This article is an extract from GTDT Market Intelligence Merger Control 2022. Click here for the full guide.

Marc Israel is a London-based partner in the White & Case global antitrust practice. He has considerable experience in a wide range of antitrust, foreign direct investment and merger control work and has been involved in some of the most high-profile UK and European cases in recent years in the fields of M&A, cartels and antitrust litigation. Marc has worked on matters that established legal precedents now reflected in merger guidance published by the Competition and Markets Authority and the European Commission.

Mark Powell has been advising clients on antitrust and competition law issues for 30 years. Clients benefit from his considerable experience handling regulatory clearance for complex mergers and acquisitions, such as Aegean/Olympic II, Metso/Outotec, Zimmer/Biomet and Tele2 NL/T-Mobile Netherlands, to name but a few.

Kate Kelliher is an associate in the antitrust practice, based between the London and Brussels offices. Her practice includes a wide range of competition law issues, with a particular focus on state aid, energy markets and cross-border international merger control cases.

Luc Rosenberg is an associate in the White & Case competition team, based in London. His practice extends across a range of competition law matters, with a particular focus on international merger control and foreign investment screening across a variety of sectors.

1 What are the key developments in the past year in merger control in your jurisdiction?

On 4 January 2022, the National Security and Investment Act (NSIA) came into force, beginning the UK’s investment screening regime. Although investment screening and merger control are separate – unlike in some other jurisdictions, different government bodies oversee the regimes – they nonetheless overlap, and the NSIA will impact on merger control in the UK. We discuss how the NSIA regime interacts with merger control further in question 5.

In April 2022, following a lengthy consultation, the UK government announced some important proposed changes to strengthen the merger and antitrust regime. The implementation of many of the government’s proposals will require legislative change; however, the government has not yet published the text or the time frame for any new proposed legislation. The government’s proposals include raising the turnover threshold for a transaction to be reviewable by the Competition and Markets Authority (CMA). Where, currently, a target’s UK turnover has to be £70 million, the proposals see this increasing to £100 million, and the alternative share of supply test for the CMA’s jurisdiction will remain the same. The turnover threshold for intervention in media mergers on public interest grounds will remain the same. The government also proposes to create a ‘safe harbour’ for mergers between small businesses where the UK turnover of each of the merging parties is less than £10 million. Transactions that qualify for this safe harbour threshold will be immune from CMA review, even if the 25 per cent share of supply test is met. These are both welcome changes that represent a practical recognition by the government that transactions in these categories are unlikely to pose real competitive threats to the UK market.

In addition, the government has also proposed a UK nexus criterion to ensure that only mergers with an appropriate link to the UK will be captured. No detail of the proposed criterion has been published, but this is a welcome development. Although recent case law has shown that the test for nexus is broad, this criterion, if introduced, may curtail the CMA’s ability to intervene in deals with a very limited UK nexus. Intervention in such deals has been a notable trend in the past few years (landmark examples include Facebook/GIPHY, Sabre/Farelogix and Roche/Spark).

Although these proposals may appear to loosen the regime, other proposals intend to tighten it. In particular, the government proposes a broadening of the jurisdictional threshold to capture the risk of ‘killer acquisitions’, which the government feels the current share of supply test is not capable of addressing. This would be achieved by adding another jurisdictional threshold test, whereby a transaction could potentially be subject to CMA jurisdiction if an acquirer has an existing share of supply of goods or services of 33 per cent in the UK or a substantial part of the UK and UK turnover of £350 million or more. This effectively removes the existing requirement that there be some overlap between the parties for a transaction to be reviewable, capturing the acquisition of start-ups even if there is no overlap, and thus the share of supply test is not met. Although the proposal is likely designed to tackle issues in the tech sector, other industries may be affected too.

The government is also planning to widen powers of enforcement. Currently, the CMA can fine a party up to £30,000 or a daily rate of £15,000 for failure to comply with its information-gathering powers. The government considers that these sanctions (with the amounts not having changed over time) do not provide effective deterrence, and therefore it has proposed to increase fines to a maximum of 1 per cent of a business’s annual turnover, as well as grant the CMA the power to impose an additional daily penalty of up to 5 per cent of daily turnover. As those familiar with UK merger control will know, the CMA is not afraid to impose penalties for non-compliance (in September 2021, the CMA issued its largest ever fine to Facebook, over £50 million, for its failure to comply with a hold-separate order). If enacted, we are in no doubt that these changes will be a significant addition to the CMA’s enforcement toolkit.

The government’s proposals also foresee updates to try to increase the speed and efficiency of the merger review process. The government proposes a more flexible Phase II commitments procedure to allow the CMA and the merging parties to resolve a merger investigation at any stage of the Phase II process, without needing to wait for the investigation to be completed. This will apply to mergers reviewed on competition grounds, but will exclude public interest intervention cases. The proposals also include placing the existing non-statutory fast-track procedure on statutory footing, giving the CMA discretion to automatically refer a merger straight to Phase II where the merging parties have requested this.

On balance, the 2022 UK government proposals are very much focused on securing extra scrutiny for problematic deals, and it is welcome that there have not been any attempts to cast the net broader in terms of capturing other transactions. However, the proposed changes to extend the CMA’s jurisdiction where an acquirer has an existing share of supply of goods or services of 33 per cent in the UK and UK turnover of £350 million or more will mean extra considerations for deals in the digital space, in particular.

2 Have there been any developments that impact how you advise clients about merger clearance?

As has been the case for some time, internal documentary evidence plays an important role in the CMA’s competitive analysis. However, the extent of requests for internal documents, including emails, has steadily increased, even in Phase I investigations. Relevant internal documents are typically those produced to inform business strategies and investment decisions and for general planning purposes. In Amazon/Deliveroo, the CMA examined a large number of internal documents, focusing particularly on the likelihood of Amazon re-entering the online restaurant delivery market, whether Deliveroo may have started to deliver more non-food items in competition with Amazon and what future competition between the parties might look like. More recently, the CMA deemed internal documents to be an important form of evidence in both TVS Europe Distribution/3G Truck & Trailer Parts and JD Sports/Footasylum. These review decisions show that the CMA views internal documents as a reliable way of gauging parties’ intentions, both in the past and for the future.

In light of the above, we are consistently emphasising the importance of document management with clients contemplating merger transactions, in terms of both information memoranda and other market-facing materials, but also in respect of internal communications, some of which will predate any merger plans. It is therefore good discipline to try to ensure that all documents and emails are considered potentially discloseable in future merger reviews and to draft clearly and unambiguously.

We also continue to advise our clients of the increasingly creative ways in which the CMA asserts jurisdiction over deals. Recent years have demonstrated that the CMA is willing to adopt a frame of reference in order to find that the share of supply test is met. As a result, it is not uncommon for the CMA to dissect a market in ways that may be ‘nonsensical’ from an industry or business perspective, but which the CMA is entitled to adopt for the purposes of asserting jurisdiction. Although a willingness to do this has been noticeable for some time, in January 2022, the CMA cemented this in its amendments to its guidance on the CMA’s jurisdiction and procedure, which now states that ‘Whilst the share of supply used may correspond with a standard recognised by the industry in question, this need not necessarily be the case.’ As a result, clients should be aware that a potential deal may be subject to CMA review, even if the overlap in the parties’ businesses is minimal.

3 Do recent cases or settlements suggest any changes in merger enforcement priorities in your jurisdiction?

The publication of the new NSIA makes clear that national security is a top priority for government review. Numerous cases since the start of 2021 bear out this same focus in a merger control context. Shanghai Kington Technology/Perpetuus, Parker-Hannifin/Meggitt, NVIDIA/Arm and Ultra Electronics/Cobham Ultra all saw the Secretary of State issuing a public interest intervention notice (PIIN) on the ground of national security under the previous Enterprise Act 2002 (EA02) regime, before the NSIA came into effect. Whereas such interventions tended, historically, to be made in the context of defence-related transactions, arguably, they are now being made in a wider set of circumstances. Of the four PIINs issued in 2021/22, two (Ultra Electronics/Cobham Ultra and Parker-Hannifin/Meggitt) were in the aerospace and defence sector, one (Shanghai Kington Technology/Perpetuus) was in engineering and one (NVIDIA/Arm) was in electronics.

In terms of sectoral focus, digital remains top of the agenda across the competition law sphere. The year 2021 saw the Digital Markets Unit (DMU) established in ‘shadow form’ within the CMA in April. In its consultation on ‘a new pro-competition regime for digital markets’, launched in July 2021, the government identified that, in its view, the ‘unprecedented concentration of power amongst a small number of digital firms is holding back innovation and growth’. The CMA’s focus on the sector, in short, is only going to increase.

The CMA’s increasingly tough stance in the tech sector has also been shown in the recent Facebook/GIPHY case. After the CMA blocked the deal (and ordered its unwinding), Meta (formerly Facebook) appealed the case in the Competition Appeal Tribunal (CAT). Although the CAT upheld the CMA’s decision on all substantive grounds, the judgment provides interesting commentary on the dangers of the CMA being over-zealous in its intervention in global deals. Although the CAT stated that it was ‘in no doubt’ that the CMA had jurisdiction, it also stressed that the ‘demands of comity do require the CMA to be at least conscious of the international dimension’. Although this falls short of an outright critique, it may hint that the CAT is growing sceptical of (or, at least, is carefully watching) the CMA’s increasing willingness to intervene in global deals with a very limited UK nexus. Is this a recognition that the CMA is beginning to go too far? Time will tell. The judgment’s comments on the potential virtues of concentration were also noteworthy: the CAT recognised that small, entrepreneurial companies like GIPHY ‘will have at least half an eye on future acquisition by a behemoth […] and this may inspire, rather than eliminate, innovation and enhance consumer benefit’. Arguably, such comments jar with the recent focus on killer acquisitions described in question 1 above and, although made in the context of big tech, could clearly apply to other sectors too.

4 Are there any trends in merger challenges, settlements or remedies that have emerged over the past year? Any notable deals that have been blocked or cleared subject to conditions?

Greater CMA scrutiny continues to be a notable trend, together with the CMA’s willingness to make independent post-Brexit decisions that may not always align with those of the European Commission (EC). At the time of writing, since mid-2021, the CMA has issued decisions on, and closed, 10 Phase II investigations. Of these, three were prohibited, two were cancelled and five were cleared (three with remedies).

JD Sports/Footasylum saw the CMA block a completed merger following a Phase II review. JD Sports appealed to the CAT, leading to the CMA decision being quashed in relation to its assessment of the likely effects of covid-19 on the relevant markets and parties. Following reconsideration of the remitted case, the CMA concluded again in November 2021 that the merger should be blocked and that JD Sports was to divest Footasylum. Notably, the CMA’s decision considered in-store and online sales channels to form part of a single market because they were found to be used by consumers interchangeably. This shift away from the CMA’s general approach of treating these channels as separate is likely to have an impact on the analysis of future retail mergers in light of the sector’s increasing reliance on online sales channels.

Cargotec/Konecranes was the first case post-Brexit in which the CMA diverged from a decision taken by the EC, which reviewed the transaction in the same markets and on the same theories of harm. Although the CMA and EC cooperated closely, the EC ultimately accepted the divestiture package offered by the parties, which the CMA found to be insufficient to remedy the ‘substantial lessening of competition’ (SLC) it had identified. This shows that despite frequent engagement between Europe’s antitrust regulators, the post-Brexit competition landscape brings with it the risk of divergent outcomes between the CMA and the EC. Similar, but less obvious, was the decision in S&P/IHS where both the EC and the CMA conditionally cleared the deal involving global markets, even though they identified slightly different concerns and required slightly different remedies.

Another continuing trend is the CMA’s preference for structural remedies over behavioural remedies. In TVS Europe Distribution/3G Truck & Trailer Parts, the CMA deemed a full divestment of the 3G business to be the only appropriate remedy. In viagogo/StubHub, a divestment of the StubHub international business was necessary. Although the covid-19 pandemic had little impact on UK merger control generally, it did mean, however, that the CMA granted a longer than usual time frame for divestment in both JD Sports/Footasylum and Hunter Douglas/247 Home Furnishings.

Finally, the CMA’s Annual Plan for 2022–2023 also notes a particular focus on both effective competition in digital markets and supporting the transition to low carbon growth (including through the development of ‘healthy competitive markets in sustainable products and services’).

5 Have the authorities released any key studies or guidelines or announced other significant changes that impact merger control in your jurisdiction in the past year?

In March 2021, the CMA published its new Merger Assessment Guidelines (MAGs), marking the first update to its guidelines since 2010. The MAGs set out in detail the types of transactions that are more likely to result in an SLC. The MAGs also place greater emphasis on ‘non-price factors’ that may affect merger assessments, and state that factors such as innovation, quality and service should be interpreted broadly to cover a wide range of consumer benefits. In a similar vein, the new MAGs discuss how sustainability (which until now has been largely ignored by the CMA) can be a non-price factor, with any environmental benefits to be included in some assessments. The CMA also used the opportunity to signal that uncertainty (eg, uncertainty about whether efforts to enter a market will be successful) will not prevent the CMA from finding a competition concern. It also suggested that it would take an increasingly flexible approach to the counterfactual and the concept of market definitions going forward.

The new MAGs apply to all Phase I and Phase II investigations launched after publication (ie, 18 March 2021). Although the MAGs provide some clarity on factors the CMA will use in assessing mergers going forward, some commentators have argued that they have not been sufficiently useful in this regard. In particular, it has been suggested that they focus too much on examples of mergers that will be cleared, rather than on those that are likely to be blocked. Now that the UK has formally left the EU, this could very well be the beginning of a divergence between UK and EC policy in this area.

In January 2022, the CMA revised its guidance on Mergers - the CMA’s jurisdiction and procedure: CMA2. The update took into account changes resulting from the NSIA. In particular, the revised guidance both notes that UK merger control is distinct from the new national security regime and acknowledges that parties may be subject to both regimes. In cases of parallel investigation under both regimes, the CMA and the Investment Security Unit (part of the Department for Business, Energy & Industrial Strategy (BEIS), which oversees the NSIA) will coordinate and may share confidential information about the transaction with each other. To that end, the CMA and BEIS signed a memorandum of understanding to govern their relationship. The revised guidance also clarifies that the Secretary of State’s power to intervene in cases of a national security public interest consideration (PIC) will no longer fall under the merger control legislation (the EA02) and will now fall exclusively within the remit of the NSIA. The other PICs under the EA02 (plurality of the media; stability of the financial system; and, since covid-19, public health emergencies) remain intact.

6 Do you expect any significant changes to merger control rules? How could that change your client advocacy before the authorities? What changes would you like to see implemented in your jurisdiction?

Along with many other antitrust authorities globally, the CMA is busy designing plans to tackle perceived issues in big tech. Following a July to October 2021 consultation period, the UK government in May 2022 announced plans to create a new pro-competition regime for digital markets as part of the Digital Markets, Competition and Consumer Bill. This development followed from the establishment by the CMA of the DMU in ‘shadow’, non-statutory form in April 2021. The Digital Markets, Competition and Consumer Bill is due to be brought to Parliament ‘as soon as parliamentary time allows’ and will provide the DMU with statutory status. Until then, the DMU will work on preparing for and operationalising the new regime. Such preparations will include building appropriate teams and preparing draft guidance, supporting the government in the establishment of the new regime, evidence-gathering on competition in digital markets and engaging with a range of stakeholders.

In accordance with the government’s May 2022 response to the public consultation on the new pro-competition regime, the DMU will be responsible for designating firms with strategic market status (SMS). SMS will be applied to a small number of firms with substantial and entrenched market power in a specified activity, which provides the firm with a strategic position. A minimum revenue threshold and UK nexus test will also be identified in legislation. The CMA has already indicated in its final report on the mobile ecosystems market study that there is a ‘strong case’ for designating both Apple and Google with SMS for their main activities within their respective mobile ecosystems.

SMS firms will need to comply with certain conduct requirements centred around the objectives of fair trading, open choices, and trust and transparency. The government’s response also proposes the introduction of designated merger reporting requirements for firms with SMS, whereby such firms would be required to report mergers to the CMA where a transaction (1) involves the SMS firm acquiring over a 15 per cent equity or voting share, (2) the value of the SMS firm’s holding is over £25 million and (3) the transaction meets a UK nexus test. These new SMS merger reporting requirements are intended to give the CMA advance, pre-completion notice of transactions, to give it an opportunity to determine whether to investigate the transaction further. Although this additional reporting requirement does not expand the CMA’s jurisdiction to review mergers in digital markets, the largest SMS transactions that meet these thresholds could also be subject to mandatory merger review, with completion prohibited until clearance is received from the CMA. If this is enacted, it will be a stark change from the entirely voluntary merger regime that exists in the UK currently.

The Inside Track

What should a prospective client consider when contemplating a complex, multi-jurisdictional transaction?

For deals in potentially sensitive sectors such as cyber-related or artificial intelligence, clients should consider the proliferation of global foreign direct investment rules, including the new NSIA regime in the UK. They should also carefully consider the risk of a potentially lengthy (18 months or longer) CMA review process, even though the UK’s system is ‘voluntary’.

In your experience, what makes a difference in obtaining clearance quickly?

Navigating a smooth path through merger control approvals depends on various factors. These include being prepared and, where possible, doing as much work as possible upfront so that parties are ready to respond to questions from authorities. It also helps to think early about potential remedies, even if parties are confident that they will not be needed. Finally, the benefits of having a good team cannot be underestimated!

What merger control issues did you observe in the past year that surprised you?

As we noted last year, the growing trend of enforcing procedural infringements, such as alleged breaches of hold-separate orders in merger cases, is notable. This reached dizzying heights in September 2021, when the CMA issued a record fine of £50.5 million in Facebook/GIPHY. Given that the first ever fine issued was a mere £100,000 (in Electro Rent/Microlease in 2018), parties (and their counsel) need to be aware of the increasing frequency and magnitude of such penalties.