OFT merger shock - confidential guidance and informal advice

The Office of Fair Trading has made a surprise announcement that it has suspended until further notice the provision of confidential guidance or informal advice to parties considering a merger. OFT Chairman Philip Collins stated on 1 December 2005 that the decision is due, at least in part, to “heightened expectations at a time of increased caseload.”

Under both confidential guidance and informal advice, the OFT would give a view on whether it would be likely to refer a particular transaction to the Competition Commission (CC) for in-depth review. Confidential guidance was the more formal procedure. Both procedures take place before the particular transaction is in the public domain. This means the OFT would give its view before it could know the views of third parties, such as the merging parties’ customers or consumers. Recent appeals on OFT merger decisions have emphasised the importance of the OFT taking into account third party comment in its merger decision making process.

The OFT has stated that it intends to undertake a public consultation early in its next financial year (beginning April 2006) on the long term position on provision of these services. In the interim, confidential guidance will not be provided at all, and informal advice only in pro bono cases where the requesting party is unable to afford external competition law advice. Exceptions may be possible but are likely to be rare. “Focused” pre-notification contact with the OFT will however continue to be possible. Pre-notification concentrates on practical matters concerning transactions which are close to being concluded, such as timing and format of notifications and agreeing whether a draft notification’s scope, level of information and reasoning etc are adequate.

The surprise move appears to be motivated by increased pressure on the OFT’s resources caused by a recent upturn in merger activity combined with more work being required on individual cases. Recent merger appeals have clarified that the threshold for referring cases to the CC is lower than the OFT originally thought. Those appeals also highlighted insufficient reasoning and evidence to support OFT conclusions. This has all meant that the OFT now scrutinises cases more thoroughly and requires more evidence from the parties than previously, all of which takes more time and resources. It also seems that parties have in recent months felt less able to rely on confidential guidance or informal advice, as the OFT has consistently stressed the influence of third parties in its decision-making process. It has been suggested that over 20% of cases which received favourable confidential guidance (i.e. where the OFT said it was unlikely to refer the case) were eventually referred to the CC and that in a number of cases where the OFT said it was likely to refer the case, it was eventually cleared.

What this means for those involved in potential merger activity is that, at least until the end of the consultation period (probably around summer 2006), the OFT sounding board is no longer available. It will be up to parties and their advisers to form a view on the likelihood of CC reference. This will emphasise the need to obtain clear evidence of the competitive benefits of possible transactions. It will also be very important to gauge likely third party reaction to proposed transactions and devise strategies for dealing with unfavourable comment. It also seems likely that the OFT will be unwilling to discuss jurisdictional questions with merging parties unless a notification is made.

For the text of the OFT’s current position on confidential guidance and informal advice, please click here. This will open a PDF in a new window.