Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Merger Control volume discussing topics including enforcement priorities, evidence review and notable cases within key jurisdictions worldwide.

1 What are the key developments in the past year in merger control in your jurisdiction?

2021 began with the UK’s formal departure from the EU, heralding the end of the UK’s participation in the European Commission’s (EC) ‘one-stop shop’ for qualifying European transactions. The Competition and Markets Authority (CMA) assumed responsibility for merger and competition enforcement cases that would have previously fallen under EU jurisdiction. As a result, parties participating in transactions with substantial European and UK dimensions may have already had the pleasure of navigating simultaneous filings in both jurisdictions.

The other key development has come in the form of the National Security and Investment Act 2021 (NSIA), which will create a mandatory investment screening mechanism in the UK for certain share acquisitions of targets in any of 17 ‘sensitive’ sectors. The range of these sectors is broad, although, following a consultation, the government has made some effort to narrow their scope in the final version of the statutory instrument that defines the sectors, published in November. Nonetheless, while the sectors include the types of industries one might expect in a national security-focused regime (defence, military or dual-use technologies, satellite and space technologies), the remit remains expansive. Other sectors, for example, include communications, data infrastructure, energy and transport.

The NSIA regime will go live from 4 January 2022, with penalties for failure to notify when required of up to 5 per cent of group global turnover or £10 million – whichever is the greater. On 4 January 2022, the NSIA will replace the ‘national security’ public interest consideration (PIC) of the Enterprise Act 2002, which currently allows the government to issue public interest intervention notices in designated PIC cases (ie, plurality of the media, stability of the financial system, and the need to maintain in the UK the capability to combat and mitigate the effects of public health emergencies), which will continue to operate alongside the NSIA regime, once live. In the interim, the NSIA is already requiring careful consideration before its go-live date as, once in effect, it will give the Secretary of State the power to retrospectively ‘call-in’ for review any deal closed from 12 November 2020 in one of the sensitive sectors that he or she considers could pose a risk to national security in the UK.

2 Have there been any developments that impact how you advise clients about merger clearance?

As has been the case for some time, internal documentary evidence has played an important role in the CMA’s competitive analysis. However, the extent of requests for internal documents, including emails, has steadily increased even in Phase I investigations. Relevant internal documents are typically those produced to inform business strategies and investment decisions and for general planning purposes. In Sabre/Farelogix, internal documents were considered to provide an important insight into the parties’ ability to compete, their perception of competitive threats, and how this affected their strategic thinking. The documents were then used to support the CMA’s theories of harm. Similarly, in Amazon/Deliveroo, the CMA examined a large number of internal documents, focusing particularly on the likelihood of Amazon re-entering the online restaurant delivery market; whether Deliveroo may have started to deliver more non-food items in competition with Amazon; and what future competition between the parties might look like. These decisions show that the CMA views internal documents as a reliable way of gauging parties’ intentions, both in the past and for the future.

In light of the above, we are consistently emphasising the importance of document management with clients contemplating merger transactions, in terms of both information memoranda and other market-facing materials, but also with respect to internal communications, some of which will pre-date any merger plans. It is therefore good discipline to try to ensure that all documents and emails are considered potentially disclosable in future merger reviews and to draft clearly and unambiguously.

While economic evidence has always played an important role when assessing the likelihood and potential effect of competition issues in mergers, recent developments suggest that greater account may be taken of merging parties’ arguments on efficiencies. It has been very difficult to convince the CMA that efficiencies are likely to outweigh any potentially adverse impact on competition that the CMA may have identified. In Sainsbury’s/Asda, the CMA quantified the efficiencies likely to be generated by the merger at around 1.25 per cent of prices (equivalent to £500 million), but concluded that they were insufficient to outweigh the negative effects of the merger. Nevertheless, the case did show the CMA’s willingness to undertake a detailed quantitative assessment of efficiencies. Together with the Three/O2 judgment from the EU General Court (in which the General Court criticised the EC for failing to take efficiencies analysis into account in its assessment), recent developments suggest an increasing focus on efficiencies may be beneficial in complex cases.

3 Do recent cases or settlements suggest any changes in merger enforcement priorities in your jurisdiction?

The publication of the new NSIA makes clear that national security is a top priority for government review. Numerous cases in recent years bear out this same focus. Imprivata/Isosec, Advanced Micro Devices/Xilinx, NVIDIA/Arm, Ultra Electronics/Cobham Ultra and Perpetuus/Taurus all saw the Secretary of State issuing a public interest intervention notice (PIIN) on the ground of national security. Whereas such interventions tended, historically, to be made in the context of defence-related transactions, arguably they are now being made in a wider set of circumstances. This is further exemplified by the expanded list of sectors contemplated for inclusion in the new NSIA, which includes energy, transport, communications and artificial intelligence, for example. Of the five PIINs issued thus far in 2021, one (Ultra Electronics/Cobham Ultra) was in the aerospace and defence sector, three were in electronics and one (Perpetuus/Taurus) in manufacturing.

In terms of sectoral focus, digital remains top of the agenda across the competition law sphere. 2021 saw the Digital Markets Unit (DMU) established in ‘shadow form’ within the CMA in April. In its consultation on ‘a new pro-competition regime for digital markets’, launched in July 2021, the government identified that, in its view, the ‘unprecedented concentration of power amongst a small number of digital firms is holding back innovation and growth’. The CMA’s focus on the sector, in short, is only going to increase.

4 Are there any trends in merger challenges, settlements or remedies that have emerged over the past year? Any notable deals that have been blocked or cleared subject to conditions?

Greater CMA scrutiny is a notable trend, with the CMA’s Annual Plan for 2020–2021 noting an ‘unprecedented number’ of Phase II merger investigations. The CMA’s stern approach to merger review is also borne out in the statistics. So far in 2021, the CMA has issued decisions on eight Phase II investigations. Of these, only two have been cleared and four were prohibited (the other two were remitted back). These cases have been across a range of different sectors.

The CMA has also not been shy about asserting its competence to review mergers that might appear, at first blush, to fall outside its sphere of influence, with an increasingly flexible approach to share of supply tests. Roche/Spark, Sabre/Farelogix and Facebook/Giphy were all examples of this flexible interpretation: in all of these cases, the target parties had minimal (if any) UK turnover, but the CMA asserted jurisdiction on the basis of the share of supply test, using frames of reference that the parties considered to be highly questionable. That trend is set to continue with the new Merger Assessment Guidelines (MAGs) published by the CMA in March 2021 emphasising closeness of competition as a key metric for assessing the competitive effects a transaction may have, which will give the CMA plenty of room for interpretation.

The other trend, and likely part of the reason Amazon/Deliveroo and Facebook/Giphy were subject to extra scrutiny, is the CMA’s continued focus on the digital sector – a trend common across the spectrum of competition law issues. Merger control enforcement in the digital sector is only expected to accelerate, with the MAGs identifying a perceived level of under-enforcement in digital deals by the CMA.

5 Have the authorities released any key studies or guidelines or announced other significant changes that impact merger control in your jurisdiction in the past year?

In March 2021, the CMA published its new MAGs, marking the first update to its guidelines since 2010. The MAGs set out a list of examples of the types of transactions that are more likely to result in a ‘substantial lessening of competition’. The MAGs also place greater emphasis on the ‘non-price factors’ that may affect merger assessments, and state that factors such as innovation, quality and service should be interpreted broadly to cover a wide range of consumer benefits. In a similar vein, the new MAGs discuss how sustainability (which until now has been largely ignored by the CMA) can be a non-price factor, with any environmental benefits to be included in some assessments. The CMA also used the opportunity to signal that uncertainty (for example uncertainty about whether efforts to enter a market will be successful) will not prevent the CMA from finding a competition concern. It also suggested that it would take an increasingly flexible approach to the counterfactual and the concept of market definition going forwards.

The new MAGs apply to all Phase I and Phase II investigations launched after publication (ie, 18 March 2021). While the MAGs provide some clarity on factors the CMA will use in assessing mergers going forward, some commentators have argued that they have not been sufficiently useful in this regard. In particular, it has been suggested that they focus too much on examples of mergers that will be cleared, rather than on those that are likely to be blocked. Now that the United Kingdom has formally left the EU, this could well be the beginning of a divergence between UK and EC policy in this area.

6 Do you expect any significant changes to merger control rules? How could that change your client advocacy before the authorities? What changes would you like to see implemented in your jurisdiction?

In July 2021, the UK government launched a consultation on reforming competition and consumer policy that contains a slew of proposals for the competition law regime in the United Kingdom, including a host of changes to merger control. According to the accompanying impact assessment, the government believes the update will better enable the CMA to scrutinise potentially harmful mergers, while reducing costs to businesses in other cases.

The proposals being consulted upon include raising the jurisdictional threshold for CMA review based on turnover from £70 million to £100 million. The consultation also envisages the creation of a ‘safe harbour’ for mergers between small businesses where the worldwide turnover of each of the merging parties is less than £10 million. Transactions that qualify for this safe harbour threshold would be immune from CMA review, even if the 25 per cent share of supply test is met. These are both welcome changes that represent a practical recognition by the government that transactions in these categories are unlikely to pose real competitive threats to markets in the UK.

On the other side of the coin, the consultation foresees a broadening of the jurisdictional threshold to capture the perceived risk of ‘killer acquisitions’, which the government feels the current share of supply test is not capable of addressing. This would be achieved by adding another jurisdictional threshold, whereby a transaction could potentially be subject to CMA jurisdiction if either party to the jurisdiction has at least a 25 per cent share of supply in the UK and UK turnover of more than £100 million. This effectively removes the existing requirement that there be some overlap between the parties for a transaction to be reviewable and captures the acquisition of start-ups and other firms with low turnover.

In terms of enforcement, the consultation foresees stronger enforcement powers and penalties for the CMA across the board. At present, the CMA can fine a party up to £30,000 or a daily rate of £15,000, or both, for failure to comply with requests made under its information-gathering powers. The proposals would see this raised to a maximum cap of 1 per cent of a business’s annual turnover, as well as the power to impose an additional daily penalty of up to 5 per cent of daily turnover. As discussed above, the CMA is very comfortable meting out penalties for non-compliance, as has been increasingly the case for providing incomplete or misleading information, so these changes would be a significant addition to their enforcement toolkit if enacted.

The consultation also foresees a range of updates to try to increase the speed and efficiency of the merger review process. Potential reforms targeting the streamlining of the remedies procedure include allowing the CMA to agree binding commitments earlier in a Phase II investigation, without needing to wait for the investigation to be completed.

The government is also considering allowing parties to request a ‘fast-track’ reference to Phase II without going through a Phase I investigation first for cases where the parties think remedies discussions are likely. The consultation recognises that the current fast-track procedure is probably under-utilised because it requires that parties accept in writing that there is a realistic prospect that the merger will substantially lessen competition. This would not be a requirement under the self-referral proposal, and the government is also seeking wider views on whether similar or other changes to the fast-track procedure could make it more attractive.

The expedition of Phase II review is also the focus of the proposal to limit the scope of Phase II investigations to issues that have been identified in Phase I only. In principle, this should prevent wholesale re-review of a transaction during a Phase II investigation, although there might be concern, especially given the CMA’s sometimes expansive approach to its own jurisdiction, that this could realise itself in a wider set of issues identified during Phase I, to ensure that maximum optionality is preserved.

Of more practical effect are proposals to make the CMA’s extension powers during Phase II subject to conditions, although precisely what those conditions might be is yet to be determined.

On balance, the proposals are very much focused on securing extra scrutiny for problematic deals, and we are happy to see that there have not been any attempts to cast the net broader in terms of capturing ordinary transactions. The share of supply changes, however, will mean extra considerations for deals in the digital space, in particular.

Indeed, as well as the general reform contemplated by the above proposals, the government is also consulting on a new pre-competition regime specifically for digital markets. Again, this foresees changes across the spectrum of competition law rules. With respect to merger control, powers will be centred in the CMA’s DMU, established in shadow form in April. The DMU will be empowered to designate firms with Strategic Market Status (SMS). It is these firms with SMS that will be subject to the new regime that emerges from this consultation.

Among the options being explored are designated merger rules for firms with SMS. The focus appears very much to be creating pre-emptive options for regulating killer acquisitions in the sector, with proposals that firms with SMS be required to inform the CMA of all mergers, irrespective of whether they meet the jurisdictional thresholds. This would be intended to give the CMA advance, pre-completion notice of transactions, to give them a ‘short time’ to determine whether to investigate the transaction before it completes.

The jurisdictional thresholds for SMS mergers would also be a bespoke creation, with the government considering transaction value thresholds combined with a UK nexus test to try to capture some of the transactions that are not caught by the current thresholds.

The largest SMS transactions that meet these thresholds could also be subject to mandatory merger review, with completion prohibited until clearance is received from the CMA.

SMS transactions that are subject to Phase II review may also see changes to how that review is conducted under the consultation proposals. While the test would remain focused on the prospects that a transaction will result in a substantial lessening of competition, that prospect would need to be a ‘realistic prospect’ rather than the current ‘more likely than not’, which in effect requires a probability of greater than 50 per cent.

The Inside Track

What should a prospective client consider when contemplating a complex, multi-jurisdictional transaction?

For deals in potentially sensitive sectors, such as cyber-related or artificial intelligence, clients should consider the proliferation of global foreign direct investment rules, including the new NSIA regime in the United Kingdom. Even deals that predate the entry into force of the NSIA will be capable of retrospective review, so investors should consider now whether their transactions could have potential national security implications and whether pre-engagement with the Investment Screening Unit at BEIS is advisable.

In your experience, what makes a difference in obtaining clearance quickly?

Navigating a smooth path through merger control approvals depends on various factors. These include being prepared and, where possible, doing as much work as possible up front so that you are ready to respond to questions from authorities. It also helps to think early about potential remedies even if you are confident that they will not be needed. Finally, the benefits of having a good team cannot be underestimated!

What merger control issues did you observe in the past year that surprised you?

The growing trend in going after procedural infringements, such as alleged breaches of ‘hold-separate’ orders in merger cases, has been notable. Even in cases that have been cleared, there is an increasing appetite to pursue companies for such alleged infringements. While some cases appear clear-cut, others are more questionable. It is a wake-up call for both clients and advisers. On the other hand, the General Court judgment about the standard of proof in oligopolistic markets is a welcome development that will have wide-reaching implications.