When is a jurisdictional GOAT not good enough? UK deal nexus and the CMA’s expanded hunt for ‘killer acquisitions’ and harmful vertical mergers

Is #23 the jurisdictional GOAT? 

Wearing its iconic section #23 “share of supply test” jersey, the CMA becomes the Michael Jordan of Multi-Jurisdictional merger control – acrobatic, gravity-defying, almost unstoppable when motivated. The MJ of MJ, it dunks on adviser opponents muttering ultra to its vires and plays killer defense against their clients’ “killer acquisitions”.

Why do the referees never call the CMA for an offensive foul when it charges a foreign-to-foreign deal? The legislative section that closely guards the CMA’s deployment of jurisdiction is section 23, and it limits the CMA to only those cases where it can posit a 25% share of supply (SoS), with an increment – the catch being, to crunch these numbers, the CMA can only apply “value, cost, price, quantity, capacity … workers”. Oh, and: “or some other criterion of whatever nature”. Or “such combination of criteria, as [it] considers appropriate” (section #23 subs. 5, Enterprise Act). For the denominator, the CMA has similar discretion to separate or aggregate distinctions in supply regardless of industry practice, substitutability, etc. (s. 23(6)).

Little wonder, then, that the CMA holds the International Competition Network (ICN) league records in... let’s see, scoring, assists, steals and, of course, blocked shots. It is the “Be Like Mike” jurisdictional tool other enforcers can only dream of. 

Consequently, the SoS test has caught a number of potential killer acquisition – Platypus prefers the less emotive “incumbent/challenger” – theory of harm cases where the target achieved not a pound of its own UK revenue. Zero-UK-turnover Big Tech examples such as Facebook/Instagram, Google/Waze and Facebook/Giphy, are based quite simply on UK users of the relevant free target service (photo-sharing apps, turn-by-turn navigation apps, GIF libraries). Outside the free-service fact pattern, the CMA was called upon to display more SoS test ingenuity in cases such as Sabre/Farelogix, Roche/Spark and Mastercard/Nets – but apply said ingenuity it did, with its position in Sabre vs. CMA being handily upheld by the Competition Appeal Tribunal (CAT).

For “pure” non-horizontal mergers, the SoS test is ostensibly unable to capture such cases that fall below the £70m target turnover test. But on the court, the SoS test can sometimes spin around defenders to construct technical overlaps out of captive or integrated services not marketed to customers. A case in point is the CMA’s first-ever prohibition in 2016 of a fundamentally vertical deal, ICE/Trayport, using the SoS test. 

Even a GOAT is not 100% perfect

But even the SoS test is not infinitely omnipotent. While Jordan’s Chicago Bulls of the 90s won six NBA titles, they never once had a perfect regular season record: 82-0. Even the 1995-96 Bulls lost ten games, winning only 72 (for an 88% win rate). To rub in the imperfection, some twenty years later the Greatest Of All Time (GOAT) regular season trophy was ceded to the 73-9 (89%) record of the 2015-16 Golden State Warriors.  

Like both these teams, the SoS test is capable of losing a handful of jurisdictional games – although certainly not as many as 9 or 10 in one season. In any case, the regular season of jurisdiction is just one metric for GOAT regime prowess purposes.  

While some regimes have wider powers to review deals in principle, they encounter other more challenging substantive enforcement inhibitors. So, just as the 90s Chicago Bulls were more than Jordan, the SoS test must be looked at it in terms of total regime arsenal. 

• Off court, there’s the renowned global hold separate powers now made famous by social media (Phil Jackson).
• On court, there’s the team’s less heralded but no less pivotal All-Star, a uniquely broad substantive “SLC test” discretion that, like the SoS test, can hang in the air and – per the new Guidelines – do almost anything it wants with the deal ball (Scottie Pippen).
• The King of Rebounds ensures that, in the rare case of an errant attempt, the CMA team gets the ball back anyway and the shot clock resets. Otherwise known as CAT judicial review and remittal (Dennis Rodman).

Taken together, even if the SoS test has an off night every now and then, the CMA’s overall merger regime powers look to be to the ICN’s 2020s what the Chicago Bulls were to the NBA’s 90s. 

A jurisdictional challenger?

A reported motivation for the must-watch Netflix documentary on the 90s Bulls, The Last Dance, was to remind a new generation of His Airness’ awesomeness and cement Jordan’s status… because some were talking about the contemporary superstar, LeBron James, as a credible GOAT challenger.

And our Air Multi-J incumbent now faces its own new challenger for assertive jurisdiction: the ability of 27 EU Member States to refer to the European Commission (EC) a deal over which none of them had jurisdiction (and the EC lacked original jurisdiction). This revised practical interpretation of Article 22 has been applied as a test case in Illumina/Grail, whose legality is being challenged by Illumina, with the EU General Court’s ruling expected in mid-July.  

The CMA is not investigating this vertical deal, despite its role in the abandoned Illumina/Pacific Biosciences “incumbent/challenger” deal. Platypus speculates, but it may be that the CMA concluded the share of supply test was not elastic enough. This is because the SoS test requires some form of a UK nexus, and it would at least logically follow from CMA inaction that Grail has no UK presence. The Article 22 test also has a domestic nexus hardwired in: the Transaction must threaten significantly to affect competition within the territory of the [EU] Member State making the referral request; it cannot do so extra-territorially on behalf of consumers in other countries.

But even if it was true that this SoS nexus requirement meant that the CMA “lost” one regular-season jurisdictional game, what would be the consequences for UK consumers of this perceived hole in the CMA net?  

UK merger control is part of an MJ archipelago. Whatever the view on the merits, the US FTC has challenged Illumina/Grail and its jurisdiction is not in dispute, even if the General Court were to rule against EC jurisdiction; and if the EU ruling is in the EC’s favour, the world’s two largest Western jurisdictions would be reviewing the global deal in parallel. Despite leaving the EU, the UK is still a lead member of NATO whose premise is collective defence: that is, no one NATO country need carry the entire load for defending its own national security interest (or here, by analogy, protecting the UK fraction of wider consumer welfare on global or international markets of which the UK is a part).  

While not a complete answer to every hypothetical, cooperation and comity can therefore be an efficient tool of protecting the UK consumer welfare interest; after the Illumina cases, NVIDIA/Arm and others, it would be an outdated premise to assume that only the CMA cares about, or has the toolkit to deal with, incumbent/challenger or non-horizontal theories of harm in merger control. 

Benching proportionality and playing for perfection

Each regime strikes a different legislative balance in terms of proportionality and setting of merger thresholds.

Thus, despite the SoS test’s elasticity, in 2021 the UK Government consulted on a supplementary threshold to the existing SoS test to "provide a more comprehensive and effective jurisdictional basis" to capture (more) “killer acquisitions” of nascent competitors and (more) non-horizontal mergers. The proposal was to empower the CMA to review mergers where at least one merging business has: (i) an existing share of supply of 25% in the UK (note: no increment required); and (ii) UK turnover of at least £100m.  

If the only public policy value relevant were a textbook case where consumer harm could arise but which the regime could not catch, there should be no jurisdictional boundaries at all, because there is always a fact pattern just below the threshold (e.g. a “global monopolist acquirer whose UK revenue is only £99m and who acquires the only possible global market entrant” – and so on). 

However, as John Fingleton has pointed out, any zero-tolerance attempt to reduce the “error rate” of either under- or over-enforcement in merger control close to zero, can only do this by (perhaps exponentially) increasing the error rate on the other side. In other words, to make sure not one guilty merger goes free, it requires the incarceration of (or at least substantial regulatory tax on) very many innocent mergers; conversely, making sure not one single benign merger is prosecuted requires letting many harmful mergers go free. And the logic of minimising the “tax burden” on benign deals that do not need notification is the reason the regime is still voluntary despite calls for a mandatory regime. (There is an overall UK regime schism, though, in that the broad and compulsory scope of the NSI Act of 2022 goes in entirely the opposite direction). 

The importance of domestic nexus has been a concern that the International Competition Network of antitrust agencies and others have raised (and had successfully reformed) in other expansive jurisdictions, like the Ukraine. The ICN has commented that “jurisdiction should be asserted only with respect to those transactions that have a material nexus to the reviewing jurisdiction” (and not the mere presence of the acquirer).

The acquirer-centric proposal in the Government’s original consultation removed the requirement of a UK increment to a 25% share, and therefore dispensed with a UK nexus of the target and therefore of the transaction. The existing turnover test is focused purely on one party – the target’s – turnover but the principle of target turnover in the jurisdiction is globally much less controversial as a point of nexus, and does come with its own proportionality safe harbour (the sales level, i.e. £70m, with the reform proposal moving to £100m).

Respondents to the Government consultation pointed out the problem of removing a UK deal nexus in share of supply. It would have subjected a large plethora of domestic and international firms outside the single digit set of Big Tech “SMS firms” (which will have their own bespoke regime) to UK merger jurisdiction and consequently substantive risk screening for 100% of all deals they conduct globally including for targets without UK revenues, users, assets, subsidiaries, or employees.

The Government’s 2022 response and the issue of an unspecified UK nexus test

The UK Government’s response tweaks the numbers on the proposal so that the existing share of supply is raised to 33% from 25% and from £100m to £350m for UK acquirer turnover. Commentators on the SoS test will know these changes are largely cosmetic in practice, save for the small subset of firms now dropped from the turnover requirement. And £350m of UK turnover will still cover a dominant slice of the world’s multinationals and the FTSE250.

Far more consequentially, the Government agreed that – having taken the UK nexus out with the removal of the increment requirement – it was appropriate to put a UK nexus back in. However, no one has yet ventured a candidate UK nexus test, or if the CMA shared a concrete proposal with the Government, it seems no one was prepared to consult on it. The Government is therefore consulting on this question now to focus on “transactions where there is a material impact on UK consumers”.

UK targets or UK-centric targets

It would not be controversial if the Government were to decide that (i) a UK-headquartered target or (ii) a foreign target but who achieves e.g. the majority of their global sales in the UK, or have a majority of their global user base in the UK, meets the nexus test. These could be carved out separately, so as to leave room for a more reasonable and proportionate approach for the acquisition of non-UK targets that have a minority (less than 50%) of their sales or users in the UK. 

Dropping the 33% share of supply test

Any seasoned adviser knows that it will be extremely hard in most cases to establish that an acquirer does not have a 33% share of some permutation of supply that the CMA could use. Although on paper the limb notionally serves as a limiting principle (and has been raised from 25% to 33% to that end), there should be no illusions that it is a hollow limiting principle for the vast majority of cases. It is like telling the player you have assigned to defend Michael Jordan: make sure he doesn’t score too many points. Well, yes, quite. Instead, the only real-world limiting principle is the £350m turnover threshold.

The more intellectually honest solution is to drop the entire 33% share of supply test concept and substitute it with a transaction value test, as set out in more detail below. This could still easily be coupled with a UK turnover test for the acquirer, such as the £350m proposed. Because arguably, the existing SoS test is as much SoS as any one regime needs. Put differently: isn’t one Michael Jordan enough?

Substituting a transaction value test

The policy logic of a new test

Simple nexus tests based on UK target turnover or users are appealing, but leave unaddressed the policy scenario that will motivate the CMA to push for wider jurisdiction: the future entrant who currently has no UK presence but whose entry would generate substantial competition and consumer benefits that a merger would remove: in other words, a variation on the textbook killer acquisition fact pattern.

The below transaction value test is offered on the premise that the very reason the Government (and CMA) proposed the new test is to capture deals not caught by share of supply because the target has no current UK commercial presence that would provide the increment (sales, users, employees, etc). And the addition of a UK nexus test in response to feedback is an attempt to square the circle, even though by definition, target turnover in the UK, or a SoS test increment in the UK, do not catch the scenario the legislative change aims to capture: a future or forthcoming competitive presence but for the merger.

Here, the constraint on the SoS test, for all its elasticity, is that it is time-bound as a present-tense test. Unlike under the SLC test, a share of supply increment cannot be conjured out of the future as a likely or forthcoming overlap; it must exist at the time of the assertion of jurisdiction.

No bright lines

The inherent problem with this no-current-UK-presence scenario is that it is largely incompatible with simple bright line tests, which hinge on demonstrable current facts (such as £ sales or # of users).

Unless the Government thinks again, if it were a given decision that the CMA should be granted power to review deals in which the target has no current UK presence of any shape or kind, on any metric, then we are automatically in the realm of more complex and non-bright line tests.

If that is correct, a transaction value threshold springs to mind, and is not wholly novel: for example, Austria, Germany, Mexico and the United States all have transaction value tests partly to deal with the sometimes disconnect between domestic target revenue and potential enforcement interest. 

For the UK, it is clear that the CMA sees high transaction values of small-revenue targets as an indicator of a potential market power premium: it was an important part of the CMA’s assessment in Paypal/iZettle and flagged explicitly in its new Merger Guidelines. So, there is policy coherence in applying a transaction value test if the entire goal is to catch incumbent/challenger deals (which may lead to elimination of entry or expansion to protect market power) or non-horizontal deals (which may foreclose rivals for the same ends).

International precedents

None of the foreign precedents, Platypus suggests, are suitable for direct importation in the UK and each has its own practical issues associated with it. 

The German and Austrian tests apply a global transaction value threshold (which appears simple and bright line) but then each use other (complicated) means to introduce a domestic nexus back into the jurisdictional equation (which then sacrifices the simple and bright-line principle and leads to precautionary filings given the uncertainty). This is not such an undue burden given the relatively light touch review process/timeline in these jurisdictions but would not be appropriate given the lengthy end to end process of a full-fat UK review.   

In the US, the HSR rules require assessment of the fair market value of assets in the jurisdiction when applying the foreign-to-foreign US HSR exemption for non-US targets. HSR experience is that fair market valuation can be difficult and subjective without detailed methodology (in particular when attributing value for a nascent competitor who has not yet launched). Introducing non-bright line tests, despite precedents in mandatory regimes such as the US, would raise issues of the need for guidance and potentially the kind of interpretative assistance provided by the FTC’s Premerger Notification Office (PNO) which has no UK equivalent

A starter for ten proposal

With these health warnings in mind, taking broad rather than line-item inspiration from these other regimes, one coherent conceptual proposal is to base a test on the share of global transaction value attributable to the UK. 

No such test is easy to apply. However, assessing UK share of transaction value could be made with reference to the fair market value of UK assets (such as hard or soft IP registered in the UK) where this is applicable and can robustly be done. Where not, the analysis could turn to what the acquirer, for good faith valuation purposes in “4(c)” board-level documents, has assumed with respect to future global target sales over a defined time horizon. To derive a UK percentage to apply to this value, if projected UK sales were not broken out separately, as will very often be the case, recourse could be had to evidence as to proxies for the UK share of the global addressable market, such as third-party reports on UK share of global projected market size or using the acquirer’s current UK sales as a proportion of its global sales as a proxy. Rebuttable presumptions set out in guidance could be applied to make the analysis tractable to resolve scenarios of uncertainty.

Building cross-border proportionality into the nexus test 

For any given metric, such as UK sales, UK users, or UK share of transaction value, the Government could consider applying a threshold whereby jurisdiction is only established where the UK nexus is material relative to the global picture.

Again, the premise here would be that for deals where the UK nexus is small, it is highly likely that other jurisdictions will have greater nexus, and that comity and proportionality favour allowing those jurisdictions to decide whether to intervene or not. To the extent that problems diagnosed arise on global or European-wide markets, it is also a respectable general assumption that most of the UK’s peer regimes would obtain remedies commensurate with the geographic scope of those markets, and in so doing, would protect not only their own consumers but those in the UK as well. It would also minimise regulatory duplication and potential for conflict and allow the CMA to preserve resources to allocate to more UK-centric cases.

Regardless of the precise new jurisdictional tests, there are real “valves” in the form of CMA discretion under the briefing paper / own-initiative inquiry / de minimis regimes that the CMA can and should deploy to strike the right balance that an ex ante UK nexus test can never perfectly achieve. 

A Government steer could reinforce the view that the CMA should continue to review mergers in accordance with its enforcement priorities and aim to ensure that its powers are exercised in accordance with the principles of international law and comity. These issues are currently before the CAT in the Meta v CMA appeal, so the court’s guidance can be reflected in time before any legislation is settled. (Disclosure: Linklaters acts for an intervener in this appeal).

One final thought

Finally, it is a strange UK anomaly that Phase 1 is not the definitive venue for resolving whether the CMA has merger jurisdiction. In most peer regimes, jurisdiction is a threshold question.   

Any grant of a new test should stipulate that jurisdiction be decided as a threshold question, and that this be decided on the balance of probabilities no later than at the end of Phase 1. The CMA’s Phase 1 human capital is more than up to this task, and the CAT can meaningfully exercise judicial review of a finding on jurisdiction at the end of Phase 1, not after the end of Phase 2. 

Platypus accepts that this logic applies to the current tests. But if the Government is not prepared to make this change across the board, it should at least not compound the issue in the context of granting ever more jurisdictional powers. The question of power to review should not be left to the very end of an extended review process. That would be like playing a best-of-seven Finals series and only once the series has been won 4-3, asking whether the CMA was, in fact, eligible to play.

Conclusion

It was the 1992 Barcelona Olympics US basketball Dream Team that put Michael Jordan and the NBA on the global cultural map.  

Since 2018, the CMA has put the UK squarely on the global merger control map. Riveting global audience milestones include: 

• blocking a US/US global deal that the US courts had approved (the DoJ lost its first-round litigation in Sabre/Farelogix);
• blocking an EU/EU deal that the EC had conditionally approved (Cargotec/Konecranes);
• unwinding a US/US deal such as Facebook/Giphy with no UK target sales and ordering a reconstitution of the target beyond its pre-merger state (under appeal). 

Global M&A audiences are watching live to see how far the Government will extend the CMA’s already gold-medal-winning jurisdictional reach.  

If it does so, the most tempting option is to use ICN-friendly simple and bright line metrics (such as target turnover or users), but these are at odds with introducing a new test at all, because they are baked into the existing law (cf. turnover test and share of supply increment). 

If GOAT is not good enough and there is to be reform, then a transaction value test with a proper UK nexus requirement may be the most sensible way to square the circle and maintain a British sense of proportion.