A conversation with Peter Harper, partner, Annabel Borg, principal associate PSL and Claire Morgan, principal associate, in the London office of international law firm Eversheds Sutherland, on key issues on merger control in the UK.
NOTE–to see whether notification thresholds in the UK and throughout the world are met, see Where to Notify.
Focused intervention across a range of transactions
The UK merger control regime is voluntary and the Competition and Markets Authority (CMA) can intervene in both anticipated and completed transactions which satisfy the jurisdictional thresholds. The CMA has a very active Mergers Intelligence Committee (MIC) which monitors transactions to determine whether unnotified transactions should be called in for review. In the financial year April 2018 to March 2019, the MIC reviewed over 600 transactions.
The CMA is intervening in a high proportion of transactions that it investigates and those that it does investigate can often raise potential competition law concerns. For example, of the 56 transactions it investigated in the financial year April 2018 to March 2019, two involved Phase I remedies and 11 were referred for an in-depth Phase 2 investigation of which eight were either prohibited, abandoned or involved Phase 2 remedies.
Because the CMA has broad jurisdiction over the types of transactions it can investigate, the transactions which the CMA investigated in 2019 included:
acquisitions of minority shareholdings eg RWE AG’s acquisition of a 16.67% minority stake in E.ON and Amazon’s acquisition of a minority stake in Deliveroo, and
global M&A transactions with a limited nexus to the UK, eg Thermo Fisher / Roper and Illumina / Pacific Biosciences were both primarily US deals which were abandoned during the CMA’s phase 2 process.
Strict application of Initial Enforcement Orders (IEOs)
The CMA has the power to impose IEOs to prevent the parties to a transaction from integrating their businesses and requires them to hold those businesses separate pending the CMA’s decision. The IEO process has become an increasingly significant part of the CMA’s merger control process in recent years.
Although the CMA routinely requires IEOs for completed transactions, it has recently started imposing them for anticipated transactions.
Moreover, the CMA has also begun to use its enforcement powers to fine companies for non-compliance. Non-compliance with IEOs can result in fines of up to 5% of the addressee’s group worldwide turnover. Between 1 December 2018 to 30 November 2019, the CMA used this power to impose fines on four occasions (see UK mergers enforcement actions—closed cases tracker).
In 2019, the CMA also imposed its first unwinding orders in relation to the completed Tobii/SmartboxTobii/Smartbox and Bottomline Technologies/Experian acquisitions requiring the parties to unwind integration which had already taken place prior to the IEO.
Greater reliance on internal document
The CMA’s approach to internal document requests was formalised in new guidance published in January 2019 (the Guidance). The Guidance
confirms the CMA’s greater willingness to use its formal powers to require companies to provide internal documents. These powers place a statutory obligation on companies to comply. The CMA also notes that it may request the CEO or general counsel of the company to sign a compliance statement confirming that the business has complied with the formal request for information when it provides a response
explains that ‘Internal documents’ include all types of documents in the merging parties’ possession that have been prepared, sent or received by their officers or employees; however, the Guidance states that handwritten notes and instant messages are ‘rarely likely’ to be requested
clarifies that the CMA does not expect to receive documents such as emails in response to its pro forma requests in Phase I but it makes clear that it may ask for such documents where those initially submitted to it ‘do not appear to fully capture the merging parties’ analysis of the merger or their assessments of competitive conditions within the markets at issue’
confirms that the types of documents requested, as well as the identity of the custodians ‘will be driven by the way in which a party conducts its commercial operations’. To this end, the CMA relies on information from the merging parties on their decision-making procedures and the way in which they gather, assess and disseminate competitive analysis, and
states that when the CMA issues a formal statutory information request and the request is particularly complex or extensive, the CMA may share a draft request with the merging parties where ‘practicable and appropriate’.
The importance of internal documents is demonstrated throughout the CMA’s Phase 1 and Phase 2 recent merger decisions. In J Sainsbury/Asda, for example, the CMA revealed that it had reviewed 136,000 of the parties’ emails and ‘thousands of pages’ of other internal documents.
New national security regime
National security continues to be a focus for the UK government.
The Queen’s Speech, delivered on 19 December 2019, announced a National Security and Investment Bill, which is intended to strengthen the Government’s powers to investigate and intervene in business transactions to protect national security. This follows a Government consultation in July 2018 on a proposed new national security regime.
The UK Government in the meantime has continued to use the UK merger control regime to ask the CMA to assess transactions on national security grounds. In particular, the UK Government has used the expanded jurisdiction under the Enterprise Act for national security public interest matters to intervene on a number of deals in 2019. For example, the CMA was directed to investigate the public takeovers of Cobham plc and Inmarsat plc on national security grounds. In both cases the acquirers were private equity firms and in both cases the acquirers agreed to undertakings to protect national security in order to obtain clearance.
As an interim measure, the UK government announced in June 2020 that further markets impacting national security would be subject to the reduced notification thresholds (impacting transactions involving markets in relation to the developing, producing or research into (i) artificial intelligence, (ii) cryptographic authentication technology, or (iii) advanced materials). These new rules came into force on 21 July 2020.
Focus on transactions in digital markets
One of the CMA’s key strategic objectives is to promote better competition in online markets. It has sought to achieve this by intervening in transactions in digital markets, for example, PayPal/Izettle and TopCashback/Quidco (which was ultimately abandoned). The ‘Furman Report – a step-change in analysis of transactions in digital markets?’, which was commissioned by the Government proposed a number of recommendations that would fundamentally affect the way digital mergers are assessed in the UK. The CMA, however, does not currently consider that significant changes to the UK merger regime are required to handle transactions such mergers. This policy debate will remain a key issue in the UK and elsewhere over the coming years.
Brexit
Once the UK ceases to be part of the EU’s ‘one-stop-shop’ merger control regime, the CMA expects to review an additional 30 to 50 mergers annually as a result of Brexit. These are likely to be bigger and more complex global cases.
The CMA has also proposed a number of changes to the UK merger control regime to ensure that it remains an effective competition enforcement agency, the most significant being the introduction of a hybrid merger control regime under which:
a mandatory merger control regime will apply to large international mergers that meet certain thresholds. This will include a standstill obligation that will prohibit parties from implementing their transaction prior to the CMA’s clearance. The CMA is also considering introducing a ‘short-form notification’ process to minimise the impact of non-problematic mergers on businesses, and
the current voluntary merger regime will continue to apply where the current UK merger control thresholds are met.
Further details on the proposed changes to the UK merger control regime are expected to be published and consulted on this year.
Public interest interventions
As a result of the coronavirus (COVID-19) pandemic, the UK government introduced a fourth ground for government intervention in merger investigations on public interest grounds (ie grounds that permit the government to act as decision-maker rather than the CMA). The new ground covers transactions that impact the UK’s ability to combat a public health emergency such as coronavirus (COVID-19). This amendment came into force on 23 June 2020.
No—the control test in the UK is different from the EU concept of ‘decisive influence’. In the UK a ‘relevant merger situation’ requires, inter alia, that two or more enterprises cease to be distinct, that is, are brought under common ownership or control.
The CMA’s publication ‘Mergers: Guidance on the CMA’s jurisdiction and procedure’ provides guidance on the concept of control under the UK regime. Control can comprise:
legal control—this usually arises where one entity owns more than 50% of the voting shares in the target
de facto control—this may arise where an entity has the ability to control a company’s policy, despite holding less than 50% of voting rights in the target company; all relevant circumstances will be taken into account and a shareholding of say 30% may indicate de facto control
material influence–—this can arise even where the proportion of voting shares held is low (even below 20%). When making its assessment, the CMA will focus on the acquirer’s ability 'materially to influence policy relevant to the behaviour of the target entity in the marketplace'. Relevant factors include the distribution of shares in the target, patterns of attendance/voting at shareholders meetings, special voting rights or veto rights, board representation and contractual arrangements. ‘Material influence’ is a lower level of control than the ‘decisive influence’ test of the EU Merger Regulation.
A conversation with Peter Harper, partner, Annabel Borg, principal associate PSL and Claire Morgan, principal associate, in the London office of international law firm Eversheds Sutherland, on key issues on merger control in the UK.
NOTE–to see whether notification thresholds in the UK and throughout the world are met, see Where to Notify.
Focused intervention across a range of transactions
The UK merger control regime is voluntary and the Competition and Markets Authority (CMA) can intervene in both anticipated and completed transactions which satisfy the jurisdictional thresholds. The CMA has a very active Mergers Intelligence Committee (MIC) which monitors transactions to determine whether unnotified transactions should be called in for review. In the financial year April 2018 to March 2019, the MIC reviewed over 600 transactions.
The CMA is intervening in a high proportion of transactions that it investigates and those that it does investigate can often raise potential competition law concerns. For example, of the 56 transactions it investigated in the financial year April 2018 to March 2019, two involved Phase I remedies and 11 were referred for an in-depth Phase 2 investigation of which eight were either prohibited, abandoned or involved
A conversation with Peter Harper, partner, Annabel Borg, principal associate PSL and Claire Morgan, principal associate, in the London office of international law firm Eversheds Sutherland, on key issues on merger control in the UK.
NOTE–to see whether notification thresholds in the UK and throughout the world are met, see Where to Notify.
Focused intervention across a range of transactions
The UK merger control regime is voluntary and the Competition and Markets Authority (CMA) can intervene in both anticipated and completed transactions which satisfy the jurisdictional thresholds. The CMA has a very active Mergers Intelligence Committee (MIC) which monitors transactions to determine whether unnotified transactions should be called in for review. In the financial year April 2018 to March 2019, the MIC reviewed over 600 transactions.
The CMA is intervening in a high proportion of transactions that it investigates and those that it does investigate can often raise potential competition law concerns. For example, of the 56 transactions it investigated in the financial year April 2018 to March 2019, two involved Phase I remedies and 11 were referred for an in-depth Phase 2 investigation of which eight were either prohibited, abandoned or involved
Phase 2 remedies.
Because the CMA has broad jurisdiction over the types of transactions it can investigate, the transactions which the CMA investigated in 2019 included:
acquisitions of minority shareholdings eg RWE AG’s acquisition of a 16.67% minority stake in E.ON and Amazon’s acquisition of a minority stake in Deliveroo, and
global M&A transactions with a limited nexus to the UK, eg Thermo Fisher / Roper and Illumina / Pacific Biosciences were both primarily US deals which were abandoned during the CMA’s phase 2 process.
Strict application of Initial Enforcement Orders (IEOs)
The CMA has the power to impose IEOs to prevent the parties to a transaction from integrating their businesses and requires them to hold those businesses separate pending the CMA’s decision. The IEO process has become an increasingly significant part of the CMA’s merger control process in recent years.
Although the CMA routinely requires IEOs for completed transactions, it has recently started imposing them for anticipated transactions.
Moreover, the CMA has also begun to use its enforcement powers to fine companies for non-compliance. Non-compliance with IEOs can result in fines of up to 5% of the addressee’s group worldwide turnover. Between 1 December 2018 to 30 November 2019, the CMA used this power to impose fines on four occasions (see UK mergers enforcement actions—closed cases tracker).
In 2019, the CMA also imposed its first unwinding orders in relation to the completed Tobii/SmartboxTobii/Smartbox and Bottomline Technologies/Experian acquisitions requiring the parties to unwind integration which had already taken place prior to the IEO.
Greater reliance on internal document
The CMA’s approach to internal document requests was formalised in new guidance published in January 2019 (the Guidance). The Guidance
confirms the CMA’s greater willingness to use its formal powers to require companies to provide internal documents. These powers place a statutory obligation on companies to comply. The CMA also notes that it may request the CEO or general counsel of the company to sign a compliance statement confirming that the business has complied with the formal request for information when it provides a response
explains that ‘Internal documents’ include all types of documents in the merging parties’ possession that have been prepared, sent or received by their officers or employees; however, the Guidance states that handwritten notes and instant messages are ‘rarely likely’ to be requested
clarifies that the CMA does not expect to receive documents such as emails in response to its pro forma requests in Phase I but it makes clear that it may ask for such documents where those initially submitted to it ‘do not appear to fully capture the merging parties’ analysis of the merger or their assessments of competitive conditions within the markets at issue’
confirms that the types of documents requested, as well as the identity of the custodians ‘will be driven by the way in which a party conducts its commercial operations’. To this end, the CMA relies on information from the merging parties on their decision-making procedures and the way in which they gather, assess and disseminate competitive analysis, and
states that when the CMA issues a formal statutory information request and the request is particularly complex or extensive, the CMA may share a draft request with the merging parties where ‘practicable and appropriate’.
The importance of internal documents is demonstrated throughout the CMA’s Phase 1 and Phase 2 recent merger decisions. In J Sainsbury/Asda, for example, the CMA revealed that it had reviewed 136,000 of the parties’ emails and ‘thousands of pages’ of other internal documents.
New national security regime
National security continues to be a focus for the UK government.
The Queen’s Speech, delivered on 19 December 2019, announced a National Security and Investment Bill, which is intended to strengthen the Government’s powers to investigate and intervene in business transactions to protect national security. This follows a Government consultation in July 2018 on a proposed new national security regime.
The UK Government in the meantime has continued to use the UK merger control regime to ask the CMA to assess transactions on national security grounds. In particular, the UK Government has used the expanded jurisdiction under the Enterprise Act for national security public interest matters to intervene on a number of deals in 2019. For example, the CMA was directed to investigate the public takeovers of Cobham plc and Inmarsat plc on national security grounds. In both cases the acquirers were private equity firms and in both cases the acquirers agreed to undertakings to protect national security in order to obtain clearance.
As an interim measure, the UK government announced in June 2020 that further markets impacting national security would be subject to the reduced notification thresholds (impacting transactions involving markets in relation to the developing, producing or research into (i) artificial intelligence, (ii) cryptographic authentication technology, or (iii) advanced materials). These new rules came into force on 21 July 2020.
Focus on transactions in digital markets
One of the CMA’s key strategic objectives is to promote better competition in online markets. It has sought to achieve this by intervening in transactions in digital markets, for example, PayPal/Izettle and TopCashback/Quidco (which was ultimately abandoned). The ‘Furman Report – a step-change in analysis of transactions in digital markets?’, which was commissioned by the Government proposed a number of recommendations that would fundamentally affect the way digital mergers are assessed in the UK. The CMA, however, does not currently consider that significant changes to the UK merger regime are required to handle transactions such mergers. This policy debate will remain a key issue in the UK and elsewhere over the coming years.
Brexit
Once the UK ceases to be part of the EU’s ‘one-stop-shop’ merger control regime, the CMA expects to review an additional 30 to 50 mergers annually as a result of Brexit. These are likely to be bigger and more complex global cases.
The CMA has also proposed a number of changes to the UK merger control regime to ensure that it remains an effective competition enforcement agency, the most significant being the introduction of a hybrid merger control regime under which:
a mandatory merger control regime will apply to large international mergers that meet certain thresholds. This will include a standstill obligation that will prohibit parties from implementing their transaction prior to the CMA’s clearance. The CMA is also considering introducing a ‘short-form notification’ process to minimise the impact of non-problematic mergers on businesses, and
the current voluntary merger regime will continue to apply where the current UK merger control thresholds are met.
Further details on the proposed changes to the UK merger control regime are expected to be published and consulted on this year.
Public interest interventions
No—the control test in the UK is different from the EU concept of ‘decisive influence’. In the UK a ‘relevant merger situation’ requires, inter alia, that two or more enterprises cease to be distinct, that is, are brought under common ownership or control.
The CMA’s publication ‘Mergers: Guidance on the CMA’s jurisdiction and procedure’ provides guidance on the concept of control under the UK regime. Control can comprise:
legal control—this usually arises where one entity owns more than 50% of the voting shares in the target
de facto control—this may arise where an entity has the ability to control a company’s policy, despite holding less than 50% of voting rights in the target company; all relevant circumstances will be taken into account and a shareholding of say 30% may indicate de facto control
material influence
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