The introduction of the Enterprise Act 2002 changed the focus for assessing mergers from public interest to competition. The Act also transferred the decision making power from the Secretary of State to the OFT and created a duty to refer mergers to the Competition Commission if the OFT considered that the merger will result in a substantial lessening in competition. These changes have led to the OFT reviewing its enforcement procedures for mergers, including the de minimis exclusion, the arrangements for informal advice and pre-notification contacts. These reviews and changes have taken place over a number of years and the most recent guidance is explained below.
In June 2007, OFT consulted on its ability not to refer a merger to the Competition Commission under the Enterprise Act 2002 in situations where (despite the fact that it may result in a substantial lessening of competition) the market is considered to be of insufficient importance (also known as the de minimis exception). On 15 November 2007, the OFT published the final version of its substantive merger guidance for such de minimis situations.
The principal change is that the OFT has decided (as proposed) to increase the market size threshold from £400,000 to £10 million. This means that the OFT can decide not to refer mergers which fall below this threshold to the Competition Commission even if they may result in the substantial lessening of competition.
It is worth noting that to date, the OFT has not used the de minimis exception as a reason not to refer a merger which it considered could result in a substantial lessening of competition.
It was suggested by some respondents to the consultation that the OFT should provide reasons to refer a merger where it is in a market below the £10 million threshold. The OFT have confirmed that for reasons of transparency it will do this.
Whilst none of the commentators expressed an opinion that £10 million was too high a threshold, some did express a view that it could be higher. The OFT, however, did not want to further increase the threshold and, as such, was not persuaded to increase it any further. The OFT will, however, keep the figure under review and adjust it if appropriate.
Application to certain cases within the threshold - The revised guidance clarifies that the OFT is "less likely" to apply the de minimis in certain situations, including the following:
1. Mergers in very highly concentrated markets where the prospect of market entry is low; and
2. Mergers in markets where there is evidence of coordination between or among competitors.
Some commentators were concerned that the first category was too broadly defined and could include most cases. In response to this, the OFT amended the text to clarify that "the pivotal issue is whether the impact of the merger is likely to be particularly significant".
In this regard, the OFT has clarified that even when the case falls into one of the two categories listed above, the de minimis exception may be applied if the impact of the merger on consumer welfare is limited.
When assessing impact on consumer welfare, the OFT will examine three variables:
- The size of the market;
- The magnitude of the competition lost as a result of the merger; and
- The durability of the merger.
Therefore, in theory, the smaller the market, the greater the likelihood that the exception will be applied.
The OFT believes that the finalised guidance provides a greater degree of clarity on the de minimis exception.
Interim arrangements for informal advice and pre-notification contacts
Informal advice refers to advice given on an informal basis by the OFT on the likely competition issues of a merger that has not yet been made public. Historically, this advice has been given orally, has not taken into account the views of third parties and importantly, has not been binding on the OFT. Similarly, companies planning on making a formal merger submission to the OFT could also take part in pre-notification discussions with the OFT, during which the parties would discuss the type of information required in the merger notice that is going to be submitted to the OFT.
In October 2007, the OFT confirmed that, until new guidance was published, it would continue to apply the guidance issued in April 2006 when dealing with informal advice. This means that the OFT will continue its policy of only giving informal confidential guidance in limited situations e.g the transactions must be 'good faith transactions' with an intention to proceed and there must be a genuine issue as to the OFT's duty to refer.
Procedure - an application for informal advice should be submitted to the Director of Mergers and should comprise a clear concise executive summary (of no more than five pages in length) covering:
(a) the suitability of the proposed transaction for informal advice;
(b) any evidence that would suggest that the proposed merger would have a substantive affect on competition in a market and would lead the OFT to believe the duty to refer is genuine; and
(c) the key substantive issues.
The OFT will attempt to give the applicant an indication of the suitability of a case for informal advice within five days of receiving the application. Where a meeting is required before any advice can be given, the OFT will endeavour to schedule this within 10 – 15 days.
These interim arrangements will continue to apply until the OFT further clarifies the position on this matter for the long-term. The intention in April 2006 was to have new guidance published by March 2007. This has not taken place and, at present, the April 2006 guidance remains in force.