Bucharest syndrome: holding onto hold-separates and resisting a mandatory regime
Can IEOs ever be loved? Because there is a vigorous consensus in UK merger control: everybody hates IEOs. Need to be reminded that IEO means “initial enforcement order”? That suggests you’ve not spent quality transfusion time with Vlad the I
On the receiving end, as anyone who’s been through UK review of a completed deal knows all too well, the CMA’s hold-separate regime captured in the standard template IEO is a pain in the neck: highly intrusive and presumptively global regardless of the nature of the parties, the theories of harm, or the relevant geographic markets. It goes beyond preserving the independent competitive integrity of the target business, which most business folk would readily accept, and applies to a wide range of ordinary course acquirer group activity.
Conversely, on the CMA side, Platypus has great sympathy for those on the receiving end of IEO derogation requests as a time-sucking distraction from substantive review. The public sector viewpoint may well be: no good deed goes unpunished – the UK generously allows parties to close, unlike most of the world’s regimes, and then the grumbling begins.
So the fact that IEOs are burdensome? That's a feature, folks. Not a bug. It is the quid pro quo for the voluntary UK regime. The sanguine riposte when the moaning begins is that the parties chose to take the risk and close. As noted, a mandatory regime wouldn’t even have allowed this option, so parties must lie, under the Count’s watchful eye, in the (separate) camp beds that they made.
And while the resource burden on the CMA and the parties is bad enough, there is the more draining issue of breach. We know that from the moment those wide-eyed campsters say, “Hey, my tent is crawling with leeches, let’s spend the night in this really cool castle,” it’s only a matter of time before more copious quantities of teenage blood are on the menu. The sheer stringency of the regime coupled with the propensity for human error is a cocktail that trends towards infractions the more timetables elongate.
As a result, various developments – most recently Facebook’s lost appeals and £50.5m bill for IEO violations – have led to calls to get rid of IEOs by adopting a mandatory merger control regime.
In this blog post, we explain why, in the current enforcement climate and given the likely alternative, Platypus probably prefers Dracula, campsite bloodbath and all. Against this backdrop, it may be that hold separates (ultimately imposed in a relatively small number of cases) are simply the least bad option to spare pain for the masses, saving it for a select few.
Transylvanian breakfast: Bloody Mary and two eggs, unscrambled
It is a well-known feature of the UK regime that the CMA will impose hold separates (formally known as IEOs at Phase 1 and interim orders or IOs at Phase 2) in all completed deals and, exceptionally, in anticipated deals.
The rationale for these is to address the risk of parties ‘scrambling the eggs’ and to ensure that the CMA is able to impose remedies if it ultimately concludes that a deal raises competition issues.
Apart from preserving the target’s integrity, the standard IEO also prevents the acquirer group worldwide from executing a number of ordinary course decisions (such as hiring, firing and moving key staff, disposals of unrelated business units, etc.) without the CMA’s prior consent. This is because, on a cautious basis, such actions on the acquirer side might also qualify as potentially pre-emptive action that could impinge on the CMA’s remedial options.
Indeed, IEOs under the UK regime have global application and are incredibly far-reaching, arguably imposing obligations on companies (in particular in relation to the flow of information) that go beyond what we would typically deem the ‘rules of the road’ governing information exchange between a trade bidder and target for anticipated deals, including in mandatory and suspensory merger regimes. Derogations from these obligations are available but these take time to be agreed and involve the exercise of discretion by the case team (recently improved through the primary allocation of responsibility to the CMA’s specialist Remedies, Business and Financial Analysis (the RBFA team).
The recent fines of over £50m imposed on Facebook highlight the importance of strict compliance even if, in the acquirer’s view, the IEO is disproportionate in subject matter or geographic terms. However, the CMA says that it needs to go down hard on compliance with IEOs given that they underpin the effectiveness of the voluntary regime.
In short, IEOs represent blood, sweat and tears, and add a chunky amount to the (already significant) cost of going through the CMA process. But as with any discussion about UK merger control, the picture is nuanced.
IEOs are only applied to a small proportion of overall UK M&A activity. For deals that don’t raise any material concerns, there is no obligation to file. Over 550 transactions were reviewed by the CMA through its Mergers Intelligence function in the 2020/21 financial year, of which fewer than 2% were ultimately called in. As a result, there is no such thing as a simplified procedure in UK Phase 1 (unlike the European Commission, for whom simplified procedures represent 70-80% of the Phase 1 workload). In the UK, the CMA need not bother with ‘no issues’ private equity deals and rather only looks at mergers which are likely to raise substantive issues.
This is one of the key benefits of the UK regime compared with its Brussels counterpart and most international regimes, with the exception of a handful of voluntary ones (e.g., Australia and New Zealand).
Via its Mergers Intelligence function, the CMA is able to screen a significant proportion of unproblematic deals either proactively, by reviewing press and receiving market intelligence and deciding not to review, or reactively, by clearing briefing papers submitted by merging parties. The net result is that, in practice, there haven’t been IEOs in many deals (only 15) in this calendar year. Indeed, the CMA will tell you that its call-in regime is working well (according to Platypus stats, while completed deals make up 27% of the CMA’s Phase 1 caseload since 2019, that increases to nearly 50% at Phase 2).
But the clumsy alternative is…. Frankenstein’s monster?
Like pretty much everyone, Platypus is no fan of IEO fact and friction. But the alternative is to take the approach taken by the majority of merger regimes globally: to require mandatory filing and prohibit closing before clearance.
There is much to recommend this approach. Business people tend have a much easier time getting their heads around a simple and intuitive ban on closing rather than the voluntary regime’s compulsory paradox: you can close, but not only will you have nothing to do with the target (though you may need to pump money into it), but you suddenly need CMA permission to make unrelated HR decisions for key staff in your pre-merger business. So mandatory regimes score points on being less psychologically taxing and disruptive: at least it’s completely business as usual for the acquirer group pre-closing and agency interaction is focused on substance – getting the deal through.
So… what would a mandatory and suspensory merger regime look like in the current UK enforcement climate?
As a starting point, if Government decided to introduce mandatory merger control in the UK, as well as having a “jurisdictional nexus”, it is reasonable to expect that the rules should be clear and understandable (so merging parties know if they fall in or out of the rules). Therefore, the CMA should be required draw a line in the sand, likely by reference to objective criteria such as turnover / assets, rather than apply a market share test (or the even broader ‘share of supply test) which is not recommended (at least when there is a legal obligation to file) by ICN or OECD guidance.
Such a bright-line test would be needed for legal certainty and designed by reference to a nexus to the UK with a view to filtering out deals that are unlikely to have a negative impact. Traditionally, this also creates a ‘safe harbour’, meaning that the authorities would only (all things being equal) investigate transactions which meet the thresholds. However, the tide is turning.
As demonstrated by the EC’s change in practice as outlined in its recent Article 22 guidance (seen in action in the Illumina/Grail merger) and the US FTC's retrospective reviews of Big Tech acquisitions, authorities are increasingly concerned about an enforcement gap for deals which don’t meet the fixed jurisdictional thresholds, for targets with little or no turnover.
For its part, the CMA has been vocal about the benefits of the share of supply test and its ability to look at ‘killer acquisitions’ due to the Enterprise Act’s broad jurisdictional reach, described by the CMA’s CEO as “a flexible test which, in practice, has meant that the CMA has consistently been able to exert jurisdiction over transactions in digital markets”.
Against this backdrop, as a policy matter, it would be entirely out of kilter and anti-zeitgeist for the UK to introduce a safe harbour for deals involving small or no target turnover. This would jettison the enforcement elasticity of share of supply and head in the opposite direction of the Commission’s Article 22 efforts to make the EU regime jurisdictionally closer to the UK’s. For example, a mandatory regime with a sensible safe harbour threshold would probably have meant the CMA lacked jurisdiction over most if not all of its highly significant incumbent/challenger docket (see PayPal/iZettle, Experian/Clearscore, Roche/Spark, Illumina/PacBio and Sabre/Farelogix, etc.).
Accordingly, Platypus is confident that the introduction of mandatory filing requirements in the UK would inevitably be accompanied by a retained additional “voluntary regime” for deals which wouldn’t meet the jurisdictional thresholds. This would not mark the end of the share of supply test (and would likely be supplemented by recently proposed changes abandoning the requirement for an increment for certain deals).
If the alternative to Count Dracula is what we expect it would be, the “hybrid” (dare we say Frankenstein) regime would
- graft the head of a voluntary regime for deals below the threshold (i.e., a safe-harbour free zone of “share of supply”) onto
- the body of a mandatory regime above the threshold (i.e., capturing a large number of no issues deals).
This would maintain all of the legal uncertainty associated with the current elastic jurisdictional thresholds while clogging up the CMA’s workload and already stretched resources for deals that, by definition, are mostly unlikely to raise any issues and would not have been looked at when the system was geared towards spending time on interesting deals from a competitive perspective.
Living with IEOs
Therefore, as much as it pains Platypus to say it, as things stand, it seems necessary if not to love one’s captor, Stockholm style, to at least learn to live with IEOs as a necessary Transylvanian evil and ultimately better than the likely alternative – a hybrid regime. We christen this paradox: Bucharest syndrome.
Nevertheless, and ever the optimist, Platypus does have some suggestions as to how the IEO regime could be improved for both the CMA and the merging parties.
Reversing the presumption for unrelated (or at least unrelated and foreign) activities
Certain derogations are very common (e.g., the carve-out of unrelated businesses of the acquirer) and the time and difficulty in agreeing these derogations can be one of the most frustrating elements of the CMA process. Try telling the LA exec in a foreign-to-foreign merger that she can’t make organisational changes to her own unrelated business without first obtaining a derogation from the CMA... This is only going to become a bigger issue as the CMA grapples with more global mergers post-Brexit. Against this backdrop, the most straightforward approach would be to reverse the template presumption for wholly unrelated acquirer-side businesses.
The template currently assumes that all acquirer activities have a meaningful relationship with the target, and are of possible UK remedial interest, until proven otherwise. The presumption should instead be that acquirer businesses with no horizontal overlap or vertical link to target (or, more narrowly, all those with no UK nexus or none beyond import sales or UK users) are automatically carved out from the IEO template, on a self-declaration basis, and are only added in subsequently by the CMA on a case-by-case basis for good reason, with no IEO liability attaching to such activities prior to such inclusion. At the very least, it would be preferable for all parties if there were a streamlined or “simplified” procedure for the most common requests, in particular for primarily foreign-to-foreign mergers, and/or clearer parameters for the thresholds for certain derogations being accepted (beyond the high-level signals outlined in the current IEO guidance).
Increased RBFA role
While the CMA should be praised for seeking to introduce guidance and harmonising its approach, there remains room for reducing the Mergers group burden further and perhaps an even greater role for the RBFA. This would allocate responsibility to the best placed team of individuals at the CMA, while also ensuring that the case team can focus on substantive review (the primary reason for involving the RBFA in this process in the first place).
One step further?
More fundamentally, Platypus wonders whether the CMA may even be willing to hand responsibility for overseeing IEOs and derogations to a third party, such as a monitoring trustee (MT), under its supervision, but at the parties’ cost, as is usual for an MT. In the current world, this role is typically limited to a pure monitoring role rather than exercising any delegated function within or linked to the CMA. Most MTs are high calibre experts – who often have ex-agency experience – but their remit appears frustratingly limited. Indeed, from a user perspective, it is sometimes difficult to see how the MT materially streamlines the process because any (arguably) material judgment call requires CMA sign-off. While they may free up the CMA’s attention on compliance issues, the MT offers little comfort in areas of any uncertainty, as shown by the significant fines imposed in Electrorent where the merging parties were fined in spite of claims that they were acting in line with MT oversight. However, a fully-fledged IEO Trustee could outsource most of the back and forth with parties, particularly on extraterritorial issues, both freeing up the CMA’s resources and giving parties comfort that they would have an honest broker, allowing for independent and fair evaluation of their requests.
The CMA could maintain freedom to prosecute breaches of IEOs (being an enforcer of last resort) but avoid getting bogged down in the minutiae on every issue, allowing it to focus on those issues that would practically compromise its remedy capabilities. Again, this would be a helpful development as the CMA’s merger docket expands in years to come. The CMA may worry about relinquishing control or introducing flexibility on such an important aspect of the voluntary UK regime, fearing exploitation by the merging parties. Parties in a completed deal may worry about the automatic cost of a MT.
However, all may find that the process works better for the CMA and merging parties alike and is more scalable post-Brexit and given the CMA’s enforcement priorities.