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Competition: How small firms can merge unscathed

25 July 2017 by Robert Bell

Competition: How small firms can merge unscathed - read more

Robert Bell of Bryan Cave argues more small-market mergers are likely to be cleared under new de minimis guidelines.

On 16 June, the Competition and Markets Authority, after consulting stakeholders, published the final version of its merger de minimis guidelines, which set out the criteria it will consider when exercising its discretion under UK merger control legislation to approve mergers in small markets.

Statutory duty

Under the Enterprise Act 2002, the CMA has a statutory duty to refer a completed or anticipated relevant merger situation to an in-depth Phase 2 investigation.

It does this where it believes the merger will, or might, result in substantially less competition in any UK market or markets for goods or services.

The Enterprise Act did not set out criteria for the authority to consider when exercising its discretion not to refer to an investigation. This is left to the CMA’s judgment.

Guidelines on de minimis exceptions were set out in 2010 in the guidance document ‘Mergers: exceptions to the duty to refer and undertakings in lieu of reference guidance’, published by the Office of Fair Trading. This was later adopted by the CMA (the 2010 guidelines).

There are a number of exceptions to the statutory duty to refer.

One is where the market or markets concerned are insufficiently important to justify referring, in which case the CMA has discretion not to do so. A Phase 2 investigation usually lasts six months and can be expensive and time-consuming, usually costing the public purse around £400,000.

In January this year, the CMA launched an internal review to consider its approach to the de minimis exception.

In particular, it looked at the level of thresholds below which transactions are likely to be, or may be considered to be, of minor importance and therefore not worthy of referral to a Phase 2 investigation.

Raised thresholds

Following the internal review, the CMA published a consultation on proposals to amend the 2010 guidelines by raising the applicable thresholds for categories of transaction where the de minimis exception will, or is likely to, apply.

The CMA believes the raised thresholds are appropriate in light of its previous experience and will help reduce the CMA’s costs and the burden on business.

The responses to the consultation generally favoured the recommended threshold increases, although some commentators said the levels remain small compared to other developed competition regimes.

“The Authority conceded the de minimis exception may play a role in the future when addressing the implications of Brexit”

Other submissions focused on Brexit and how the thresholds could or should be increased substantially over what was being proposed, to take account of the likely substantial increase in the number of mergers the CMA will have to investigate post-Brexit.

In reply, the CMA said the proposed thresholds increases were not intended as a response to Brexit or any potential future increases in the CMA’s caseload. They were merely a reflection of the OFT and CMA’s experience in applying the exception since the 2010 guidance was issued.

Nevertheless, the authority conceded the de minimis exception may play a role in the future when addressing the implications of Brexit.

Other observations centred upon the earlier use of the exception at Phase 1.

The CMA considered that the proposed changes to the thresholds would have the benefit of reducing the CMA’s costs and reducing the burdens of a Phase 2 referral on businesses. The earlier use of the increased exception by both the parties and the CMA was central to achieving these aims.

Self-assessment

The CMA hopes the new thresholds will make it easier for parties to self-assess transactions in relation to the lower threshold and take a view on whether notification to the CMA is appropriate. This is because use of the exception is not contingent upon an assessment of a substantial decrease in competition.

The authority also singled out the work of its merger intelligence unit and how early inquiry to it by the parties would help get a steer as to whether the CMA is interested in a particular market or not.

The CMA also issued separate guidance on its mergers intelligence function and how to engage with it.

Finally, some responding to the consultation believed that in making the delicately balanced judgment on whether a Phase 2 reference was justified or not, the CMA should not just consider the public cost of an inquiry, but also the costs incurred by the parties in representing themselves before the CMA panel.

The authority disagreed, stating it was up to the parties whether they wanted to engage in merger transactions, and if they did they must bear the costs.

The authority felt it was inappropriate to consider the parties’ costs alongside those of the CMA or the public purse in making the judgment about whether a merger was of insufficient importance to refer to a Phase 2 inquiry.

The new guidelines

This revised guidance replaces Chapter 2 of the 2010 guidelines, introducing changes.

Under the amendments, the threshold over which the CMA considers that the UK market or markets concerned will generally be of sufficient importance to justify referral will be increased from £10 million to £15 million.

The lower threshold for transactions, below which the CMA will generally not consider a referral to be justified, will be increased from £3 million to £5 million.

“The costs shouldered by the parties are not part of the CMA's consideration in applying its de minimis exception”

The new guidelines do not introduce any other substantive changes to the CMA’s approach to the de minimis exception. Therefore the primary purpose was to avoid referrals being made where the costs involved would be disproportionate to the size of the market or markets concerned.

The guidelines make clear the CMA applies its de minimis discretion with regard to a general broad cost/benefit analysis, taking into account how much the public cost of a Phase 2 referral would be. The costs shouldered by the parties are not part of its consideration.

Therefore the guidelines tell us that the benefits of a Phase 2 referral are likely to outweigh the public cost where the market or markets concerned have a total value of more than £15 million.

Expected harm

Even so, the CMA will still refer a merger on a market with a total value of less than £5 million in exceptional circumstances.

These include where the direct impact of the merger in terms of customer harm is particularly significant and/or where the merger is one of a potentially large number of similar mergers that could be replicated across the sector in question.

Where the annual value of the relevant UK market or markets is between £5 million and £15 million, the CMA will consider whether the expected customer harm flowing from the merger is substantially greater than the average public cost of referral to Phase 2.

In making its decision, the CMA will consider the size of the market concerned; its view of the likelihood that a substantial lessening of competition will occur; and its assessment of by how much, and for how long, competition would be weakened by the transaction.

The CMA will also have an eye on the ramifications of its decision not to refer in any particular case and whether similar transactions could be replicated across the country which taken together would have a major effect on the competitive landscape.

More mergers likely

The new guidelines are likely to result in more mergers in small markets being given clearance, even if they result in substantially less competition. In fact, since the guidelines were issued the CMA has already taken a decision based upon them.

On 26 June it decided to clear a merger in a niche specialist market on the grounds that the merger related to a market which fell within its de minimis guidance.

“Although welcome, the new guidelines should not be seen as licence for blatantly anti-competitive mergers”

This was despite the merger resulting in a reduction of competitors from three to two, which could have the effect of substantially reducing competition. The CMA justified the clearance because the size of the UK market was less than £5 million.

These guidelines will relieve a number of transactions in smaller markets from being subject to the onerous costs of a Phase 2 investigation.

Although welcome, they should not be seen as licence for blatantly anti-competitive mergers, and parties should proceed with caution as the thresholds contained in the notice are advisory – and subject to the CMA’s discretion.

Robert Bell is a Partner of Bryan Cave

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