In March 2021, the Competition & Markets Authority (CMA) published its revised Merger Assessment Guidelines (MAGs) along with a Quick Guide, complementing the revision of its Guidance on jurisdiction and procedure, which was published in December 2020.
The updated MAGs underpin the CMA’s ambitions now that it is no longer part of the EU merger control regime’s “one-stop shop”. To that end, businesses need to be aware of the key changes in how the CMA approaches merger control in the UK and where deals may be caught given the CMA’s well-documented interventionist approach to transactions. Even though the UK regime may still be voluntary (seemingly in name only), businesses would be well-advised to pay attention to UK merger control. If the CMA finds it has jurisdiction over an unnotified merger, the merger can be ‘called in’ for review and even eventually pulled apart.
The test for jurisdiction in the UK: refresher
The CMA has the jurisdiction to examine a merger (which includes acquisitions and joint ventures) where:
(a) two or more enterprises cease to be distinct
(i) either the UK turnover of the acquired enterprise exceeds £70 million, or
(ii) the two enterprises supply or acquire at least 25 per cent of the same goods or services supplied in the UK (or a substantial part of it) and the merger increases that share of supply
NB: The National Security and Investment Bill gives the Government power to scrutinise foreign investments in the UK that involve the acquisition of control over certain types of entities and assets, on the grounds of national security. For more details see our latest note.
Overview of the MAGs
The updated MAGs reflect the fact that markets have evolved at a rapid pace since the last iteration of the guidelines in 2010. They incorporate recommendations made by the 2019 Furman and Lear reports on how the CMA should assess digital mergers. This includes an increased focus on the potential for future competition and considers innovation, and other non-price related effects, when assessing whether there is likely to be a substantial lessening of competition. The CMA specifically references a common theme of the risk of under-enforcement, particularly in relation to digital markets.
To that end, the updated MAGs reflect the legal framework within which the CMA undertakes merger assessments, taking account of its recent experience and case law. The focus is very much on emphasising the CMA’s discretion and flexibility in assessing mergers and the removal of a number of presumptions and thresholds. This means that businesses do not have the same level of comfort and predictability that was previously available. The crux? Businesses need to consider UK merger control early on in their negotiations, seek advice on the jurisdictional merger thresholds, assess risk and build enough flexibility into timetables to take account of informal discussions with the CMA and any subsequent notification.
Some key takeaways
There is much to unpack from the revised MAGs, but some of the key takeaways are:
1. What constitutes a substantial lessening of competition (SLC)
The MAGs state that ‘substantial’ does not necessarily mean ‘large’ or ‘considerable’ in absolute terms. Rather it encompasses a range of meanings and depends, like much else, on ‘the facts of the case’. A lessening of competition in a market may be considered substantial even if that market is small in total size or value. In considering whether a lessening of competition is substantial, the CMA may also take into account whether the market to which it applies is ‘large’ or is ‘otherwise important to UK customers’, or whether there is only limited competition in the market to begin with. The flag to ‘large’ or ‘important to the UK customers’ markets is a warning call to sectors such as telecoms, technology, banking and energy.
2. Horizontal unilateral effects: closeness of competition
Where the CMA finds evidence that competition mainly takes place among few firms, any two would normally be sufficiently close competitors that the elimination of competition between them would raise competition concerns, subject to evidence to the contrary. The smaller the number of significant players, the stronger the prima facie expectation that any two firms are close competitors. In such a scenario, the CMA states it requires persuasive evidence that the merger firms are not close competitors in order to allay any competition concerns.
3. Potential and dynamic competition
The MAGs remove presumptions such as a firm providing a constraint as a potential competitor if entry could happen within a year. The CMA also emphasises that losses of dynamic competition are more relevant when, for e.g., the investments involved in entering a market or expanding within a market represent an important part of the competitive process, as well as in industries where the process of entering markets takes place over a long period of time and involves significant costs or risks. Examples including digital platforms are provided. Moreover, the CMA considers that entry and/or expansion preventing an SLC from arising would be rare. The move by the CMA to undertake more dynamic assessments of the counterfactual to account for future competition, means it is equipped to deal with so-called ‘killer acquisitions’.
4. Two-sided platforms
The CMA has included more detail on how it will consider competitive effects in mergers involving two-sided platforms, including network effects and tipping.
In accordance with the CMA’s strategic objectives, the MAGs include references to where the CMA may consider sustainability issues in a merger assessment. For instance, it recognises that in some circumstances benefits in the form of environmental sustainability and supporting the transition to a low carbon economy are relevant customer benefits.
6. How the CMA assesses evidence and the importance of internal documents
The MAGs dedicate an entire section on how the CMA assesses evidence and stipulates its wide margin of appreciation. The evidence gathered and used will depend on factors such as the theories of harm being investigated, the nature of competition in the marketplace and what evidence is available. The MAGs state that after reasonable evidence gathering, where the evidence supporting competition concerns is strong at an early stage, especially if there is little evidence to the contrary, the CMA will expect to undertake less detailed further analysis in deciding whether there is an SLC. Notably, the presence of some ‘uncertainty’ will not in itself preclude the CMA from concluding that the SLC test is met on the basis of all the available evidence.
The MAGs specifically reference that the CMA has increasingly interrogated the parties’ internal documents as a part of its merger investigations and has more closely scrutinised evidence on deal valuation, for e.g. when considering losses of actual and potential competition or when seeking to understand the rationale for and synergies arising from mergers. Businesses should focus closely on the narrative their internal documents portray and that it aligns with what the CMA is then told.
7. Market definition
Relegated to the end of the MAGs, the clear message is that the assessment of the relevant market is just an analytical tool that forms part of the analysis of the competitive effects of the merger and should not be viewed as a separate exercise. Market definition is all about identifying the most significant alternatives available to customers of the merger parties and includes the most immediate sources of competition to the merger parties. The CMA is primarily concerned by the analysis of the closeness of competition between the parties. Gone are any thresholds or indications of market share which would not give the CMA cause for concern.
Together with its revised Guidance on jurisdiction and procedure, the CMA is certainly a force to be reckoned with post Brexit. The CMA is now able to pursue its own merger control investigations into international transactions in parallel with the EU Commission. It has not shied away from pulling its punches, asserting jurisdiction, using the tools available to enforce its evidence-requesting powers by fining businesses that do not comply with its information requests, and diverging where it feels appropriate from the EU Commission’s approach.
Businesses should be alive to the fact that, owing to its mergers intelligence unit which scans the markets and press releases, the CMA can call in non-notified transactions up to 4 months post-closing/announcement (whichever is the later) should they meet the rather flexible ‘share of supply test’ (above). The CMA wastes no time in imposing hold-separate orders. Not least, the CMA has also taken a broad approach in assessing what constitutes ‘material influence’ over the strategic direction of another business and investigating the acquisition of minority stakes.
Together with the revised MAGs, businesses should plan for intense information requests and the provision of documentation, specifically internal documents. Early engagement with the CMA is also the key to avoiding unwelcome surprises.