In response to recent consultation findings the UK Competition & Markets Authority (“CMA”) last week made certain changes to its merger control function, including the issuing of new guidance. The CMA says its aim is to simplify its process and reduce the burden on businesses, while providing them with a clearer understanding of their obligations.
Initial enforcement (‘hold separate’) orders
Initial enforcement orders (“IEO”) can be issued by the CMA where they suspect that two or more businesses have merged or are in the process of doing so. An IEO prohibits the merging parties from taking ‘pre-emptive’ action, meaning steps that are likely to prejudice a CMA investigation of the merger or the CMA’s ability to remedy any competition concerns further down the line.
IEOs are colloquially known as ‘hold separate’ orders, as they only tend to be used where a merger has already completed and their principal effect is to require that the existing business and the acquired business be operated separately from each other (i.e. putting a hold on any integration plans). This makes it easier for the acquired business to be sold on to a new buyer if the CMA concludes that the merger would lead to a competition problem.
Parties subject to the IEO are entitled to apply for ‘derogations’ from the order to allow them to carry out what would otherwise be prohibited conduct (such as allowing the purchaser’s back-office functions to fill any gaps in the acquired business’s capabilities).
In our experience IEOs are onerous to manage, particularly where the senior management of the acquired business has left on completion of the deal (a particular risk in an owner-managed business) and in asset sales where no back-office or management personnel have transferred. Where we have requested derogations, the CMA has demanded significant information by way of justification.
The new additional guidance on IEOs clarifies the circumstances in which they will be used; the sorts of derogations the CMA will generally be willing to grant; and the timing for imposing IEOs and granting derogations. Key points are:
- Confirmation that the CMO will “only exceptionally” impose an IEO on an incomplete or anticipated deal (e.g. one conditional on CMA clearance), which is in line with the practice to date;
- By contrast, the CMA has confirmed that it would normally expect to impose an IEO in a completed merger, and that that will almost always be in its standard form (though early engagement with the CMA pre-completion might allow the IEO to be tailored to avoid unnecessary disruption to business and minimise the need for later derogation requests);
- Amendment of the template IEO to clarify that commercially sensitive information can be passed between the businesses where that is necessary for “integration planning”, though it still should not be provided to the acquirer’s senior management or other commercially-focused personnel;
- Guidance on the circumstances in which the CMA will typically be willing to grant derogations;
- A new template to facilitate the making of derogation requests;
- Confirmation that an IEO will typically be lifted if the CMA is provisionally minded to clear the deal; and,
- Clarity on the CMA’s willingness to allow the required fortnightly compliance statements to be signed by someone other than the CEO, as long as that person has the authority to bind the business and enough knowledge of its operations.
While this new guidance will hopefully make the process of dealing with IEOs somewhat more straightforward, they will remain onerous. It will almost always be in the buyer’s interest to avoid an IEO by making any deal likely to need merger clearance conditional on that clearance being proactively sought and obtained from the CMA.
Merger notice form
Mergers that are proactively notified to the CMA use a Merger Notice. Following a consultation, the CMA has sought to reduce the amount of information businesses are required to provide in the Notice.
The summary of responses to the consultation sets out the most notable changes to the form, which include:
- Clarity that submissions not following the Merger Notice template are still welcome;
- Additional guidance on when certain information may or may not be required; and
- More clarity on the data required to establish the parties’ market shares.
- Removal of some of the previous information requirements.
Completing a Merger Notice, and compiling all the information required to accompany it, can be a very demanding task. Time will tell whether these changes make a significant difference to that, but the direction of travel is certainly welcome.
Revised guidance on the CMA’s mergers intelligence function
UK merger control is principally a voluntary system – i.e. the law does not oblige the parties to a merger that meets one of the CMA’s jurisdiction thresholds (a ‘qualifying merger’) to notify the deal to the CMA. However, the CMA does monitor merger activity to identify completed mergers that qualify for review, with a view to calling them in for an ‘own initiative’ investigation (which always results in an IEO) if there is a reasonable change that competition concerns would arise. This function is carried out by the CMA’s mergers intelligence committee. The committee also deals with third party complaints about mergers.
Where the CMA has (or might think it has) jurisdiction over a merger, but the parties do not intend to notify the deal, it is possible to submit a briefing note setting out why the CMA should not investigate the deal – i.e. that it is not in fact a qualifying merger, or it should not have an anti-competitive effect. Persuading the CMA of these points at this early stage can not only avoid the cost of dealing with an investigation and managing an IEO, it also avoids the merger fee (of between £40k and £160k) that must be paid where the CMA investigates a qualifying merger.
The CMA has made a number of (relatively minor) amendments to its mergers intelligence guidance, in particular to clarify when parties to a merger should submit a briefing note to the CMA – as a general rule, only after there is a signed merger agreement.