15 May 2017 by Robert Bell
The Business Secretary has intervened in a merger on the grounds of public interest
Under the Enterprise Act 2002, the Competition and Markets Authority (CMA) is charged with vetting mergers covered by the ambit of the Act on competition grounds alone. However, in certain narrowly defined circumstances, the UK Government can intervene in merger situations and review them on public interest grounds.
Hytera Communications Corporation Ltd is a large Chinese manufacturer of radio transceivers and radio systems, headquartered in Shenzhen and operating globally. It attempted to acquire Cambridge-based Sepura plc, a leader in the design, manufacture and supply of digital radio products, systems and applications, developed specifically for business and mission critical communications.
“The Secretary of State can intervene where he believes it is, or may be, the case that one or more public interest considerations may be relevant”
The CMA looked into the transaction on competition grounds. However under section 42 of the Enterprise Act, the Secretary of State for Business, Energy and Industrial Strategy (BEIS) Greg Clark was also considering an ‘intervention notice’ to the CMA in this case. He can do this where he believes it is, or may be, the case that one or more public interest considerations may be relevant to the transaction.
Public interest considerations are those specified in section 58 of the Act at the time of the giving of the intervention notice or, if not so specified, should be, in the opinion of the Secretary of State. Under section 58(1) ‘the interests of national security’ is a specified ground for the Secretary of State to intervene. Once an intervention notice is given, the CMA has to report to the Secretary of State within the time period specified in the notice.
The CMA, in its normal role, reports on the competition issues of a relevant merger situation and decides whether to refer the transaction to Phase 2 for a more detailed review or whether to accept undertakings in lieu of a reference.
However, in public interest cases the CMA has to report its views on the competition issues, and its views and recommendations on the public interest consideration, to the Secretary of State, who then decides whether to make a reference for a Phase 2 investigation. This would happen if he believes the merger may be expected to operate against the public interest as a result of: either both the public interest consideration and a substantial lessening of competition, or solely on the basis of the public interest consideration.
In exercising his discretion as to whether to make a reference or not, the Secretary of State is required to accept the CMA’s findings on competition issues (section 46(2) of the Enterprise Act), but not on any views expressed about the public interest consideration.
At the end of March, BEIS wrote to Sepura and Hytera confirming that Clark was minded to intervene on national security public interest grounds, and inviting further representations for consideration before coming to a final decision.
On 10 April, Clark confirmed his decision and issued a public interest intervention notice on national security grounds.
“Clark further believed that national security public interest considerations may be relevant to the merger situation”
The intervention notice stated that Clark had reasonable grounds for suspecting that, as a result of the proposed acquisition by an indirectly wholly-owned subsidiary of Hytera of the entire share capital of Sepura, the merger would qualify for investigation under the Act because:
Clark further believed that national security public interest considerations may be relevant to the merger situation. It is believed that TETRA radio terminals are used in the UK by the police and other emergency services, such as the fire brigade and the ambulance service, as well as other mission critical services.
This event is significant because it is the first intervention notice issued under section 42 by the Secretary of State on national security grounds in the 15 years since the Act was passed.
“It is also significant because the concerns revolve around the acquisition of a company responsible for the maintenance and upkeep of essential digital communications infrastructure”
There have been other public interest interventions under section 42 on different grounds, such as media plurality, in the case of BSkyB’s acquisition of a stake in ITV, or protecting the stability of the financial system, in the case of the Lloyds TSB/HBOS merger.
It is also significant because the public interest concerns revolve around the acquisition of a company responsible for the maintenance and upkeep of essential digital communications infrastructure. This is the latest of many transactions where Chinese companies are trying to buy technology, or market share and presence, in European and particularly UK markets, and Clark’s actions confirm these can be of sufficient concern to trigger the intervention procedure.
In the UK, an investigation has been rumbling on for several years into whether certain hotels and online booking websites have been guilty of resale price maintenance.
However, this investigation morphed into an inquiry into the anti-competitive effects of most favoured nation (MFN) or price parity clauses. These clauses benefit large established online booking websites by stipulating that hotels cannot give more favourable room rates to others. This has the effect of restricting new entrants to the market.
The UK investigation, and several others in other European jurisdictions, have focused on how much freedom hotels have to offer better prices to new entrant booking websites, or whether they are restricted by the presence of MFNs, demanded and enforced by leading online booking websites. Remedies in these cases range from a legislative prohibition in France on MFNs in the hospitality sector, to competition law orientated remedies in Germany, the UK and Italy.
As a result of these cases, in December 2015, the European Competition Network (ECN), a grouping of the European Commission and 10 EU member state competition regulators, undertook a monitoring exercise of the hotel online booking sector to ascertain how effective these remedies have been in changing pricing behaviour.
In July 2016, the CMA also launched a monitoring project to examine how changes to room pricing terms, and other recent developments, have affected the market. This covered the way hotels sell rooms with particular regard to price and room availability, and any differentiation by hotels between sales channels, as well as rates of commission for online travel agents.
The results of the exercise suggest that measures restricting the use of MFNs have generally improved conditions for competition and led to more choice for consumers. The results also revealed a material level of price differentiation between online travel agents, suggesting that hotels are increasingly taking advantage of the ability to set different prices between different online travel agents, and are able to do so in response to differences in the competitive offers of these agents.
On 6 April 2017, the ECN reported on the results of its own monitoring exercise. This prompted the CMA to announce that it would not prioritise further investigation on the application of competition law to pricing practices in the sector at this stage.
At the same time, the ECN agreed to keep the online hotel booking sector under review and to reassess the competitive situation in due course. The CMA agreed with this conclusion and said it would also keep the market under review.