Competition

The past year has seen rapid development in tech regulation. Whilst the EU is ahead of the UK (its Digital Markets Act came into force in November 2022) the UK's equivalent (the Digital Markets, Competition and Consumers Bill) is expected to come into force in Autumn 2024, making far-reaching changes in these areas:

• Digital markets: giving the CMA new powers to regulate "Big Tech". See our briefings on the new regime for scrutiny of Big Tech and what recent CMA activity tells us about the rationale for the new legislation.
  
  
• Competition law and merger control: a series of changes designed to strengthen the UK's existing regimes.
  
  
• Consumer protection: a significantly tougher enforcement regime, enabling the CMA to impose fines of up to 10% of worldwide turnover.

Whilst the EU and UK aim to tackle the same types of harm (i.e. to ensure that digital platforms behave in a fair way) the regimes differ in form. The EU requires firms to proactively notify the Commission where a set of thresholds (based on turnover/market cap and user numbers) are met. There is a (rebuttable) presumption that such firms will be designated as "gatekeepers" and, thus, be subject to the prescribed rules of the DMA in respect of their designated activities. The UK regime, in contrast, does not require proactive notification: it will be for the CMA (through its Digital Markets Unit) to investigate the question of designation where the regime's own (but similar) thresholds are met. 

The DMA provides prescriptive ex ante rules that apply in a uniform way to all gatekeepers (with the potential for further specification), whereas the DMCC Bill will set tailored ex ante rules for each designated firm (albeit these need to be drawn from a wide list of options) and permit the CMA to remedy adverse effects on competition through ex post 'pro-competition interventions'. Whilst some firms will welcome the flexibility of tailoring, others may be more sceptical to the extent that different firms risk being subject to differing obligations within the UK, or a given gatekeeper being subject to different obligations as between the EU and UK. A further important development is that the UK Bill introduces a new, widely drawn reporting obligation on designated firms to report possible M&A activity before it takes place. Both the EU and UK allow for public enforcement (by the Commission/CMA) and private enforcement.

Seven firms have notified their potential gatekeeper status to the Commission under the DMA, leading to the designation of six: Alphabet (Google), Amazon, Apple, ByteDance (TikTok), Meta and Microsoft. In total, 22 core platform services provided by those gatekeepers have been designated, although there are appeals underway. In the UK, the CMA expects to initiate approximately 3 to 4 designation investigations in the first year of the DMCC regime (this will likely involve Google, Apple and Meta – with Amazon potentially joining the group or coming later).

Increased scrutiny of private equity investment is firmly on the radar for competition authorities, both in the US and UK. US antitrust enforcers are targeting the degree of leverage and market power that private equity firms have, in their view, amassed in certain sections of the US economy. 

In the UK, the CMA has, to date, taken a broadly neutral stance. However, comments made by the CMA's Chief Executive, Sarah Cardell, at the Spring 2023 Enforcers Summit in Washington D.C. suggest the dial may be shifting. In the M&A space, Cardell made clear that 'roll up' acquisitions (whereby private equity firms buy up, and merge, multiple smaller or independent players in the same industry to benefit from economies of scale and valuations at higher multiples) will, consistent with enforcement priorities in the US, "come in for very close scrutiny" here in the UK.

Cardell's comments are the strongest to date on the CMA's approach to the growth of PE investment in the UK economy. They follow questions posed by a government committee back in July 2021 to the then CMA Chief Executive over whether the CMA had sufficient ability to investigate acquisitions of high street brands by private equity firms. Ultimately, the CMA's competition and merger control functions are based on competition-related tests, and, in this respect, PE deals are subject to the same rules as any other owner or investor. Nevertheless, the CMA's flexible tools mean that it would be prudent for the industry to anticipate some prioritisation of PE activity in the way in which the CMA focuses its resources, at least in the short term.

For more, read Private Equity: A new enforcement priority for the UK competition & markets authority? | Travers Smith

In the first two years of the National Security and Investment Act 2001 (NSI Act) regime, the UK Government has readily taken strong action where UK national security concerns arise, prohibiting transactions in the case of acquirors linked to politically sensitive states and sectors that are key to the UK’s national security. However, the UK Government has also demonstrated a pragmatic stance when considering the appropriateness of remedies packages even where politically sensitive states are involved.

To date, prohibitions have related to acquirors with links to China (or, in one case, to sanctioned Russian individuals) and transactions that pose risks to the UK defence sector, semiconductors (within the 'advanced materials' sector) or telecommunications. However, notifications have been received across all sectors covered by the NSI Act and therefore it is only a matter of time before the scope of sectors in which action is taken broadens. Indeed, clearances subject to remedies have now been seen, for example, in the emergency services, energy, satellite communications, critical national infrastructure (specifically for quantum timing and atomic clocks), software, aerospace and semiconductor spheres. A broad range of remedies have been imposed, typically including restrictions on the sharing of information and the maintenance of strategic capabilities in the UK. The UK Government’s action to date also reflects the focus of the NSI Act on the activities of the target, rather than purely the nationality of the investor. UK based investors and acquirors based in politically friendly nations are not exempt from notification or from facing in-depth probes into their deals.

Where deals which do not raise material national security issues, the new system appears to be working efficiently. Filings are generally accepted by the UK Government within a few days, with clearance received within the initial review period without significant requests for further information. During the first two years of the regime, over 90% of notifications were cleared without detailed assessment. Against this backdrop, the UK Government recently carried out a Call for Evidence to consider potential changes to the regime. The Government has said that the responses to that consultation will be used to inform a review of the 17 sectors subject to mandatory notification, hone the scope of mandatory notification to details that actually pose national security risks, improve processes in order to minimise burden and develop further public guidance.

The increasing presence of sovereign wealth funds in M&A deals – as well as the expansive investment strategies of other government-related investors – has been a concern for EU policymakers in recent years. As well as the obvious national security implications, the EU has been determined to combat the effects of potentially distortive subsidies granted by other national governments to companies operating in the EU. The result is the EU Foreign Subsidies Regulation (or FSR).

The FSR imposes new notification rules for investors, including PE investors. As of 12 October 2023, deals where the target has revenues of at least €500 million in the EU need to be notified, and an associated stand-still obligation applies, where the acquiror and target groups (combined) have received at least €50 million in "financial contributions" from non-EU states in the preceding three years.

The way in which the filing thresholds work means that sovereign wealth funds are clearly in scope, but also potentially other government-aligned private investors and entities entrusted with a public goal, such as state pension funds. For asset managers, the widely defined notification thresholds will catch many deals involving targets with at least €500 million of EU turnover, even where there is clearly no real foreign subsidy issue.

For more, read - The EU Foreign Subsidies Regulation update: how the new implementation rules will impact private equity deals | Travers Smith and EU foreign subsidies regulation: another notification regime for dealmakers to become law | Travers Smith

Consumer-facing businesses should be aware that there has been a huge increase in claims brought and collective proceedings orders (CPOs) granted in the past year. 

The collective proceedings regime established by the Consumer Rights Act 2015, enables claimants to bring claims for redress for breaches of competition law, if the Competition Appeal Tribunal make a CPO.

In a landmark ruling, the UK Competition Appeal Tribunal (CAT) approved a settlement for the first time since the collective proceedings regime was introduced. The settlement relates to the 'roll on roll off' (RoRo) claim, following-on from the European Commission's 2018 infringement decision against several shipping firms. The class representative (Mark McLaren) brought an opt-out claim against 12 defendant shipping firms on behalf of UK consumers and businesses who had purchased or leased new cars or vans. In short, Mr McLaren's case is that vehicle shipping costs were unlawfully inflated as a result of the anti-competitive conduct, and that these inflated charges were passed on through delivery charges ultimately paid by end customers.

Whilst the judgment provides some clarity on the way in which the CAT will approach settlement (for example on the importance of parties setting out all of the pros and cons of the settlement before the CAT, and advancing expert evidence on the quantum and merits), key questions remain because the relatively small sums involved meant that the CAT and parties were prepared to take a pragmatic approach. In particular, some of the thornier issues (on contribution and the reversion of unclaimed sums) did not ultimately have to be determined, so guidance from future cases is keenly awaited. For more, read this briefing.