second stage merger control investigation

13 February 2004

Richard Eccles

The Competition Appeal Tribunal has clarified the basis on which the Office of Fair Trading (“OFT”) must determine whether or not to refer a merger to the Competition Commission for full investigation, in particular in cases involving significant market shares and/or complex factual situations.

The OFT is required by the Enterprise Act 2002 to carry out preliminary assessments of whether mergers may be expected to result in a substantial lessening of competition in any market in the UK for goods or services (section 33 (1)) and to refer the merger to the Competition Commission for full investigation if the OFT believes that it may be the case that such a substantial lessening of competition may arise.

In the present case, the OFT found the merging parties to hold a combined market share of between 45% and 55% in relation to the supply of IT software to the healthcare sector. The OFT declined to make a reference on the ground that a new English national procurement system for IT in the healthcare sector changed the competition position so that, in the OFT’s view, the merger was not expected to result in a substantial lessening of competition. A competing supplier of IT solutions, IBA Health appealed against to the OFT’s decision to the CAT, arguing that a combined market share of 45% - 55% self-evidently resulted in a substantial lessening of competition and hence should have been referred to the Competition Commission.

The Competition Appeal Tribunal (“CAT”) concluded that the OFT may only conclude that it believes that a merger should or should not be referred, on reasonable grounds and on the basis of sufficient material following sufficient investigation. In order for the OFT to believe that it may not be the case that a merger would result in a substantial lessening of competition, the OFT must be satisfied that there is no alternative credible view that it could result in a substantial lessening of competition. However, if there is room for two genuine and credible views about the effects of the merger, then the OFT is under a duty to refer it to the Competition Commission. Where there is a real issue of a possible substantial lessening of competition, only in exceptional circumstances could the OFT seek to resolve the matter itself rather than making the reference. This is especially so where the facts are complex, as in this case.

In particular, the CAT stated that where a merger involves market shares of 45% - 55%, the OFT should give an explanation on the question of a substantial lessening of competition, involving a full factual assessment of the market and exceptional clarity of analysis. Further, any shortage of time for the OFT’s assessment under the statutory timetable does not justify the OFT in permitting mergers without such full factual examination and analysis. If there is doubt as to whether the merger would involve a substantial lessening of competition, then it should be referred to the Competition Commission, even if, taking into account the time scales, this would mean that most horizontal mergers should be referred to the Competition Commission for full investigation.

The CAT judgment establishes very clearly that the OFT should act only as an initial filter on mergers and should refer a merger to the Competition Commission for full investigation if there is any possibility or any doubt as to whether or not it may result in a substantial lessening of competition. This is especially so in complex factual cases or cases involving significant market shares of around 50%. In such cases, the OFT should only clear the merger without making reference to the Competition Commission if it can demonstrate clearly, on an objective basis, without there being room for an alternative view, that the merger would not result in a substantial lessening of competition. This creates a strong presumption in favour of second stage investigations by the Competition Commission in any factually complex cases or cases involving significant market shares.


Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.

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