Merger Control

By Jamie Johnson

Merger control is where a competition authority reviews a proposed merger to see whether it would have anticompetitive effects. The main question is whether the merger will result in a substantial lessening of competition (an “SLC”).

When merger control applies

The European Commission will still oversee some merger control for British companies in 2020. The European Commission will manage merger control if three conditions are met. Firstly, the combined global turnover of the merging firms needs to be at least €5 billion. Secondly, the combined firms’ EU turnover would need to be €250 million. Finally, the 2/3 rule cannot be met. The 2/3 rule is satisfied if two-thirds of the combined entity’s revenues are generated in one EU member state.

The Competition and Markets Authority (“CMA”) provides two tests for when it will review a proposed merger. Firstly, the UK turnover for the entity needs to exceed £70 million. Secondly, the result of the merger will be that the body controls 25% of the supply of that particular good or service. These tests come from the Enterprise Act 2002 (the “EA 2002”). There are lower thresholds if the merged entity is in the military, computer hardware, quantum technology, artificial intelligence, cryptographic authentication technology or advanced materials sector. There can also be political involvement in deciding whether to investigate a merger if there is deemed to be a public interest in the outcome.

How the CMA investigates a potential merger

There are two phases of investigation.

The first phase (“Phase 1”) will test whether the statutory thresholds under the EA 2002 are met.

The second phase (“Phase 2”) will determine whether the proposed merger would lead to an SLC. The CMA will refer a proposed merger to a Phase 2 investigation if it believes that it is necessary.

Phase 1 Investigations

The CMA will investigate to see whether there is any cause for concern. Phase 1 can involve the CMA providing informal advice on how the transaction should be structured.

At this juncture, the CMA can accept any proposals from the merging parties that might mean that the proposed merger does not need to be referred to a Phase 2 investigation. However, the CMA cannot impose changes at this point.

Phase 2 Investigations

The CMA has 24 weeks to conduct a Phase 2 analysis and to prepare a report. The report will state any remedies for the proposed merger. A remedy is a change that the CMA will impose on the parties.

The CMA will make an initial request for information about the relevant companies. This will include information about the financial standing of each firm, the legal documents that set out the merger, internal company documents about the proposed merger and anything else the CMA deems relevant.

Each party will then set out their arguments to the CMA and meet the CMA so that the timetable for the investigation can be agreed upon. After discussion with the parties, the CMA will formally publish the timetable.

After this, the CMA will ask for more information by issuing market questionnaires to the parties. The CMA could ask about issues such as the firm’s suppliers, customers and products. This lets the CMA know more specific information about each firm.

The CMA will also see the facilities of each firm in person within six weeks of the Phase 2 investigation. This gives each party another chance to meet the CMA to discuss any issues.

The CMA will then make an issues statement. This sets out the CMA’s framework for analysis on any potential harms that the merger will lead to. It will set out, for example, the market definition, the current state of the market and any barriers to entry. It could also discuss possible benefits to consumers from the merger.

The CMA will also send out working papers to each party at this point. This shows the parties what the CMA is thinking about the merger at that time.

There will then be hearings with each party and any third parties who wish to provide evidence. This allows the CMA to cross-examine the merging parties. The CMA could also have informal case team meetings at this point to discuss any issues with the firms’ staff.

The CMA will then publicly publish its provisional findings and remedies notice. Remedies will be proposed if the CMA believes that the proposed merger would lead to an SLC. Parties have 21 days to challenge any provisional findings and 14 days to challenge any of the proposed remedies.

After any challenges or comments have been discussed, the CMA will publish its final decision.

Remedies

If the CMA believes that there has been an SLC, it will impose a remedy. There are two main types of remedies: structural remedies and behavioural remedies.

Structural remedies typically involve a divestiture. This is where there will be a disposal of a business or some of the business’ assets to a different firm. The CMA will ensure that this other firm is a suitable purchaser that can operate the business or assets that it acquires.

If the CMA thinks that a structural remedy is not suitable, it will impose a behavioural remedy. Behavioural remedies will involve the CMA stating that the merged entity has to conduct itself in a particular way. Changes to conduct could include a merged entity having to commit to new firms joining a market or keeping its prices below a certain level.

How the CMA is notified

There is no obligation to notify a merger to the CMA even if it qualifies. A merger can proceed without notification. However, it usually is wise to notify the CMA to avoid the risk of the CMA later stating that the merger should not have gone ahead.

The CMA can reject a merger notification if it believes that the notification has false or misleading information. After the CMA has confirmed that the notification is adequate, the CMA has 40 days in which to clear the merger or refer it to a Phase 2 investigation.

Case studies

On the 4th of August 2020, the CMA published its issues statement for the proposed merger of Taboola and Outbrain. Both firms provide content recommendation services to publishers. It is unclear whether the Phase 2 investigation will state that there has been an SLC.

In July 2020, the CMA accepted final undertakings from JD Sports and Footasylum for their proposed merger. The merger risked reducing the choice over sportswear in the UK. The CMA decided that it would result in an SLC. It proposed a divestiture of Footasylum by JD Sports, which means that Footasylum will be sold off to a suitable buyer.

In May 2020, the CMA approved the Just Eat and Takeaway.com merger. This came after it had announced in January that it would have to investigate the transaction because it was worried about the creation of an SLC. The CMA gave Phase 1 clearance.