Part of the Collyer Bristow guide to UK and EU competition law for overseas clients

Where two or more undertakings merge their activities, clearance from the authorities may be required if the merger is large enough to impact on competition.

In the UK, merger control applies if either:

  1. the UK turnover of the target is over £70 million; or
  2. the acquirer and the target: 
    • both buy (or sell) goods (or services) of a similar kind; and  
    • after merger they would buy (or sell) 25% or more of those goods (or services) in the UK or a substantial part of it.

The second test need not be a high bar. In one case, Slough (population: 140,000) was considered a "substantial part" of the UK. It is not a typical market share test based on clearly defined product and geographic markets; and the Competition & Markets Authority has a wide margin of discretion in relation to it. 

Larger mergers may have an "EU dimension" making them subject to European merger control. The criteria are complex so not repeated here, but their applicability should be investigated if the parties have turnovers above €250 million or do business in three or more member states. In these cases, jurisdiction to review the merger rests with the European Commission.

This guidance focuses on UK merger control.

Triggering of merger control

Where the £70m turnover or 25% "share of supply" test is met, this triggers the Competition & Markets Authority's jurisdiction to review the merger to decide if it could result in a substantial lessening of competition

It need not be a traditional merger

The £70m / 25% tests are applied where two (or more) enterprises cease to be distinct.  

  • The legislation defines "enterprise" to include part of a business's activities. The acquisition of part of another company's business may therefore be subject to regulation.
  • The legislation defines "ceasing to be distinct" to include bringing the enterprises under common control which, at its lowest, can include one enterprise acquiring the ability materially to influence the policy of another. This could mean acquiring a 25% holding (enough to block special resolutions) or even less if, say, the other shareholdings are diffuse or the acquirer also obtains board representation. It could also mean a joint venture if, through veto, each party has the ability materially to influence the other. If a joint venture does not meet the £70m / 25% test, it should still be considered whether it could be an anticompetitive agreement.

Merger control procedure

There is a first, and possibly a second phase to merger control. Since 2014, the Competition & Markets Authority has been responsible for both Phase 1 examination of mergers and, if necessary, the more detailed Phase 2 investigation and final determination.

Below is a brief summary of the procedure. The CMA’s more comprehensive guidance can be found here.

Phase 1: The phase is commenced either by voluntary notification by one of the parties or because the CMA becomes aware of a merger which appears to satisfy the £70m or 25% test.

The CMA may give the merger unconditional clearance in Phase 1 if it believes it will not result in a substantial lessening of competition.

The CMA should refer the merger to Phase 2 if it thinks it may result in a substantial lessening of competition. However, this is subject to exceptions:

  • It need not refer mergers in markets of insufficient importance. As a rule of thumb, markets worth over £10m UK-wide are sufficiently important. With markets worth from £3m to £10m, the CMA will weigh the likely customer harm against the cost of a Phase 2 investigation.

Note: The Slough example above concerned Tesco's acquisition of a single Co-op store. This was sufficiently important because the test was whether the UK groceries market as a whole was worth over £10m.

  • The CMA need not refer mergers where customer benefit from the merger - such as lower prices or greater innovation - is likely to outweigh the adverse effects of the substantial lessening of competition.
  • The CMA may accept "undertakings in lieu" of a reference. Undertakings may be:

- structural: such as a party selling off part of its business; or

- behavioural: such as undertakings on price, although this is less satisfactory as it needs ongoing monitoring.

The possible outcomes of Phase 1 are therefore:  

  • Unconditional clearance.  
  • Conditional clearance, subject to undertakings.  
  • Reference to Phase 2.

Unlike the EU, the UK does not insist that relevant merger situations are notified to the CMA, although not doing so carries the risk of the merger being reversed or having conditions imposed upon it which are less satisfactory than any undertakings that could have been negotiated beforehand.

As the CMA only has 40 working days from notification to make a Phase 1 decision, it is common to hold pre-notification meetings with the regulator to discuss its likely approach and possible undertakings.

Phase 2: There are only a handful of Phase 2 investigations each year. Once companies identify the benefit of merger, they tend to prefer to negotiate undertakings than take their chances (and time) in Phase 2, so this guide does not go into detail about the process.

The CMA has 24 weeks to conduct its investigation, which can be extended by up to 8 weeks. The investigation includes both:

  • Written submissions from the parties to the transaction and interested third parties.  
  • Oral hearings with the parties to the transaction and significant third parties.

The CMA must decide whether the merger is subject to control and, if so, whether it may lead to a substantial lessening of competition.

The possible outcomes of Phase 2 are:  

  • Unconditional clearance.  
  • Conditional clearance, subject to undertakings agreed with the merging parties or an order imposed by the CMA.  
  • Prohibition.

Substantial lessening of competition

Phases 1 and 2 are both concerned with analysing whether a merger will substantially lessen competition (or "SLC") in the affected "market".

The CMA’s guidance referred to above does not define an SLC, but instead refers to the joint guidance of its predecessors; the OFT and Competition Commission which, until 2014 were responsible for Phases 1 and 2 respectively.

According to that guidance, competition is a process of rivalry between firms seeking to win business by offering a better deal, and any merger is considered in terms of its effect on this rivalry. A merger gives rise to an SLC when it has a significant effect on rivalry over time, and so on the competitive pressure on firms to improve their offering to customers or to become more efficient or innovative.

The regulator draws up "theories of harm" as a framework to assess whether a merger could lead to an SLC. The theories set out possible changes arising from the merger, especially how it could impact on rivalry and harm customers. For example, the theories may set out the merger candidates' offerings in areas where they compete and which could worsen as a result of the merger in terms of price, quality, product range or innovation.

Whether the merger risks an SLC is assessed by comparing these possible situations with the possible situations if the merger does not go ahead (the "counterfactual"). The counterfactual will not be the same as the current situation if change is expected in any event.

SLC is not the same test as abuse of dominance (see our Introduction to Competition Law). It is inevitably more speculative to assess - through counterfactual comparison - whether there is likely to be an SLC in the future than it is to assess whether there is an abuse of dominance now. If the arguments for and against merger are finely balanced, the existence of laws prohibiting abuse of dominance provides a safeguard, so where a proposed merger has clear efficiency benefits, the regulators can be more inclined to allow it knowing there is a regime to tackle any subsequent abuse.