Parallel merger investigations: a starter for ten

Deal-makers on cross-border transactions now need to think about UK merger control more often. Save for in a small number of cases formally initiated by the European Commission before the end of 2020, the UK Competition and Markets Authority ("CMA") is now unshackled from the "one-stop shop" of the EU merger control regime, able to pursue its own merger control investigations into international transactions in parallel with those of other authorities.

Some deals involving parties with a significant UK-presence may enjoy a 'Brexit bonus' of falling beneath the EU turnover thresholds (once UK turnover is stripped-out) requiring a mandatory filing to the European Commission.

But in the run-up to Brexit, the CMA has established its credentials as one of the more dynamic and interventionist merger control authorities globally. A combination of its flexible jurisdictional test, comparatively lengthy investigations, and willingness to block deals and take divergent decisions from other authorities means that the CMA is increasingly seen in some quarters as operating a voluntary regime in name only. So as we enter this brave new world of UK merger control enforcement, we summarise below ten things to keep in mind to make sure the CMA does not become an obstacle in your deal.

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A voluntary regime, but the CMA can halt integration

While it operates a voluntary regime, the CMA reserves the right to call in non-notified transactions up to 4 months post-closing/announcement (whichever is the later) if they meet the existing jurisdictional thresholds based on turnover and, in particular, the flexible concept of 'share of supply' (see below). If the CMA calls-in your deal, the subsequent investigation may pose significant obstacles to realising post-completion synergies. Not only could the CMA subsequently prohibit/unwind the deal or require remedies after a lengthy investigation (as it has shown itself increasingly willing to do, see below), but it routinely imposes stringent hold separate orders halting all integration when it opens an investigation – sometimes even for anticipated deals (e.g. Tesco/Booker and Mole Valley Farmers/Countrywide Farmers).

As demonstrated by the spin-off litigation from the CMA's review of Facebook/GIPHY (in which the UK Courts confirmed the CMA's wide discretion in this regard), negotiation of and compliance with a hold separate order becomes a significant deal workstream it is own right, with such orders often being global in scope (e.g. Google/Looker, GTCR/PR Newswire, Salesforce/Tableau), and sometimes resulting in fines for failure to comply (which the CMA has increasingly pursued in recent years, e.g. Electro Rent/Microlease, Ausurus Group/Metal & Waste, Vanilla Group/Washstation).

UK focus, international reach

Despite the regime's focus on the impact of transactions on UK firms and consumers, the CMA has increasingly taken advantage of its flexible jurisdictional test to monitor and intervene in cross-border transactions in circumstances not only where the merging parties are not direct or close competitors, but also where the relevant target business has a small or indeed no clear UK nexus.

In addition to one on turnover, the CMA operates a jurisdictional threshold which requires the merging parties to consider whether they will have a 'share of supply' exceeding 25% post-transaction. In revised guidelines published at the end of last year, the CMA has made clear that it has a "broad discretion" when applying this test: having regard to "any reasonable description" of a set of goods or services; and calculating shares of supply based on not only conventional market share measures (turnover, volume of commerce, etc.), but also "any other criterion" such as number of relevant employees, patents or suppliers entering bids for a tender.

Particularly in markets involving new or innovative technologies and services related to online commerce, the CMA has been keen to establish jurisdiction even if those technologies/services have not yet been commercialised in the UK or generate comparatively small revenues. In both Sabre/Farelogix and Roche/Spark, the CMA established jurisdiction despite the merging parties purportedly deriving no direct revenues from UK-based customers – e.g. on the basis of number of UK-based employees and revenue derived indirectly from one UK-based customer (via a partnership agreement with another downstream client).

Minority stakes on the radar

As compared to the European Commission (and many EU national authorities), the CMA has greater scope to investigate the acquisition of minority stakes and other transactions which might not otherwise be considered a merger of businesses meriting investigation.

The CMA has long had the ability to investigate any agreement or acquisition (shares or assets) which might afford a firm "material influence" over the strategic direction of another business. The CMA's revised guidelines underline that "even shareholdings of less than 15%" might attract scrutiny if other factors are present. Recently, for example, the CMA investigated Amazon's acquisition of a 16% stake in Deliveroo and limited rights at a Board level.

Willing to cooperate, but happy to go it alone

The CMA has emphasised that it is keen to facilitate international cohesion in parallel merger control proceedings. The CMA has stated that it will not necessarily call-in transactions if it is clear that remedies agreed in other merger control proceedings are likely to address any UK concerns. If it is does intervene, it will try to coordinate merger reviews with other authorities and align timetables where possible and appropriate – e.g. by using procedural powers to 'fast track' a deal to an in-depth Phase II investigation more often where there are clear potential competition concerns.

However, the CMA has also informally indicated that it will not be afraid to take the lead where it considers that the centre of gravity of a transaction is in the UK or where UK market dynamics are materially different. Even prior to Brexit, the CMA has shown itself willing to take divergent analytical approaches and decisions from other authorities in parallel investigations, e.g. pursuing in-depth investigations in Taboola/Outbrain when the US Department of Justice thought this unnecessary, and blocking Groupe Eurotunnel's acquisition of Sea France assets when the French authority cleared it.

Longer review periods, requiring more documents

UK merger control currently remains subject to the same statutory timetable as before, but its longer review periods are now likely to disrupt more transactions. The CMA's initial 'Phase I' and in-depth 'Phase II' review periods are materially longer as compared to many authorities, including the European Commission (CMA: 40 working days vs. European Commission: 25 working days at Phase I; CMA: 24 weeks vs. European Commission: 90 working days at Phase II). In common with the European Commission (but in contrast to a number of EU national authorities), the UK CMA also often engages in relatively lengthy pre-notification discussions before formally starting its review period.

The UK process can also burdensome. Even in an initial 'Phase I' investigation, the UK CMA requires the merging parties to produce a material amount of internal documentation and information relevant to the transaction. Recently published guidance makes clear that the CMA will want parties to adopt a thorough methodology for data collection, review and production, including using e-discovery technology where necessary. The CMA has underlined that it regards internal documents regarding competitive dynamics and deal rationale as crucial to its assessment – particularly in dynamic markets where the CMA is likely to place less weight on more 'static' market data or economic evidence. Linked to this, the CMA has increasingly used its formal legal powers to gather information (including via interview) and sanction parties for failing to producing it in a complete or timely manner via fines and/or by 'stopping the clock' on the review.

Late to the remedies party?

Structural differences between UK merger control and other regimes may prevent full alignment of merger reviews. For example, in Phase II investigations, potential remedies for the CMA's concerns (partial divestments, etc.) will usually be considered by the independent panel responsible for taking decisions only at the very end of the process. Other regimes are less rigid in this regard, with the regulator being able to consider remedies in tandem with the assessment of competition concerns. As a result, the CMA may only be fully considering the merging parties' proposed global remedy package sometime after negotiations have progressed with other regulators around the world.

That said, the CMA has previously shown itself willing to coordinate remedies packages with other authorities – e.g. with the US Federal Trade Commission. It has now also suggested that decision makers may be able to get involved in remedies discussions earlier on in the process than usual at both Phase I and II. Further, it has proposed introducing a mechanism at Phase II by which parties can concede that the transaction raises competition concerns in certain market(s) in order to skip forward to the formal consideration of remedies.

How effectively these procedural tools will circumvent the structural differences baked into the UK regime, and how often they will be used in practice remains to be seen – particularly if parties are expected upfront to waive their right to challenge the CMA's competition concerns.

Public findings, private process

Merging parties may also have to consider other procedural quirks to the UK merger control regime if the CMA is investigating cross-border transactions more often.

For example, in contrast to the process adopted by the European Commission, the CMA does not formally disclose its substantive concerns with a transaction until near the end of the process, only after the oral hearing, and without affording the merging parties the opportunity to consult the authority's case file. Merging parties will need to consider the extent to which the European Commission's statement of objections to the transaction and its materials on file may influence the case presented to the CMA.

The CMA also publishes its provisional findings and possible remedies publicly at Phase II, which may have implications for other merger investigations which are still ongoing – e.g. by prompting third parties to object to the merger elsewhere based on concerns raised by the CMA.

Blocking more deals?

The CMA's substantive legal test for establishing competition law concerns and subsequently prohibiting a merger is broadly similar to that adopted by the European Commission (and other major European authorities), albeit the legal threshold for the CMA to refer cases for an in-depth Phase II investigation is sometimes regarded as being lower as that compared to the European Commission.

The CMA's recent statistics regarding deals being prohibited, unwound or otherwise being unwound following a referral to an in-depth Phase II investigation are however striking, with the number of prohibitions/abandonments materially increasing to 70% of all Phase II in the last 24 months. While bare statistics do not take account of structural differences inherent in the UK regime (and the relatively small number of Phase II cases means that these statistics can change in any given year), this could be seen as in keeping with the CMA's increasing willingness to consider in-depth a range of more novel competition law concerns (e.g. with greater consideration of how competition might evolve in future).

Quantifying your risk - Early engagement may be necessary

The CMA's messaging and proposed procedural flexibility regarding coordinating merger control reviews globally is welcome. However, it also serves to underline the potential need for parties to engage with the CMA early on and possibly in parallel with those authorities where a mandatory notification is required.

Early engagement need not necessarily however take the form of a proactive notification to the CMA, prompting a formal investigation. The CMA operates a 'mergers intelligence' unit which scans global market press for investigations potentially warranting investigation. The same unit is also open to considering briefings proactively submitted by merging parties regarding why a transaction does not warrant investigation in the UK. Should it agree with the merging parties' assessment, it can provide comfort that the CMA will not intervene (albeit this is not legally binding).

Parties may well want to take advantage of this informal channel of communication with the CMA when considering how to coordinate multiple potential merger control investigations.

Merger control is not the only thing to worry about

Finally, it should be noted that merger control will soon no longer be the only significant UK review process your deal may need to go through.

As we reported in December, the UK is introducing a new, standalone national security regime controlling inward investment into a wide range of sectors relevant to national security and emergency services – including aspects of digital technology, cyber security and artificial intelligence. As currently drafted, the regime can capture minority acquisitions, and will legally oblige parties to acquire clearance from the UK Department for Business, Energy and Industrial Strategy (BEIS) prior to closing in respect of 17 sensitive sectors and could have a retrospective effect in respect of transactions post-dating November 2020 when it is passed into law.

The final bill is still going through the Parliamentary process and is therefore subject to further change. It is nevertheless expected to pass into law possibly as early as Spring 2021. Deal-makers considering new acquisitions now should therefore keep in mind that the CMA might not be the only potential obstacle by the time they come to close.

Read Richard J Brown Profile