The Competition Commission has for some time expressed its concern about how difficult it is to unscramble anti-competitive completed mergers referred to it by the Office of Fair Trading (“OFT”) for investigation. Partial or total implementation of the transaction already undertaken by the merging parties can often make it impossible or extremely difficult for regulators to unwind the deal and preserve the status quo if it is ultimately found to substantially lessen competition.
In response, the Enterprise and Regulatory Reform Bill (“Bill”), currently going through Parliament, (it has now been passed to the House of Lords) contains greater powers for UK regulators to prevent integration in completed mergers at an early stage. The Bill is likely to come into force in late 2013 soon after which the Competition and Markets Authority (“CMA”), the new unified competition authority created by the Bill will become fully operational.
The Existing Law
Under the current law contained in the Enterprise Act 2002 (“EA 2002”) the OFT has the power to order or seek undertakings from the merging parties to stop the further integration of the merging businesses (so called “hold separate” undertakings or orders) pending the outcome of the OFT’s merger control investigation. These powers can only be exercised when the OFT has reasonable grounds for suspecting that a “relevant merger situation” has been created. The uncertainty of being able to ascertain very early on in its investigation whether a relevant merger situation had been created had historically led to the OFT seldom using these powers. This allowed merging companies to put their transaction into effect notwithstanding the existence of a parallel competition investigation.
Tougher Interim Measures
Under the new proposals in the Bill, the CMA will have increased powers to order hold separate remedies. Under Clause 22 merging parties will be prevented from putting their deal into effect by the CMA whether in relation to a completed or anticipated merger if the following are satisfied:-
the CMA is considering making a reference to the Competition Commission;
it has reasonable grounds for suspecting that the parties have merged their businesses or are in the process of doing so.
In contrast to the existing legislation the Bill allows the CMA to intervene much earlier on in its investigation This allows regulators to carry out their investigation without the fear that their ability to protect effective competition on the market will be undermined by the actions of the merging parties.
The Bill introduces for the first time substantial sanctions for non-compliance with hold separate orders. The CMA will have the power to fine the parties up to five percent of their worldwide turnover for non-compliance. In another significant strengthening of their powers the new UK regulator will be given the power to order that any integration already undertaken by the merging parties be reversed.
Hold separate orders are very onerous and significant measures which can seriously limit the economic and financial freedom of the relevant parties and cause them considerable cost. They can also be highly disruptive to their customers.
Mandatory Notification….. by the back door?
Although the Government quite rightly refused to implement a mandatory notification procedure for qualifying mergers under the Enterprise Act 2002, it is likely that the CMA could use these powers rigorously to make entry into completed mergers a much riskier proposition for would-be deal makers seeking to steel a march on the regulators and push through potentially anti-competitive mergers. Blanket imposition of hold-separate orders on completed mergers could result in a form of “quasi”-mandatory merger control and would be disproportionate. Such a policy would be damaging and burdensome for business and would be inimical to the Government’s growth objectives for the economy.
Tougher OFT Stance
We have already seen the OFT make far more aggressive use of its powers under Sections 71 and 73 EA 2002 to seek hold-separate undertakings or impose similar orders. However they appear to be using these powers in a rather indiscriminate way in all completed merger cases. We have been involved in a number of cases where the OFT has sought hold separate undertakings from parties even if their mergers do not qualify for investigation.
Will this foreshadow the stricter regime to come where every completed mergers is treated with suspicion? Those entering into completed mergers should therefore be aware that if the OFT come knocking at their door it will almost invariably seek extremely wide-ranging hold separate undertakings from the parties, which can frustrate the integration of the businesses for at least the initial consideration period (currently six to eight weeks) or maybe even longer if the matter is referred to the Competition Commission for further investigation.
Further reforms in the Bill include a set of new statutory timetables for the various stages in the merger assessment process to give parties greater comfort over timetables and allow them to more easily plan transactions around the gaining of clearance. The first phase review, currently undertaken by the OFT soon to be the CMA, must now be completed within 40 working days. However, this timetable only commences when the merger notification is deemed complete. There is currently no obligation on the CMA to confirm within a specified period whether they regard the notification as complete or not. This is likely to lead to considerable pre-notification contact with the CMA as parties seek to obtain assurances that their notification will be deemed complete from day one of submission. If it is incomplete the regulator can “stop the clock” until such time as the required information has been obtained from the parties. The Phase II merger investigation (currently undertaken by the Competition Commission soon to be the CMA) will have to be completed within a further 15 weeks (including up to an initial 3 weeks for preparing a report).
Finally, merger fees have been increased, with the previous bands being raised by a third (to £40,000, £80,000 and £120,000, depending on the target’s turnover) and a new upper fee of £160,000 being introduced for mergers where the target entity has a turnover in excess of £120 million.
PE houses looking to undertake transactions that could fall within the auspices of the OFT/CMA, whether platform deals or add-on acquisitions, will need to be mindful of these changes and the increased necessity to take competition issues into account at an early stage.