As noted in our recent Law-Now the UK Government has finally published the long-awaited Digital Markets, Competition and Consumers Bill (the Bill).
This is the first in a series of articles analysing specific features of the digital and competition aspects of the Bill. We examine the proposed reforms to UK merger control, which represent the most significant upheaval in the UK’s merger control regime for a decade.
The Bill introduces key reforms in two areas: the jurisdictional thresholds for UK merger control, and special notification requirements for digital mergers. There are also procedural reforms, the stand-out one being increased fines for information request breaches.
Amendments to the jurisdictional thresholds for UK merger control
While the Bill retains the voluntary nature of the notification regime, the jurisdiction thresholds for notifying a relevant merger will be amended as follows:
- The turnover test will be kept but the threshold will be raised from £70 million to £100 million;
- The existing share of supply test will also be retained, but a new “safe harbour” will be introduced where the annual UK turnover of each of the parties is below £10 million. Media mergers are carved out from both the rise in turnover thresholds and the safe harbour.
- Most significantly, a new alternative third jurisdictional test will be added where:
- Either party has at least a 33% share of supply or purchases of goods or services in the UK or a substantial part of the UK;
- That party has more than £350 million of turnover in the UK; and
- The other party meets a UK nexus test – essentially that it is based in the UK, carries on activities in the UK, or supplies goods or services to UK customers.
The real incremental impact of this is to capture mergers where the acquirer is of a significant UK size and has a substantial UK market share, irrespective of the target’s activities as long as they have a UK nexus – in other words to bring vertical and conglomerate acquisitions by significant UK acquirers within the merger regime. We explore the background and implications of this “acquirer test” below. The changes under the Bill also capture where a relevant party has a large share of purchases, e.g. a prominent buyer accounting for at least a third of all purchases of relevant goods or services in the UK would be caught. This has slipped by without commentary but it too expands the scope of this test considerably.
The introduction of a mandatory reporting regime for “SMS” firms
The Bill introduces a new, ex ante regulatory regime for certain firms found by the CMA to have “strategic market status” or “SMS” in respect of a particular digital activity.
Once a firm has been designated as having SMS status, that firm and any entity within its group must provide the CMA with notification, prior to completion, of any acquisition worth at least £25 million where they go through an equity or voting right gateway of 15%, more than 25%, or more than 50%. A fresh notification is required each time an increase of equity interest or voting rights passes a relevant gateway.
The aim of this is to increase transparency meaning that the CMA is aware of digital mergers involving SMS firms that it may want to investigate in time to decide whether to do so. It is a key part of the new digital regulatory regime. Unlike the jurisdictional thresholds, this is a reporting regime and it is for digital SMS firms only. But it goes hand in hand with the new “acquirer test” alternative jurisdictional threshold that applies to all industries – because the CMA’s general jurisdictional thresholds need to be met in order for the CMA to have the right to open an investigation, and the new “acquirer test” is most likely to be used to assert jurisdiction over SMS firm acquisitions.
The reporting requirements impose a significant and mandatory reporting burden on firms deemed to have SMS and represent a further encroachment on the voluntary nature of UK merger control.
The Bill also introduces procedural changes, including:
- An adapted “fast-track” procedure under which merging parties will be able to request a referral straight to Phase 2 investigation at any point during the pre-notification phase.
- The ability to extend Phase 2 time limits by consent with the merger parties.
- Giving the CMA the power to impose fines of up to 1% of an undertaking’s worldwide turnover for failure to comply with information requests, and daily penalties of up to 5% of daily turnover for ongoing breaches. This is a very substantial increase on the previous caps (£30,000 and then £15,000 per day for ongoing breaches). It comes in the wake of increasingly tough enforcement of information requirements in recent years.
How did we get here?
The need for a new jurisdictional test
Two types of concerns explain the introduction of the proposed “acquirer test”. First, concerns about the competition impact of certain mergers not obviously caught by the current jurisdictional thresholds - in particular “killer acquisitions” (the acquisition of a potential competitor with turnover below the existing thresholds before they pose a significant competitive challenge to the acquirer) referred to in the Furman Review which fed into the digital regulatory regime proposed in the Bill.
Second, concerns have also been raised about the increasing unpredictability of the UK’s merger control regime as the CMA has applied the current share of supply test in increasingly expansive ways - for example, in Sabre/Farelogix, where the CMA’s application of the test was challenged and upheld in the Competition Appeal Tribunal despite the target having no material UK revenue.
The new jurisdictional test is intended to provide a more straightforward route to jurisdiction for vertical and conglomerate mergers involving a significant UK acquirer. The CMA’s impact assessment indicates that it expects the reforms to lead to only around two to five extra merger investigations per year, but on its face this is a substantial expansion of the CMA’s scope to review mergers. It seems likely to fuel an increase in notifications or briefing papers (whether merited or out of caution) and give rise to further uncertainty as to how aggressively the CMA intends to use the new thresholds in practice. This increased burden seems unlikely to be offset by any reduction brought about by the more modest rise in the turnover threshold and the small mergers safe harbour.
The existing “horizontal” share of supply test will remain in force, and the reforms will not undermine the CMA’s past decision making practice under that test, leaving previously expressed concerns about the increasingly uncertain application of this test unresolved. It is possible that the CMA will continue to take an expansive approach where an acquirer does not reach the thresholds set out in the “acquirer test”. However, in its April 2022 proposals, the Government indicated it would expect the CMA to be “more predictable” in its application of the share of supply test once the new thresholds are available. It is hoped that the CMA will heed the Government’s steer on this. The Government also indicated that it would keep the operation of the share of supply test under review.
A separate merger regime for digital?
One of the most interesting features is those proposals which did not make it into the Bill. Some of the reports feeding into the new digital regulatory regime had called for special merger control rules to be imposed on SMS firms, for example:
- A mandatory notification regime for mergers involving SMS firms meeting certain thresholds (Digital Markets Taskforce – see our previous Law-Now);
- A “balance of harms” approach to the economic assessment of digital mergers (Furman Review); and
- The Government’s initial consultation proposals in July 2021 had indicated that the Government was minded to lower the threshold to block a merger, potentially in line with Digital Markets Taskforce’s proposals of a “realistic prospect” that a merger would result in a substantial lessening of competition (SLC), rather than the current requirement to demonstrate that it is “more likely than not” that the merger would result in a SLC.
As trailed in the Government’s April 2022 consultation response, these elements have not made their way into the Bill. This is unsurprising: these proposals had met criticism from businesses and competition practitioners; in particular, concerns were raised about the wisdom of applying a separate regime to transactions in digital markets, while similar concerns about vertical mergers and “killer acquisitions” have been raised in other sectors - and having the same test to block a merger as to take it to phase 2 in the first place did not make much sense.
The Bill needs to make its way through the parliamentary process before the above reforms enter into force. The latest indications from Government are that the Bill is expected to receive Royal Assent in Spring 2024, entering into force later that year.
Parties engaging in M&A activity in the UK should familiarise themselves with the upcoming reforms and consider their likely impacts on their future acquisition strategies.
Keep an eye out for further updates and analysis of the other reforms proposed in the Bill in the coming weeks.