnover in the UK of the enterprises that cease to be distinct and deducting:
- the turnover in the UK of any enterprise that continues to be carried on under the same ownership or control (eg, the acquiring enterprise); or
- if no enterprise continues to be carried on under the same ownership and control (eg, formation of a new joint venture), the turnover in the UK which, of all turnovers concerned, is the turnover of the highest value.
Is the filing mandatory or voluntary? If mandatory, do any exceptions exist?
Filing in the UK is voluntary. However, a large number of deals are, in practice, notified prior to completion to give the parties legal certainty as, irrespective of a notification, the CMA may commence an investigation on its own initiative and subsequently refer the merger for a Phase II investigation. This carries the risk of remedies being imposed even if the transaction has already been completed. Further, the CMA monitors the market for transactions falling within its jurisdiction that have not been voluntarily notified and has significant interim measures powers, which enable it to prevent or unwind action that might prejudice the outcome of a reference for a Phase II investigation or impede remedial action. The CMA can intervene as soon as it has reasonable grounds for suspecting that it may be the case that arrangements are in progress or in contemplation, but uses interim orders mainly in the context of completed mergers. The CMA stated in its 2018/19 Annual Plan that, to achieve a balanced and targeted approach to investigating non-notified mergers, it will welcome informal briefings from companies to advise on whether a potential merger is likely to come under CMA scrutiny.
Filing must be by merger notice in the form prescribed by statute or by a submission containing the same information.
Do foreign-to-foreign mergers have to be notified and is there a local effects or nexus test?
There is no system of mandatory notification in the UK. It is implicit in the jurisdictional criteria that at least one of the enterprises will be active within the UK (although it need not necessarily be incorporated within the UK). These principles apply equally to non-UK companies that sell to (or acquire from) UK customers or suppliers. In assessing whether a firm is active in the UK, the CMA will have regard to whether its sales are made directly or indirectly (via agents or traders) and the extent to which a firm is active at each level of trade. The CMA increasingly adopts a broad interpretation of the required local nexus with the UK, asserting jurisdiction in the Roche/Spark case despite the target not having any sales in the UK (see also its decision in Sabre/Farelogix).
In June 2013, the Court of Appeal confirmed the CC’s jurisdiction over the AkzoNobel/Metlac merger on the basis that AkzoNobel had significant influence over its UK subsidiaries, which were carrying on business in the UK, including the setting of strategies and approval of operational decisions and did not itself need to be carrying out commercial activities in the UK.
Are there also rules on foreign investment, special sectors or other relevant approvals?
The UK does not currently have a domestic legal framework that specifically governs inward foreign direct investment. However, the EA merger regime sets out special rules for mergers involving public interest issues and special public interest cases (including mergers involving certain government contractors that possess information relating to defence and of a confidential nature). Broadly, where the Secretary of State intervenes in a public interest case, that case is considered in light of both competition and public interest issues. Where the Secretary of State intervenes in a special public interest case (ie, one in which the CMA does not have jurisdiction under its normal rules) the outcome of the case is dependent on public interest issues only.
The public interest grounds on the basis of which the Secretary of State may intervene are national security, media plurality, the stability of the UK financial system and new public interest considerations that may be added by the Secretary of State. Since June 2020, the EA also allows the government to intervene on grounds of public health emergency, with changes intended to enable the scrutiny of certain foreign takeovers to ensure they do not threaten the UK’s ability to respond to a public health emergency such as the covid-19 pandemic.
Where the Secretary of State issues an intervention notice specifying a ‘media public interest consideration’, Ofcom is required to report whether it is, or may be, the case that the merger may be expected to operate against the public interest, to assist the Secretary of State in its decision as to whether there is a plurality concern requiring further investigation by the CMA. At the request of the Secretary of State, Ofcom published a measurement framework for media plurality in November 2015. One recent example of an intervention by the Secretary of State for Digital, Culture, Media and Sport on public interest grounds is the investigation into the proposed acquisition of Sky plc by 21st Century Fox. In June 2018, the Secretary of State for Digital, Culture, Media and Sport accepted the CMA’s recommendation that the proposed acquisition was not in the public interest due to media plurality concerns and accepted the CMA’s recommendation that the most effective and proportionate remedy was for Sky News to be divested to a suitable third party. In 2019, the Secretary of State intervened on grounds of national security in a number of cases, including in December 2019 in relation to two separate transactions in the aerospace industry, namely the proposed merger of Impcross Ltd and Gardner Aerospace Holdings, as well as the acquisition of Mettis Aerospace Limited by Aerostar (a Chinese-established fund).
There is also a special regime for water (and sewerage) mergers. In some circumstances water mergers are subject to mandatory reference to the CMA and are governed by the Water Industry Act 1991 (as amended by the EA and Water Act 2003) and the Water Act 2014. There are currently no special provisions for other regulated utilities (such as electricity, gas, telecommunications or rail), which are subject to the EA merger regime although various regulatory approvals are required for the acquisition of certain regulated businesses and businesses operating in the financial or insurance sector. The Industry Act 1975 confers power on the Secretary of State to prohibit changes of control over an important manufacturing undertaking where the change of control would be contrary to the interests of the UK, although this power has not been used in practice.
In June 2018, the CMA published guidance on changes to the UK merger thresholds for changes of control over enterprises that are active in any of three defined sectors: the development or production of items for military or military and civilian use; quantum technology; and computing hardware. The turnover threshold applicable to such ‘relevant enterprises’ has been reduced from £70 million to £1 million, and the share of supply test has been broadened to include mergers involving a target with 25 per cent or more share of supply of the relevant goods and services in the UK (as well as where the merger leads to an increase in the share of supply to, or above, this 25 per cent threshold, which is the requirement for those enterprises not deemed ‘relevant enterprises’). The new tests were approved by Parliament and came into force on 11 June 2018. The purpose of these changes is to ensure that the Secretary of State is able to intervene to address any national security-related issues raised by such transactions, and the CMA has stated that the amendments to the jurisdictional thresholds will not result in different treatment of the three defined sectors from a competition perspective.
BEIS is still considering additional long-term reforms to the public interest regime, which are intended to introduce a new notification regime for mergers relevant to national security and critical infrastructure.
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21 April 2020