UK merger-control reforms promise twin win of catching problem deals while easing others

26 Jul 2021 3:26 pm by Victoria Ibitoye

Mergers & Acquisitions

Acquisition-hungry companies worried at plans to tweak the UK's merger-control regime should be comforted by indications that the government is chiefly concerned about problematic deals.

Its proposals favor flexibility over regulatory overreach and could signal a more streamlined review process — and thus a potentially faster one — if taken forward.

The government lifted the lid last week on long-awaited plans to overhaul the Competition and Markets Authority in a call for feedback under the title “Reforming Competition and Consumer Policy”.

Expectations are realized that the CMA is in line for enhanced powers to tackle consumer rip-offs and bad business practices, but also signals key changes to its merger-control responsibilities.

The consultation is the government’s response to a letter by former CMA chairman Andrew Tyrie in February 2019 that urged a raft of changes, and to a report by Conservative lawmaker John Penrose in February this year on the UK’s post-Brexit competition regime.

Jurisdiction thresholds

The proposals knock back Tyrie’s calls for a mandatory merger-notification regime, instead backing the UK’s current voluntary and non-suspensory approach — which allows companies to complete mergers without notifying the CMA. It strikes the right balance between consumer protection and regulatory burden, the government said, though it is seeking suggestions on how the system can be improved.

Where a tweak has been floated is over the existing thresholds for the CMA to call in and review mergers, intended to ensure that smaller companies can escape scrutiny, while granting the regulator greater flexibility to tackle so-called "killer acquisitions."

Currently, the regulator has jurisdiction to examine a deal when the UK revenue of the acquired enterprise is more than 70 million pounds ($97 million), or when the merging parties supply or acquire at least 25 percent of the same goods or services provided in the UK and the merger increases that share of supply. This “share of supply” test has been used flexibly in recent years to examine deals seen as posing risks to potential future competition.

The government proposals suggest raising the revenue threshold from 70 million pounds to 100 million pounds, while also excluding deals where both parties have revenues of less than 10 million pounds.

They also expand the application of the share of supply test by proposing to empower the CMA to review a merger, if either party has both a share of supply of at least 25 percent of a particular category of goods or services supplied or acquired in the UK or a substantial part of the UK, as well as a UK revenue of more than 100 million pounds.

“This new jurisdictional threshold would allow the CMA to more easily investigate vertical mergers involving larger, established market players, or mergers that might increase the concentration of market power across different products or services,” the consultation states.

"It would also allow the CMA to call in mergers that consist of large companies acquiring new startups or potential new entrants to a market, even if the target does not yet have a qualifying share of supply in a UK market where this might affect customers in the UK."

The government called this a “significant step” and said that while it was aware of concerns expressed by some businesses over the unpredictable reach of the CMA's merger control, the need for effective merger control must be assessed in the round.

Faster merger reviews?

The government has also floated measures to speed up merger reviews by allowing the CMA to consider remedies earlier in phase II probes.

Currently companies can either offer commitments at the end of the phase I review to head off an in-depth probe, or after the watchdog reports its provisional findings from a phase II investigation.

The consultation acknowledges merit in allowing binding commitments earlier in phase II, particularly if the merging companies were simply timed out on agreeing commitments with the CMA at the end of phase I. Under this proposal, the CMA would narrow the scope of its phase II probe to consider only concerns identified at phase I.

“Such a proposal may assist in streamlining the competition analysis carried out at phase II. This could help to use the CMA’s resources more efficiently and reduce overall timescales for phase II mergers,” the consultation states.

The government is also considering reforming how mergers can be fast-tracked by allowing companies to request an automatic reference to an in-depth review via a short-form submission to the CMA, ahead of an initial probe explaining why they believe it has jurisdiction.

That would mean the deal won’t need a phase I investigation, and the companies won’t need to formally accept that the merger could result in competition concerns. The government might, however, add a three-week extension to fast-tracked phase II investigations to ensure that the CMA has enough time to conduct its probe.

Lastly, the government has proposed having a smaller pool of dedicated members of the CMA Panel — from which are drawn the independent group that conducts phase II probes — as well as revising the role of members to making final decisions on theories of harm.

“This would retain the role of the CMA Panel as a ‘fresh pair of eyes’ while allowing the CMA greater administrative flexibility during the course of the investigation itself,” the consultation said.

More flexibility, more scrutiny

The proposals show that the government is keen to strike a balance between allowing the CMA to go after problematic mergers planned by larger companies while not unduly burdening all companies or stifling innovation.

The floated measures, coupled with the government’s separate merger-control plans for companies deemed to have strategic market status under the CMA's new Digital Markets Unit, suggest that the government has recognized that a proportionate and tailored approach is likely to produce the fairest outcomes.

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