Widespread reforms to the UK's competition law regime entered into force today. The Office of Fair Trading (OFT) and Competition Commission (CC) have ceased to exist and been replaced by the Competition and Markets Authority (CMA). As part of the reforms, the merger control regime has been toughened up. This alert sets out some of the key changes for dealmakers.
What hasn’t changed?
Much stays the same:
- The jurisdictional tests remain the same. Mergers are still subject to the UK regime if the target company’s UK turnover is over £70 million, or if the deal creates or enhances a UK share of supply of 25% or more for goods or services of a particular description.
- Deals are still subject to the UK regime in cases where one business acquires ‘material influence’ over another business, even if it falls short of a controlling stake.
- The substantive analysis of whether a deal is anti-competitive has not changed, and the CMA has the ability to block deals, or require far-reaching remedies such as divestments or behavioural undertakings.
- The Phase 1/Phase 2 investigation structure remains. The vast majority of deals will still be cleared after the initial Phase 1 review process; potentially problematic deals will still be subject to the in-depth 24-week Phase 2 process.
- The merger control notification regime is still voluntary, although it is now slightly more risky not to notify for pre-clearance as a result of the strengthened hold-separate measures discussed below.
- The filing fees of between £40,000 and £160,000 remain the same (they were only fairly recently increased to current levels).
What has changed?
Both the CMA’s processes and the documentation required have been revised.
A more prescribed form of notification has been introduced. This requires extensive data gathering and drafting. Deal parties will also need to provide a potentially large volume of internal documents to the CMA. It remains to be seen to what extent CMA case teams will be willing to grant derogations from the full requirements. So parties will need to prepare the materials for submission to the CMA earlier in order to avoid delay.
The CMA now has formal information-gathering powers applying to all stages of the merger assessment process and to both the deal parties and third parties, with the ability to impose financial penalties for failure to comply with a compulsory request. Under the previous regime, the OFT did not have the power to force parties to provide information or documents, and deadlines were less strict. So the process will be more demanding in this respect as well.
Hold separate measures
The CMA has enhanced powers to impose so-called interim measures to prevent or unwind pre-emptive transaction implementation which might prejudice their subsequent ability to unwind the deal if they conclude it is anti-competitive. This now applies at both the Phase 1 and Phase 2 stages of the review – and to both mergers that have completed and those that have not yet done so. The powers apply even where the CMA is not yet clear whether it has jurisdiction over the deal. The measures can apply with immediate effect once issued; the CMA will now issue orders rather than take time to negotiate measures by way of undertakings agreed with the parties. The CMA can impose large financial penalties (up to 5% of worldwide group turnover) where interim measures are breached.
These enhanced powers also now allow the CMA to order merging parties to reverse any integration that has already happened (at the parties’ own cost) and not to integrate further. The onus will be on the parties to plead for derogations where these are needed – for example in an asset acquisition where the target cannot stand on its own and needs support services from the new owner.
This is a significant change and the CMA has said that it will look to impose these measures to a much greater extent than it did under the previous regime. At the very least, parties should expect the CMA to impose them in nearly all mergers that have completed prior to the start of the CMA’s investigation.
Single authority review
The transition from Phase 1 to Phase 2 ought to be smoother now that cases stay within the same organisation throughout the process. For example, some members of the Phase 1 case team will continue to work on the case in Phase 2 and there should be less repetition of information requests at Phase 2. Weighed against these efficiencies is the increased risk of ‘confirmation bias’ affecting Phase 2. To address this, new CMA members will join the case team in order to preserve the ‘fresh pair of eyes’ that the CC used to provide, which was a feature generally valued by merging parties.
Statutory time limits have been introduced for all stages of the merger assessment process, including the following:
- There is a strict 40 working day time limit for Phase 1 investigations – although the clock only starts when the CMA says it starts, and the CMA can stop the clock fairly easily (for example, by sending an information request with a short deadline and then stopping the clock when the parties fail to comply in time). The new statutory deadline is also likely to make pre-notification discussions longer in practice because before the clock starts both the CMA case team and the parties will want to ensure that the CMA will have all the information it needs.
- There is a time-limited procedure for offering undertakings to remedy competition concerns so as to avoid a Phase 2 inquiry and for the CMA to decide whether to accept them. This is an improvement over the previous process, which essentially required parties to offer the undertakings (if they wished to) before they knew for sure what the problems actually were.
- The CMA can also now suspend the start of its Phase 2 investigation for up to 3 weeks, upon request by the parties where they are likely to abandon a merger that has not yet been completed.
- Following a Phase 2 inquiry, there is a shorter period of 12 weeks (extendable by a further 6 weeks) for the CMA to make an order or accept undertakings implementing final remedies.
Some aspects of the UK merger regime have been toughened up, such as the documentation requirements, the information-gathering powers, and the ability to unwind integration that has already occurred. While these changes are not fundamental, the regime is likely to feel more severe than it used to and more similar to regimes with mandatory notification processes such as under the EU Merger Regulation.