In recent years, the Competition and Markets Authority (CMA) has become noticeably more pro-active and interventionist in reviewing transactions. In 2019 more than 50% of mergers referred to Phase 2 were prohibited or abandoned. At Phase 2 in 2020, the CMA has already issued three prohibitions and another four transactions have been abandoned. Only one has been cleared. Despite the UK operating a voluntary notification regime, the CMA has available to it an extensive range of powers to intervene in transactions, which it is increasingly exercising, making the regime, in practice, one of mandatory notification. This article assesses two recent developments that will further confirm and reinforce this trend: the CMA’s proposed revision to its jurisdictional guidance and the recent Competition Appeal Tribunal (CAT) decision in the Facebook/GIPHY merger.
Consultation on updated jurisdictional guidance
In November, the CMA launched a consultation on updates to two of its merger guidance documents. The summary consultation document highlights specific areas of interest where the CMA intends to enhance its ability to investigate proposed mergers.
EU merger control
After the end of the Brexit transition period, from 1 January 2021, the UK will no longer form part of the one-stop shop EU merger control regime. The CMA is therefore free to open its own, separate investigations, parallel to any EU investigation. The CMA has stated that it may ask parties to grant waivers to discuss the case with other European authorities dealing with a multijurisdictional merger. Given that the CMA has shown an appetite for intervening in cases where notifications were not made (for example, in the Facebook/GIPHY case) parties may be inclined to notify the CMA pre-emptively if they are also notifying other European authorities. This may be the case even if the parties consider that the transaction is likely to be found to fall below the thresholds for referral, or that the transaction is certain to be cleared, in order to remain on the ‘front foot’ rather than risk the transaction being called in at a later date and undergoing a separate investigation.
Share of supply test applied flexibly
The CMA has stated that it will consider the “commercial reality” of parties’ activities, with a focus on the “substance rather than the legal form of arrangements”. The share of supply test threshold is satisfied where the parties together account for 25% of the goods or services of a particular description supplied or purchased in the UK or a significant part of it. However, the revised guidance notes the CMA’s wide discretion to assess value, cost, price, quantity, capacity, number of workers employed or any other criterion which it may regard as relevant. This wide discretion will enhance the CMA’s powers to review deals and may cover transactions which previously would not have been within the remit of the CMA. Parties should consider carefully the scope of the market they are operating in. The CMA may take a very narrow view if it is flexibility to regard evidence beyond the purely financial aspects of market control. Of course, it remains to be seen whether the courts will apply any such wider view of the statutory test.
Enhanced post-closure review powers
The draft guidance notes that “completing a merger without first obtaining clearance from the CMA carries the risk that the completed transaction may be unwound by disposal of the acquired business … or assets”. This is a clear warning to parties who are within the review threshold and do not notify the CMA of their proposed transaction. In addition, Parliament has recently enacted the new National Security and Investment Bill. This further strengthens the powers of the UK Government to review transactions in sectors which involve elements of national security, including a mandatory notification regime for those which are the most high-risk or sensitive.
The recent judgment of the CAT in the Facebook/GIPHY appeal has further emboldened the CMA, with the CAT approving the CMA’s use of wide-scope Interim Enforcement Orders (IEOs). Neither party notified the proposed transaction to the CMA. The CMA issued an IEO in June 2020, despite the fact that the CMA had not yet formally launched its Phase 1 investigation. It subsequently directed the appointment of a monitoring trustee and a hold separate manager. Facebook requested derogation ‘carve-outs’ from the IEO which would mean that parts of it would not apply to Facebook. In order to review the carve-out requests, the CMA requested further information, which Facebook did not provide. Consequently, the CMA granted no derogations and Facebook lodged the appeal at the CAT.
Facebook considered that, without the derogations, the IEO was unreasonable in terms of the compliance burden placed on Facebook. Facebook’s case was that the IEOs were irrational, disproportionate, breached the legal certainty principle and created impossible obligations. The CAT dismissed the appeal on all grounds for the following reasons.
Facebook contended the CMA was wrong to use the IEOs ‘pre-emptively’. Under section 72(2) of the Enterprise Act, the CMA may make an IEO for the purpose of preventing pre-emptive action, which is defined at section 72(8) of the Enterprise Act. The CAT held that a broad interpretation should be applied to s72. Pre-emptive action does not only relate specifically to remedies. It also captures actions which have the potential to affect the competitive structure of the market during the CMA’s investigation.
The CAT was clear that pre-emptive action by the parties is a broad concept and includes the possibility of prejudice to a later Phase 2 reference or an impediment to justified action. The definition of pre-emptive action was held to include that which might prejudice a Phase 2 reference. The wording of ‘might’ set a low threshold and as the statutory purpose of an IEO is precautionary, the CMA has a wide margin of appreciation. The CAT concluded that it is not the case that it must be ‘likely’ to prejudice a Phase 2 reference; a mere risk or possibility is enough to justify their use.
The IEO and subsequent information requests would have given the CMA the opportunity to properly acquaint itself with the relevant information. Where the CMA has formed the view that it requires further information, it has a wide margin of appreciation to decide what information is needed. The CAT noted that the CMA had a ‘duty’ to acquaint itself with the facts and could not simply rely on parties’ assurances, with no verification, that there were no competitive concerns. Facebook failed to provide the requested information to allow the CMA to review if the derogations were appropriate and as such, the CAT upheld that the CMA used the IEOs correctly.
The CEO of the CMA, Andrea Coscelli, noted that “initial enforcement orders are an essential part of the CMA’s merger toolkit” and that companies seeking derogations from IEOs “must provide sufficient information to the CMA before a decision can be made to release them” from the obligations.
Clearly, the CMA is looking to take a more hands-on approach to transaction reviews. Andrea Coscelli has already made it clear that the CMA is looking to “take back control … of the decisions” post-Brexit and the CMA wants to make its mark, free from any constraints of the EU merger control regime. Far-reaching powers with wide discretion, such as IEOs, are an alternative way in which the CMA will seek to manage or prevent proposed transactions. Combined with the NSI bill, this signifies a shift towards what is in practice a mandatory notification regime and a more obstructive, burdensome landscape for companies proposing mergers or acquisitions in the UK. More than ever, thorough up-front analysis, risk assessment and risk allocation will be necessary when entering into any sort of transaction process.