The Competition and Markets Authority (CMA) has published new guidance on the thresholds for the 'de minimis' exception when deciding not to raise competition concerns in relation to merges involving markets of insufficient importance.
At the end of its initial Phase 1 merger review, if the Competition and Markets Authority (CMA) is unable to clear a merger because of concerns that there could be a substantial lessening of competition in any market for goods or services in the UK (including national, regional or local markets), there are two possible outcomes:
- The CMA can consider accepting undertakings such as divestments if these offer a clear-cut solution to any identified competition issues; or
- The CMA will otherwise be under a statutory duty to refer the transaction to an in-depth Phase 2 review lasting 24 weeks.
However, for markets of 'insufficient importance', the CMA has discretion to apply the 'de minimis' exception, in which case it can clear the transaction without making a reference to Phase 2. The rationale for this approach is that the public cost of conducting a Phase 2 investigation is estimated at £400,000, which the CMA considers would be disproportionate to the size of the market under review.
On 16 June 2017, after a public consultation, the CMA published revised guidance (New Guidance) to ensure its continued relevance, reduce the burden on notifying parties and manage the CMA's workload.
In particular, the New Guidance sets out increased thresholds to determine whether a market is of 'significant importance' to justify a referral to Phase 2, but does not make any material changes to the CMA's approach in applying the thresholds:
- Upper limit: the CMA will generally now consider a market with an annual aggregate turnover of £15 million or more to justify a reference (increased from £10 million); and
- Lower limit: the CMA will generally consider that a reference is not necessary for a market with an annual aggregate turnover below £5 million (increased from £3 million).
For markets below the lower limit, the CMA would only open an in-depth investigation in exceptional circumstances if there were concerns over consumer harm or where the market is seeing a large number of small mergers which together could be problematic.
The CMA will also rely on these exceptions at an early stage when it is considering whether it should send initial enquiry letters to the parties to commence investigations of its own initiative for mergers that were completed without first being notified.
Although the thresholds for exemption have been increased, they remain relatively low. The CMA is still in a position to review relatively 'small' mergers. For example, the CMA can review mergers in niche markets where the parties have over 25% share of supply of the relevant goods or services regardless of their turnover. The 'de minimis' thresholds apply by reference to the value of the entire market rather than to the parties' respective turnover. Furthermore, the exception is applied at the CMA's discretion and will not be available if clear-cut undertakings would sufficiently address any competition concerns. Therefore, parties should be mindful that the exception will not always apply automatically even in smaller markets and they could still face a full Phase 2 review.
The CMA's decision to update its 'de minimis' guidance by introducing higher turnover thresholds is to be welcomed. However, the CMA retains considerable discretion as to whether it can review a deal and parties should consider the position very carefully before concluding that their deal is 'too small' to attract CMA scrutiny. Indeed, historically, the CMA has had a tendency to investigate relatively small deals (particularly those that involve niche markets and/or local geographic markets). The new guidance will mean that some small deals escape scrutiny, but it remains likely that the CMA will continue to scrutinise deals that it considers might raise real competition concerns.
Most transactions will not require any pre-completion notification to the CMA but in some circumstances it may be sensible to consider whether there could be any potential competition concerns given the broad powers and discretion of the CMA to review even completed deals.