18 July 2016
The CMA has released new guidance on operation of the UK Merger Control Regime
On 17 June 2016, the Competition and Markets Authority (CMA) published guidance for lawyers and third parties on how it collects information before deciding whether to investigate a merger. It also sets out how parties can bring their mergers to the attention of the CMA, without a formal notification, to seek clarification whether the CMA is interested in investigating the transaction more fully.
Under the Enterprise Act 2002, a qualifying merger is one where either:
As the UK operates a voluntary notification system, the parties which believe they may have a qualifying merger have to decide whether they are going to formally notify the CMA for investigation.
Alternatively, they can decide not to notify but there is a risk that the CMA may approach the parties and start a merger investigation of its own volition − including imposing initial enforcement orders (IEOs) to stop any integration of the businesses if the transaction has been completed. These IEOs can be onerous and substantially disrupt the running of a party’s business.
Therefore parties with mergers which qualified for investigation, regardless of the size of the transaction/market, or where there is uncertainty about the application of the share of supply test, would have to decide whether to risk not notifying the CMA.
If they make a notification, the parties will inevitably incur considerable legal fees drafting a submission, have to engage with the CMA in its investigation process and possibly find themselves paying merger control fees at the end of the process.
The CMA has set out a procedure by which it can receive informal short submissions from the parties to ascertain the CMA’s interest in looking at the merger in question. If the CMA decides it is not interested it will inform the parties. This will not preclude the CMA from starting an investigation at any time within the four-month statutory time period from the date of announcement of the transaction if circumstances change.
However, it will greatly assist parties in reducing the risk and expense of notifying a merger transaction in which the CMA has little or no interest. It will also help the CMA to focus its scarce resources on material cases where a substantial lessening of competition may result.
The CMA has a duty to track merger activity to determine whether any unnotified merger may give rise to a substantial lessening of competition. To do this the CMA has a mergers intelligence unit that scans public sources of information on mergers and suggests potential transactions for investigation to the CMA’s Mergers Intelligence Committee, which meets weekly.
The CMA will make a decision to investigate if it believes that there is a reasonable chance that the test for a reference to an in-depth phase two investigation will be met. The threshold for opening an investigation is, therefore, lower than the threshold for it referring the case to a phase two investigation.
Section 105 of the Enterprise Act draws a distinction between deciding whether to investigate a matter and deciding whether to make a reference. If the CMA decides to investigate, then it must publish an invitation to comment. In addition, once the CMA has decided to investigate, section 107 usually requires it to publish a reasoned decision setting out why it has or has not decided to make a reference.
However, crucially neither the duty to publish an invitation to comment nor the duty to publish a reasoned decision applies while the CMA is still deciding whether to investigate. This is where the current informal procedure fits in.
The CMA’s new guidance supplements chapter 6 of the CMA’s main guidance, ‘Mergers: guidance on the CMA’s jurisdiction and procedure’. This guidance explains how its mergers intelligence function operates in the light of the discretion the CMA has in deciding whether to investigate a case or not.
As well as assisting lawyers in advising merging parties on whether to notify the CMA of a merger or third parties which may wish to alert the CMA of an unnotified merger, it describes the steps that the CMA might take before it decides whether to investigate an unnotified merger.
When the CMA starts an investigation it will often do so without any prior engagement with either the main or third parties. Nevertheless, if the CMA has identified a transaction that raises potential concerns, it may ask parties to provide information to help it determine whether to open an investigation. These requests, made under section 5 of the Enterprise Act, will usually be to the parties involved in the transaction and rarely to third parties.
Requests to main parties will usually relate to the turnover and share of supply tests set out in section 23 of the Enterprise Act, but may also relate to whether the target is an enterprise (i.e. is carrying on an economic activity), or when the transaction completed. If the initial response to these questions is unsatisfactory, the CMA may ask further short, supplementary clarifying questions without opening an investigation.
Usually the CMA will make a decision whether to investigate based on the parties’ initial or clarifying answers. Only rarely will it indulge in more than two rounds of questions before making a decision whether or not to investigate.
Requests to third parties will be rarely made. These are only likely to arise if the CMA is not able to establish by other means that a relevant merger situation has been created. Requests to third parties will only relate to transactions in the public domain and are likely to relate to understanding the nature of the products and any overlap for the purpose of applying the share of supply test. The CMA will not at this stage ask questions relating to a substantive competitive assessment of the transaction before ascertaining whether it has jurisdiction to investigate.
The CMA invites parties to provide it with intelligence in relation to merger activity that affects UK markets. In particular, it states it welcomes both short briefings from merging parties about their transaction and complaints from interested third parties.
The merging parties are invited to submit a short note (maximum five pages) to the CMA, explaining why they do not propose to notify a particular merger to the CMA. This paper may address both whether, in the view of the parties, a relevant merger situation exists and if this gives rise to a substantial lessening of competition.
The advantages of this informal system is that the submission of such a paper does not attract a merger fee − although a fee may be payable if the CMA subsequently opens an investigation − nor does it require the CMA to issue a reasoned decision in the case. So the CMA has a wide discretion whether to launch an investigation.
The CMA also welcomes information from third parties explaining their concerns about a merger. However, the CMA will be loath to launch a formal investigation without supporting evidence. Complainants are, therefore, encouraged to make a reasoned submission supported by evidence. The CMA may then follow up with the person submitting the briefing or complaint to understand the submission better.
Where, following engagement with main parties, either at the CMA’s own initiative or as a result of a briefing from the parties, it decides to open an investigation, it will generally inform the parties of this decision within a week of the last contact.
Alternatively, the CMA might decide not to open an investigation immediately. In such cases, it will contact the main parties and indicate that it has no further questions at this stage. As mentioned above, this does not rule out the CMA’s power to open an investigation at any point during the four-month statutory period.
This process does assist in reducing the risk of a CMA investigation, however, it does not eliminate it. Therefore, if the parties want complete certainty that the transaction might be subject to a reference, they should submit a case team allocation request form and a merger notice requesting the CMA to open a formal investigation.