"Separate and sovereign” – the risk of divergent outcomes in merger control post-Brexit
Companies involved in global deals are finding that increased levels of CMA intervention coupled with the imminent end of the European One Stop Shop for the UK component of transactions, mean that they need to factor into their deals the possibility of a CMA review.
In this post we consider the implications of Brexit on merger control, in particular the risk of divergent outcomes for deals involving parallel reviews by the CMA and European Commission.
The CMA and Global Deals
While there may have previously been a perception, at least outside the UK, that the voluntary nature of the UK merger control regime meant that a UK condition precedent was not an important consideration for global deals, that perception has shifted in the face of several high profile prohibitions or abandonments of global deals including Sabre/Farelogix, Illumina/Pacific Biosciences and Thermo Fisher Scientific/Roper, and the throwing of a wide jurisdictional net by the CMA in order to review deals lacking (for example) UK customers (Sabre/Farelogix) or UK sales (Roche/Spark). The CMA operates a proactive mergers intelligence committee (MIC) which scans press and industry coverage for potentially relevant deals and commonly calls deals in for review. As shown in our Phase II statistics, of the 33 cases on our Phase II docket since 2018, 16 were picked up by the MIC rather than proactively notified.
In addition, the CMA can and does impose global hold separate orders notwithstanding the fact that a small portion of the deal may be in the UK. In GTCR / PR Newswire, the CMA imposed a global hold separate order on the parent company of the acquirer shortly before it issued its Phase 1 decision, meaning that the parties could not integrate until the remedy process was complete. The CMA coordinated with the US DOJ on its investigation and the remedy (divesting the target’s Agility business) also formed part of the proposed settlement to resolve the DOJ’s concerns.
Some international household names have been involved in extended CMA reviews (for example Amazon in its acquisition of a 16% stake in Deliveroo; and PayPal in its acquisition of mobile POS device and payments provider iZettle). Some US lawyers view the CMA as the most interventionist merger control authority globally at present. Explore our Phase I and Phase II analyses of CMA interventions on our Platypus page.
But what does this actually mean in practice for deals facing parallel reviews by the UK and EU regulators? Will the cost to merging parties be reflected only in the administrative burden of another filing or will it cut deeper than that and mean that deal planning, particularly for deals with challenging substantive competition issues and lacking a “clean” global remedy, become (even) riskier business?
The Substance: similar tests similar outcomes?
At least in principle, the approaches of the European Commission and the CMA to merger control are similar – they follow a two-phase administrative review process (discussed further below) and their substantive tests are comparable. The Commission’s “significant impediment to effective competition” (SIEC) test was introduced with the EU Merger Regulation in 2004 and was designed to give the Commission more flexibility than the old dominance test, particularly with regard to unilateral effects when the merged firm would not become single firm “dominant”, and to catch cases that were perceived to have fallen through the cracks (such as Oracle/Peoplesoft). The SIEC test is more in line with the CMA’s “substantial lessening of competition” (SLC) test, which is not defined in the UK Enterprise Act itself but is described in the CMA’s Merger Assessment Guidelines and focuses on customer harm: “a merger [substantially lessens competition] when it has a significant effect on rivalry over time … and therefore on the competitive pressure on firms to improve their offer to customers [and] will be expected to lead to an adverse effect for customers”.
The theories of harm that underline the tests also broadly align. Both regulators are typically more concerned with horizontal than vertical or conglomerate effects (although an analysis of the decisive theories of harm for intervention indicates a slightly higher prevalence of vertical/conglomerate concerns at EU level which may relate to case mix rather than policy stance). They also adopt similar approaches to market definition –using the “small but significant non-transitory increase in price” (SSNIP) test or “hypothetical monopolist” test - while both acknowledging the limitations of market definition as a tool to establish competitive effects.
However, there is arguably a difference in terms of the threshold for referral to a Phase II investigation. The European Commission will refer a Transaction to Phase II where it has “serious doubts” as to its compatibility with the common market. The CMA applies a lower standard in deciding to refer a case for in-depth investigation – applying a “realistic prospect” of an SLC test, which has been interpreted by the Court of Appeal as a spectrum covering “more than fanciful but less than 50% likelihood.
Against this background, evidence from previous cases and our analysis of intervention rates indicates that similar tests do not always lead to similar outcomes.
Divergent outcomes between the UK and other jurisdictions
The protracted attempt by Groupe Eurotunnel to acquire assets from SeaFrance following its entry into liquidation is a stark example of the risks associated with divergent outcomes in relation to one and the same relevant market. While the Competition Commission (CC) (which was merged with the Office of Fair Trading to form the CMA in 2014) found that the merger may have been expected to result in an SLC in the supply of transport services to passengers and freight customers on the UK-France short sea and prohibited the deal, on the other side of the Channel, the Autorité de la Concurrence conditionally cleared it. That is not to say that the regulators did not find common ground – they largely agreed that the transaction would restrict competition for short-sea transport services on the Channel.
Nevertheless, their analyses diverged in important respects, including their approach to the counterfactual (i.e. the competitive situation without the merger). The Autorité considered that a counterfactual whereby the SeaFrance assets would have been sold to another entity pursuant to the court liquidation process was too hypothetical and that the relevant counterfactual was one of two scenarios, which broadly aligned with the pre-merger conditions of competition (i.e. the status quo). The French authority found that the deal could lead to a restriction of competition through conglomerate effects on the cross-channel freight market but cleared it subject to remedies from Eurotunnel restricting its ability to bundle services for five years. Back in the UK, the CC decided to rule out the pre-merger conditions of competition as the relevant counterfactual and instead considered the options that would have been available to the French court if Eurotunnel had not bid for the SeaFrance assets. The CC concluded that the most likely outcome absent the merger would have been one in which another bidder (consisting of a joint bid by a Danish company DFDS and a French company Louis Dreyfus Armateurs) acquired the assets. The CC concluded that the transaction may have been expected to result in an SLC in the freight and passenger markets compared with the counterfactual situation (which would have been less harmful to competition), and that an effective and proportionate remedy would be to prohibit Eurotunnel from operating ferry services out of Dover.
Similarly, the UK authorities reached a divergent outcome from all other authorities on one and the same EEA-wide market - investigating AkzoNobel’s acquisition of a controlling interest in a competing metal packaging producer: Metlac, in which it had previously held a minority non-controlling stake. The CC blocked the deal, despite the deal having been approved by several other competition authorities in Austria and Germany (and also Brazil, Colombia, Cyprus, Pakistan, Russia and Turkey). In Germany, the deal was referred for a Phase II investigation, where the German authority (BKA) found that the parties had combined market shares of up to 45-55% of an EEA-wide market but cleared the deal. (Meanwhile, outside the EEA, the Turkish Competition Board found that the combined market shares would give AkzoNobel the highest market share in Turkey (as well as in the region comprising EEA and Russia) but ultimately concluded that the deal would not lead to the creation or strengthening of a dominant position). However, in the UK, despite also finding that the geographic scope of the market was EEA-wide, the CC identified an SLC in the supply of metal packaging coatings in the UK. The CC rejected behavioural remedies proposed by the parties, including an undertaking not to increase the prices at which Akzo and Metlac currently supplied to UK customers for a certain period.
In both AkzoNobel/Metlac and Groupe Eurotunnel/SeaFrance, the CC imposed remedies on non-UK purchasers, rejecting arguments that the CC could not enforce those prohibitions on the basis that the companies did not themselves carry on business in the UK – both controlled subsidiaries that carried on business in the UK.
UK vs US and RoW
The CMA investigated and cleared Google’s acquisition of Looker Data Sciences, following approvals from other regulators. The US Department of Justice had cleared the deal in November 2019 and the Austrian competition authority approved it in December the same year. While the deal was also ultimately unconditionally cleared in Phase I in the UK, the CMA imposed a hold separate order on the parties in December, obliging them to hold the businesses separate during its investigation (which is its normal practice for completed deals), meaning that the parties could not integrate the businesses and realise synergies until its investigation was complete. In addition, it appears that the US and Austrian authorities were able to reach their clearance decisions more readily than the CMA, which published a detailed Phase I decision exploring the potential for both horizontal unilateral effects and vertical effects on global markets. This is an example of a deal where the outcomes ultimately aligned but the effort and cost of getting there was much higher for the CMA compared to the other regulators involved. It is also indicative of the CMA’s heightened interest in certain types of deals, particularly tech deals involving GAFAM companies.
More recently, Taboola and Outbrain abandoned their proposed merger in September 2020, after it had been referred to Phase II by the CMA in July 2020. While the US and German authorities approved the deal quickly without the need for an in-depth review, the CMA referred it to Phase II, finding the parties are two of the largest providers of content recommendation services to publishers in the UK, with a combined market share of over 80%. The CMA found that other types of digital advertising did not exercise a significant competitive constraint on the parties. Interestingly, although Google is currently active in the supply of content recommendation services to publishers, the CMA found that it has a market share of only 0-5% and exerts a limited constraint on the parties. In addition, the parties argued that Google had pitched a product “that is nearly identical to the Parties’ offerings to several publishers” but the CMA was not convinced that this expansion would be sufficient to prevent an SLC.
Of course, the competitive impact of a transaction may well differ between jurisdictions but particularly in global markets (such as in Thermo Fisher Scientific/Roper) or otherwise on one and the same relevant market (such as the Sea France and Metlac cases) and with a similar analytical framework, the expectation would be that materially different outcomes should not arise. The Thermo Fisher deal was abandoned some time after adverse provisional findings by the CMA, despite clearances in the only other jurisdictions the deal was notified – the US and Austria.
UK vs EU
Our analysis of respective CMA and Commission intervention rates provides some interesting insights. Considering Phase II cases from 1 January 2019 to 15 September 2020, the “deal mortality” (blocked, unwound or abandoned) rate for UK cases was 70% compared to 29% in the EU (more than two times higher in the UK). At the same time, deals cleared with remedies accounted for 9% of cases in the UK compared to 50% of cases in the EU (more than five times higher in the EU).
The divergence can be explained at least in part by the mandatory nature of the EU regime versus the voluntary nature of the UK regime (which means that typically only deals which could raise competition issues are notified) and the fact that the Commission currently has sole jurisdiction (under the one-stop-shop principle) over larger, global deals where a remedy that entails divestment of most or all of the overlap in the EU (i.e. an effective EU prohibition recorded as a remedies case) is more likely to be acceptable (such as Lafarge/Holcim, ABI/SABMiller, Linde/Praxair). However, it is arguable that some CMA interventions and ultimately decisions, including in the tech and retail sectors, may well have had different outcomes if subject to the Commission’s review. In addition, the rigidity of the UK merger control regime (discussed further below) means that both the authority and parties are straitjacketed within a process that offers more limited opportunities to engage on remedies in parallel with substance and navigate any issues swiftly.
The Form: procedural considerations
The CMA process is longer and its decision structure more rigid than the Commission’s, in particular when it comes to remedies. At a glance:
| EU | UK | |
| Phase I | 25 working days | 40 working days |
| Phase II | 90 working days (approx. 18 weeks) | 24 weeks |
| Fast-track to Phase II | No | Yes |
| Short Form Notification | Yes | No |
| Phase I Remedies / UILs | Not more than 20 days from notification | Five working days from Phase I decision (at 40th working day) |
| Phase II Remedies / UILs | Not more than 65 working days (approx. 13 weeks) after start of Phase II | On publication of Provisional Findings (approx. week 15/16) |
The UK review periods are longer than the EU equivalents (Phase I: 40 working days for the CMA, compared to 25 working days for the Commission; Phase II: 24 weeks for the CMA compared to 90 workings days (approx. 18 weeks) for the Commission, excluding extensions and stop the clocks). If engagement with the CMA commences later than engagement with the Commission (or indeed the CMA falls behind or stops the clock) then there is a risk of the overall deal timetable being pushed out. This is likely to be an additional issue for parties to global deals to manage post Brexit.
The CMA process has a number of other differences with the Commission’s, including that (i) the CMA can ‘fast-track’ cases straight to a Phase II review at the parties’ request where it is clear that the test for reference will be met; and (ii) while the Commission has a simplified notification procedure for deals that do not raise competition concerns, there is by definition no such procedure at the CMA because deals that raise no obvious competition concerns are, at least in principle, not notified.
With regard to remedies, the Commission remedies process is more integrated with its substantive assessment than the discrete steps of the Phase 2 CMA process. While the Commission process allows parties the opportunity to engage on remedies from an early stage and to offer remedies not more than 20 working days from notification in Phase I and not more than 65 working days after the initiation of Phase II, parties to a CMA investigation can only meaningfully offer remedies at later stages of the process. At Phase I, if the parties wish to understand the competition objections the CMA has in relation to a transaction before offering remedies, they then have five working days from the publication of the Phase I decision (i.e. after the 40th working day) to offer “undertakings in lieu” of reference to Phase II, which in practice means there is often a late-stage scramble to take the “one shot” allowed to address the CMA’s concerns. At Phase II, it is only on publication of its Provisional Findings (which usually occurs between week 15 and week 16) that the CMA starts its formal discussion on remedies and publishes its Notice of Possible Remedies in parallel. While the CMA’s Remedies Guidance provides that, “in exceptional circumstances (eg where the remedies are likely to be complex in design and/or implementation or where competition authorities in other jurisdictions are considering a merger which the CMA is also investigating) or when requested by the merger parties”, the CMA may consider possible remedies at an earlier stage, it is not clear whether remedies could be accepted or formally considered prior to Provisional Findings given the nature of the sequential process and the involvement of a group of independent decision makers in the form of the Panel.
The differences in process are very likely to give rise to issues for the regulators and parties alike in trying to coordinate the processes in a manner that would be more likely to avoid divergent outcomes. On the UK side at least, it is not clear that alignment can practically be achieved given the rigidity of the UK system (particularly in Phase II). The CMA is forecasting that it will look at an extra fifty cases per year, depending on the general M&A environment. Ensuring that a remedy offer can straddle the EU and UK systems will be challenging and require careful planning (potentially with greater use of fix it first and upfront remedy offers) and buy-in from the regulators.
A regulatory ‘Brexit tax’?
The growing trend of interventionism by the CMA and its approach to imposing hold separate orders with global reach has already made the UK a key consideration for some global deals. Parties can build this into their deal protection mechanisms, including through conditionality, allocation of risk in relation to remedies (such as “hell or high water” clauses) and reverse break fees. The standard seller stance, especially in an auction situation, is to resist a UK condition precedent as a voluntary regime and often to require bidders to close once mandatory suspensory conditions precedent have been satisfied even where a deal has been called in by the CMA.
Greater UK risk has meant bidders attempting to take compromise approaches to balance UK competition risk against the need to remain competitive in auction situations: for example by proposing something less than a full UK filing, for example “no further questions” being asked by the CMA following submission of a briefing paper; or use of reverse break or ticking fees to sweeten a UK condition precedent being included.
Aside from the administrative burden associated with extra conditionality and an extra filing, experience suggests that parties need to consider the risk of divergent outcomes in London and Brussels. While both authorities will hopefully strive for consistency and alignment, there is a risk that a Brexit “tax” could be applied to deals where the regulators cannot agree. It does not seem likely, given the leadership role the CMA is already playing in relation to digital deals for example, that the CMA will be content for the Commission to take the lead role on global deals.
Can’t we all just get along?
One solution to the risk of divergent procedural and substantive reviews would be greater inter-agency cooperation. The CMA recently signed a new framework with five of its international counterpart competition authorities (from Australia, Canada, New Zealand and the United States (FTC and DOJ)) to improve co-operation on investigations. Building on the antitrust agencies’ existing cooperation arrangements, the framework includes a memorandum of understanding designed to reinforce and improve existing case coordination and collaboration tools among the agencies, including in relation to merger control, and a model cooperation agreement. Procedural and substantive cooperation between the CMA and the Commission post-Brexit would also be desirable but it is not yet clear what form that will take. While the CMA has been parallel tracking cases in Brussels and triaging those with UK considerations in preparation for the end of the transition period on 31 December and while the approach to allocating cases straddling the transition period are clear, there is as yet no clarity on how the outcomes in parallel review cases will play out.
For more on CMA merger control, head to our new dedicated page: Platypus. Here you can see statistics on CMA reviews over recent years, and read more about the regime and recent developments.