For a number of reasons, UK merger control is at a crossroads:
- Phase 2 merger investigations are currently reviewed by a panel of independent decision-makers who are not involved in Phase 1 and who consider the case with “fresh eyes”, ensuring robust, well considered analysis and decisions – in light of concerns about resources and expertise, the government is reconsidering this;
- merger clearance decisions have been taken on the basis of competition/economic analysis since the mid-1980s, with minimal political involvement since 2003 – in light of the Prime Minister’s desire for “a proper industrial strategy”, the government is reconsidering this; and
- the relationship between UK and EU merger control rules has been well understood since the early 1990s – in light of Brexit, the government has no choice but to reconsider this.
Putting to one side the impact of Brexit, the extent to which the fundamentals which underpin UK merger control are currently being debated is perhaps surprising. The system was overhauled in 2013 and many of the issues that are now in contention were considered at that time. This article looks back at the impact of the 2013 reforms, before looking forward to consider the future challenges faced by the UK merger control regime. It concludes that since the UK’s world class competition regime is about to see a material upturn in its international impact (following Brexit), any reforms which threaten its robustness, quality, or transparency should be approached with caution.
Looking back – the 2013 reforms
The headline reform resulting from the Enterprise and Regulatory Reform Act 2013 was the creation of the Competition and Markets Authority (“CMA”), merging the Office of Fair Trading (“OFT”) and the Competition Commission. However, despite this fundamental change to the institutional framework for competition enforcement in the UK, much less profound changes were made to the substance of UK merger control. These can be broadly summarised as tightening up and improving procedure and ensuring the CMA is well equipped to enforce the merger regime effectively.
Unlike most merger control regimes in Europe, the UK system is home-grown and does not mirror EU merger control (despite pressure to conform). A number of the defining characteristics of the UK regime, dating back to the 1960s, came under scrutiny in the lead-up to the 2013 reforms, but were retained:
- a separation between Phases 1 and 2: from the introduction of UK merger control, the Phase 1 investigation was undertaken by the OFT, while Phase 2 was conducted by the Monopolies and Mergers Commission which became the Competition Commission. This differentiation was reinforced further from 2003 onwards, when those bodies were empowered to be the decision-makers (rather than advising the Secretary of State). Notwithstanding the recent institutional merger of the OFT and Competition Commission, the same separation between Phase 1 and Phase 2 decision-making has been retained within the CMA. It was recognised by the 2013 reforms as generating robust, well considered decisions, as well as preventing the risk of confirmation bias;
- the absence of politics in merger control decision-making: ministerial involvement in merger outcomes was removed (from the vast majority of cases) by the Enterprise Act 2002. This has proved to be a successful reform and ministers have been sparing in their use of their residual intervention powers where the defined public interest issues of national security, media concerns and the stability of the UK financial system are at stake. This balance was left untouched by the 2013 reforms;
- assessing the impact of a merger by reference to its impact on competition: since 2003, the statutory test against which a merger is assessed has been whether it will result in a “substantial lessening of competition”. However, in practice, this has been the case since the 1980s when the then Secretary of State, Norman Tebbit, announced that decisions should be taken “primarily on competition grounds”. Again, there were not considered to be grounds for changing this approach in 2013; and
- the benefits of a voluntary regime: despite calls at a high level for a move to a regime of mandatory notification and prior clearance, the 2013 reforms concluded that the voluntary system should be preserved. The underlying presumption in the UK that mergers are pro-competitive remains in place. However, the CMA’s powers to prevent parties from implementing a merger before clearance have been strengthened.
The fine-tuning and honing of the merger control regime which resulted from the 2013 reforms was widely welcomed as implementing a sensible and measured streamlining and strengthening of an already successful and well functioning domestic regime.
Looking forward – challenges to CMA decision-making process
The separation between the Phase 1 and Phase 2 decision-making structures is now being reconsidered. In May 2016, the Department for Business, Innovation and Skills (“BIS” – now the Department for Business, Energy and Industrial Strategy (“BEIS”) issued a consultation paper which proposes a significant change of approach.
CMA Panel members currently comprise a body of senior lawyers, accountants, academic and professional economists, senior industry executives and former civil servants with wide experience in competition policy matters – essentially, independent people with a depth of relevant knowledge for assessing the impact of a merger. They are not CMA staff but are appointed to the Panel and selected from time to time to serve on a specific Phase 2 merger investigation. Phase 2 staff are mostly also new to the case, with only one or two members of the Phase 1 team transferring across to Phase 2. There is therefore a distinct break with Phase 1, such that the merger is considered afresh. The BIS consultation paper proposes to dilute this defining concept of a fresh and independent decision-maker at Phase 2 by including CMA officials in the Phase 2 decision-making group. It also proposes a greater commitment of time by a smaller number of Panel members, with more specific qualifications, appointed for a shorter term (currently 8 years). These latter changes also suggest a shift from separate, independent decision-makers to individuals who are more closely connected to (and thereby potentially more aligned with) the CMA officials.
At the time of the 2013 reforms, the value of the “fresh pair of eyes” was recognised and accepted by the government. There is a strong argument that the independence of Phase 2 decision-makers in merger (and market) investigations is a key factor in the success and credibility of the UK competition regime. The separation of merger control decision-makers – not often found in other countries – is integral in ensuring the robustness of decision-making. As such, it reduces the risk of decisions being challenged on appeal. This is reflected by the fact that, broadly speaking, Phase 2 merger investigation decisions have fared much better when challenged before the Competition Appeal Tribunal than decisions under the Competition Act 1998.
Of course, by retaining the Competition Commission’s decision-making structures, some of the cost and procedural efficiencies which could have been generated by integrating the OFT and Competition Commission have not been realised. The recent proposals were made by the Cameron government, but the current government is no less concerned about costs. It will be interesting to see whether these changes to the Phase 2 decision–makers are taken forward, but there is no doubt that they appear to be rowing back on the commitment at the time of the 2013 reforms to retain the independence and impartiality of the Phase 2 decision makers. It would be unfortunate if saving costs was put ahead of maintaining one of the hallmarks of the UK’s world class competition regime.
Looking forward – the potential impact of a “proper industrial strategy”
In July 2016, the new Prime Minister, Theresa May, stated her intention to implement a “proper industrial strategy” policy for the UK, protecting strategically important UK businesses from foreign takeovers. Quite how this policy statement will translate into hard law remains to be seen. The most significant announcement to date came in September 2016, when BEIS announced new controls on foreign investment in “critical infrastructure”. At the same time, it announced a review of the public interest provisions of UK merger control. These provisions enable the government (usually BEIS but the Department of Culture, Media and Sport for media mergers) to take the role of decision-maker in place of the CMA. These powers can currently be exercised in relation to mergers raising national security issues, media issues (such as plurality and accuracy of news) and the stability of the UK financial system (used during the 2008 financial crash to clear the Lloyds/HBOS merger). Such mergers are assessed by reference not only to their impact on competition, but also on the public interest. The government can clear a merger on public interest grounds notwithstanding significant competition concerns (as occurred when Lloyds’ purchase of HBOS was cleared at Phase 1).
Foreign investment control?
UK merger control has not, for many years, been concerned with the nationality of a purchaser, or with protecting British industrial champions from foreign takeovers; decisions have been taken by reference to competition concerns alone. The introduction of foreign investment control is therefore a significant policy departure.
It is not yet clear how controls over foreign investment in critical UK infrastructure will be implemented. One option would be to use the existing public interest provisions under UK merger control law. In fact, the government could probably use the existing “national security” ground to intervene in a deal concerning UK energy infrastructure, given that this concept is broader than military security. Alternatively a new ground could be specified to extend the public interest regime expressly to foreign ownership of critical infrastructure in the UK. The meaning and scope of “critical infrastructure” has not yet been clarified.
However, comments from the government suggest that this may not be the only area of foreign investment which is to be scrutinised. The BEIS announcement, moreover, stops short of making a clear connection between the new controls and the existing merger control framework. It may be that a standalone foreign investment review procedure is created in the UK (as is the case in many other countries including the USA (CFIUS), Australia (FIRB) and Canada (Investment Canada Act), as well as a number of EU Member States). Such an approach would potentially enable the review of all foreign investment, not just mergers and acquisitions which qualify for review under the merger control rules.
These proposals do not necessarily run counter to the current structure of UK merger control, but they do challenge the presumption in the UK that mergers should generally be permitted. Depending on how any review is structured, including whether notification is required and whether parties must wait for approval, it may be that this presumption is removed, at least for foreign purchasers. Whether EU investments will be subject to control in the future depends both on the terms of the new controls, the pre-Brexit constraints of the EU principles of non-discrimination and free movement of capital, and the extent to which the UK remains bound to some degree by these principles post-Brexit.
A public interest test for all mergers?
The government’s review of the public interest provisions of UK merger control appears to include a reappraisal of the consensus that competition analysis should underpin merger control assessments. As noted, the public interest test was replaced by the substantial lessening of competition test with effect from 2003, although in practice, merger control decisions have been taken primarily on competition grounds since the mid-1980s. Where the public interest provisions are triggered, the CMA does not currently review such issues itself but acts as a hub, reporting to the political decision-maker on the views of others (such as the Ministry of Defence for national security issues, Ofcom for media issues, the Bank of England, Treasury and Financial Conduct Authority for financial stability issues). An increase in the use of the public interest provisions – or indeed a return to a public interest test for all mergers – therefore suggests greater political involvement in merger decisions.
It is probably unlikely that UK merger control will see a wholesale return to a public interest test. As noted, the CMA neither takes decisions nor advises on public interest issues and is not well equipped to do so. Moreover, it is a double-edged sword for high profile elected politicians to be responsible for deciding whether a merger should be permitted on a broad and flexible public interest basis. Former Secretary of State Peter Mandelson discovered this in the late 1990s, when he was responsible for deciding whether to permit BSkyB to proceed with its bid for Manchester United Football Club. The bid generated strong opinions and high levels of interest amongst the public and media, but minimal competition concerns. The proposal that politicians should be removed from the day-to-day role of decision-maker for merger investigations followed soon afterwards in a White Paper of 2001 and, as noted, the resulting reform took effect in 2003.
As regards an expansion of the public interest provisions in merger control, BEIS recently made a call for information about the government’s industrial strategy. In response, the CMA submitted a paper highlighting the importance of effective competition policy as being complementary to, and at the heart of, industrial strategy. As regards merger control specifically, the CMA warned that any revision of the current public interest regime should take into account:
- the breadth of the existing provisions;
- the need for clarity and legal certainty, such that the scope of a public interest provision is understood and can be objectively assessed. A wide discretion for the government on whether to intervene would generate unwelcome uncertainty for business;
- the need for transparency of decision-making, such that the current transparency, certainty and independence of the regime is not undermined;
- the risks to competitiveness, reducing the overall message that “competitive businesses are critical to the UK economic well-being”; and
- the adverse effect on trade and investment if the UK’s reputation as open and competitive is diminished, as well as the risk of reciprocal constraints on the ability of UK businesses to do business overseas.
There is considerably less transparency in a public interest case compared to a competition-led case, where extensive information is published on the CMA’s website during the course of an investigation (particularly at Phase 2). By contrast, submissions to the decision-making Minister in a public interest case might not be published during or even after the case is decided, and then only if a Freedom of Information Act 2000 disclosure request is made. Under the current CMA Phase 1 and Phase 2 procedures, lobbying outside the formal procedures of the investigation is largely ineffective; the position as regards public interest mergers is much more opaque.
At the time of writing, it is difficult to predict which route the government is likely to take as regards the scope for political intervention in merger control. However, any change will be driven by wider industrial policy concerns, not because of any perceived deficiency in the CMA’s ability to oversee the merger control regime.
Looking forward – Brexit
The issues arising out of Brexit need little introduction. The decision of the UK electorate to leave the EU dominates current political and legal debates. Competition law is less dramatically affected than many other areas, because there are already separate UK and EU regimes. Certainly, there are some difficult questions to be addressed about transitional arrangements and the future relationship between the EU and UK frameworks, but many of these concern changes to the interaction between the two systems, rather than the fundamentals of what the law will be in the UK. That said, the seismic shift caused by Brexit offers the opportunity for a re-evaluation of competition policy, just as it does across the whole legislative landscape. Indeed, some of the proposals already discussed – particularly as regards foreign investment control – would be easier to implement without having to have regard to overarching EU principles such as discrimination and free movement of capital.
At this stage, the final impact of leaving the EU on UK merger control law is unclear, since it depends on the post-exit relationship which the UK agrees with the remaining 27 Member States. The UK government’s policy regarding the post-Brexit relationship generally is still mostly unknown and negotiations around neither the terms of the UK’s exit nor the future EU/UK relationship have yet commenced.
There are two broad options for the future relationship of UK and EU merger control law:
- if the UK enters into a relationship with the EU based on EFTA/EEA membership, then the interaction of EU and UK merger control will remain largely unchanged. The EU Merger Regulation will continue to apply as a “one stop shop”, excluding the application of UK (or other EU Member States’) domestic merger control where the jurisdictional thresholds are met. At the current time, this outcome appears unlikely; or
- if the UK has a more distant relationship with the EU then it will become a third country for EU Merger Regulation purposes. EU and UK merger control will therefore apply in tandem to the same transaction. This appears the more likely outcome.
In the latter scenario, the scope of UK merger control will extend to the larger transactions which are currently usually reviewed in Brussels. However, the UK already has in place the legislation and institutions required to undertake detailed, sophisticated reviews of large scale, complex mergers and there is no reason to think that any reforms will be required simply to equip the CMA to deal with larger international mergers (albeit that the expected increase in mergers to be reviewed presents resourcing issues).
International co-operation may well become more significant for the CMA if its post-Brexit relationship with the EU is as a third country. The CMA may need to enter into co-operation arrangements with the major international merger control bodies, much as the EU has in place with the authorities from, for example, the USA, Canada, South Africa and Japan. The purpose of such arrangements is to facilitate co-ordination and liaison in merger cases (and broader competition enforcement) to allow for more aligned and consistent outcomes.
The most widely felt commercial impact will be the possibility that a merger may have to be notified in both London and Brussels (assuming the current “one stop shop” arrangements fall away). Although the UK is likely to retain its voluntary filing regime, this will result in more notifications and investigations, with the associated increase in financial cost and management time. Notwithstanding the points made about international co-operation and co-ordination, parallel notifications raise the risk of conflicting outcomes and difficulty in co-ordinating the investigations because of different timetables, often with fixed statutory deadlines. Conflicting outcomes have occurred recently in relation to Akzo’s proposed acquisition of Metlac (cleared in several jurisdictions around the world but blocked in the UK), Eurotunnel’s attempt to purchase the former SeaFrance business (cleared in France but blocked in the UK) and, famously, in GE’s bid for Honeywell (cleared in the USA but blocked in the EU). All mergers requiring multi-jurisdictional consents face the challenges of co-ordination and conflicting outcomes, but Brexit generates additional transaction risk in that they will also arise as regards the EU. It may be that calls are made for the CMA to align its merger investigation timeframes more closely with those of the EU Merger Regulation (or introduce flexibility to enable co-ordination), and perhaps to make formal arrangements for greater sharing of information.
One of the significant legal impacts will be the extension of the reach of the public interest provisions. Currently, the government can only override competition concerns with public interest issues in relation to mergers being reviewed under UK merger control law. Whilst it can take “appropriate measures” to protect legitimate national interests being reviewed under the EU Merger Regulation, it cannot block a merger on public interest grounds which the European Commission had cleared unless it was the only objective and proportionate means of protecting its legitimate national interests. Conversely, a merger which was blocked by the European Commission on competition grounds could not be permitted by a Member State which considered it to be in the national interest. Post-Brexit (and subject to the terms of the UK’s future relationship with the EU), the UK might be able to permit a merger considered to be in the public interest to proceed in the UK, notwithstanding that it had been prohibited at EU level, provided that the prohibited EU aspects of the transaction could be carved out of the wider transaction.
Conclusion – which way now?
The UK regime is at a crossroads as regards many of its previously accepted underlying principles. A downgrading or gradual diminution of the independence of Phase 2 decision-making would be a tangibly adverse move. Greater and less predictable political involvement in merger control outcomes would reduce the current legal certainty and transparency of the regime. The impact of the introduction of foreign investment control depends on the mechanisms by which it is implemented (which could range from extending the use of the existing law, to creating a new public interest test, to a completely new and separate regime). But if standalone foreign investment control mechanisms are introduced, the presumption that merger activity is pro-competitive and welcomed in the UK is materially weakened, at least for overseas purchasers. The greatest difficult is arguably that Brexit has created such a measure of uncertainty in government direction and policy that predictions about the future are very difficult.
What is certain is that the impact of UK merger control in the global arena is poised to increase significantly if, as expected, Brexit results in major international mergers falling within the UK’s jurisdiction. In that context, any reforms which threaten the robustness, quality, or transparency of the UK regime should be approached with caution.
The original press release can be found here on the Ashurst website