The UK may leave the EU on 29 March 2019 without a transition period or agreed arrangements on the terms of its exit. For deals that have been notified to the European Commission but are still pending approval on 29 March, the end of the EU’s one-stop shop for mergers could mean that an additional UK filing is triggered. In such cases, businesses should consider whether it is necessary to engage in parallel discussions with the CMA before the Brexit date. Businesses also need to ensure that there is enough flexibility in transaction agreements to address the risk of a “No Deal” Brexit.
The Brexit date of 29 March 2019 is fast approaching. However, the effect of the UK’s impending exit from the EU remains unclear and hinges on whether it exits the bloc under the terms of the Withdrawal Agreement or without an agreement (No Deal Brexit). This could have a significant impact on merger review filings and timing in Europe and beyond.
In the event the UK Government is able to get the Withdrawal Agreement (or a similar agreement) signed into law, the UK competition regime will remain tethered to the EU during the implementation/transition period until at least end 2020. Although the UK will no longer be a Member State, it will still be treated as one for purposes of the EU Merger Regulation. There will thus be a period of continuity under this scenario, with the Commission continuing to hold exclusive jurisdiction over deals that meet the EU jurisdictional thresholds. For ongoing merger reviews at the end of the transition period, i.e., December 2020 or later, the Withdrawal Agreement makes provision for the Commission to retain exclusive jurisdiction over those cases.
But if a No Deal Brexit materialises, which remains a possibility amid the political turmoil, the UK will at once become an autonomous jurisdiction. According to the UK Competition and Markets Authority’s (CMA) own estimates, Brexit could increase its 2018 caseload of around 60 mergers by up to 50 additional cases, a jump of over 80%. Despite the UK Government’s decision to allocate the CMA additional funding of up to £23.6 million in 2018/19 and recent recruitment drives, the prospect of this sudden increase in workload is a real challenge. The CMA has been at pains to point out that it will be able to cope with the anticipated increase in its workload, but there is a risk that its resources will be stretched since the additional cases will include major international deals – like Dow/DuPont or Siemens/Alstom – that give rise to more complex issues. For such deals the UK will become an important new “parallel” jurisdiction – parallel, that is, to the major filings that are typically required (EU, US and often China). There are of course dozens of parallel jurisdictions (with over a hundred jurisdictions around the world practicing merger control), but countries such as Australia, Brazil, Canada, Russia and South Africa often command attention: the UK will now be added to that list, given the size of its economy.
Conversely, there will be a reduction in the number of cases that qualify for review under the EU Merger Regulation, since revenues generated in the UK will no longer count towards the EU jurisdictional thresholds. But this is likely to be a slight reduction only, up to 15% according to the Commission’s estimates, since many of the cases triggering UK review will still need EU filing. And it is true of course that cases taken out of EU review will then be likely to trigger national filings at the Member State level.
The most immediate challenge posed by a No Deal Brexit concerns deals currently under DG Comp review at the moment of Brexit. These deals could become subject to UK review, in addition to the ongoing EU examination since the jurisdiction of the Commission will have crystallised by the time of notification. This includes deals where the exclusion of UK revenues would have brought them below the EU jurisdictional thresholds; they will remain even so under EU examination.
Although the UK operates a voluntary merger control regime, the recently issued Draft Guidance on a No Deal Brexit advises merging parties to engage in a parallel dialogue with the CMA at an early stage, particularly where the deal may raise potential UK competition issues.1 That is precisely what RWE and E.ON did in connection with their asset-swap deal, which was recently notified to the EU.
The CMA actively monitors non-notified mergers. For completed mergers that straddle the Brexit date and would otherwise fall under the jurisdiction of the Commission, the CMA has a four-month window from the date of Brexit or the date the CMA is considered to have been provided with notice of material facts about the merger (whichever is the later) to launch an in-depth investigation. The CMA has also put in place parallel case teams for deals that are being reviewed by the Commission that will likely qualify for review in the UK. Businesses that choose not to notify a reviewable deal run the risk of the CMA imposing interim measures to prevent the completion of the merger, or the CMA requiring additional remedies or even prohibiting the merger following an investigation.
From a procedural standpoint, an additional UK filing for deals that have already been notified in Brussels will leave businesses facing the prospect of a prolonged transaction timetable. Although a parallel dialogue with the CMA in the run up to the date of exit could help minimise any potential delays, businesses will still have to go through another merger review which cannot be formally launched before the date of Brexit. Moreover, UK merger reviews are subject to a theoretically fixed timetable and there is very little scope to accelerate the clearance process.
As regards substance, Brexit could affect the outcomes of EU and CMA reviews. If the UK is outside the Single Market, and behind tariff barriers, the conclusion may be that the UK is a separate market. The assessment of parties’ competitive strength in a narrower geographic market that is solely comprised of the UK may yield different results than if the UK is considered a part of a wider market encompassing the European Economic Area. Parties may also need to put forward remedies that are specifically intended to address competitive issues in the UK since it will no longer be the role of DG Comp to regulate the UK. This adds a layer of complexity to the design of remedies in transactions that are reviewable in the EU and the UK. Finally, there is an increased risk of conflicting decisions due to substantive divergence, or differences in a deal’s competitive impact on the EU and the UK. This has already been illustrated by two transactions that were blocked by the CMA but cleared by national competition authorities, namely Akzo Nobel/Metlac (German Bundeskartellamt) and Eurotunnel/SeaFrance Assets (French Autorité de la concurrence).
For cross-border transactions that trigger multiple filings including the EU and the UK, in addition to the increased administrative burden, there is a risk that businesses may encounter difficulties where they are seeking to coordinate the various review timelines. This risk is particularly higher in cases that require remedies. In this regard, US merger control practice provides for a somewhat flexible review period, which allows some scope for coordinating the timing of EU-US merger reviews. In contrast, the UK operates under a theoretically fixed statutory timetable, which is not aligned with the EU timetable, and a remedies process that is entirely separate from the substantive review. It is likely, when time allows, that the CMA will consider revisions to its procedures so as to facilitate international coordination.
Merger clearance planning for a No Deal Brexit
Businesses planning deals in the run up to 29 March need to assess whether the exclusion of UK revenues would take a transaction that currently qualifies for merger control review at EU level below the jurisdictional thresholds. If so businesses need to evaluate whether the deal will qualify for review in the UK (as well as any other EU Member State), and the risk that the CMA will launch an own-initiative investigation.
The risk of a No Deal Brexit needs to be adequately reflected in transaction agreement(s) and in particular the wording of merger control-specific provisions such as conditions precedent. Additionally, to the extent timing differences between the processes will impact the deal timetable and time-sensitive provisions in the agreement, businesses should plan accordingly by negotiating flexibility into agreements to address these contingencies.
For deals that are being investigated by the Commission on the date of Brexit and meet the UK jurisdictional thresholds, businesses should strongly consider approaching the CMA, particularly where the deal may raise potential competition concerns in the UK.