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Legislation, triggers and thresholds
Legislation and authority
What legislation applies to the control of mergers?
The primary merger control legislation in the United Kingdom is Part 3 of the Enterprise Act 2002 (as amended). The act was amended by the Enterprise and Regulatory Reform Act 2013.
What is the relevant authority?
The Competition and Markets Authority (CMA) is the authority responsible for carrying out Phase 1 and Phase 2 merger control investigations in the United Kingdom. The CMA assumed this role following the introduction of the Enterprise and Regulatory Reform Act 2013. As a result, it replaced the Office of Fair Trading (OFT) and the Competition Commission, which previously performed Phase 1 and Phase 2 merger control investigations, respectively.
In the course of its investigations, the CMA typically consults the sector regulators (eg, rail, water, energy, telecoms and media) about any mergers in which they are likely to have sector-specific knowledge.
Transactions caught and thresholds
Under what circumstances is a transaction caught by the legislation?
A transaction is potentially caught by the Enterprise Act (and therefore subject to the possibility of a reference for an in-depth Phase 2 investigation) where a transaction gives rise to a "relevant merger situation" in the United Kingdom. A relevant merger situation arises where:
- two or more enterprises have ceased to be distinct; or
- there are arrangements in progress which, if carried into effect, would lead to two or more enterprises ceasing to be distinct;
- one of the jurisdictional tests is met; and
- the transaction has either:
- not yet completed; or
- completed within the CMA's four-month statutory deadline for reaching a decision on whether to refer the transaction for a Phase 2 investigation.
‘Enterprise’ is defined under the Enterprise Act as "the activities, or part of the activities, of a business". The CMA makes its assessment as to whether the target business constitutes an enterprise for the purposes of the act based on the "totality of all relevant considerations". In this context, the CMA will, in particular, take into account whether the transaction involved:
- a transfer of customer records;
- the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006; and
- some form of consideration attributable to goodwill obtained by the purchaser.
Each assessment will necessarily be fact-specific.
‘Ceasing to be distinct’ is defined under the Enterprise Act as being brought under common ownership or control. ‘Control’, for UK merger control purposes, is not limited to the acquisition of decisive voting control; it may include situations which fall short of this, and the act expressly distinguishes between three levels of control:
- material influence;
- de facto control; and
- a controlling interest (de jure control).
The ability to exercise material influence is the lowest level of control that may give rise to a relevant merger situation. It covers the situation where the acquirer can materially influence policy relevant to the behaviour of the target entity in the marketplace (ie, the management of the target's business, including its strategic direction and its ability to define and achieve its commercial objectives). Material influence over a target enterprise can arise in a number of ways, including as a result of shareholdings (as low as 15%), board representation or other financial or contractual arrangements. In BSkyB/ITV (ME/2811/06) a shareholding of 17.9% was deemed sufficient to give rise to material influence on the basis that historic attendance and voting patterns at ITV's shareholder meetings meant that BSkyB's shareholding was likely to be sufficient to allow it to cast more than 25% of the shareholder votes. It is important to note that a shareholding of less than 15% might exceptionally attract scrutiny when combined with other factors indicating the ability to exercise material influence.
De facto control arises when the purchaser controls a company's policy but holds less than 50% of the voting rights in the target (eg, situations where, in practice, the acquirer has more than 50% of the votes cast at a shareholder meeting).
‘Controlling interest' generally describes the situation where the purchaser holds more than 50% of the voting rights in the target.
Under the Enterprise Act, an increase in control (ie, from material control to de facto control, or from de facto control to a controlling interest) may also give rise to a relevant merger situation (Coca-Cola Company/Fresh Trading Limited (ME/5978/13)). Further, where a person acquires control of an enterprise over a series of transactions or successive events, the act allows the CMA to treat the events as having occurred simultaneously on the date of the last transaction.
The second criterion in relation to jurisdictional thresholds is considered in the next section.
As regards the third criterion for a transaction to be caught under the Enterprise Act, the four-month deadline for a Phase 2 reference decision starts from the earlier of the date on which:
- the transaction was made public; or
- the CMA was informed of it, whichever is the earlier.
Accordingly, where a completed transaction has neither been publicised nor brought to the CMA's attention, the CMA will consider that it remains able to begin a Phase 1 investigation despite more than four months having passed since the date of completion. The CMA can also extend the four-month deadline in certain circumstances – for example, where the merger parties have failed to comply with requests for information made under a Section 109 notice (Vanilla Group/Washstation).
Do thresholds apply to determine when a transaction is caught by the legislation?
With the exception of certain sector-specific thresholds, a transaction will meet the jurisdictional thresholds necessary for a relevant merger situation where:
- the UK turnover associated with the target enterprise exceeds £70 million (the turnover test); or
- at least two of the merging enterprises supply or acquire goods or services of a particular description, and post-transaction the merged entity will supply or acquire at least 25% of those goods or services in the United Kingdom, or a substantial part of it, provided that the merger gives rise to an increment in the share of supply or acquisition (the share of supply test); and
- (subject to limited exceptions) the transaction is not otherwise caught by the EU Merger Regulations.
The turnover and the share of supply tests are separate. Accordingly, in Facebook/Instagram (ME/5525/12) the OFT was able to claim jurisdiction on the basis of the share of supply test, despite Instagram – at the time – never having generated any turnover.
It is important to note that the share of supply test is not an economically defined market share test. For the purposes of this test, the CMA will have regard to "any reasonable description of a set of goods or services" when describing the relevant goods or services being supplied or acquired. Often, this will correspond with a standard recognised by the industry in question – although the CMA may consider other criteria in determining whether the share of supply test is met.
The CMA can also adopt a broad interpretation of what constitutes a substantial part of the United Kingdom provided that the area is of such size, character and importance as to make it worthy of consideration for the purposes of the merger control rules (R v MMC ex parte South Yorkshire Transport Authority ( All ER 289)). Further, the substantial part of the United Kingdom need not represent a single, geographically undivided part, and the geographic area for consideration can be localised (Archant Limited/London newspapers of Independent News and Media Limited).
Where any of the merger parties already supplies or acquires 25% of goods or services of a particular description, the share of supply test will be met if the transaction results in any increment in that share, no matter how low. For example, in Tesco/Capper & Co (ME/4162/09), the OFT assumed jurisdiction over the purchase by Tesco, the UK's largest grocery retailer, of a single grocery retail store in the village of Wroughton.
Sector-specific thresholds exist in relation to enterprises which are, in whole or in part, credit or financial institutions or insurance undertakings as well as in the retail sector as it relates to large grocery retailers.
As of 11 June 2018, sector-specific thresholds were introduced in relation to enterprises which are involved in specified activities in connection with military or dual-use goods which are subject to export control, computer processing units and quantum technology (see above).
There are also certain additional procedural steps for mergers meeting certain criteria in the water and sewerage and healthcare sectors.
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
In general, it is the responsibility of the merger parties and their advisers to assess whether a contemplated merger is likely to give rise to a relevant merger situation or competition concerns.
However, in limited circumstances, the CMA may be willing to provide informal advice on a 'one shot' basis in relation to jurisdictional or substantive issues that may arise in relation to a contemplated merger. Having regard to its limited resources, the CMA may agree to provide informal advice where:
- there is evidence of a good-faith intention on behalf of the parties to proceed with the transaction (and such intention is not yet publicly known); and
- the transaction gives rise to a genuine issue which could result in the transaction being referred for a Phase 2 investigation.
Both the content and the fact that parties have applied for informal advice are confidential. This will not trigger a Phase 1 investigation by the CMA. However, it does not prevent the CMA from subsequently investigating a transaction if it goes ahead or – in exceptional circumstances – imposing an initial enforcement order on the parties, prohibiting them from taking any pre-emptive action.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
The CMA can assume jurisdiction over relevant merger situations, irrespective of whether they are ‘foreign-to-foreign’ mergers. As such, where a foreign-to-foreign merger results in a relevant merger situation in the United Kingdom, the CMA can investigate.
Arguments regarding the lack of ‘local impact’ arising from a transaction would apply to the CMA's substantive analysis of the transaction (ie, whether the transaction gives rise to a substantial lessening of competition) rather than its ability to take jurisdiction over the transaction.
What types of joint venture are caught by the legislation?
The creation of a joint venture, or a change in control or influence over an existing joint venture, will be capable of review where it gives rise to a relevant merger situation.
In the case of a start-up joint venture (ie, one in which resources are pooled by parents into a new corporate entity), the relevant question will be whether the activities transferred to the joint venture from one or more of the parents, or acquired from a third party, are sufficient to constitute an enterprise.
Significantly, a joint venture may qualify as a relevant merger situation under the UK merger control regime in circumstances where it would not qualify as a concentration under the EU Merger Regulation.
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