Legal briefing | |

UK merger control - 6 key trends for 2022

Overview

Since the end of the Brexit transition period on 31 December 2020, the UK's merger control regime was untangled from the EU's one-stop shop, and has therefore operated as a standalone merger control regime in parallel to the EU. 12 months on, we have outlined 6 key trends in UK merger control below, and the impact of those trends for corporate transactions.

  1. The CMA is likely to remain an active merger control authority

  2. Following Brexit, the CMA has been taking an independent line when investigating transactions in parallel with the European Commission, and we would expect that to continue

  3. The CMA will continue to take an expansive view of the scope of its jurisdictional tests

  4. New jurisdictional tests may be introduced, together with a new de minimis regime

  5. The CMA is likely to continue to pursue enforcement action and issue fines for procedural breaches

  6. Expect cooperation between the CMA and the UK's new national security body, the ISU
Trend 1: The CMA is likely to remain an active merger control authority
  • The UK operates a voluntary and non-suspensory merger control regime, meaning that even if the CMA has jurisdiction over a transaction, parties remain free to decide whether to notify the CMA for merger control clearance, and can proceed to closing without such clearance. The trade-off for this flexibility is that the CMA retains the ability to commence investigations on its own initiative, either prior to or following closing. 

  • The CMA has a dedicated Mergers Intelligence Unit (MIU) responsible for monitoring markets to identify transactions for potential call-in. In recent years, the MIU has been quite proactive, and we expect this trend to continue into 2022.  The MIU typically considers a large number of unnotified deals each year – a number of those will inevitably result in Phase I investigations, while many will ultimately be filtered out by the MIU as not warranting investigation. 

  • For those transactions identified by the MIU as candidates for a potential call-in, a typical process might involve (at most) a limited number of rounds of questions over a period of weeks, in which the MIU seeks to ascertain basic facts about the transaction and the competitive landscape (including the UK turnover of the parties, UK shares of supply, and deal rationale). Proactive briefing papers can also be submitted.  While engaging with the MIU can still involve detail-orientated submissions, for those parties who are able to demonstrate to the MIU that no formal Phase I investigation is warranted, the process can be comparatively efficient for transaction parties when compared with the length of a typical UK Phase I investigation, which can last for some months.

  • Correspondingly, we have seen in transaction documents, and expect to continue to see, an increase in forms of "layered" conditionality under which closing may be conditional upon either a favourable outcome at MIU stage, or clearance being obtained after a Phase I investigation. Landing on the appropriate form of conditionality, however, requires early consideration of the UK merger control risk.
Trend 2: Following Brexit, the CMA has been taking an independent line when investigating transactions in parallel with the European Commission, and we would expect that to continue
  • At the end of the Brexit transition period on 31 December 2020, the CMA's merger control regime became untangled from the EU's "one stop shop", with the result that transactions meeting the EU merger control thresholds as well as the those in the UK could fall for parallel review by both the European Commission and the CMA.

  • In 2021, a number of deals were investigated in parallel in this way, including for example, Facebook/Kustomer, Cargotec/Konecranes (UK), NVIDIA/Arm (UK), Veolia/Suez, S&P Global/IHS Markit, Thermo Fisher/PPD, SK Hynix/Intel's NAND and SSD business, Graphic Packaging/AR Packaging, and AstraZeneca plc/Alexion Pharmaceuticals, Inc.

  • Substantively, for deal parties in cases which are being investigated by both authorities, there is a risk of divergent outcomes, given (among other things) the CMA's willingness to take an independent line in its assessment of a case, and its focus on UK-specific issues. Since Brexit, that has played out in practice in certain of the cases noted above.  For example, whereas each of the Cargotec/Konecranes (UK) and NVIDIA/Arm (UK) cases are undergoing parallel Phase II reviews by the EC and the CMA (with decisions pending), the EC granted a Phase I remedies clearance in Veolia / Suez, and the CMA has opened a Phase II review.  Similarly, the CMA cleared Facebook's acquisition of Kustomer unconditionally at Phase I, and the EC has opened a Phase II review. 

  • We would expect this trend to continue through 2022, making early assessment of the potential substantive issues in a case from a UK perspective increasingly important at the outset of a transaction.
Trend 3: The CMA will continue to take an expansive view of the scope of its jurisdictional tests
  • The CMA's jurisdiction is engaged if either the Target's UK turnover exceeds £70m or, in the alternative, if the transaction creates or enhances a share of supply of 25% or more of any goods or services in the UK or a substantial part of it. While the turnover test is clear-cut, the share of supply test affords the CMA wide discretion to assert jurisdiction over a range of transactions, even where the 25% share arises by reference to narrowly defined categories of goods or services, or in small geographic areas of the UK.

  • A notable example of the CMA's willingness to apply an expansive approach to the share of supply test from last year is that of Facebook/Giphy. In that case, the CMA asserted jurisdiction over the transaction even though Giphy did not generate any revenue in the UK. In applying the share of supply test, the CMA found that Facebook and Giphy overlapped in the supply of apps and/or websites that allow UK users to search for and share GIFs (even though Giphy's products are vertically integrated into Facebook's services).  Similar expansive approaches have been taken in other cases in recent years, including Roche/Spark (where the CMA measured share of supply by reference to number of employees and number of patents), and Sabre/Farelogix (where the CMA attributed a UK of share of supply to the target, despite the target having no direct UK customers and no UK turnover).

  • Merger control regulators around the world have become increasingly focused on the extent to which they should be able to expand their jurisdictional thresholds to review, in particular, acquisitions of disruptive nascent or startup businesses, by large firms potentially seeking to protect their incumbent position in a market (so-called "killer acquisitions"). Some proposals under consideration have included a requirement on companies in particular industries (e.g. Big Tech companies) to notify all transactions to the regulator.  At the EU level, the European Commission has sought to expand Member States' use of the mechanism in Article 22 of the EU Merger Regulation to refer smaller deals up to the Commission for investigation.  Against this background, the CMA considers that its very flexible share of supply test is a key advantage of the UK regime, enabling it to review transactions which would otherwise not be capable of investigation in other countries. 

  • Last year, the Competition Appeal Tribunal confirmed the CMA's broad jurisdiction to review transactions in its consideration of the appeal of the Sabre/Farelogix case, and we therefore expect the CMA to continue to adopt an expansive approach to this question.

  • However, an expansive and flexible approach to the share of supply test comes at the price of legal certainty for parties, who risk having their deals being subject to a UK merger control review in a range of circumstances, including post-closing. When planning for acquisitions, parties should therefore carefully consider whether there might be a realistic basis for the CMA to take jurisdiction, and whether any associated conditions or 'clawback' protections need to be included in the deal documents. 
Trend 4: New jurisdictional tests may be introduced, together with a new de minimis regime
  • Notwithstanding the flexibility of the CMA's current jurisdictional tests, there nonetheless remains a range of transactions which are not caught by the UK's merger control regime. For example, the share of supply test can only be met if there is a horizontal overlap between the parties.  Vertical overlaps, or overlaps arising on neighbouring markets, are also not sufficient to trigger the test.  In such cases, the jurisdiction of UK merger control would only be engaged if the target's UK turnover exceeded the turnover test (currently £70m).  

  • This leaves scope for vertical mergers and some "killer acquisitions" to fall between the cracks. The UK Government is therefore contemplating the introduction of a new (alternative) threshold which would apply if any party has both a share of supply of at least 25% and UK turnover exceeding £100m.

  • At the same time, the Government is considering:

    • increasing the level of the turnover test from £70m to £100m; and

    • the introduction of new de minimis safe harbour, which would apply if the worldwide turnover of each of the merging parties is less than £10m.

  • The new thresholds are currently only proposals. Therefore, at the time of writing, there is no immediate impact.  However, if introduced, the new thresholds will enable the CMA to scrutinise a greater range of transactions.

  • The de minimis threshold is a welcome carve out, although it should be noted that it will only apply in a relatively limited number of cases given the level of the proposed threshold. Further, the CMA has told the Government that the proposed threshold may in fact be too high, and that it would prefer the safe harbour only to apply where the parties' combined UK turnover does not exceed £10m.

  • These reforms are set against the backdrop of a range of potential reforms to the UK's competition and consumer law landscape, including a new regime for digital markets. You can read our previous briefings here:

Trend 5: The CMA is likely to continue to pursue enforcement action and issue fines for procedural breaches
  • A significant procedural implication of the UK's voluntary and non-suspensory merger control regime is that, when the CMA is investigating a transaction, it has the power to impose a hold separate order (known as an initial enforcement order, or IEO). Under an IEO, the parties' businesses must be operated entirely separately for the duration (or majority) of the CMA's review.  These orders are routinely imposed in completed deals, and sometimes (but less commonly) in anticipated deals.  Complying with an IEO is usually onerous, and the CMA expects strict compliance.

  • In recent years, CMA has issued a number of fines for procedural breaches of IEOs, including:

    • Successive fines of £100k and £200k imposed on Electro Rent for, respectively, (i) serving a break notice on a target's leased premises, and (ii) making appointments to the management of the target, in each case without CMA consent;

    • A fine of £120k imposed on JLA and Vanilla Group for disposing of certain target assets without consent;

    • A fine of £146k imposed on Nicholl's (Fuel Oils) for relocating target staff without CMA consent.

  • In 2021, that enforcement trend has continued, with each of Facebook (£50.5m, in relation to the Facebook/Giphy case) and ION Trading Technologies (£325k) being subject to fines. The fine on Facebook is notable for its scale, which is significantly above previous fines issued by the CMA.  It is also notable that prior to the imposition of the fine, Facebook had twice appealed the scope of the IEO imposed on it by the CMA, and the CMA's refusal to grant derogations from that IEO.  The Competition Appeal Tribunal, and subsequently the Court of Appeal, endorsed the CMA's approach to the imposition of IEOs, and we therefore expect that the CMA will continue to take a robust approach to enforcement of those orders.

  • Worth noting for international transactions in particular, in practical terms, is that the CMA's starting point will continue to be that an IEO will apply globally, such that all parts of the parties' businesses will be subject to the requirements of the IEO until the parties can demonstrate to the CMA that releasing the non-UK aspects (or non-overlapping aspects) of the relevant businesses will not impact on the CMA's ability to remedy any competition concerns. Demonstrating this to the CMA to requisite level of proof prior to the CMA's determination of its substantive investigation would usually require significant evidence to be produced to the CMA.
Trend 6: Expect cooperation between the CMA and the ISU
  • Perhaps one of the biggest shake-ups of the UK's regulatory landscape in recent years has been the introduction of the UK's new national security regime, which came fully into force on 4 January 2022. Unlike the UK merger control regime, the new national security regime is a hybrid regime containing a mix of mandatory and voluntary elements.  The Government also retains a call-in power.  You can read our briefing on the new regime here.

  • Both the CMA and ISU have publicly acknowledged that coordination between the authorities is to be expected. For example, the CMA issued a revised version of its "Guidance on the CMA's Jurisdiction and Procedure" on 4 January 2002, in which it notes that "the CMA and the ISU expect to coordinate, as may be appropriate, to manage the interactions between the two regimes that may arise in specific cases".

  • The scope of the new national security regime is broad, with the government having previously stated that it expects the Investment Security Unit (ISU) will review approximately 1000-1850 notifications per year. Inevitably, a number of those cases will also be reviewed in some form by the CMA, either at MIU stage, or in the context of a more formal merger control review at Phase I (and in some cases, Phase II).  Given the expected level of cooperation, if parties are choosing to notify either of the ISU or CMA of any given transaction, it will be prudent to consider in advance whether a proactive approach to the other should be made in parallel.  Deal documents may need to cater for both processes, with appropriate gap periods.

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