The UK government has confirmed that it will pass emergency legislation to allow Lloyds TSB’s proposed rescue package for Halifax-Bank of Scotland (HBOS), now valued at £8.6bn (at the time of going to print), to go ahead. The deal would create a retail banking giant, controlling 28 per cent of the mortgage market. Such a deal would in normal circumstances almost certainly involve a detailed merger control review by the Office of Fair Trading (OFT), with the distinct possibility of a reference to the UK Competition Commission (CC). A previous attempt by Lloyds TSB to take over Abbey National in 2001 had been blocked by the CC due to concerns in personal current accounts and banking services to SMEs. However, in the current financial climate, the government wants to ensure that this latest transaction proceeds irrespective of competition concerns. In an interview with the BBC, Chancellor of the Exchequer, Alistair Darling, stated that at this time “financial stability must trump competition”.
What would normally happen?
In normal circumstances, the deal would be notified to the OFT (either voluntarily or at the OFT’s request), which would generally take 30 – 40 working days to decide if the merger should be referred to the CC for a more detailed review. If the OFT concluded that it is or may be the case that the merger may be expected to result in a substantial lessening of competition in any UK market(s), it would then be under a statutory duty to refer the deal to the CC under the Enterprise Act 2002 (the Act) unless the parties offered clear-cut remedies to avoid a reference. The CC would, after a 24 – 32 week review, decide whether to clear, possibly subject to remedies falling short of prohibition, or block the merger.
How will the deal go through?
On 18 September 2008, John Hutton, the then Secretary of State for Business (SoS), issued an “intervention notice” under s.42 of the Act. The issuing of this notice does not affect the assessment procedure undertaken by the OFT, as detailed above. However, if the OFT concludes that the merger may be expected to result in a substantial lessening of competition, it has no powers to make a direct referral to the CC under the Act and must instead report its findings to the SoS. The SoS then has the power to refer the matter to the CC on the strength of the OFT’s findings, but as is all but certain in this case, he can also conclude that public interest considerations outweigh competition concerns and thereby clear the merger.
As it currently stands there are only two public interest considerations on which the SoS can issue an intervention notice: national security and plurality of the media1. Neither of these is relevant to the Lloyds TSB-HBOS merger. Therefore, in order to clear the deal, the government has had to pass secondary legislation, by way of an Order, to add ‘stability of the UK financial system’2 to the list of public interest considerations.
Intervention notices have been used on several occasions since their introduction in the Enterprise Act 2002, but this is only the second time – the first coming in 2007, when Alistair Darling used the power to refer BSkyB’s bid for a substantial share in ITV to the regulator, Ofcom – that a public interest consideration other than national security has been used to justify the application of a notice.
Fortunately for the banks, as Lloyds TSB and HBOS both conduct two thirds of their business in the UK, the deal will not fall to be scrutinised by the European Commission, and no changes to European competition laws - as a result - are required.
What happens next?
The Order required to amend the Act was laid before Parliament on 7 October 2008 and adopted six days later. It will come into force on 24 October 2008.
The OFT is currently investigating the merger and has invited third parties to comment3, both on competitive impact of the proposed transaction and on any issues concerning the stability of the UK financial system. According to the terms of the intervention notice, their investigation must be completed by 24 October 2008.
There are, of course, further clearances required in-house. The shareholders of Lloyds TSB must vote in favour of the deal and because the merger is intended to proceed by way of a scheme of arrangement, a majority in number representing 75% in value of HBOS shareholders must pass a resolution approving the scheme of arrangement. A further special resolution (requiring 75% of votes in favour) of the HBOS shareholders is required to approve the related reduction of capital. The court must sanction both the scheme of arrangement and the reduction of capital. This may take several months, but both parties hope the merger will be completed by early 2009.
This matter is a clear illustration that, given the current economic climate, in certain key sectors (most notably the financial sector), the competition policy rule book is effectively being re-written to fast-track arrangements that would otherwise be unlikely to fly. However, most businesses should not expect any such favours and can expect “business as usual” from the competition regulators and from the government.