Changes to the UK merger control regime

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

A new competition regulator, the Competition and Markets Authority or "CMA", will start work on 1 April 2014. The CMA replaces the Office of Fair Trading and Competition Commission. On the same date changes to the UK merger control regime will take effect. Whilst much of the current regime remains unchanged, there are important reforms which will impact how businesses and their advisers plan a path through the regulatory scrutiny of mergers, acquisitions and joint ventures.

The current UK merger control regime

Certain key elements of the current regime will stay in place after 1 April:

• Test for when the CMA can investigate: a transaction may be reviewed if target has UK turnover of more than £70 million and/or acquirer and target have a combined share of supply within the UK of any type of goods or services of 25% or more;
• Test for clearance: the CMA will assess whether the transaction may result in a substantial lessening of competition within any UK market;
• "Voluntary" regime: the UK remains one of very few merger control regimes where there is no obligation to pre-notify or make completion conditional on merger clearance, though the CMA can investigate and prohibit completed transactions.

The UK will also retain a two phase process, with an initial investigation to determine if a case may raise issues, followed by longer and more intense scrutiny of potentially problematic transactions. The CMA will carry out both phases, unlike the current regime where the OFT reviews at Phase I, with an entirely new investigation by the Competition Commission at Phase II. It remains to be seen whether the CMA will be more inclined to find its Phase I decision to be justified than was the Competition Commission when it took over from the OFT (around half of cases referred by the OFT are cleared outright by the Competition Commission).

What's new in the new regime?

There are three areas where significant changes will take effect from 1 April:

• New powers to stop integration of merging businesses;
• New statutory time limits for investigations;
• A new regime for offering undertakings to secure clearance at Phase I.

New powers to stop integration of merging businesses

Both the OFT and Competition Commission have in in the past voiced concerns over alleged significant difficulties in enforcing remedies with respect to completed mergers because integration of the merged businesses hinders the re-creation of pre-merger competitive conditions.

Whilst there is limited evidence that this has been a problem in practice - and the regulators already had extensive powers to halt integration which they employed routinely - the new regime goes even further in stopping integration until the regulatory process has concluded.

First, the CMA has significantly enhanced powers:

• Rules now make clear that the CMA can order unwinding of integration that has taken place before CMA intervention. This could include reversing re-branding, requiring the replacement of departed staff (for example, recruitment of a new finance director for the acquired business to replace an executive who departed on completion), and separation of functions that have been integrated;
• The CMA can impose financial penalties for breach of non-integration undertakings of up to 5% of global turnover.

Secondly, and of particular importance, the new regime extends these powers to anticipated mergers. If a transaction has not completed integration will normally be limited, but the CMA will nonetheless have powers, for example, to order parties to stop exchanges of information unless objectively necessary for due diligence and to cease joint negotiations with customers or suppliers. Most significantly, the CMA could order the parties not to complete a transaction, for example, if completion was likely to lead to an exodus by key staff. The CMA's use of these powers could be particularly disruptive.

New statutory time limits for investigations

Under the current regime there is already a procedure for notifying using a "merger notice" with fixed deadlines for a decision. However, the merger notice is rarely used, first because the OFT has always expressed its opposition to the procedure (making clear that "rushing" them by tying them to a time limit would be more likely to lead to an adverse decision), and secondly because the OFT usually finds technical means to "stop the clock".

For the vast majority of transactions therefore the only timetable is a non-binding OFT "administrative target" for decision of 40 working days from receipt of all required information.

Under the new regime, however, all investigations must by law be concluded within 40 working days of "Satisfactory Notification" or be deemed automatically cleared. The CMA has published a detailed standard form "Merger Notice" (32 questions covering 40 pages).

In practice, the key issue will be when a notification is deemed by the CMA to be satisfactory. Experience with the European Commission (and the OFT under the current regime) suggests that there will be a prolonged period of pre-notification discussions of the draft Merger Notice (even if the CMA merely indicates "at least 1 to 2 weeks"), and that the CMA may well seek to stop the clock by issuing detailed information requests (sometimes the merging parties themselves accede to this with a view to gaining extra time to address the regulator's concerns).

However, even if the new rules do not mean a guaranteed decision in 40 working days (itself a long time compared to most other regimes - the European Commission's process takes only 25 working days), it will be very interesting to see how the CMA responds to "time pressure".

New regime for offering undertakings to secure clearance at Phase I

Probably the most revolutionary change affects how parties can avoid a long and expensive Phase II investigation by offering undertakings at Phase I.

The current procedure is one of the most peculiar and, for merging parties, frustrating aspects of the UK merger control regime.

How it works is that the OFT sends the parties an Issues Paper which sets out hypothetical competition concerns. The parties have a very short period (usually around 2 days) to respond in a meeting and in writing. More importantly, within a similar period the parties are required to indicate what undertakings they would be prepared to offer to address these hypothetical concerns.

At no point in the process do the parties meet the OFT decision-maker and they do not know which (if any) of the hypothetical concerns will be upheld in the final decision. Parties will often therefore offer more by way undertakings than they hope will ultimately be required.

Whilst the OFT insists that any offer the parties make does not influence the final decision, it is difficult to avoid a suspicion that the OFT will be less diligent in thoroughly testing whether a hypothetical concern is justified if they know that the parties will in any event resolve the issue.

For example, if the OFT has hypothetical concerns in a merger between two supermarket groups that 20 stores raise significant problems, the only "safe" offer is to divest all 20; an offer of only 15 risks a Phase II investigation (and you do not normally get an opportunity to improve your offer). However, an offer to divest all 20 may lead the OFT to conclude, even if subconsciously, that it is not necessary to work too hard to defend its case against all 20 stores, as the parties are obviously "happy" to divest all of them in any event.

Under the new regime, it is still possible (and will often be useful) to discuss remedies pre-decision, but no offer need be made until the CMA issues its decision with a definitive finding on its concerns. At that point, the merging parties have 5 working days to offer undertakings to address those concerns.

So, in the supermarkets example, the Issues Paper may indicate hypothetical concerns with respect to 20 stores, but if the final decision upholds those concerns for only 15 stores, the parties know that an offer to divest 15 stores will definitely secure Phase I clearance.

This introduction of certainty and "real world" information can only be of benefit to merging parties, even if the period immediately post-decision is likely to be tense and busy. An interesting dimension will be market reaction during the critical 5 days, as the CMA's decision will have been announced.

What difference will the new regime make?

The advent of the CMA and the new merger control regime is likely to bring advantages and disadvantages:

• Advantages are likely to be an improved quality of Phase I decisions, more efficient use of combined resources concentrated in one entity, and a more consistent policy approach between Phase I and Phase II (though the last could be a disadvantage if the approach is consistently wrong);
• Disadvantages include the uncertainty arising from a new regime and a new regulator, the likelihood of a cautious approach in the early days as the CMA finds its feet and, potentially the risk of so-called "confirmation bias" at Phase II, with the CMA thinking "we decided to refer it, so how can we now conclude that there's no problem?".

Overall, the changes are to be welcomed and should with time lead to an improvement of the UK merger control regime in both speed and transparency.

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Equity Capital Markets Update Q4 2013.