From 1 January 2021 the Brexit transition period will be over and the UK will, with or without a "deal", be outside the European Commission's competition law jurisdiction.
As a result, the UK will no longer be covered by the 'one-stop-shop' rule that governs mergers and acquisitions under EU law. At the moment, if a deal meets the turnover thresholds for European Commission jurisdiction then the national competition authorities of member states cannot examine it themselves (unless the Commission refers it to one of them, as has just happened in the O2 / Virgin Media / Virgin Mobile deal).
From 2021, however, a merger that has to be cleared by the Commission may also be subject to review by the UK's Competition and Markets Authority ("CMA"), which could of course reach a different conclusion from the Commission on clearance. The CMA estimates that its merger clearance caseload will increase by 40-50% (30 to 50 additional phase 1 cases per year and around half a dozen phase 2 cases per year) as a result of this change, in particular because of many more 'multi-jurisdictional' deals being notified. UK merger control will therefore need to be a bigger consideration for those planning international deals.
UK turnover will also have to be excluded when calculating EU turnover under the EU regime. This could mean that some deals that would have qualified for EU review will no longer do so, and will have to be notified to member state authorities instead.
The CMA has jurisdiction to examine any merger or acquisition where the target has an annual UK turnover of £70m or more, or the transaction will create or enhance a 25% or higher share of the supply or purchase of particular goods or services in the UK or a part of the UK. This latter threshold gives the CMA significant scope to establish jurisdiction over deals that it thinks could cause a problem for competition.
Unlike in many countries, it is not mandatory to notify a transaction to the CMA even if the above thresholds are met. However, if parties complete their deal without notifying they run the risk of the merger being 'called in' by the CMA for investigation (which it can do up to four months after the completed deal is made public), in which case it can order that the completed transaction be unwound through divestment. While under investigation, completed deals will almost always be subject to 'hold separate' orders preventing integration. These orders are onerous and can be difficult to manage, as Facebook has recently discovered.
The voluntary nature of the regime can lead to significant uncertainty, and means UK merger control can require more nuanced consideration than jurisdictions where turnover thresholds usually produce a clear yes/no answer on whether to notify.
In June 2018 the UK Government introduced lower thresholds for deals where the target (or a subsidiary) engages national security considerations, in order to facilitate greater intervention in those deals. In such cases the target only needs to have turnover of £1m or more, or a 25% UK market share in the relevant product (regardless of whether the buyer is active in the sector) for merger control to be available. Initially this covered firms that are producing goods that are subject to certain export controls, own IP relating to computer processors, or are developing "quantum" technology (even if those activities are only a small part of the target company's business). Earlier this year the Government added to this list artificial intelligence, cryptographic authentication (where the technology in question could be used in national security systems) and certain types of advanced materials.
The CMA noted when these separate thresholds were introduced that in its view the principal purpose of these new thresholds was not to increase the scope of its competition jurisdiction, but to increase the scope for the UK Government to use its own powers to intervene in deals on public interest grounds (for which merger control jurisdiction is the gateway). These grounds originally covered national security, media plurality and financial stability, but were expanded by the Government in June 2020 to include mergers that the Government considers could adversely affect the UK's ability to combat and mitigate public health emergencies (a category it interprets widely enough to include internet service providers, food supply chain firms and even car manufacturers).
The national security aspects of these changes can expect to be short-lived, however, as the new National Security and Investment Bill (which we will cover in more detail shortly) will give the UK Government significant new standalone powers to intervene (including retrospectively) in any deals that it considers pose a risk to national security. Deals in key sectors will have to obtain clearance before completion, on pain of civil and criminal penalties and of non-notified deals being "void". This change will take national security considerations outside of the existing public interest intervention aspect of the merger control regime.
The CMA has been ramping up its resources in preparation for having to consider mergers that previously would have been dealt with by the European Commission acting as a one-stop-shop. Going forward, deals involving targets with a UK presence are going to have to consider whether to notify the CMA regardless of whether they have already notified the Commission. For example, a German firm buying a German target with significant UK operations might previously have been able to rely on an EU notification to deal with any UK competition issues, but from 2021 will have to consider notifying the deal to both the Commission and the CMA.
Into the future
This expansion in the CMA's caseload will coincide with what may be a more interventionist approach following on from the Covid-19 pandemic. On 3 November Jonathan Scott, the acting chair of the CMA, spoke to the Scottish Competition Forum about the CMA's role going forward, and acknowledged that the CMA would have a real part to play in how the economy adjusts and evolves in response to the pandemic (particularly the strengthening position of large digital services companies) and how this impacts on consumers in the short, medium and long term.
In a possibly connected development the CMA is consulting on a change to its merger assessment guidelines, in particular so that it can focus more on how a merger will affect potential future competition and innovation (rather than just effects on existing markets) and how it might affect competition on things other than price (for example, the ability of consumers to shop around for better privacy terms or interoperability). This follows hot on the heels of a consultation on changes to the CMA's jurisdictional and procedural guidelines, including to anticipate the changes that will follow the end of the Brexit transition.
The 2019 Furman review identified certain shortcomings in the UK's merger regime, including that the lack of a mandatory regime in the UK can be "challenging" for the CMA. The review identified a perception within the CMA that merging companies can just complete mergers and then present them as faits accomplis, which can make it nearly impossible for the CMA to "unscramble the eggs". That has led to the use of onerous hold separate orders as a matter of course, but there are limits on what those can achieve in certain cases. The CMA therefore wants greater powers to impose higher fines on companies that delay or disrupt the CMA's investigations.
There is also the possibility of a new mandatory notification threshold being introduced on top of the existing thresholds (for example, if a target has UK turnover above £150m), following the suggestion from the CMA's former chairman Andrew Tyrie that the largest international mergers will otherwise de-prioritise the post-Brexit UK in favour of jurisdictions with mandatory regimes.
The Penrose review of competition law may also provide a prompt for an expansion in the CMA's powers, as well as other changes to how competition law is enforced.
However, the Covid-19 pandemic presents immediate concerns for the CMA – many sectors are exposed to oversupply in a time of constrained demand, and this is something that historically has foreshadowed consolidation (as well as anti-competitive behaviour). The CMA will need to rely on its existing merger control powers for now.
Whatever the changes on the horizon, the clear direction of travel is towards more scrutiny of mergers and acquisitions by the CMA. Anyone handling a deal involving a target active in the UK is therefore going to have to pay a lot more attention to UK merger control in the future.