Regulatory Squid Game? The stretched tentacles of UK merger control reform
We’ve previously written about the uniquely elastic nature of UK merger jurisdiction and the CMA’s expansive interpretation of the various elements of the current jurisdictional tests. Since then, the CMA’s approach to jurisdiction in the Sabre case has been validated by the Competition Appeal Tribunal. So why is the Government proposing to stretch the boundaries of UK merger jurisdiction even further, so as to render the need for any thresholds at all almost meaningless? Will this really achieve ‘rebalanced merger control’ and what is left to rebalance?
▲ What’s new?
In late July, the Government published two consultations: one proposing sweeping reforms to competition and consumer policy (the General Consultation), and a second on the operation of the CMA’s new Digital Markets Unit (DMU) (the Digital Consultation). Both consultations are broad in scope and set out their proposals in relatively high-level terms. A key area where they cross-over and potentially conflict is in relation to merger control.
The General Consultation proposes both jurisdictional and procedural amends that would apply to all firms across the economy. The first proposal on jurisdiction – raising the turnover based threshold from £70m to £100m and creating a safe harbour for mergers where the worldwide turnover of each of the parties is less than £10m – although welcome, is a largely cosmetic, political window dressing nod to SMEs and, given the profile of cases considered by the CMA, will have little practical effect.
The other proposal involves a more fundamental change in the other direction and is designed to target a perceived gap under the current regime in relation to vertical and conglomerate mergers in particular. Under this proposal, the CMA would have jurisdiction where any party to the merger, i.e. including the acquirer, has at least a 25% share of supply of particular goods or services in the UK, or a substantial part of the UK, and has UK turnover of more than £100m. Unlike the current thresholds, this would mean that the buyer alone could satisfy the test and that no increment to a share of supply would be required. As there would be no requirement for the other party to have any presence in the UK, the obvious implication is that deals with no nexus to the UK would be caught.
The proposals contained in the Digital Consultation are more nuanced, as they will apply to digital firms that the DMU designates with “strategic market status” or “SMS”. This designation will involve an assessment of whether a firm has “substantial and entrenched” market power in at least one activity, providing it with a strategic position. Such firms will be subject to a range of obligations, including a new SMS merger regime, which will introduce (for firms designated with SMS):
- an in advance reporting obligation for all transactions;
- a transaction value threshold, combined with a ‘UK nexus’ test;
- mandatory review for a subset of the largest SMS transactions; and
- lowering of the Phase 2 probability standard to align with the Phase 1 “realistic prospect” test. The combined proposals would result in a fundamental overhaul of the UK merger control regime and make it (even) easier for the CMA to assert jurisdiction over all deals and ultimately block SMS deals.
The combined proposals would result in a fundamental overhaul of the UK merger control regime and make it (even) easier for the CMA to assert jurisdiction over (almost) all deals and ultimately block SMS deals.
● Green light red light?
The extension of the share of supply test to remove the need for an increment (where one party has UK turnover >£100m) would remove what the increment delivers: the jurisdictional requirement of a UK nexus for a transaction. Platypus would welcome a removal of the inelegant “gymnastics” to which the CMA has (quite lawfully) resorted to construct an increment and assert jurisdiction in incumbent/challenger deals. But Platypus suggests that this in itself does not justify a proposed change to drop a domestic nexus, which is the opposite of the International Competition Network’s direction of travel. Instead, if the CMA’s intention is to capture non-horizontal mergers below the turnover threshold, which is understandable, a separate nexus requirement should be introduced, and creative proposals could and should be put forward beyond simply revenue, such as if the # of UK users for free-to-consumer services is above X or if the UK portion of transaction value is above Y (à la US-style HSR).
■ Has BEIS handed over all its marbles?
The proposed SMS merger reforms presuppose a UK transaction nexus requirement, and it is clearly only coherent and logical to ask the same for regime extension on non-SMS mergers (although equally, if the general merger control boundaries are elasticised in the way proposed, it is not clear why additional SMS jurisdictional rules are required at all). Expansive extra-territorial jurisdiction seems to be a more general theme in the General Consultation, with BEIS proposing a more US-style effects test in relation to anti-competitive conduct more broadly.
If Government’s policy goal is that the CMA should have the power to review the full universe of potential competition cases even without any UK nexus, then it should be transparent that the rebalancing is really a post-Brexit “more is more” step change in one direction: the CMA can dispense its M&A medicine sans frontières. And in that case, it would be more honest and sensible to have no limit rather than expanded jurisdictional boundaries that are so elastic as to be largely cosmetic. Ironically, it would provide greater legal certainty: the Government would want the CMA to be able to review any transaction, period, and no argument: firms could dispense with sometimes prolonged and expensive discussions with the CMA in relation to its jurisdiction to review a deal (prolonged as the CMA only takes a view on jurisdiction in parallel with its substantive review, and not as a threshold question). In addition, in Phase 1, as a number of parties have found to their cost, the CMA need not decide on jurisdiction: only needing to satisfy itself there is a realistic prospect that it may have jurisdiction, which has had the effect in a number of cases including Sabre/Farelogix of kicking the can into Phase 2, with the yes-or-no binary answer on jurisdiction arriving … up to a year after Phase 1 pre-notification began.
On the other hand, if the Government’s policy goal reflects some policy trade-offs (such as legal certainty and predictability can also be good for the economy), and that there should continue to be some jurisdictional limits based on UK nexus, the net effect of the proposals is a substantial increase in jurisdiction, with a net increase in legal uncertainty for transactions where any party has UK turnover greater than £100m. In reality, this will catch the majority of transactions, resulting in the substantive SLC test being the only nexus test for UK merger control. Similar concerns are being aired in the EU, with the Commission’s March Article 22 Guidance having the effect of non-EU transactions with parties without EU activities in principle being reviewable.
ᴥ Game over? (The 45.6 billion Won question)
The consultations closed on 1 October. While we anticipate that Government will have reams of responses to work through given the breadth and reach of the proposals, BEIS has indicated that the intention is to process responses and legislate quickly. The CMA has already published its responses to both consultations, unsurprisingly indicating that it largely backs the proposals, including in relation to merger control.
The net effect of the proposed reforms as they stand is that the only real jurisdictional test for mergers will be the substantive SLC test. This would formally be somewhat like the US (notwithstanding HSR mandatory filing) except the US agencies have to challenge deals in court which in practice acts as a threshold against review or challenge of every deal below HSR. All that said, given the elastic nature of the current UK jurisdictional tests, these stretched tentacles may arguably have little effect in practice save in a small handful of marginal cases.
However, for SMS firms, the stakes are much higher, considering the probability standard for the substantive test will also be lowered at Phase 2. We will explore the implications of this in more detail in our next post.