Legal briefing | |

COVID-19 and UK merger control: five key points

Overview

The UK Competition and Markets Authority has made it clear that it will not relax key UK merger control rules in response to COVID-19, although it recognises that some adjustments may be required.

In this briefing we look at what this means for parties contemplating corporate transactions (including acquisitions, disposals, joint ventures and debt for equity swaps) which may be subject to UK merger control.

On 22 April 2020, the UK Competition and Markets Authority ("CMA") issued welcome guidance summarising its approach to merger control processes in the current climate, including its approach to "failing firm" arguments. In short:

KEY POINTS

  • While the jurisdictional and substantive tests remain unchanged, the CMA's processes and procedures have (understandably) been affected. In particular, timelines for review may be extended – either by virtue of longer pre-notification or by the use of "stop-the-clock" powers.
  • The guidance addresses the CMA's current approach to two areas which have been the subject of increasing enforcement activity and fines in recent years, namely: (i) parties' responses to formal information requests (issued under section 109 of the Enterprise Act 2002); and (ii) parties' compliance with the terms of hold separate orders.
  • The CMA does not intend to relax its evidential bar to clearing transactions on the basis of so-called "failing firm" scenarios. The CMA's comments arrived less than a week after its provisional Phase II decision to clear Amazon's minority investment in Deliveroo on the basis that, absent the transaction, Deliveroo would have exited the market.  However, the CMA will continue to address failing firm arguments with the same rigour and evidential requirements as before.

Merging parties should bear in mind the following five key points on the CMA's approach to merger control assessment in the context of COVID-19.

Now Reading

1. The CMA remains open for business. The jurisdictional tests and the CMA's approach to substantive assessment remain unchanged – but review timelines may be subject to delay.

  • The CMA's merger control workload is subject to statutory timelines, both at Phase I and Phase II (see "What are the normal merger control timelines?").  These timelines have not changed as a result of COVID-19. 
  • However, notwithstanding the statutory deadlines (nor indeed the CMA's early clearance in April 2020 of the JustEat/Takeaway.com transaction, some 26 days ahead of its statutory deadline, albeit under rather unusual circumstances), parties can expect delays to review timelines.

WHAT ARE THE NORMAL MERGER CONTROL TIMELINES?

A Phase I investigation involves the CMA deciding whether to (i) clear the merger; (ii)  seek commitments from the parties intended to remedy any competition concerns;  or (iii) launch a detailed (Phase II) investigation.   Phase I investigations must normally be completed within 40 working days. 

Phase II investigations must normally be completed within 24 weeks.

In both cases, however, the CMA has powers to "stop the clock" and various extensions are possible.  It is also particularly important to take account of the time needed for pre-notification discussions ahead of any Phase I investigation, as the CMA will not normally agree to "start the clock" until it is satisfied that the Merger Notice which the parties propose to submit contains all the information it requires.

  • Pre-notification discussions may take longer than usual in the current climate, particularly if the CMA encounters difficulties with evidence gathering (see below). For those cases on the clock, "stop-the-clock" powers may also be used.
  • In some cases, the 40 working day Phase I clock may not be started at all – if, for example, third parties are unable to meaningfully engage with the CMA. To mitigate that, the CMA may carry out more public consultations ahead of the Phase I clock starting.
  • Unlike some other merger control authorities, the CMA is not requiring parties to delay submitting merger notifications (although it is encouraging parties to consider whether some filings may be postponed if, for example, their transaction is not well advanced or may not proceed). The CMA does not consider a sweeping requirement to delay notifications would work well in the context of a voluntary system which is subject to statutory timelines and which is designed to focus its attention mainly on transactions involving competing parties.

2. Where parties can substantiate claims that they cannot properly comply with the requirements of a formal information request as a result of COVID-19, fines will not be imposed.

  • The CMA's ability to carry out its merger control functions relies heavily on its ability to gather evidence and information from transaction parties and from third parties (such as customers, suppliers and competitors).
  • Like the European Commission, the CMA can issue information requests either formally or informally. In recent years, the CMA has made greater use of its formal information gathering powers under section 109, particularly when requesting information and documents from transaction parties.  It has imposed a number of fines on parties which have failed to comply, without reasonable excuse, with the requirements of such statutory demands, including Hungryhouse (£20,000), AL-KO (£15,000), Rentokil (£27,000) and Sabre (£20,000).

Whilst fines for failure to provide information may be less likely, parties should expect greater use of "stop the clock" powers.

  • In its COVID-19 Mergers Guidance, the CMA has provided a welcome clarification that, provided businesses can substantiate their claims that the failure to comply with a section 109 notice is due to COVID-19, such claims will generally constitute a reasonable excuse for non-compliance and fines will not be imposed. The CMA may however make greater use of its "stop-the-clock" powers in these circumstances as it ultimately still requires evidence on which to base its decisions.

3. The CMA will continue to impose interim measures/hold separate orders. Parties seeking to take particular steps as a result of COVID-19 which would otherwise constitute a breach must seek evidence-based derogations in the usual way.

WHAT ARE INTERIM MEASURES / HOLD SEPARATE ORDERS?

Contrary to the mandatory and suspensory regime that applies at EU level, the UK operates a voluntary and non-suspensory merger control regime.   The quid pro quo to the voluntary system is that the CMA retains the ability to investigate transactions that have not been notified to it (including on a post-closing basis) and it routinely imposes hold separate orders requiring parties not to integrate their businesses for the duration of the CMA's review.  Such orders (which are now standard practice in completed deals, but which can also be imposed in anticipated transactions) are onerous and bite not only on the activities of the target business, but also on the activities of the buyer's pre-existing business.

  • Consistent with its focus on procedural compliance, the CMA has issued a number of fines in recent years for breaches of hold separate orders, including fines on Electro Rent (which was fined twice, for a total of £300,000), Paypal (£250,000) and European Metal/Ausurus (£300,000).
  • The CMA's COVID-19 Mergers Guidance cautions that its approach to imposing hold separate orders will not change as a result of COVID-19. However, the CMA is prepared to grant derogations to parties which can demonstrate that particular steps/actions are necessary in the current climate.  COVID-19 related derogations have already been granted in a number of live cases, including Breedon/Cemex and viagogo/StubHub.

4. The CMA's approach to substantive assessment has not changed. In spite of the (at least) short term consequences of COVID-19, the CMA's decision-making is generally based on a longer term outlook.

  • The CMA will continue to assess transactions with rigour, based on evidence and not speculation. This will not change as a result of COVID-19.
  • The CMA's COVID-19 Mergers Guidance acknowledges that "at least in the short-term, there will be a substantial impact across the UK as a result of changes in market conditions", but also cautions that the CMA's decision-making is driven more by reference to longer term structural change, rather than the short term impact of any particular event.
  • The CMA takes the view that "even significant short-term industry-wide economic shocks may not be sufficient, in themselves, to override competition concerns that a permanent structural change in the market brought about by a merger could raise". A good example of this in practice is the CMA's recent decision (in April 2020) to refer Kingspan’s then-anticipated (and now abandoned) acquisition of Building Solutions to Phase II.

THE CMA'S FOCUS ON THE LONG TERM: KINGSPAN/BUILDING SOLUTIONS

According to the CMA, Kingspan and Building Solutions are two of only three key suppliers of standard foam sandwich panels in the UK and would only face serious competition from one other UK-based supplier post-transaction (Tata Steel).  The CMA's press release announcing the Phase II referral acknowledged that the construction sector is expected to be heavily impacted by the pandemic and experience a considerable slowdown of activity in the near term, but notes that nonetheless the transaction parties are expected to remain important competitors in the longer-term – hence the decision to proceed to Phase II.

5. The CMA has not relaxed its evidential bar to clearing transactions on the basis of "failing firm" scenarios.

  • One possible impact of the COVID-19 pandemic is the increased number of transactions in which parties may raise failing firm arguments in favour of merger control clearance – i.e. to try to persuade the CMA that, absent the transaction, the target business would have exited the market owing to its distressed financial position.
  • However, the evidential bar to clearing a deal on the basis of a failing firm scenario is high. In the UK, the CMA will consider: (i) whether the firm would have exited the market; (ii) whether there would have been an alternative purchaser which would produce a better outcome for competition than the deal in question; and (iii) what would have happened to the sales of the target in the event of its exit from the market (e.g. whether the sales would have been redistributed amongst the remaining market participants).
  • On 17 April 2020, the CMA announced its provisional Phase II decision to clear Amazon's minority investment in Deliveroo on failing firm grounds.

WHY DID THE CMA CLEAR THE AMAZON/DELIVEROO MERGER?

The CMA found that without additional funds, Deliveroo would be likely to exit the market as a result of the COVID-19 pandemic, which has substantially affected the market and Deliveroo's financial position.  In particular, a number of its supplier restaurants (including major brands that account for a substantial portion of Deliveroo's orders) have closed or reduced their offerings, and its recent attempts to increase its supply of groceries services in the context of the pandemic were not sufficient to off-set those losses.

  • The CMA's decision in Amazon/Deliveroo is provisional (with a final decision due by 11 June 2020 following a period of public consultation). However, it is comparatively rare for the CMA's provisional findings to be reversed and if the CMA does proceed to confirm its provisional conclusion in its final report, the transaction will represent a noteworthy application of the failing firm scenario in the UK.  That is particularly so in the context of case which had given rise to prima facie competition concerns at Phase I.
  • Nonetheless, while the CMA recognises that the current economic environment may give rise to a greater number of failing firm arguments, the CMA will not relax its investigation standards or its evidential requirements. As such, consistent with the lessons of previous economic downturns, the current environment is unlikely to yield a long string of failing firm clearances.   However, the CMA's COVID-19 Mergers Guidance does acknowledge that if a firm's financial difficulties do not meet the conditions for the failing firm analysis to be applied, the fact of its weakened economic position could be a factor in the CMA's competitive assessment.

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