- Phase I probes becoming increasingly thorough – lawyer
- Expected market entries have not always materialised – CMA
Increased number of mergers in 2018/2019 referred to Phase II compared to previous years – analytics The UK’s Competition and Markets Authority (CMA) appears to be unafraid to take an expansive approach to jurisdiction in merger control, as signalled by recent reviews of deals in dynamic markets, according to competition lawyers.
“The CMA has been stretching the boundaries of the jurisdictional tests to be able to look at these sorts of transactions,” Greg Olsen, head of Clifford Chance’s London antitrust practice, said.
The existing breadth of UK legislation affords the CMA latitude for establishing jurisdiction over M&A deals, said Jonathan Ford, competition counsel at Linklaters. However, the agency has been utilising this discretion, particularly in cases that involve challenger players, innovation, and digital and pharmaceutical industries, he opined.
The Enterprise Act 2002 stipulates that the competition authority may intervene when at least two companies are brought under common control or ownership and the target’s UK turnover surpasses GBP 70m, or the combination is deemed to result in a 25% market share for the supply or consumption of certain goods or services in the UK.
In 2018, those thresholds were lowered for especially sensitive sectors, such as military and quantum technology, to capture transactions involving targets with existing market shares of 25% or more, and turnovers above GBP 1m.
But some recent transactions over which the CMA has claimed jurisdiction arguably had a limited UK nexus, a third lawyer opined.
Though it ultimately cleared the deal in Phase I, last year the CMA decided to probe Roche Holding’s [SWX:RO] acquisition of US-based Spark Therapeutics, a developer of gene therapy treatments with no UK turnover at the time.
The agency argued that the companies overlapped in the provision of treatments for haemophilia A in the UK – despite Spark’s products still being in the pipeline – and that the share-of-supply test was met through the number of UK staff engaged in those treatments.
Earlier this month, the CMA blocked Sabre’s [NASDAQ:SABR] proposed takeover of US-headquartered Farelogix in the airline booking space, in spite of the parties’ claims that it had no jurisdiction over the deal.
In its investigation, the agency looked at the share-of-supply test from a number of different lenses, even on the basis of supply to one customer, namely British Airways, in its Phase I decision, Ford noted.
Last Friday (17 April), the CMA provisionally cleared Amazon’s [NASDAQ:AMZN] acquisition of a minority stake in food delivery app Deliveroo, following a Phase II investigation that considered the impact of COVID-19 pandemic on the target’s business. Despite the size of Amazon’s stake, the agency argued that the tech giant would acquire material influence through its investment.
“There have certainly been cases recently, such as Roche/Spark, which indicate, perhaps, that the CMA is prepared to take an expansive approach to the UK jurisdictional thresholds,” according to Stephen Whitfield, a competition partner at Travers Smith.
A toughening approach?
“The CMA is sending a very strong message about being tougher on mergers in dynamic markets like technology and pharma,” Olsen, of Clifford Chance, said.
According to Olsen, the CMA is lowering the bar when it comes to applying the share-of-supply test to capture deals in dynamic markets and assessing theories of harm centred on the acquisition of potential competitors.
However, at the same time, the bar seems to be higher for acquirers to establish that target companies face competitive constraints from other potential players in these markets, creating a risk of imbalance and overenforcement, he argued. “This unpredictability makes it hard to advise companies in this space at the moment,” he said.
In addition to a potentially expansive jurisdictional approach, it also appears from recent decisional practice that the CMA is taking an increasingly thorough approach to Phase I investigations, for example in relation to its examination of internal documents, Whitfield noted.
“However, as to whether more cases are being referred to Phase II, or ultimately being prohibited, as a result of that approach is maybe more open to question,” he said.
A high proportion of deals have been referred for Phase II over the last 12 months, with some being prohibited, the third lawyer noted.
Over the last two financial years, 20% and 22% of all mergers assessed in Phase I were referred for an in-depth investigation, compared to an average of 12% in the preceding CMA years, according to data by this news service. Undertakings in lieu – where parties prevent Phase II by offering remedies at the end of Phase I – became less frequent, however.
In 73% and 70% of Phase II cases in FY 2018/2019 and 2019/2020, the deal did not go ahead as originally notified, be it because of remedies, a prohibition or an abandonment. This was only higher in FY 2016/2017, when only 12% of mergers was cleared unconditionally after an in-depth probe. Behavioural remedies have not been accepted at all in the last three years. However, whether that amounts to the CMA behaving more assertively remains to be seen, and the agency will likely argue that is simply dealing with cases in concentrated markets, the third lawyer indicated.
It might also be simplistic to say that the agency is picking up more deals and identifying more problems with transactions in preparation for Brexit, he noted.
Post-Brexit, the CMA expects an additional 30-50 cases subject to review each year, on top of the existing 50-60 cases, as it anticipates a more global role in the competition arena, as reported. Last month, the agency unveiled its plan for the year 2020/21, including pharma and digital markets among its priorities.
“In all of our investigations into merging companies, it is essential that we interrogate them to really test whether consumers will lose out from things like higher prices or reduced innovation,” a CMA spokesperson said, adding: “Lessons from previous investigations have shown that in some cases where we expected competition would increase because new companies would enter the market this didn’t happen.”
“We use these lessons, alongside the evidence in front of us, before reaching a conclusion. And all of this is done with the consumer in mind,” said the spokesperson.
This article was originally published in Policy and Regulatory Report (PaRR). You can view the original article here (subscription required).