It’s Monotrematic - Introducing Platypus and the UK’s merger control regime
Of all the Mammalia yet known it seems the most extraordinary in its conformation, exhibiting the perfect resemblance of the beak of a Duck engrafted on the head of a quadruped.
- G. Shaw, 10th Volume of The Naturalist's Miscellany (1799)
Ornithorhynchus paradoxus (later re-labelled anatinus). Along with echidnas, platypuses are the only living monotremes, a subset of mammals. These duck-billed creatures lay eggs in true bird-like fashion (ornithorhyncus means bird-snout). But then – paradoxus – they suckle their young like a true mammal.
The UK’s merger control regime is paradoxical like the platypus: it confounds neat classifications. The answer to basic questions about the UK’s regime is both yes and no. Or: it’s complicated. Is it voluntary? Yes – for sellers, it has the friendly beak of a voluntary duck. For buyers where there may be issues, no – it has the body of a powerful and potentially dangerous quadruped. Is there an objective qualifying threshold? Yes - the turnover test. Well, no – material influence, share of supply, substantial part, associated persons.
These other aspects of the UK’s unique regime allow the Competition and Markets Authority (CMA) to reach deals that are off-limits to other authorities. And while there is formally no requirement to notify a deal to the CMA, its Merger Intelligence Unit can “call in” any transaction that it believes may give rise to competition concerns. This flexibility puts digital and other innovation-based sectors, where the CMA perceives there to have been historic under-enforcement, firmly in this platypus’ sights.
Milking the analogy
To those 19th century Europeans, the shape and form of the platypus was hard to summarise without sounding like a hoax. Start with the snout of a duck, add the tail of a beaver, the feet of an otter, the eggs of a bird and the glands of a mammal. Its interior organs are … reptilian. Similarly, UK merger jurisdiction is a strange and fuzzy array of concepts bolted together that confound concise description – other than to say: it’s any animal the CMA wants it to be (see sections 23(5)-(7) Enterprise Act).
Some key attributes of monotrematic merger control:
- Electrolocation – the share of supply test. A platypus’ bill is comprised of thousands of cells that give it a sort of sixth sense, allowing the creature to detect electric fields generated by all living things. It is so sensitive that the platypus can hunt with its eyes, ears and nose all closed, relying entirely on the bill’s electrolocation. The “share of supply” threshold is the CMA’s electro-locating bill. It allows the CMA to review any transaction which leads to an increment on a share of supply of 25% or more in any plausible ‘frame of reference’ (which can be infinitely broader or narrower than a well-defined market in antitrust terms). The CMA’s elastic share of supply test allows it to hunt cases which have escaped less ‘sensitive’ authorities including recently Sabre / Farelogix (no UK sales, customers or market share) and Roche / Spark (jurisdiction based on employees active in R&D). For more in depth analysis, see here.
- A retracted level of ‘control’. The webbing between a platypus’ front claws retracts when the platypus ambles up the riverbank to expose sharp claws. The CMA can review the acquisition of a retracted level of control known as “material influence” – a lower and more nebulous threshold than the EU’s “control” test (followed in most EU Member States and other major jurisdictions worldwide). Recent examples include E.ON / RWE (material influence conferred by a 16.67% shareholding) and Amazon / Deliveroo (16% shareholding). See here for more details. And at Phase 1, the CMA need only establish that it “is or may be the case” that the jurisdictional (as well as the substantive) threshold for a Phase 2 reference is met. This means that the CMA can take a view of the likely competition issues in a new investigation and then decide if the jurisdictional test is met. And end-game conclusions on whether the CMA believes it can lawfully assert jurisdiction to review a transaction are not definitively reached until the end of a full Phase 2 merger review process. Typically, this is at least a year into the CMA process. For a binary yes/no question like jurisdiction, that is a long (egg-based) gestation period!
- Substance over form – the ‘enterprise’ test. A platypus is judged to be a class of mammal not from its outward and egg-laying form, but for the substantive fact that, at the end of the day, it suckles its young. The concept of an “enterprise” is the equivalent of a business or undertaking in other regimes, but a broader concept that is more substance than form and stretches to more extreme fact patterns – the equivalent of the egg-laying among regular mammals. The EA 2002 defines “enterprise” as “the activities, or part of the activities, of a business”. The CMA’s approach, endorsed by the Supreme Court in Eurotunnel/Sea France, makes clear that simply means that the activities in question could be carried on for gain or reward (even mothballed for over half a year) provided there was nonetheless sufficient continuity that “economically the whole is greater than the sum of its parts” and therefore an enterprise, even if only its “embers”.
- A strong grip. When it does choose to bite, the UK regime's beak has a vice-like grip. The CMA’s hold-separates (interim enforcement orders) that apply in all cases post-closing have more information-sharing restrictions than the suspension obligations of most compulsory regimes.
- Lethal when it sees a threat. The hind foot of the male platypus is also venomous – itself a rarity among mammals. And the UK regime can be pretty lethal at the back end of the process in Phase 2 – as our deal mortality stats show. Indeed, the regime can cause deals to be unwound “voluntarily” even at Phase 1 (e.g. Danspin/Lawton Yarns) and in Phase 2 nothing should be considered safe – even deals that are quite small (e.g. Vanilla Group/Washstation) or not particularly British (e.g. Sabre/Farelogix).
- A most implausible creature. A most implausible creature. Those who had actually encountered the strange animal – the Aboriginal population of Australia and some of the early colonists of New South Wales - were convinced that platypuses laid eggs. From afar, however, the European scientific community thought it “knew” better. As Hall put it on this issue: “rarely are the strongly held views of professionals overturned by the evidence of amateurs”. And in London no less than other European capitals, the merger efficiencies claims and evidence of business amateurs are mostly met with the same professional scepticism that met the claims of Aborigines and colonists: sure, your mammal will lay me some eggs.
It took a long time for Western understanding to crystallise of just exactly what creature the platypus was. But dealmakers today should be prepared to move quickly to get to grips with the unusual animal that is the CMA.
Brexit will trigger fast evolution by giving the CMA scope to review deals previously outside its domain on top of its existing ability to hunt its prey in the shallowest of jurisdictional waters. No foray into its broadened habitat should be undertaken without careful preparation.
Our Platypus page will present updated statistics on CMA case outcomes as well as periodic commentary and insights into the unique beast that is UK merger control.