Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Merger Control volume discussing topics including enforcement priorities, evidence review and notable cases within key jurisdictions worldwide.
GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?
Martin McElwee: In the past year, the Competition and Markets Authority (CMA) undertook six Phase II inquiries and 55 Phase I merger inquiries, according to statistics published on 1 March 2018 (down from 65 deals reviewed in 2016–2017). There was an uptick in the number of phase II referrals, with eight cases referred this year compared to five in 2016–2017 (that year perhaps being an outlier, with relatively fewer referrals compared to previous years). The number of cases in which remedies have been given following a Phase I review also continued to rise, with 11 cases concluded in this way in the 2017–2018 financial year, compared with nine cases in 2016–2017.
Notable cases included the fast-track reference and subsequent clearance of the Tesco/Booker merger, the decision to clear three mergers between competing hospital trusts on the basis of patient benefits, and, of course, the ongoing review of the Fox/Sky acquisition, which was referred to a Phase II inquiry on public interest grounds related to media plurality and broadcasting standards.
Last year, the CMA issued updated guidance on mergers in smaller markets, noting that mergers in markets of less than £5 million are generally unlikely to be found sufficiently important to refer to Phase II. The CMA exercised this discretion and cleared the IBA/Mallinckrodt deal, despite finding that the merger would substantially lessen competition in respect of one category of products, for which the merger would reduce suppliers from three to two.
On the procedural side, the CMA has emphasised in its draft annual plan for 2018–2019 that it continues to take incremental steps to streamline Phase I and Phase II cases while maintaining independent decision-making at Phase II. This approach involves greater continuity of staff involvement and enhanced alignment of evidence gathering across both phases, as occurred in Tesco/Booker, with more members of the Phase I case team continuing on in Phase II and less voluminous information requests at the beginning of Phase II. The CMA has also published a new merger notice template designed to reduce burdens on businesses and issued guidance on the mergers intelligence unit and the application of initial enforcement orders (IEOs) to prevent pre-emptive action pending the CMA’s review of a deal. That guidance also covers information sharing for due diligence and the merger control process. There are some signs that the CMA is ready to relax its approach to IEOs (albeit very slightly) by tailoring them to suitable cases, and there is also a reduction in the number of IEOs imposed this year (16 compared to 30 in 2016–2017, although it is too soon to tell if that year may have been an outlier).
GTDT: What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
MM: Over the past year, there have been more cases reviewed by the CMA that have been considered to raise complex or material competition issues, as demonstrated by the increase in the proportion of cases where the CMA held a case review meeting (which typically involves the CMA setting out its concerns to the parties at Phase I): over 50 per cent of all Phase I cases are now going to a case review meeting, a noticeable increase compared to previous years; only 39 per cent of Phase I cases had a case review meeting in 2015–2016. In addition, the rate of Phase II referral also remains relatively high at around 15 per cent, compared to around 2–3 per cent for the European Commission. Phase I remedies were given in around 20 per cent of cases and divestitures were required in three of the eight Phase II cases completed last year.
The relatively high rate of case review meetings, Phase II referrals and conditional clearances has some basis in the UK’s voluntary merger regime, but the increase in the proportion getting more detailed review is almost certainly also explained by the success of a more pragmatic approach when deciding which cases to investigate formally. Informal briefing papers – which provide merging parties with an opportunity to put forward their views on the deal and why it will not raise competition concerns, and are reviewed by the CMA’s mergers intelligence team before any formal review kicks off – continue to be an important route to establish whether a formal review is necessary for cases that appear to give rise to no real prospect of significant issues. This means that a higher proportion of those cases that are reviewed are likely to need more detailed scrutiny. The CMA’s draft annual plan for 2018–2019 notes that it will continue to welcome such briefings from companies, so that it can advise on whether a potential merger is likely to require a formal review. This is also an effective way for it to control its workload and use its resources efficiently, ensuring that it maintains a balanced and targeted approach to investigating non-notified mergers.
Tesco/Booker is notable as the first case where the parties requested to fast track to Phase II once the CMA was well into Phase I (in previous cases the parties submitted the request at or around the point of notification), which indicates that it is beneficial to consider a fast-track request later in the process, in order to avoid an issues statement and issues meeting.
GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
MM: In the past year, the CMA has taken three decisions (including two at Phase I) to clear mergers of competing NHS hospital trusts in Derby, Birmingham and Manchester, despite finding that the hospitals concerned overlapped across a number of services and patient choice, and that incentives to maintain or improve quality could be reduced post-merger. The CMA concluded that substantial patient benefits would outweigh potential competition concerns in these cases. These decisions may provide comfort for merging hospitals, who have raised concerns ever since the UK merger regime became applicable to them that the regime was poorly adapted to their situation.
Despite the significant number of cases involving countervailing benefits, it would be a stretch to consider that this could be interpreted as a signal that the CMA is more likely to accept efficiency arguments or customer benefits claims in other contexts. These clearances are better read as being specific to the particular situation of hospital mergers (and the general climate of competition between hospitals in the UK). Moreover, the finding of substantial patient benefits was also supported by evidence from several neutral expert stakeholders, including NHS Improvement (a sector regulator), which strongly supported the mergers. In that context, the CMA seems to have taken the pragmatic approach of recognising the challenges the UK public health sector faces and the potential benefits a merger could bring. This suggests that the success of such efficiency arguments is likely to remain very rare outside this context.
One of the other major cases this year is Fox/Sky, which was referred to Phase II on public interest (media plurality) grounds, despite having been cleared (as regards its competition aspects) unconditionally at Phase I by the European Commission. The case has made clear some of the continuing challenges around the application of the media plurality regime, which lacks the developed case law that characterises the assessment of mainstream competition issues. It is also worth mentioning the Hytera Communications/Sepura deal where the parties gave undertakings to address public security concerns regarding technology related to the emergency services.
The CMA also continues to give close scrutiny to retail mergers and mergers involving local competition. In the past year this included the major Tesco/Booker acquisition, DFS/Sofology, Henderson/Martin McColl and Heineken/Punch Taverns.
“The CMA launched a consultation on new guidance on internal document requests in merger investigations on 28 March 2018.”
GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
MM: In the past year it has become clear that the CMA is becoming more stringent as regards the provision of evidence in merger cases. In November 2017, it imposed a penalty of £20,000 on Hungryhouse in the context of the Just Eat/Hungryhouse merger, owing to the failure to provide certain documents in response to a section 109 notice (a compulsory information request) without reasonable excuse. In particular, the CMA found that 49 responsive documents were not disclosed at the relevant time and that Hungryhouse had failed to put in place proper processes for identifying relevant documents and failed to discuss its process with the CMA.
This was the first time the CMA imposed a penalty under section 110 of the Enterprise Act in relation to mergers, having imposed a similar administrative penalty on Pfizer for failure to comply with a formal information request in an antitrust investigation. While the fine is not large, in imposing this penalty, the CMA is clearly sending out a message that merger parties must respond comprehensively to CMA information requests and any concerns must be discussed with the CMA in advance of the final deadline. This can prove particularly challenging when authorities demand a high volume of data and internal documents within tight time frames.
Following this decision, the CMA launched a consultation on new guidance on internal document requests in merger investigations on 28 March 2018, setting out guidance on the circumstances when additional internal documents may be requested, use of compulsory powers, likely scope of requests, approach to IT issues, approach to privilege logs and use of compliance statements.
In its annual plan, the CMA announced that it would create a new digital, data and technology team with the aim of improving how it captures, analyses and draws conclusions from large data sets, and explore new analytical techniques to help develop its understanding of issues in the technology sector. The work of this new team is expected to influence how the CMA gathers and reviews evidence in electronic format in the future.
Highly sophisticated economic analysis continues to feature prominently in Phase II assessments, as evidenced by the central role played by the vertical gross upward pricing pressure index model and weighted share of shops (WSS) in Tesco/Booker. Owing to the vertical nature of the transaction, in that case the CMA took a different approach than in previous cases by using an economic model (based on WSS instead of the traditional fascia counting) to estimate diversion ratios and dispensing with consumer surveys and with a second-stage analysis of the particular features of local markets failing an initial filter.
“The government is looking to expand its powers to intervene in deals from a national security perspective.”
GTDT: Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
MM: The CMA achieved notable success with its defence of a challenge to its 2016 decision to prohibit the (vertical) merger between Intercontinental Exchange, Inc (ICE) and Trayport. The Competition Appeal Tribunal (CAT) upheld the CMA’s findings that the merger between the two companies was likely to result in a loss of competition and that, in order to address this issue, ICE must sell the Trayport business. However, the CMA was asked by the CAT to reconsider its additional requirement that the companies terminate an agreement entered into during the original investigation and that would significantly expand their commercial relationship. On remittal, the CMA concluded that termination of the agreement was necessary and that the loss of competition identified in the original merger investigation would not be comprehensively remedied if the agreement remained in place. This case demonstrates that the CMA will not shy away from taking action to defend its decisions and ensure that the outcomes of its investigations are fully effective. It also shows that a remittal from the CAT does not necessarily mean that the CMA will change its position.
As for cases cleared subject to commitments, Diebold/Wincor Nixdorf once more confirmed that upfront purchaser requirements are increasingly common. In Mastercard/VocaLink the CMA accepted a set of behavioural commitments (including access to network connectivity and contributing to switching costs to a new competitor) instead of a divestment on proportionality grounds.
Also noteworthy are the unconditional Phase II clearance decisions in Tesco/Booker and Just Eat/Hungryhouse, both involving relatively new business combinations or models: the former was the first major combination between a groceries retailer and a wholesaler (albeit with a limited retail operation) and the latter involved the merger of two digital platforms of food ordering and delivery. In relation to Tesco/Booker in particular, in addition to the economic analysis and approach to local markets (described previously), following submissions from competing wholesalers, the CMA had to analyse in detail the impact of the the merger from a buyer power perspective. The final report sets out a legal test to identify when a merger gives rise to buyer power concerns, which is based on potential harm to end consumers.
GTDT: Do you expect enforcement policy or the merger control rules to change in the near future? If so, what do you predict will be the impact on business?
MM: Following a period in which merger control has, with rare exceptions, become more independent of political intervention, the government is looking to expand its powers to intervene in deals from a national security perspective. In March this year the government introduced draft legislation that will allow it to intervene in a wider range of investments in the military, dual-use goods, computing hardware and quantum technology sectors. The proposals lower the thresholds for investigation of transactions in those sectors, dropping the turnover thresholds from £70 million to £1 million and removing the need for an increase in the share of supply. Although the CMA has indicated that it does not anticipate many deals that only satisfy the new thresholds to raise competition concerns, deals in these sectors will be closely scrutinised and the likelihood of intervention by the Secretary of State is higher. These new rules are a first step in a package of proposals designed to strengthen the UK government’s powers to intervene in foreign investments on national security grounds and to protect critical national infrastructure. Consultations on longer-term reforms, including a potential call-in power or a mandatory notification regime, will continue into 2018.
Post-Brexit (subject to the proposed transitional period), the European Union’s ‘one-stop-shop’ for merger reviews will no longer apply to the UK and deals will be subject to parallel EU and UK reviews if the respective thresholds are met. This will mean the review of more deals in the UK: the CMA estimates up to 50 additional cases per year (almost doubling current numbers), with about six more Phase II investigations (again doubling the current caseload). Even with additional funding, such increases are likely to present challenges for the authority and merging parties. It will also mean the review of fewer deals by the European Commission: if current thresholds remain the same, informal estimates suggest that around 100 fewer cases per year will be subject to EU review (notified deals currently number around 360 each year).
The CMA has so far indicated that maintaining effective cooperation with the European Commission and other competition agencies will remain a priority. For deals crossing the Brexit period, parties will need to closely monitor developments in both the EU and UK on the transitional arrangements that are needed to resolve current uncertainties, such as which authority gains or cedes jurisdiction at different points.
Finally, in a recent speech, Andrea Coscelli, the CMA’s Chief Executive, argued that when it comes to reviewing vertical mergers in the digital economy, relying on complex economic quantifications to predict future price effects is inherently difficult and renders the analysis of limited use. Instead, Coscelli proposed that it would be more useful for agencies to scrutinise the available documentary evidence, while seeking to understand what the market thinks about the deal and the rationale behind it. These statements clearly signal that the CMA will look very carefully at vertical mergers in the digital world, but also that this could be an area of divergence with the assessment carried out by other competition agencies.
The Inside Track
What are the most important skills and qualities needed by an adviser in this area?
Above all, a merger control adviser needs to be able to clearly articulate a rationale for the transaction that is pro-competitive, or, at least, coherently not anticompetitive. Without this overarching narrative, there is a risk that the detail will never quite be fitted together in the most beneficial way.
Second, over the past several years, merger control processes in the UK and internationally have become more procedurally heavy – with more focus on avoiding gun-jumping risks, clean teams, document production modalities, etc. Being able to carry the client with you through these sometimes demanding processes is now a critical element to advising successfully on mergers.
What are the key things for the parties and their advisers to get right for the review process to go smoothly?
The team needs to work well together. This means dedicating the right resource on the client side to cope with what the authorities may throw at you. On the lawyer side, it means being truly joined up with the client’s key people, with economists and any other advisers. The more we can all work as one team, the more effective we are.
What were the most interesting or challenging cases you have dealt with in the past year?
Diebold/Wincor Nixdorf was a really interesting case involving a market – ATMs – going through a major period of change as more and more people make ‘cashless’ transactions. In the UK merger control process, a lot of the discussion focused on market entry – both that of the acquirer a few years before the transaction, and other new providers as potential entrants from the Far East. It remains the case that relatively few cases succeed based on the prospect of future entry alone, and the CMA demands a high standard of proof before accepting entry arguments.