Legislation and jurisdictionRelevant legislation and regulators
What is the relevant legislation and who enforces it?
The primary legal basis for merger control in the United Kingdom is the Enterprise Act 2002, which came into force on 20 June 2003. In April 2014, the Enterprise Act 2002 was significantly amended by the Enterprise and Regulatory Reform Act 2013. In particular, the Office of Fair Trading and Competition Commission were merged into a single authority, the Competition and Markets Authority (CMA). The CMA’s primary duty is to seek to promote competition, both within and outside the United Kingdom, for the benefit of consumers. Published guidance explains how the provisions work in practice and secondary legislation implements some of the provisions.
The Enterprise Act 2002 establishes an administrative procedure for merger control, which is now solely implemented by the CMA. In limited cases, raising defined public interest issues, the secretaries of state for Business, Energy and Industrial Strategy (BEIS) or Digital, Culture, Media and Sport (DCMS) may also be involved in decision-making processes. Under the general Enterprise Act 2002 merger regime:
- The CMA has a duty to refer mergers (anticipated or completed) for a Phase II review where it believes that there is, or could be, a relevant merger situation that has resulted, or may be expected to result, in a substantial lessening of competition in the UK. Exceptions to the duty to refer exist in certain circumstances (see below).
- Following a reference for a Phase II investigation, the CMA conducts a more detailed analysis to decide whether a relevant merger situation has been or will be created and, if so, whether the situation results or is expected to result in a substantial lessening of competition within any markets within the UK. If the CMA decides that there is a substantial lessening of competition, it must determine how to remedy, mitigate or prevent the adverse effect. And
- Different rules are in place for public interest, special public interest and water merger cases.
As mentioned above, in certain circumstances, the CMA has the discretion to not make a referral, despite there being a realistic prospect that the merger will lead to a substantial lessening of competition in a market or markets within the United Kingdom. These exceptions are:
- when the markets concerned are not of sufficient importance to justify a reference (the de minimis exception);
- in the case of anticipated mergers, when the arrangements concerned are insufficiently far advanced, or insufficiently likely to proceed, to justify a reference; or
- when any relevant customer benefits arising from the merger outweigh the substantial lessening of competition concerned and any adverse effects of the substantial lessening of competition concerned.
A document giving more information about these exceptions is available on the CMA’s website.
In November 2020, the UK government published a draft of the new National Security and Investment Bill 2021. The National Security and Investment Act received Royal Assent in 2021, and, when the Act enters into force early next year (this is scheduled for 4 January 2022), it will introduce a new regime for reviewing certain investments on national security grounds. The new regime will introduce for the first time a mandatory pre-screening regime for deals involving certain sensitive sectors and a voluntary regime for other deals giving rise to potential national security concerns, and five-year retrospective powers for the government to ‘call in’ transactions deemed to raise national security concerns. This new regime will replace the national security aspects of the Enterprise Act 2002’s current public interest regime, but will not otherwise affect the Enterprise Act 2002’s regime. Information relating to the introduction of the National Security and Investment Act can be found on the UK government’s website.Scope of legislation
What kinds of mergers are caught?
The Enterprise Act 2002 applies to any ‘relevant merger situation’, which may be a completed or anticipated merger. The CMA must make a reference for a Phase II review where it believes that there is or there could be a relevant merger situation that has resulted in or may be expected to result in a substantial lessening of competition. An ‘anticipated merger’ may be a merger that has been signed but not yet completed or a merger in contemplation. Where these conditions are met, a reference for a Phase II review must be made, unless one of the exceptions to the duty to refer applies or, where appropriate, it may seek and accept undertakings in lieu of a reference from the merging parties.
A relevant merger situation will arise when the following conditions are satisfied:
- Two or more enterprises cease to be distinct, that is, are brought under common ownership or control or there are arrangements in progress or in contemplation that will lead to enterprises ceasing to be distinct. ‘Control’ is not limited to legal control.
- The merger has not yet taken place or took place no more than four months before the reference being made, unless the merger took place without having been made public and without the CMA being informed of it, in which case, the four-month period starts from the announcement or at the time the CMA is informed of it.
- The transaction meets certain jurisdictional thresholds (the share of supply or turnover tests).
The Enterprise Act 2002 defines an ‘enterprise’ as the ‘activities, or part of the activities, of a business’ that could be carried out for gain or reward (it need not, therefore, be a separate legal entity). CMA Guidance (see Mergers: Guidance on the CMA’s jurisdiction and procedure and the Merger Assessment Guidelines) indicates that an enterprise may comprise any number of components, most commonly including some combination of the assets and records needed to carry on the business and the employees working in the business, together with the benefit of existing contracts or goodwill, or both. A business need not currently be trading to constitute an enterprise and the Enterprise Act 2002 does not require that a business (or part thereof) be of any minimum scale or include any particular combination of components in order to constitute an enterprise. In June 2014, following a legal challenge, the CMA found that it did have jurisdiction over Groupe Eurotunnel’s acquisition of three ferries and related assets previously belonging to the now liquidated SeaFrance. The CMA found considerable continuity between the former SeaFrance services and Groupe Eurotunnel’s new services on the same route. The assets in question were considered to form a business that was already geared up to run a ferry service, therefore the situation was distinct from merely buying assets in the market. The Supreme Court upheld the CMA’s decision regarding the definition of ‘enterprise’ for the purposes of UK merger control in December 2015.
What types of joint ventures are caught?
The creation of a new joint venture, or a shift in control or influence over an existing joint venture, may give rise to a relevant merger situation, provided that the share of supply test or the turnover test is met.
Is there a definition of ‘control’ and are minority and other interests less than control caught?
The CMA documents Mergers: Guidance on the CMA’s jurisdiction and procedure (updated in December 2020) and Merger Assessment Guidelines (updated in March 2021), provide guidance on the meaning of control. Control can comprise any of the following.
‘Material influence’ arises on the basis of an ability to materially influence another enterprise’s policy. Although shareholdings of below 25 per cent will typically be less likely to confer material influence, the CMA may examine any shareholding to determine whether the holder might be able materially to influence the target’s policy.
This can arise at relatively low levels of shareholding: the CMA’s guidance notes that even shareholdings of less than 15 per cent might attract scrutiny where other factors indicating the ability to exercise material influence over policy are present. In addition to the size of the shareholding and board representation, other factors such as industry standing and contractual relationships between the enterprises involved may also be taken into account. (The Court of Appeal upheld a finding that BSkyB’s acquisition of a 17.9 per cent stake in ITV gave rise to material influence in the circumstances of the case.)
This concept can therefore clearly catch transactions that would not be caught by the European Union Merger Regulation (EUMR). For example, the Office of Fair Trading referred Ryanair’s acquisition of a 29.82 per cent shareholding in Aer Lingus Group plc (the European Commission having concluded that it did not have the power to require Ryanair to divest itself of the minority stake under EU merger rules) to the Competition Commission. The Competition Commission reached its decision in July 2013, requiring Ryanair to reduce its shareholding in Aer Lingus to 5 per cent. Its conclusion that the 29.82 per cent shareholding gave material influence was based on a range of factors including, in particular, Ryanair’s ability to block special resolutions and the sale of Heathrow slots under the articles of association. This conclusion was reiterated by the CMA in its final decision in June 2015 following an application by Ryanair to the CMA to reconsider its decision based on material changes to circumstances. Following the CMA’s final decision, in October 2015, Ryanair withdrew its application before the Court of Appeal regarding the same issue.
In 2019, the CMA took jurisdiction over Amazon’s intended acquisition of a minority stake (of undisclosed scale, but later announced as 16 per cent) in Deliveroo, which entitled Amazon to appoint one out of eight of Deliveroo’s directors and certain other rights. In its Phase 1 decision to refer the case to an in-depth investigation, the CMA considered that Amazon would acquire material influence over Deliveroo as a result of a number of ‘mutually reinforcing’ factors, including Amazon’s particular industry knowledge and expertise as a shareholder.
De facto control
This refers to the ability to control policy, which may arise on the acquisition of a higher level of shareholding, such as 30 per cent of voting rights.
Also known as ‘de jure control’, legal control refers to a controlling interest that is unlikely to arise unless one enterprise holds more than 50 per cent of the shares carrying voting rights in the other. In some exceptional cases, acquisition of a shareholding in excess of 50 per cent may not give rise to legal control where an agreement with the other shareholders circumscribes the majority owner’s rights (eg, Coca-Cola Company/Fresh Trading Limited, where a shareholding increase from around 20 per cent to above 50 per cent did not give rise to legal control, as the acquirer did not obtain additional voting rights, either during shareholders’ or board meetings).
A change from material influence to de facto control or legal control, or from de facto control to legal control, can constitute a new relevant merger situation.Assessing theories of harm
The CMA states in its updated Merger Assessment Guidelines that, in formulating theories of harm, it will generally assess a merger on the basis of the specific shareholding or influence that will result from the relevant merger situation in question. This means that a theory of harm with respect to a firm that is acquiring material influence over another may be different – and require different analyses – to that involving a firm acquiring full legal control over another. However, the CMA notes that in some ‘rare cases’ if it has evidence that if a buyer is contemplating another transaction that will further increase its shareholding or influence over the target despite it retaining the same overall level of control, the CMA may take this into account in its competitive assessment and consideration of remedy options.Thresholds, triggers and approvals
What are the jurisdictional thresholds for notification and are there circumstances in which transactions falling below these thresholds may be investigated?
The Enterprise Act 2002 provides alternative thresholds based, respectively, on the share of supply and turnover.
Share of supply
The ‘share of supply’ test is satisfied only when the merger itself creates or enhances a 25 per cent share of supply or purchases of any goods or services in the United Kingdom (or in a substantial part of it). This is not a market share test and allows a wide discretion in describing the goods or services, which need not amount to relevant economic markets. In 2019, the CMA asserted jurisdiction over the Roche group’s acquisition of Spark Therapeutics, even though Spark had generated no sales in the UK. Instead, the CMA’s finding of jurisdiction was based on the parties’ combined numbers of UK-based employees engaged in research and development activities, as well as the number of UK patents procured from an administrative patent authority.
The turnover test is satisfied if the turnover in the UK of an enterprise of which control is being acquired exceeds £70 million. This is determined by aggregating the total value of the turnover in the UK of the enterprises that cease to be distinct and deducting:
- the turnover in the UK of any enterprise that continues to be carried on under the same ownership or control (eg, the acquiring enterprise); or
- if no enterprise continues to be carried on under the same ownership and control (eg, formation of a new joint venture), the turnover in the UK which, of all turnovers concerned, is the turnover of the highest value.
Is the filing mandatory or voluntary? If mandatory, do any exceptions exist?
Filing in the United Kingdom is voluntary. However, a large number of deals are, in practice, notified prior to completion to give the parties legal certainty as, irrespective of a notification, the CMA may commence an investigation on its own initiative and subsequently refer the merger for a Phase II investigation. This carries the risk of remedies being imposed even if the transaction has already been completed. Further, the CMA monitors the market for transactions falling within its jurisdiction that it has not received voluntary notification of and has significant interim measures powers that enable it to prevent or unwind actions that might prejudice the outcome of a reference for a Phase II investigation or impede remedial action. The CMA document, Guidance on the CMA’s mergers intelligence function (December 2020), describes the steps that the CMA can take before deciding whether to investigate an unnotified merger. The CMA can intervene as soon as it has reasonable grounds for suspecting that arrangements for a merger are in progress or are being contemplated, but it mainly uses interim orders in the context of completed mergers. In its 2018/19 Annual Plan, the CMA stated that to achieve a balanced and targeted approach to investigating non-notified mergers, it will welcome informal briefings from companies to advise on whether a potential merger is likely to come under CMA scrutiny.
A merger notice filing must be made using the form prescribed by statute or by a submission containing the same information.
Do foreign-to-foreign mergers have to be notified and is there a local effects or nexus test?
There is no system of mandatory notification in the UK. It is implicit in the jurisdictional criteria that at least one of the enterprises will be active within the UK, although it need not be incorporated within the UK. These principles apply equally to non-UK companies that sell to (or acquire from) UK customers or suppliers. In assessing whether a firm is active in the UK, the CMA will have regard to whether sales are made directly or indirectly (via agents or traders) and the extent to which a firm is active at each level of trade. The CMA increasingly adopts a broad interpretation of the required local nexus with the UK, asserting jurisdiction in Roche/Spark despite the target not having any sales in the UK. (See also the CMA’s decision in Sabre/Farelogix, in which the CMA found that the 25 per cent share of supply threshold was met, and therefore it had jurisdiction to review the merger, on the basis that Sabre’s share of the relevant market exceeded 25 per cent alone, and that there was an increment based on Farelogix’s provision of services to a single UK customer – British Airways.)
In June 2013, the Court of Appeal confirmed the Competition Commission’s jurisdiction over the AkzoNobel/Metlac merger on the basis that AkzoNobel had significant influence over its UK subsidiaries carrying on business in the UK, including the setting of strategies and approval of operational decisions, and did not itself need to be carrying out commercial activities in the UK.
Are there also rules on foreign investment, special sectors or other relevant approvals?
The UK does not currently have a domestic legal framework that specifically governs inward foreign direct investment. However, the Enterprise Act 2002’s merger regime sets out special rules for mergers involving public interest issues and special public interest cases.
Previously, mergers giving rise to potential national security concerns were also governed by the Enterprise Act 2002’s public interest regime. However, in November 2020, the UK government published the draft National Security and Investment Act. This law will introduce a new notification regime for mergers relevant to national security and critical infrastructure when it enters into force on 4 January 2022.
National Security and Investment Act
The National Security and Investment Act will introduce a new screening regime for investments in a wide range of sensitive and strategic sectors with – for the first time – mandatory filing and pre-approval requirements for deals involving targets active in specified sectors, and significant civil and criminal penalties for non-compliance.
Key features of the new regime are summarised below.Mandatory and suspensory notification for investments in designated sectors
The government has identified 17 sectors that will fall under the scope of the mandatory notification regime, including advanced materials, artificial intelligence, communications, computing hardware, defence, military and dual-use technologies, quantum technologies, and synthetic biology. Acquisitions of certain shareholdings in businesses active in one of these designated sectors will be subject to a new mandatory notification system with statutory review timelines, and they will not be permitted to complete until clearance is given by the UK government. Transactions that complete before receiving clearance will be void.
Voluntary notification and call-in powers apply to a broader range of deals
Certain deals that are not caught by the mandatory regime, but which may give rise to national security concerns, may be called in for a national security review by the government up to six months after the secretary of state ‘becomes aware’ of the deal, within five years of the acquisition taking place. Parties are therefore encouraged to voluntarily provide notifications of deals that could lead to national security risks in order to start the 30-working-day period in which government must decide to carry out a full assessment or take no further action.
Following receiving a notification (mandatory or voluntary), the government will conduct an initial screening process of up to 30 working days before deciding whether to issue a call-in notice. Where a call-in notice is issued, the government will have a further 30 working days to decide whether to clear a transaction or to impose remedies. This 30 working day period may be extended by an additional 45 working days, or longer, by agreement with the acquirer. The clock will stop following a request for information, up until the time when that request has been complied with. The fixed statutory timelines are intended to offer more predictability and certainty to investors than the existing Enterprise Act 2002 regime, under which timelines are set by the government on a case-by-case basis, largely at the discretion of the relevant secretary of state.
Minority acquisitions and asset acquisitions are in scope
Acquisitions of stakes from 15 per cent or acquisitions of further stakes (eg, 25 to 50 per cent, 50 to 74 per cent, and 75 to 100 per cent) may be notifiable or called-in, although the government will need to conclude that any acquisitions below 25 per cent enable the acquirer to materially influence the policy of the target. (This is the same test as under the UK’s merger control regime, where the shareholding is examined alongside other interests, including board representation and industry expertise.)
Acquisitions taking place from 12 November 2020 but prior to the regime coming into force
Once the regime comes into force (commencement), the government will be able to call in certain deals that completed after the Act was introduced in Parliament but before commencement, provided the government has not used its current powers to intervene on public interest grounds under the Enterprise Act 2002. Such deals will not be subject to mandatory notification, but could be subject to remedies if national security concerns arise. Deals that have not completed before commencement, and satisfy the requirements for mandatory notification, will need to be notified. Parties involved in these deals should therefore ensure that deal documents contain appropriate conditionality and should consider engaging with the government early in order to mitigate the length of a review period and reduce the formal notification requirements, to the extent possible.
Wide-ranging powers to impose conditions on (or block) deals
The government will be able to either clear, impose conditions upon or block deals where there is an unacceptable risk to national security. Typical conditions are expected to involve restricting the number of shares acquired and ring-fencing sensitive information or technology.
The government will have wide-ranging powers to request information from parties to inform its decision making at every stage of the process, including powers to require individuals to provide evidence in person.
Timing implications for live deals
Acquisitions that close between 12 November 2020 and commencement of the new regime may be ‘called in’ for up to six months from commencement (if the secretary of state for BEIS was aware of the deal before commencement) or six months from when the secretary of state became aware of the transaction (if this was after commencement) where the transaction raises national security concerns. Acquisitions that have signed but not closed by commencement and which fall within the scope of the mandatory notification regime will trigger a mandatory notification requirement and will be prohibited from closing until clearance has been received.
Sanctions for non-compliance include fines of up to 5 per cent of worldwide turnover or £10 million (whichever is greater) and imprisonment of up to five years.
Thresholds and jurisdiction
- No financial or share of supply thresholds will apply.
- The regime will apply to investors from any country, including domestic UK investors.
When the new regime comes into force, the national security provisions in the current public interest regime will be removed from the Enterprise Act 2002. However, other public interest considerations (eg, media plurality, public health and financial stability) will remain within the scope of the current regime, which will operate alongside the new national security regime, together with the CMA’s reviews of deals on competition grounds. The government will, however, be able to intervene where competition remedies run contrary to national security interests if this is considered necessary and proportionate.
Although the new regime will not be in force until 4 January 2022, any party considering investing in a business that falls within the scope of the regime should consider engaging in the debate on the regime’s scope and assessing the risk of the deal being ‘called in’ for review or falling within the scope of the regime. Given the uncertainty around the regime and the retroactive application of the government’s call-in powers, BEIS has stated its willingness to provide informal guidance to merging parties on what to expect from the regime for the purposes of business planning and is inviting merging parties to contact its new Investment Security Unit for informal advice.
Public interest regime
Upon commencement of the National Security and Investment Act, the national security provisions will be removed from the Enterprise Act 2002’s public interest regime, but the public interest regime will otherwise continue as before.
Broadly, where the secretary of state intervenes in a merger that raises potential public interest concerns, that case is considered in light of both competition and public interest issues. Where the scretary of state intervenes in a special public interest case (ie, one in which the CMA does not have jurisdiction under its normal rules) the outcome of the case is only dependent on public interest issues. The public interest grounds on the basis of which the secretary of state may intervene are:
- national security (subject to the provisions of the new regime noted above);
- media plurality;
- the stability of the UK financial system;
- the need to maintain the capability to combat and mitigate the effects of public health emergencies in the UK (introduced in June 2020 in response to the covid-19 pandemic); and
- new public interest considerations that may be added by the secretary of state.
Where the secretary of state issues an intervention notice specifying a ‘media public interest consideration’, the Office of Communications (Ofcom) is required to report whether the merger will or may be expected to operate against the public interest, to assist the secretary of state in their decision as to whether there is a plurality concern requiring further investigation by the CMA. At the request of the secretary of state, Ofcom published a measurement framework for media plurality in November 2015. An example of such an intervention notice is that issued by the Secretary of State for DCMS in respect of DMG Media Limited’s acquisition of JPIMedia Publications Limited in January 2020, before clearing the merger in March 2020. In 2019, the Secretary of State for BEIS intervened on grounds of national security in a number of cases, including in December 2019 in relation to two separate transactions in the aerospace industry, namely the proposed merger of Impcross Ltd and Gardner Aerospace Holdings (abandoned in September 2020, when the Secretary of State for BEIS announced that he had accepted undertakings from Gardner Aerospace confirming that it would not acquire Impcross), as well as the acquisition of Mettis Aerospace Limited by Aerostar (a Chinese-established fund) which was abandoned in February 2020). Two mergers are currently being considered under the public interest regime: the Secretary of State for DCMS issued a public interest intervention notice in April 2021 in respect of Nvidia Corporation’s anticipated acquisition of Arm’s Intellectual Property Group business; and the CMA brought the anticipated acquisition by Imprivata, Inc of Isosec Limited to the attention of the Secretary of State for BEIS in March 2021, as the CMA considered that the transaction may raise public interest considerations.
There is also a special regime for water (and sewerage) mergers. In some circumstances, water mergers are subject to mandatory reference to the CMA and are governed by the Water Industry Act 1991 (as amended by the Enterprise Act 2002 and Water Act 2003) and the Water Act 2014. There are currently no special provisions for other regulated utilities (such as electricity, gas, telecommunications or rail), which are subject to the Enterprise Act 2002 merger regime, although various regulatory approvals are required for the acquisition of certain regulated businesses and businesses operating in the financial or insurance sector. The Industry Act 1975 confers the secretary of state with the power to prohibit changes of control over important manufacturing undertakings, where the change of control would be contrary to the interests of the UK. This power has not been used in practice.
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21 April 2020