Will Not Sync: The challenge of multi-jurisdictional process and substantive friction post-Brexit
Does it Fit? Not a bit. The CMA would not have worn the Google / Fitbit remedy, as its CEO Dr Andrea Coscelli made clear in a speech on 9 February 2021. Google must be glad for the EU One Stop Shop while it lasted... A Commonwealth tandem of the UK and Australia might have effected a very different outcome had the deal been announced today.
“We are … quite clear in our report that we’re quite sceptical about this type of complex, long-running behavioural undertakings that require quite a lot of monitoring, and we have rejected similar undertakings in cases over the years in the UK.”
The EU’s One Stop Shop ceased applying in the UK from 1 January. The UK CMA has taken up its position on the global stage, as a regulator that can review (almost) any deal. We have written previously about the UK becoming an (even) bigger consideration for parties to global deals and the risk that the CMA reaches divergent outcomes from other regulators, including the European Commission (see here). But six weeks in, how is the CMA forging its role independently of the European Commission? And what challenges lie ahead for parties to global deals?
Quick off the mark: the CMA has wasted no time exercising its extended jurisdiction
First and unsurprisingly, the CMA has already shown its intention to take a seat at the table in major global deals that would previously have sat within the sole competency of the European Commission. So, what can we see so far? The CMA already has a number of truly international cases on its docket like NVIDIA / Arm and Veolia / Suez, which are also subject to review by the European Commission (and thus would have been outside the CMA’s jurisdiction just two months ago).
And the trend will doubtless continue: the CMA previously estimated that the end of the EU one-stop-shop applying to the UK might mean “an additional 30 to 50 Phase 1 mergers per year”, which could lead to “half a dozen or so additional Phase 2 cases”. Given the CMA’s average case load in the past five years has been 64 cases per annum, this represents a substantial uptick.
Even during the era of the One Stop Shop, the CMA has co-ordinated reviews with other agencies (for example, Sabre/Farelogix; Illumina/PacBio and more recently, Stryker/Wright which all exhibited close US-UK agency co-operation). But the types of cases that are within the CMA’s remit now, post Brexit, are likely to be larger and more global in nature, raising complex issues that will need to be coordinated with numerous other regulators and for the first time, with the European Commission. Indeed, the CMA’s Chief Executive Andrea Coscelli has said that while the CMA aspires to be "very much to be at the top of the table discussing international mergers," it is less clear how it will deal with more routine regime friction in large global transactions. How the CMA cooperates with the European Commission and other global regulators on its first post-Brexit deals will be watched closely and provide important insights for future cases.
Timetabling issues: is streamlining possible?
The CMA has one of the longest and, currently, least predictable merger control regime among the major Western economies. Its timetable does not line up neatly with that of the EU, especially on deals requiring remedies (see our previous blog post comparing the differences between the EU and UK regimes in terms of process and timing) and it has taken a significantly different approach to the Commission in relation to pre-notification and to accepting large, upfront remedy packages in Phase 1. In the new age of parallel CMA and European Commission review, this will present significant practical challenges for merger parties.
The CMA has also publicly committed to trying to align as far as possible with the European Commission and other regulators. But the CMA’s rigid statutory deadlines can raise issues for merger investigations, in particular for large and complex mergers. These issues are live in even UK-only cases, but as the Competition Appeal Tribunal recognised in a recent judgment “if the departure of the United Kingdom from the European Union will lead to all large-scale, international mergers affecting the United Kingdom which currently fall within the exclusive jurisdiction of the EU Commission, being in future also subject to the UK merger regime, [the problem of the CMA’s compressed timeline] is likely to be multiplied.” The problems the CAT identified in that case were exacerbated by the fact that the CMA’s deadlines for Phase 2 are expressed in weeks rather than working days (as in other regimes) and so can be further compressed when the time periods stretch over Christmas and Easter breaks.
Making amendments to the CMA’s statutory timelines to allow more flexibility and alignment with global peer authorities in merger investigations would require legislative change. However, process amendments that would enable the UK regime to dovetail more neatly with the other regimes, including in particular the EU, are possible. In December, the CMA published updated guidance on its “jurisdiction and procedure” (“J&P guidance”), where it says that it may depart from its standard approach “where there is an appropriate and reasonable justification for doing so, which may include the alignment of the CMA’s investigation with the processes of other competition authorities.” The CMA could, for example, contrary to its current practice, extend its review in pre-notification to ensure that it aligns with the generally longer pre-notification periods for complex cases at the European Commission.
Fast-track review may be appropriate in certain cases which the CMA has reaffirmed and expanded the scope for in its J&P guidance. A case can be fast-tracked to proceed more quickly to (i) offering Phase 1 remedies (or ‘undertakings in lieu’); or (ii) an in-depth Phase 2 investigation. The CMA has acknowledged that, in certain circumstances, “this may aid the alignment of the CMA’s substantive assessment and/or remedies process with proceedings in other jurisdictions.” To date the CMA has only applied fast track within Phase 2 relatively rarely: for example, in Optimax / Ultralase, where the Competition Commission (the CMA’s Phase 2 predecessor) reached a quick decision on the application of the failing firm defence.
And how about remedies?
The timetabling issues become even more acute in complex cases requiring remedies. At the EU level, the European Commission has been willing to consider and accept significant upfront remedy packages at Phase 1 in complex cases involving substantive overlaps, including for example ABI/SABMiller and Holcim/Lafarge. While considerable time goes into planning and agreeing the remedies on the part of advisers and the regulator, including prior to and during (lengthy) pre-notification in such cases, parties can avoid the time and costs associated with a Phase 2 review.
In addition, the European Commission has made increasing use of upfront buyer and fix-it-first remedies in merger investigations. While up-front buyer remedies (where the parties can only close the main transaction (“UFB in the EU”) or remove Phase 2 risk (“UFB in the UK”) once they have signed a binding agreement for the divestment business with a purchaser) are also common in the UK, fix-it-first remedies (where the buyer and the transaction documents are approved in the decision clearing the main transaction, for example, Alstom/GE) have not (yet) been a feature of the UK system.
The high legal standard applicable to acceptance of remedies in Phase 1 in the UK and the rigidity of the CMA process when it comes to the sequencing of harm to competition (SLC) findings and remedies (and the protections around the purity of the process in terms of decision making) means that the UK process does not readily dovetail acceptance of a remedy package with the European Commission. Parties can informally discuss remedies with the CMA case team prior to the Phase 1 SLC decision and try to ‘parallel track’ the case (as occurred for example in Wood Group/Amec Foster Wheeler; and Stryker/Wright Medical) but the CMA will not generally fully engage on remedies or to market test these until its decision finding a substantial lessening of competition is published. Critically, the decision maker (whether at Phase 1 or Phase 2) will not, other than in exceptional circumstances, be involved in remedy discussions until this point, which can make more complex or novel remedies difficult to negotiate within the statutory timeframes.
The J&P guidance suggests the CMA will be more flexible and perhaps allow such “exceptional” discussions more frequently in multi-jurisdictional mergers. The CMA has also indicated that it may decide not to open an investigation immediately where a transaction is subject to review by another competition authority and any remedies imposed or agreed in those proceedings would be likely to address any competition concerns that might arise in the UK. The CMA gives the example of where “all of the markets that are relevant to the transaction are broader than national in scope.” However, the CMA’s guidance makes clear that merging parties “run the risk” that remedies in other jurisdictions do not “fully eliminate any competition concerns relating to the UK”, which could result in the CMA opening a formal investigation within four months post-closing. It is not clear how the CMA will apply this new approach in practice and whether parties will be willing to take the (significant) risk of post-closing intervention by the CMA. Parties will need, at the very least, to ensure that they engage with the CMA, and ideally early on, in order to navigate the complexities of parallel reviews.
How the CMA puts the additional flexibility it affords itself in the revised J&P guidance into action will be critical if remedies are to be dovetailed with other competition authorities.
But will it matter in the end?
Timetabling and procedural issues can of course be critical for merging parties: system friction could lead to significant delays to closing a deal; ticking and reverse break fees and the potential for deals to lapse if regulatory issues push timing past an agreement’s long stop date. But assuming that procedural issues can be navigated, will the CMA’s ability to review the UK aspects of a deal previously within the EU’s sole competency change the outcome?
We have written previously about the high deal mortality rate for CMA reviews. Of course, to simply compare deal mortality rates between the UK and EU would give an unduly alarming result, given the different profile of CMA cases (non-overlap mergers are generally not notified to, or called in by, the CMA). But there are reasons to believe the CMA might be more likely to block a deal outright than the European Commission.
Most critically, Dr Coscelli has said publicly that the CMA is increasingly of the view that in cases where remedies would be complex and require long term monitoring, prohibition may be a more appropriate outcome. Just last week, in the clearest indication of the potential for substantive divergence yet, Dr Coscelli said that the (behavioural) remedies accepted by the European Commission to clear Google’s acquisition of Fitbit would likely have been rejected in the UK (as they were in Australia). The CMA did not have jurisdiction over Google / Fitbit because it arose during the One Stop Shop era, but it would have if the deal happened a year later.
Unlike Oracle/Peoplesoft where the European Commission did not move to block a deal that the DOJ had tried and failed to block on antitrust grounds in the US, the CMA has blocked a deal (Sabre/Farelogix, currently under appeal at the CAT) that the DOJ failed to block and is already not afraid to voice a divergent view from the European Commission’s on a very high profile case.
What it means for global M&A
In the new era of parallel CMA and European Commission review, parties to global deals need to be alive to both “system friction” and substantive risks. Developing a clear strategy for engagement with different authorities will be critical to avoid potentially significant deal-execution risks (and costs), and careful planning of engagement with all regulators more important than ever. Just as importantly, Dr Coscelli’s comments last week represent a shot across the bow and underscore that a deal feasibility analysis needs to consider the different enforcement environments around the world, and always factor in the Platypus’ surprising but potentially deadly venom.