29 September 2017 by Robert Bell
The latest competition guidance clarifies the CMA’s stance and should help streamline the merger process, says Robert Bell.
In a bid to further improve the merger process for business, the Competition and Markets Authority (CMA) updated its merger guidance on 5 September 2017.
The CMA is making three changes, intended to give additional guidance to merging companies, streamline the authority’s merger investigation process, and reduce the requirements on businesses.
These include use of initial enforcement orders (IEOs), changes to the merger notice form, and revised guidance on the CMA’s mergers intelligence function. These guidelines are useful in teaching companies how IEOs are likely to be imposed following the completion of a non-notified relevant merger.
They also set out the parameters for submitting to the mergers intelligence unit to seek guidance on whether the CMA is interested in being formally notified of a merger.
In its 2015/2016 annual plan, the CMA pledged to internally review use of the merger notice and IEOs in the Phase 1 merger-control process.
Under the Enterprise and Regulatory Reform Act 2013, it became easier for the CMA to impose IEOs to monitor, prevent or reverse pre-emptive action during a merger inquiry. Such pre-emptive action might prejudice its investigation and any eventual remedies ordered.
“The CMA may use its power to unwind the integration – although, to date, it has not used this power”
In an earlier review, published 21 March 2016, the CMA found its use of IEOs was working well, but identified concerns from stakeholders about a lack of clarity on the use and scope of the orders and derogation requests made by the parties.
The CMA therefore consulted further in March on its draft guidance on the use of IEOs and derogations.
The newly-updated guidance from 5 September is intended to further clarify when IEOs will typically be imposed, what form they will take, and what derogations are likely to be granted, while also dealing with timing issues.
In the UK, under the Enterprise Act 2002, there is a voluntary merger notification system.
Regardless, the CMA can open an investigation into mergers that result in the acquisition of an enterprise with a turnover in the UK of £70 million or more, or the creation or enhancement of a share of supply in the UK of 25% or more of goods or services of a particular description.
Relevant merger situations do not require the merging parties to obtain the CMA’s approval before completing and implementing a transaction. However, the authority does retain the power to intervene after completion, by imposing IEOs to preserve the status quo and avoid any prejudice to its investigation and any remedies it may order.
It is the CMA’s normal practice to impose IEOs immediately in completed merger cases that it wishes to investigate. It will only refrain from doing so in exceptional cases; for example, where it receives evidence there is no risk of pre-emptive action or it is apparent there are no competition concerns.
Where substantial integration has already taken place before the IEO is imposed, the CMA may use its power to unwind the integration – although, to date, it has not used this power.
The CMA might also impose other interim measures beyond those set out in the standard IEO. For example, where the management team of a target company has already left the business, the CMA could demand the appointment of a hold separate trustee or manager to run the target at arm’s length.
As time is of the essence, the CMA will normally impose an IEO in the form of a standard template without negotiation. Thereafter it is up to parties to apply for derogations from the standard order.
This approach intends to ensure that effective IEOs can be put in place as quickly as possible, and to provide legal certainty around the initial scope of an IEO.
Where the merging parties clearly show early in the process, and prior to their imposition, that some of the provisions of the standard IEO are not relevant to a specific merger, the CMA will publish derogation for those provisions alongside the IEO.
However, because of the timing constraints, the CMA is unlikely to discuss proposed derogations in detail before imposing the standard IEO.
Derogations ensure that a merged business can operate, without the CMA approving any integration of its business operations.
To assist the CMA in efficiently dealing with derogation requests, the merging parties should provide the proposed text of the derogations – there is a template derogation request on the CMA website which accompanies the guidance.
The CMA will only grant derogations where the requests are sufficiently specified, reasoned, and evidenced. As the investigation will be at an early stage the CMA will view requests cautiously. It will instinctively agree to narrow derogations, closely aligned to the justifications advanced by the parties.
“The CMA will only grant derogations where the requests are sufficiently specified, reasoned, and evidenced”
As for timing, derogation requests should be raised with the CMA as early as possible. To obtain the best response, merging parties should specify all derogations sought within a single request.
This will ensure that the IEO, combined with those derogations granted, provides a clear framework within which the merging parties can work while the investigation advances.
Multiple derogation requests can delay the CMA’s investigations and its crucial internal state-of-play meeting at Phase 1, which often delays the lifting of the IEO.
A review of previous CMA cases shows it granted derogation requests in relation to:
The CMA has also changed the merger notice form, reflecting comments it received in the consultation.
This is aimed at reducing the amount of information that businesses need to provide. There was a feeling that the amount demanded by the CMA, particularly in simple cases, could be excessive and too onerous.
Therefore the changes make the form clearer to understand, cut unneeded questions and give additional guidance on what information will likely be needed by the CMA in any given case.
Lastly, the CMA has slightly amended the guidance on its merger intelligence function.
Notably, the update clarifies the point at which merging companies not intending to notify the CMA of their transaction should submit a briefing note. The change concerns the informal steer the function can give parties who are considering whether to submit their merger for formal deliberation.
This relatively new process is a boon for companies that are on the border of the thresholds for notification of mergers. This allows parties to seek the CMA’s guidance on whether they are interested in starting an investigation into the relevant merger.
The authority insists that it is up to the parties to self-assess whether any merger transaction results in potential competition issues.
However, cases where it may be appropriate to request the CMA’s guidance could be where the value of the relevant market in the UK is small (for instance, below £15 million) or where there is little overlap between the parties.
“The CMA has indicated it will not use the informal procedure to grant the parties merger clearance by the back door – or on the cheap”
Parties can seek an informal opinion of no-interest using the merger intelligence unit of the CMA. This involves submitting a five-page paper before getting an indication back from the authority. It also has the advantage of having no filing fee.
The new September guidance just updates the CMA’s position on this, likely following repetitive questions from parties using the new process.
The authority has now stated in general, and as a matter of priority, the CMA will only consider a briefing note after there is a signed merger agreement or a legally binding heads of terms.
Mindful of its duties under the Enterprise Act 2002 to investigate relevant mergers, the CMA has also indicated it will not use the informal procedure to grant the parties merger clearance by the back door – or on the cheap.
If, after enquiries, the CMA does not wish to investigate the merger, it will only contact the main parties and indicate that it has no further questions at this stage.
Crucially for its own discretion, the CMA retains its right to investigate relevant mergers under the four-month limitation period set out in section 24 of the Enterprise Act 2002.