Conscious parallelism: is the new fast-track Phase 2 process a win for multi-jurisdictional remedies deals?
The CMA’s prohibition of Cargotec/Konecranes in April 2022 after the European Commission had conditionally approved the deal was a case of what we might call conscious uncoupling on inter-agency remedies policy.
But what can be uncoupled can also be coupled. In January 2021, at least in part to address the CMA’s enhanced role on global deals post-Brexit, the CMA introduced a fast-track Phase 2 process where this would “aid the alignment of the CMA’s remedies process with proceedings in other jurisdictions”.
We now have two recent cases in which this process was successfully road-tested. Among other things, these cases allow us to quantify the “fast” in fast-track: the Final Reports were delivered a mere 17 and 18 weeks after referral, saving 14-15 weeks respectively compared to the almost-inevitably-extended 32-week Phase 2 process where remedies are at issue. That is getting on for 50p in the pound savings and more than treble the savings of around 4-5 weeks on the Phase 1 clock in a “fast-track reference”. Of course, no fast lunch is free: the SLCs had to be conceded, abandoning any hope of unconditional clearance at the outset of Phase 2. Then again, Platypus’ Phase 2 clearance rate sits at sub-20% for the years 2019-2022.
So why go to Phase 2, even one that’s half as long, if you’re willing to offer remedies from the outset anyway? Why not go for Phase 1 remedies instead? And will the fast-track remedies process at Phase 2 ease some of this process friction and signal more flexibility for global deal-doers? Platypus puts on its monocle and considers what it all means…
The CMA Remedies Process
As Platypus previously observed, the standard CMA process is longer and its sequenced SLC-first, remedies-second decision structure is more rigid than the European Commission’s. While the Commission process allows parties the opportunity to engage on remedies from an early stage (and in practice encourages this in potentially problematic deals), parties to a CMA investigation could traditionally only get meaningful engagement from the CMA on Phase 2 remedies at later stages of the process, after the Phase 2 panel reached its Provisional Findings (PFs). This means that while the Phase 2 process seems long, the window for “negotiating” Phase 2 remedies is in practice compressed into the last eight weeks or so of the Phase 2 process.
Two brave lab rats step forward to test the 2021 guidance
The CMA has now had the opportunity to test the fast-track remedies process at Phase 2 in two cases that were running on similar timelines: the CMA issued its Phase 1 decision in Carpenter/Recticel (involving the manufacture and supply of foam) on 4 July 2022 and did so in Sika/MBCC (involving products for the construction industry) a few weeks later, on 27 July 2022.
In both cases, the merger parties had offered ‘undertakings in lieu’ (UILs) of reference to Phase 2, but these were rejected by the CMA within the confines of the Phase 1 UILs process, which, like the EC, requires that a remedy is “clear cut” and “comprehensive”.
In both cases, on publication of its Phase 2 issues statement, the CMA revealed that the parties had requested that they be permitted to concede the SLCs identified in the CMA’s Phase 1 decision, waive procedural rights to challenge the SLCs, and confirming that they intended to submit remedies. The CMA had duly accepted the requests from the parties and set out the focus of its respective investigations in the issues statements, in conjunction with which the CMA also published its indicative administrative timeline. Now that the Final Reports in both investigations have been published, it’s interesting to see how the fast-track process played out in practice in both cases:
|Indicative Phase 2 (with 8-week extension)1||Carpenter/Recticel||Sika/MBCC|
|Phase 2 reference||Week 1||18 July 2022||10 August 2022|
|Decision to accept SLC concession request||n/a||
|Publication of issues statement||Around weeks 3-5||
|Publication of provisional findings and possible remedies||Around weeks 18-20||
28 September 2022
25 October 2022
|Deadline for all parties' responses/submissions||Around weeks 20-24||
|Publication of final report||Around weeks 28-32||
16 November 2022
15 December 2022
|Statutory deadline for Phase 2 final report||Week 32||
22 January 2023
[+27w (24w+3w extension)]
24 January 2023
The Form: Lessons on Timing and Process
As noted, the fast-track remedies process notionally shaved 6-7 weeks from a standard Phase 2 investigation,2 but in reality, the saving was likely 14-15 weeks given the CMA almost always uses its right to extend the Phase 2 process by eight weeks in remedies cases. It also removed some procedural milestones, such as main-party hearings, which are typically resource and time-intensive for the parties (and can be particularly challenging should these coincide with milestones in the review processes of other jurisdictions).
So why go to Phase 2 if you were willing to offer remedies anyway? For these two cases, the answer is simply that fast-track Phase 2 was a consolation prize: their Phase 1 remedy proposals were rejected.
Remedy perimeter issues (composition risk)
The proposed UILs in Carpenter/Recticel appear to have failed largely on the basis of composition risk. Notably, the CMA focused on the dependencies with the wider Recticel business for “a number of functions, including R&D”. While the parties had offered to provide the divestment purchaser with information relating to “certain R&D projects”, the CMA ultimately considered these assurances to be insufficient to effectively restore competition to the level that would have prevailed absent the merger. Further, the CMA could not rule out other assets (such as personnel, equipment, and facilities) as necessary to “continue the planned innovation”.
Similarly, in Sika/MBCC, the CMA concluded that “the extent to which assets are currently shared … creates complexity and gives rise to a material risk of the [d]ivestment [b]usiness not being appropriately configured”. This was despite the remedy being structured as a reverse carve out which the CMA conceded as mitigating “at least to some extent, the composition risks”. The CMA also expressed concerns regarding purchaser and asset risks, which further undermined the overall effectiveness of the proposed package. Additionally, the global nature of the transaction gave rise to implementation risks. Under the parties’ proposed timeline, the CMA would have been required to accept final undertakings before other competition authorities have completed their review of the transaction. At that point, the CMA would have relinquished its ability to refer the deal to Phase 2.
The remedies ultimately accepted by the CMA in Phase 2 encompassed wider asset perimeters, transaction structures perceived as more robust and transitional arrangements coupled with additional assurances from the parties. In Carpenter/Recticel, the remedy required the divestment of the majority of the UK arm of Recticel’s engineered foams business. The CMA concluded that the divestiture under the parties’ remedy proposal to a suitable upfront purchaser, who has sufficient R&D capabilities (a key area of concern for the CMA during the Phase 1 UILs process) and chemical procurement experience, would be effective and proportionate in addressing the SLCs and the resulting adverse effects. The remedy package was also accompanied by transitional supply and service agreements (relating to R&D, consulting, IT, finance and HR).
Share sale not asset sale
The remedy in Sika/MBCC entailed a share sale (100% of the relevant MBCC legal entities which carry on the divestment business). Compared to an asset sale, the CMA considered that this would ensure greater business continuity, minimise the risk of disruption and reduce the potential complexity of reviewing and implementing the transaction from the purchaser’s perspective. To address composition, purchaser and asset risks, the remedy design was subject to an extensive iterative process involving various stakeholders. This was focused on patents, IP and know-how; R&D facilities and innovation capabilities; branding and trademarks; procurement and raw materials; premises (production sites, warehouses and offices); and financial resilience. The remedy package was also accompanied by a number of transitional arrangements between the divestment business and the retained business, which, as the final transaction documents, are subject to CMA approval.
To upfront the buyer or not to upfront the buyer?
In Sika/MBCC, unlike Carpenter/Recticel, the CMA, in its Final Decision, did not require an upfront buyer and acknowledged that completion of the sale of the divestment business would likely take place after acceptance of final undertakings. However, the CMA reserved the right to require an upfront buyer if the “current circumstances were to change”.
Commission v CMA: Does the fast-track route bring the CMA to the top of the league on flexibility?
The ability to fast-track at Phase 2 brings welcome flexibility to the CMA process, particularly for those deals parallel tracking reviews by the European Commission and other regulators. Front-loading the remedies process at Phase 2 has always been possible in Brussels, often in cases where the parties have been timed-out at Phase 1 due to complexities with the proposed remedy package and/or finding a suitable buyer.
While the fast-track process introduces much-needed flexibility, particularly in a post-Brexit arena, it remains to be seen whether, in practice, the Commission’s process remains more flexible. At this stage, the sample size is too small to draw any meaningful inferences. Of the two fast-tracked cases so far, only Sika/MBCC met the EU thresholds. Sika/MBCC seems to be on track to secure EU Phase 1 clearance subject to commitments. This is after the parties appeared to have “pulled and refiled” (the Commission’s website indicates that the merger notice was withdrawn in July 2022 and re-submitted in December 2022, presumably as the parties would have been otherwise timed-out from a Phase 1 clearance). Pull and refile is not an option Platypus has seen done in the UK. More generally, the notion of Phase 1 clock start being subject to the willingness of the Parties to pull the trigger is also part of Commission’s philosophy that the CMA has not bought into for anticipated deals. The Commission stance tends to permit elongated pre-notification to allow a run-up to a Phase 1 remedy although in Sika/MBCC the UK Phase 2 outcome arrived first.
In these fast-tracked cases, the CMA identified concerns with late provision of information, inconsistencies and shifting perimeters which make it difficult to isolate the impact of such teething issues on the ultimate UILs rejection decisions.3 What we can safely assume is that the CMA would increasingly be presented with challenges from global mergers which could call into question the adequacy of the Phase 1 “clear cut” standard (as currently formulated and interpreted) and further support the need for detailed pre-notification discussions as a tool to ensure that complex global deals are capable of Phase 1 resolution in the UK.
So … is it worth it?
The formal CMA Phase 1 UIL process is notoriously condensed and, therefore, offering a second bite of the cherry early in Phase 2 means that parties can shorten or better control the timing of deal closing, as opposed to having to work through the rigidity of the full Phase 2 process. Additionally, in transactions involving multiple theories of harm (some of which have been dismissed by the CMA in Phase 1), the streamlined process provides additional comfort that the CMA will not reopen those during its Phase 2 investigation (although the CMA must formally satisfy itself that the SLCs do meet the Phase 2 standard, in line with its statutory obligations).
However, the fast-track remedies process is only suitable for cases where the parties do not want to fight the CMA’s substantive findings, and commercially acceptable remedies are available (i.e., this process is not suitable where the outcome is binary and/or the parties want to fight the CMA’s findings on certain/all SLC(s)). Where these conditions are met, the first two cases seem from the outside to provide an attractive precedent.
1 Based on recent Phase 2 cases where 24-week statutory deadline was extended by 8 weeks.
2 Note that the statutory deadline for Carpenter/Recticel was extended by three weeks following a request from the parties which were considering next steps, including a possible abandonment of the transaction. This extension has been disregarded for the purposes of calculating the time saving under a “standard” Phase 2 review.
3 In particular, in Carpenter/Recticel, the CMA noted that “details of at least one project, which the CMA considers to be highly relevant to the SLC … were not provided to the CMA until very late in the process”. The information provided also “contradicted previous information provided by the Parties”. In Sika/MBCC, the CMA highlighted the “number of iterative changes…made to the proposed asset perimeter” as well as the identification of potential buyers “at a relatively late stage in the CMA’s consideration”.