Risk factor trends
Although the UK's merger control regime is voluntary, so merging parties can decide whether to pre-notify a transaction to the Competition and Markets Authority (CMA), the risks of not notifying a transaction before completion are increasing. The CMA may decide to investigate a transaction on its own initiative, even just to work out if it has jurisdiction. Merging parties should be aware of the following risks in particular:
- any completed transaction which the CMA decides to investigate will be subjected to an initial enforcement order (IEO). The effect of an IEO is to stop the merging parties doing anything which could be viewed as integrating, or to reverse any integration that has taken place;
- the CMA enforces IEOs rigorously. The number and size of fines imposed on companies for breaching IEOs is increasing;
- merging parties which decide to integrate and are investigated risk having to unwind their integration;
- limiting publicity about the transaction may just delay the start of the CMA's four month phase 1 review period; and
- breach of procedural steps, including the requirement to produce certain documents to the CMA at short notice, is increasingly likely to attract fines.
UK merger control regime: voluntary or semi-mandatory?The UK operates a voluntary merger control regime. Companies can therefore close a transaction without pre-notifying it to the CMA for clearance. Parties and their advisers should therefore assess whether the CMA is likely to have jurisdiction to review, and any interest in, their deal. However, the CMA may investigate a completed transaction up to four months after it is "made public" (or, if earlier, from the date the CMA received notice of "material facts" about the transaction)1. If the parties decide to complete a transaction without notifying it to the CMA, but the CMA decides to investigate it, the CMA's procedures are disruptive and costly for the parties. It can be difficult to predict whether the CMA will investigate a completed transaction. While the CMA may not want to introduce a mandatory pre-notification merger control regime, recent practice appears to be pointing in that direction.
Imposing interim measures
In merger investigations, the CMA uses interim measures, including IEOs (at Phase 1) and interim orders (IOs) (at Phase 2), to prevent the merging parties from integrating. Interim measures forbid everything which might constitute practical integration and can include orders to reverse any integration steps that have taken place. It is now standard practice for the CMA to impose interim measures for completed mergers. Points to note include:
- IEOs may now be imposed by the CMA with global effect without negotiation with the merging parties. This can be highly disruptive;
- the CMA does not have to establish that the transaction gives rise to a "relevant merger situation" (including whether it has jurisdiction according to the UK thresholds), or that the merging parties are contemplating pre-emptive action, or that there are preliminary indications of competition concerns, before imposing an IEO;
- there are limited circumstances in which IEOs are not appropriate, yet the CMA tends to impose such measures first and then negotiate derogations from or revoke them (where it considers it is appropriate to do so), rather than not impose measures at all. Negotiating derogations can be time-consuming and expensive; and
- any IEO will almost always be based on the CMA's standard template and it can take time for the merging parties to negotiate a tailored IEO, or be granted appropriate derogations.
Breach of interim measures
The CMA can impose a fine (of up to 5% of global group turnover) on companies that fail to comply with interim measures without reasonable excuse. If interim measures are breached, the CMA may also order the company to unwind the action in question.Recent cases show a clear toughening of the CMA's approach to breaches of interim measures. In May 2018, in Electro Rent/Microlease3, the CMA issued its first fine (of £100,000) for breach of interim measures. This involved a change to the terms of a lease of one of the parties. The fine was upheld by the Competition Appeal Tribunal (CAT) in February 20194. The CAT held that:
"… it is of the utmost importance that interim orders be scrupulously complied with, and that a party should not itself form judgments or reach decisions that are properly for the CMA".Since then, the CMA has issued guidance on interim measures in merger investigations5 (Interim Measures Guidance) and has imposed penalties in the following cases:
Penalties imposed to date have been significantly less than the 5% cap. According to the CMA's recent Interim Measures Guidance:"… given the importance of Interim Measures to the functioning of the regime, the CMA will not hesitate to make full use of its fining powers. The CMA will therefore impose proportionately larger penalties in future cases should this prove necessary in the interests of deterrence"11.
Whilst some actions of merging parties may have a detrimental impact on potential remedies, many actions that might breach interim measures are much less significant in their impact. The CMA's enforcement approach could therefore be viewed as turning the voluntary regime into something much closer to a mandatory pre-notification system.
Use of unwinding ordersIn certain circumstances, the CMA may unwind integration that occurred before interim measures came into force. Whilst it has had this power since 2014 (when the interim measures regime was strengthened), it was only in March 2019 that the CMA issued its first unwinding order in Tobii AB/Smartbox12. In that case, the CMA imposed the order during its Phase 2 investigation (following an earlier IO). It ordered the merging parties to unwind an agreement under which Smartbox acted as a reseller of Tobii products in the UK and Ireland, and ordered Smartbox to restart its development projects and the supply of discontinued products. Ultimately, the CMA blocked the merger by requiring Tobii to sell the Smartbox business13. The CMA imposed its second unwinding order in August 2019 in relation to the Bottomline/Experian14 merger (following an IEO imposed on Bottomline in May 2019). This unwinding order was noteworthy because it was imposed before the CMA formally commenced its Phase 1 investigation (and meant that Bottomline had to reverse some integration steps which had taken place following completion of the transaction in March 2019, i.e. some five months earlier).
Internal document requestsIn line with other merger authorities, such as the European Commission, the CMA also began taking a tougher stance in 2018 in relation to internal document requests. The CMA then issued guidance early in 2019 on requests for internal documents in merger investigations (Internal Documents Guidance)15. The merging parties' internal documents (such as internal emails, presentations and strategy plans) can be an important source of evidence for the CMA, but requests can be burdensome for the merging parties, who are obliged to provide the required documents within the specified timeframe. The CMA can issue informal requests for information, or request documents using its statutory powers (Section 109 of the Enterprise Act 2002). According to the Internal Documents Guidance, the CMA is likely to use Section 109 document requests as standard in investigations where internal documents are requested from main parties in both Phase 1 and Phase 2 merger investigations. Failure to comply with a Section 109 document request can give rise to a number of consequences, including the imposition of a fine (albeit currently capped at £30,000)16. Since issuing its Internal Documents Guidance, the CMA has imposed fines for failure to respond to Section 109 document requests in four separate cases17, with fines ranging from £15,000 to £27,000.
The regular use which the CMA is now making of its powers has effectively established a more interventionist and onerous enforcement regime for merger control in the UK. This gives rise to greater risk for interested parties, who must take steps to ensure they fully understand their compliance obligations and consider carefully the consequences of any action which may infringe the law. The CMA has power to increase fines still further.
The CMA's interventionist approach is also evident outside merger control – for example, it has increased its use of director disqualification orders and undertakings where a company has been found to breach competition law (nine out of the 13 director disqualifications that have been made to date were in 2019).Greater enforcement powers are also a feature of the reform proposals put forward earlier this year by the CMA Chairman18, which the newly elected government is considering whether to implement. The proposals include swifter use of interim measures; authority to impose legally binding remedies in the course of market investigations; a new power to request information even where it has not initiated a formal investigation; new personal sanctions for serious competition law breaches; and mandatory merger control filings for transactions above a certain threshold. Whilst it remains to be seen which, if any, of these measures will be implemented in the future (particularly given the ongoing uncertainty surrounding Brexit), the proposals clearly demonstrate the CMA's appetite to direct change and take a robust approach.