If you’re considering a merger or acquisition, it’s important to understand the impact of both European Union and UK laws as these can prohibit or change the terms of transactions, and they operate in parallel. Before you even begin negotiating a deal, you must consider whether these rules apply to your situation and we recommend you take expert advice.
The situation in the UK has become more complex since the country left the EU. After the transition period that ends on 31st December 2020, UK companies won’t be able to use the EU ‘simplified procedure’ to get clearance for the transaction, there may be a risk of dual procedures both under the EU and UK regimes.
Here we'll be covering:
- Will merger rules apply to my merger transaction?
- How does the EU merger regulation process work?
- How the UK merger regulations work?
- Who will investigate my merger transaction?
- The impact of Brexit on merger rules
- What’s a public interest merger?
Will merger rules apply to my merger transaction?
The EU merger regulations
The EU merger rules apply to any ‘concentration’ (for example, a merger, de-merger, acquisition, or joint venture) that has (or is considered to have) an ‘EU dimension’. There’s an EU dimension if one of the following two thresholds are met:
The first EU threshold
A transaction will have an ‘EU dimension’ if either:
- The combined worldwide turnover of all the undertakings (a business or part of a business) concerned is more than €5 billion and
- Each of at least two of the undertakings concerned has EU-wide turnover of more than €250 million.
The second EU threshold
A transaction will have an ‘EU dimension’ if either:
- The combined worldwide turnover of all the undertakings concerned is more than €2.5 billion
- Each of at least two of the undertakings concerned has EU-wide turnover of more than €100 million plus
- In each of at least three EU Member States, where the combined turnover of all the undertakings is more than €100 million, at least two of the undertakings concerned has a national turnover of more than €25 million.
However, it’s important to note the two-thirds rule. There’s no EU dimension if each of the undertakings concerned achieved more than two-thirds of its EU-wide turnover in a single member state.
If you meet any of these thresholds, you must notify the European Commission of your proposed merger. The Commission usually investigates the transaction, although it can reallocate the investigation, so it takes place at a national level – the UK Competition and Markets Authority (CMA) for UK transactions for example.
The UK merger regulations
A merger will be subject to UK competition law if there’s a ‘relevant merger situation’.
This can happen when two or more enterprises (activities, or part of the activities, of a business) are no longer distinct (the companies come under common ownership) and either:
- The turnover of the entity being taken over exceeds £70 million (turnover test), or
- The merger creates a business supplying or acquiring 25% or more of products or services in a given market in the UK or a substantial part of the UK (or if the business already supplies at least 25%, this would be increased).
Because you don’t have to tell the CMA about your proposed merger, they can launch their own investigation, for example, if they’re told about the proposed deal by a third party or if they’ve learned about it through an investigation.
Although it’s not mandatory, many companies wanting to merge will tell the CMA so that they can get clearance before they go ahead. This avoids wasting time and money if the CMA subsequently decides to intervene.
How does the EU merger regulation process work?
Here’s a summary of the EU merger control process:
|Notification discussions||You can provide the European Commission with details of the proposed transaction, preferably at least four weeks in advance of a formal notification, so they can start to consider the implications of the deal. |
The Commission prefers that you send them a briefing memorandum at least three working days before a pre-notification meeting, and that meetings take place at least one or two weeks before notification. You can send the Commission a draft of the form a week early, for review.
These discussions are useful for you, because you can get informal advice on competition law issues and discuss any uncertainty or market definitions that need to be clarified in the formal notification.
|Notification||This is where you tell the Commission formally about the proposed deal. You must include supporting documentation and evidence. |
Our corporate solicitors can advise which forms to use to notify the Commission and how to complete these. Once the notification is made, details are published in the Official Journal of the EU, and third parties are invited to comment.
|Formal Phase 1 investigation||The Commission will investigate and decide if there’s ‘serious doubts about compatibility with the internal market’. A decision will be made normally within 25 days of the notification being received. |
The Commission may give:
Clearance if there are no concerns.
Conditional clearance if there are serious competition concerns but these can be mitigated if there is compliance with certain conditions.
A ‘no jurisdiction’ decision due to the transaction lacking concentration or EU dimension.
Referral to another member state for it to be investigated at a national level.
Referral to Phase 2 investigation if there are serious doubts as to compatibility with the internal market such that a detailed investigation is needed.
|Formal Phase 2 investigation||The Commission will normally complete its investigation within 90 days. The options open to it are to: |
Make a written Statement of Objections if it retains concerns. You’ll be given access to the file and given an opportunity to submit a written reply before an oral hearing takes place.
Consult with and take account of the opinion of the Advisory Committee (a committee made up of representatives from member states) before making a final decision.
Decide to clear the transaction (so the parties are free to go ahead), give conditional clearance (undertakings may be attached to the clearance, meaning that the parties may need to make structural changes, for example, for the merger to be allowed to proceed), or prohibit the transaction (in which case the Commission may take other action to restore competition in the relevant market, particularly if a transaction has already happened before the prohibition is announced).
In addition to the above, you may be invited to take part in State of Play meetings during the Phase 1 and 2 investigations. These meetings allow you to understand any competition concerns that look likely, and plan your next steps in advance, for example by revising your merger transaction timetable or even by withdrawing a notification, where it appears that a Phase 2 investigation is likely.
Where significant competition concerns are not an issue, it has previously been possible to use a simplified EU procedure that’s quicker than the usual EU merger regulation procedure. However, this may no longer be an option after the end of the withdrawal period of the UK from the EU.
The simplified procedure applies to:
- Acquisitions where sole control is being passed to a party who already has joint control.
- Mergers and acquisitions where business activities of the parties are not in the same product and geographic market, and not in a product market which is connected upwards or downwards to a product market of any other party to the concentration (vertical relationships).
- Mergers and acquisitions where there are not two or more of the parties in the market with a combined market share of 20% or more (horizontal relationships), or where no party has a 30% or more market share and a vertical relationship with a party to the concentration.
- Mergers or acquisitions where both market share of all the parties to the concentration in a horizontal relationship is less than 50%; and the increase in market concentration (delta) on the Herfindahl-Hirschman Index (HHI), (which is adopted specifically to measure market concentration levels) is below 150.
- Joint ventures with no, or minimal activities (turnover and asset transfer of less than €100 million).
How the UK merger regulations work?
It’s understandable that companies considering mergers will want to keep details confidential and secret. For this reason, an informal advice procedure exists where you can ask the CMA for a confidential view of whether the merger would likely be referred to a Phase 2 investigation.
You can also ask about advice on particular aspects of competition assessment, i.e., market definition or issues regarding jurisdiction. The process therefore enables you to better understand competition law and clarify any uncertainties.
Where you ask the CMA whether a merger is likely to have competition issues, advice indicating no competition issues isn’t clearance from the CMA. You still need to notify the CMA using a Merger Notice to obtain clearance.
If you’d like informal advice from the CMA, you need to set out the key issues in a short paper. The CMA aims to respond in five working days, indicating whether they’ll give advice and whether the advice will be given immediately, or at a meeting scheduled within ten working days of the original application.
As you can only send one request for informal advice, this procedure can’t be used as continuing dialogue with the CMA.
If you decide to voluntarily notify a merger, you must give the CMA a draft of the notification and complete the new ‘case team allocation’ form, so the CMA can allocate an appropriate case team to participate in ‘pre-notification discussions’. If you don’t do this, your notification could be rejected on the grounds of being incomplete. The CMA ‘strongly encourages’ parties to contact it to engage in pre-notification discussions at least two weeks before formal notification.
The discussion with CMA at this stage strictly concerns the completeness of your draft notification. Upon sending your notification in the ‘final draft’ form, the CMA review and highlight any incomplete parts, and flag areas where they require further evidence or development. They will aim to come back to you within a reasonable time frame (five to ten working days) of their receipt of the submission.
Pre-notification discussions allow the CMA to streamline the process for reviewing transaction.
You can give the CMA a written Merger Notice to notify the merger to the CMA for clearance. This is formal notification and will be in the public domain, so details of the proposed merger are no longer confidential from this point onwards.
You’ll get a Phase 1 decision within 40 working days of the notification if they’re satisfied that there is evidence of a good faith intention to proceed (such as a signed a share purchase agreement, adequate financing and/or heads of agreement). If the notice isn’t complete, they’ll tell you normally within five to ten working days of receiving the Merger Notice.
They can either accept or reject the notice, and will reject it if:
- They consider that the notice contains false/misleading information
- There’s insufficient information
- They suspect you don’t intend to carry out the arrangement or
- The notified arrangements appear to be a concentration with an EU dimension within the EU Merger Regulation
Phase 1 investigation
Where there’s a potentially relevant merger situation, the transaction will be investigated by the CMA when they receive a complete Merger Notice, provided this has not been rejected as per the above, and does not become rejected during this phase.
The CMA obtains and reviews information regarding the transaction, to decide whether the merger has resulted in or would result in a substantial lessening of competition (SLC) within UK market(s) for goods or services. In making this decision, the CMA must have reasonable belief (objectively justified by facts) that there will be a realistic prospect of SLC.
When considering ‘substantial lessening of competition’ the CMA will consider whether the conditions of competition in the affected market(s) are better with or without the merger.
There would also be a finding of SLC where a merger would weaken competitors to the extent that customers will be harmed (reduced competition could lead to higher prices for goods, inhibit innovation, and lead to lower quality products).
If the merger is un-notified, the CMA may send an enquiry letter to the parties to the merger, typically asking for the types of information that would have been provided under a Merger Notice. Upon receiving all the information in the enquiry letter, a non-binding 40 working day response time will start to run under Phase 1, and if information is not received or is incomplete in response to an enquiry letter, the CMA may carry out the investigation with the information it has before sending the parties an issues letter.
The CMA doesn’t need to refer a transaction to a Phase 2 investigation if it believes:
- The market(s) concerned is not sufficiently important to justify a reference.
- The affected markets are worth less than £10 million in aggregate (subject to wider considerations).
- Any relevant customer benefits arising out of the merger outweigh the substantial lessening of competition.
- In the case of an anticipated merger, the arrangements are not sufficiently advanced, or not sufficiently likely to proceed to justify a reference.
- Before the merger covered by the Merger Notice is completed, any of the enterprises concerned enters into an unrelated merger.
- The merger covered by the Merger Notice is not completed within six months of the expiry of the consideration period.
- Any information supplied is false or misleading or if information is concealed and remains undisclosed to the CMA.
- The parties have offered undertakings in lieu of reference to the CMA (or to the Secretary of State in public interest cases) but the CMA (or Secretary of State) has not accepted them.
Phase 2 investigation
A Phase 2 investigation happens when a Phase 1 investigation reveals that there is relevant merger situation. The Chair of the CMA is responsible for appointing an inquiry group of three to five members, one of which will act as Chair, to conduct and decide on the Phase 2 inquiry.
The start of a Phase 2 investigation can be delayed by up to three weeks if you ask for it, or if it looks likely that a merger will be abandoned. If the merger is not abandoned a Phase 2 opening letter will be sent by the CMA to the main parties.
Any interim measures imposed under Phase 1 will be reviewed and sometimes changed during Phase 2 of the investigation, and the CMA may ask that you make structural or behavioural changes to the deal. It is important that you update and comply with any interim measures, as the penalty for non-compliance can reach a maximum of 5% of your aggregate worldwide turnover.
During Phase 2, the CMA conducts a more in-depth investigation to decide whether, on the balance of probabilities, the merger substantially lessens competition in the UK market(s).
They’ll carry out a detailed analysis of the transaction and its impact on the market. If it finds that the merger does result in SLC, it must consider what action could be taken to remedy it.
The CMA must make a final decision within a 24-week time period (from reference to final report) as to whether to give clearance to the merger, prohibit the merger, or allow the merger to proceed subject to conditions. The conditions may require you to sell parts of your business prior to the merger (or after if the merger has already been implemented).
Other conditions or remedies which may be proposed by the CMA include:
- Reversing a merger which has completed.
- Requiring the merged entity to give competitors access to essential facilities.
- Requiring the merged entity to give competitors a licence to intellectual property.
- Imposing a price cap to prevent the merged entity charging customers too highly.
- Requiring increased transparency of prices.
- Requiring the merged entity to refrain from any conduct which inhibits new competitors from entering the market.
Following the Phase 2 decision, the CMA has 12 weeks to negotiate and finalise the remedies with the parties. However, this may be extended by up to 6 weeks if there are special reasons. During this period, interim orders will be finalised, and the undertakings (explained below) will be drafted and finalised, whilst third party consultation also takes place.
Undertakings as an alternative to referring to a Phase 2 investigation
You can offer a binding undertaking to the CMA instead of accepting a Phase 2 investigation. You must do this no later than five working days from receipt of the CMA’s decision to refer to Phase 2, and you’d need to think about what you might offer at a very early stage so you could get the CMA’s cooperation if needed.
The undertakings may involve your divesting (selling) part of your business to reduce your monopolisation in the market, or even undertaking to behave in a certain way in the future.
When deciding whether to accept the undertaking, the CMA consults third parties to ‘market test’ the suitability of the proposed remedy.
Parties to mergers commonly consider undertakings as it saves them the high cost of a Phase 2 investigation. Also, since the undertakings are likely to be required as conditions to clearance after a Phase 2 investigation, implementing the measures without the investigation is more cost-effective. If the CMA does not think that it will be able to accept the undertakings offered before the statutory deadline, it may refer the merger to a Phase 2 investigation.
Who will investigate my merger transaction?
While the situation remains somewhat uncertain, it is likely that after 31st December 2020, if your proposed merger falls within the scope of both the EU Merger Regulation and UK legislation, the EU Commission will investigate the EU aspects of the transaction and the CMA may also examine the UK aspects. Until that date, if the deal has an EU dimension, the Commission has sole jurisdiction.
If the EU Merger Regulation doesn’t apply, then the CMA alone has jurisdiction to investigate the transaction.
The impact of Brexit on merger rules
The CMA is becoming more interventionist in terms of merger regulation. What’s more, if your proposed merger goes as far as a Phase 2 investigation, it’s more likely than not that the CMA will intervene or seek certain remedies. Until Brexit, there was a ‘safe harbour’ regime under the EU rules, where you notify the deal to the EU and they fast track an investigation to give you clearance. Using this fast-track scheme, the CMA was not able to intervene.
While the UK left the EU on 31st January 2020, it’s treated as an EU member until 31st December 2020. At the time of writing, the exact details of the exit arrangements haven’t been finalised, and it’s likely that at the end of the transition period of EU membership, UK companies won’t be able to use the EU one-stop-shop arrangements. This means that you may be subject to parallel review of your merger by both the EU and the UK.
If you’re planning a deal that may be on the table before the end of the year, take expert legal advice immediately.
Under the withdrawal agreement, if the Commission has jurisdiction over a deal (so the CMA doesn’t) and you tell them about it by the end of 2020, this will remain within the jurisdiction of the Commission so that the CMA can’t take this back in-house. For practical purposes, this means you need to notify the Commission not later than 23rd December 2020.
After this time, jurisdiction to look at UK aspects of the merger will be with the CMA, and EU aspects will remain with the EU.
In practical terms, if you’re planning a merger, and already have dealings with the Commission, you still need to think about notifying the CMA, or risk significant delays.
What’s a public interest merger?
One general exception to the UK competition regulation is public interest mergers. At the present, this includes mergers which concern:
- National security/defence
- Media concerns such as media plurality, accuracy, and quality and
- Stability of the UK financial system
Where there is a merger which raises wider public interest concerns, legislation allows the Secretary of State to intervene and impose additional conditions to remedy the concerns.
Similarly, where a merger is in the interest of the public, the Secretary of State can give clearance to a merger despite the CMA declaring that a merger is prohibited under competition law.