May 10, 2022

CMA Merger Control Jurisdiction to be Expanded Further

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CMA MERGER CONTROL JURISDICTION TO BE EXPANDED FURTHER

The U.K. Competition and Markets Authority (CMA) is expected to be granted wider jurisdictional powers for merger control enforcement in legislative proposals mentioned in today’s Queen’s Speech. The powers derive from the outcome of a consultation on reforming competition and consumer policy initially announced by the U.K. Government in April 2022.

The proposed merger control changes are part of a larger set of reforms,[1] including an expansion of the CMA’s market inquiry regime; tools aimed to deter, detect, investigate, penalize and remedy breaches of competition law; additional powers for the CMA to sanction both businesses and individuals for substantive and procedural infringements; as well as a raft of changes to consumer rights and consumer law enforcement. These reforms will be combined with separate proposals for digital markets under the Draft Digital Markets, Competition and Consumer Bill.

The reforms focus on a “more active pro-competition” strategy which is “more agile” than the U.K.’s approach while part of the EU. The proposal follows years of increased merger control enforcement by the CMA, which is showing no signs of slowing. These legislative proposals give yet greater powers to the CMA to enforce its merger control jurisdiction.

What Are the Existing Merger Control Thresholds?

At present, a relevant merger situation arises in the U.K. when two or more enterprises—essentially businesses of any kind—have ceased or will cease to be distinct as a result of a transaction, and at least one of the following jurisdictional tests is satisfied:

  • the U.K. turnover associated with the target company being acquired exceeds £70 million (the “Turnover Test”), or
  • the parties to a transaction will, after the transaction, together supply or acquire at least 25% of a particular good or service supplied in the U.K. or in a substantial part of it and the transaction results in an increment to this share (the “Share of Supply Test”).

The Share of Supply Test already affords the CMA huge flexibility to assert jurisdiction. First, because this does not equate to an assessment of market share, there is no need for the CMA to be constrained by a formal product market definition of an actual economic market. It captures activities which are much more loosely defined. Second, the CMA is not constrained in terms of the criteria to give regard to when applying the Share of Supply Test. The CMA will consider the commercial reality of the commercial activities focusing on substance, not form. Third, the CMA is not required to link the Share of Supply Test to its assessment of whether there is a substantial lessening of competition (SLC). The CMA’s finding of a SLC can be in a completely unrelated market, even where the share of supply in that activity is below 25%.

The CMA frequently uses the Share of Supply Test creatively, even if a transaction appears to have only limited or no impact to the U.K. For example, where the target only has indirect connection to U.K. customers[2] or where the target does not yet generate any revenues from U.K. customers.[3]

Flexibility is necessary as the U.K. operates a voluntary merger control regime. Merging parties can’t be fined for failing to notify a transaction that hits the thresholds. This prevents many transactions without any substantive issues from being notified. To balance this, the CMA needs to ensure it can review any transaction which might threaten competition in the U.K.

The CMA’s jurisdictional reach has been endorsed by the Competition Appeal Tribunal (CAT). In May 2021, the CAT confirmed the CMA has “a broad discretion as to the setting of criteria” which are relevant for assessment of the Share of Supply Test.[4] The precise criteria to be used involves a case-by-case assessment. In that case, a contract between Farelogix and American Airlines was sufficient due to American Airline’s interline agreement with British Airways, which indirectly reached U.K. customers. The CAT confirmed any increment is sufficient for the Share of Supply Test and no de minimis threshold applies.[5]

This discretion already gives the CMA extensive jurisdictional reach and makes it extremely difficult to successfully challenge the CMA’s jurisdiction under the Share of Supply Test.

How Are the Proposed new Thresholds Different?

The proposals impact the merger control thresholds in three main ways:

  • The Turnover Test will increase from £70 million to £100 million;
  • A safe harbor will be created where each party’s turnover is less than £10 million in the U.K., even if the Share of Supply Test is met; and
  • A new threshold will be created, where the acquirer has an existing share of supply of goods or services of 33% in the U.K., or a substantial part of the U.K., and has U.K. turnover of at least £350 million (the “Acquirer Only Test”).

The increased Turnover Threshold is unlikely to have much impact given the flexibility already afforded to the CMA through the Share of Supply Test.

Similarly, the introduction of the safe harbor is likely to have minimal impact. By the U.K. Government’s own admission, only a very small number of mergers meeting the newly proposed safe harbor criteria have seen CMA intervention in the past.

The most significant change will see the CMA’s jurisdictional reach extend even further under the new Acquirer Only Test. This new test is intended to capture so called “killer acquisitions” where an incumbent firm acquires a future competitive target currently generating limited or no revenues to eliminate a future competitive threat. The Government has sought to justify the Acquirer Only Test “to provide a more comprehensive and effective jurisdictional basis for certain vertical and conglomerate mergers, in particular so called ‘killer acquisitions’ that risk the development of new products or services.”[6]

Arguably the CMA already has sufficient flexibility to capture killer acquisitions, as is illustrated by its prohibition in Facebook / GIPHY where the CMA asserted jurisdiction on the basis that both parties supplied apps and/or websites that allow U.K. users to search for and share GIFs even though GIPHY did not generate any revenues in the U.K.[7]

The Acquirer Only Test will go significantly further. It will remove any doubt or difficulty for the CMA to assert jurisdiction where the Target does not or is yet to generate revenue in the U.K., provided the acquirer meets the revenue threshold. Further, there will no longer be any perceived enforcement “gap” since transactions without any competitive overlap between acquirer and target will potentially be caught.

The proposed Acquirer Only Test will apply to all large companies across all sectors and is not just designed for the digital sector. Specific rules applicable to the digital sector are also planned, which is expected to face stricter rules in the legislation.

When Will the Changes Take Effect?

The Queen’s Speech stated an intention to produce a “Draft” Digital Markets, Competition and Consumer Bill during the next Parliamentary session. Given the inclusion of new rules to the digital sector are likely to be controversial, this may slow the Bill’s progress. A further consultation is likely first before a draft is introduced to Parliament.

If passed, an implementation date will be decided in due course, but this is unlikely to be within the next Parliamentary session.

What’s the Likely Practical Impact?

The CMA has flexed its muscles on competition enforcement in recent years. With this trend expected to continue, an increase in the CMA’s jurisdictional reach should be viewed with caution. The CMA will continue to use its jurisdictional tests flexibly to ensure it reviews any transaction of interest.

The key determination of whether to notify a transaction to the CMA will continue to be substantive risk and not merely whether the jurisdictional thresholds are satisfied. If in doubt, merging parties can engage in informal discussions with the CMA prior to making this determination.

However, a wider reach of the U.K. merger control regime means additional risk for parties negotiating transaction agreements. Although the U.K. will remain a voluntary regime,[8] the practice of the CMA to routinely impose stringent hold separate obligations on parties who close transactions prior to the CMA concluding its review requires careful consideration. Enforcement action and fines for failure to comply with these obligations are becoming more common.

The CMA retains extensive powers for up to four months post-closing—even longer if closing isn’t publicized. This risks significant disruption to post-closing integration planning. This risk must be balanced carefully against the cost and effort of voluntarily submitting a notification to the CMA. Even in unproblematic cases, merging parties should expect to receive burdensome information requests, including detailed document trawls. Along with a cost and business resource implication to ensure compliance, there is a potential timing risk which needs to be reflected in the transaction agreements.

Parties should continue to carefully assess whether their transaction meets the U.K. merger thresholds and whether there are any potential U.K. substantive concerns to address. This should be done at an early stage in the process, prior to negotiating transaction agreements.

脚注

[1] Review the proposed reforms: https://www.gov.uk/government/consultations/reforming-competition-and-consumer-policy/outcome/reforming-competition-and-consumer-policy-government-response
[2]  ME/6806/19 Anticipated acquisition of Sabre Corporation of Farelogix Inc
[3]  ME/6891/20 Completed Acquisition by Facebook, Inc. of GIPHY, Inc.
[4]  Sabre Corporation v. Competition and Markets Authority [2021] CAT 11, para 141
[5]  Sabre Corporation v. Competition and Markets Authority [2021] CAT 11, para 306
[6]  Review the proposed reforms: https://www.gov.uk/government/consultations/reforming-competition-and-consumer-policy/outcome/reforming-competition-and-consumer-policy-government-response
[7]  ME/6891/20 Completed Acquisition by Facebook, Inc. of GIPHY, Inc.
[8]  The U.K. government did consult on whether to move to a mandatory notification system but decided to stick with the voluntary notification regime citing overall cost savings for the large volume of transactions not notified in the U.K. as a result of being voluntary.

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