UK merger-control reform proposals raise concerns for deal teams to watch

The UK government is considering a package of reforms to the UK's existing mergers and markets regime. While broadly intended to promote speed and proportionality in Competition and Markets Authority (CMA) decision-making, the proposals are controversial: they risk weakening key procedural safeguards and introducing more scope for political interference.

The CMA closed its public consultation on 31 March. Although the merger control reforms are not yet final, five areas of the proposals already warrant close attention from merger and acquisition (M&A) deal teams. 

The reform package

With the government's closure of the consultation on refining the UK competition regime, responses will now be reviewed with further detail expected to emerge as draft legislation and updated CMA merger guidance are developed.

While broadly supportive of the stated objectives of improving pace, proportionality, predictability and process in mergers and markets decision-making, Osborne Clarke in its consultation response expressed reservations that certain proposals risk undermining the very predictability and consistency they seek to achieve.

Notification remains voluntary: acquirer bears the risk

The CMA has chosen to retain its unfettered discretion to call in any qualifying transaction up to four months after it first enters the public domain. For merging parties, this means the current uncertainty and attendant merger control risk for the acquirer remains unaddressed.  What may seem to be a commercially reasonable decision not to voluntarily notify a qualifying transaction can result in the CMA subsequently calling it in for formal review after completion - which is a highly unwelcome, expensive and disruptive outcome. Post-completion merger reviews will typically result in costly and burdensome hold-separate obligations being imposed on the acquirer, with the subsequent information gathering exercise taking place under considerable time pressure owing to the statutory four month deadline by which the CMA is required to have carried out its Phase 1 review.  In more complex cases, as this deadline only serves to undermine the acquirer's ability to develop a strong case for clearance, it often ends up being waived in any event.

Osborne Clarke considers that the government should take this opportunity to address the fundamental unfairness and disproportionately burdensome nature of the current voluntary notification system and instead adopt a mandatory notification system that captures all material transactions meeting a turnover-based jurisdictional threshold. A well-designed, light touch Phase 1 process that combines a straightforward notification form with a short, high level review process would be considerably faster, more business friendly, less burdensome and much less expensive than the current voluntary system that, to a large extent, serves only the CMA's interests. 

Phase 1 remedies

The existing five working-day deadline for submitting a phase 1 remedy proposal is, in practice, extremely tight. Designing an effective remedy proposal that addresses the CMA's concerns while remaining commercially viable is difficult to achieve in such a short period.

The proposed reform preserves the requirement for merging parties to submit an initial proposal by working day five, ensuring there is no incentive to delay, while giving the CMA discretion to grant a further five-working-day extension where there is a reasonable prospect of resolving the identified concerns at Phase 1. In the majority of cases, it is in everyone's interest for undertakings in lieu to be agreed at Phase 1, thereby avoiding the expense and business disruption of an in-depth six-month Phase 2 investigation.

Although a welcome improvement, the timeframe for avoiding a Phase 2 reference will remain tight under this proposal. In practice, where competition concerns are anticipated (or have been identified during the Phase 1 process), businesses will be well advised to explore and stress-test potential remedies internally (and also with the CMA case team) before the Phase 1 decision is taken to maximise the prospects of a remedy proposal being accepted. 

Phase 2 independent panel safeguard under threat

To date, the panel system of independent experts tasked with deciding Phase 2 mergers and market investigations has survived various incarnations of the UK competition regime. The UK's widely acclaimed panel system, which acts as a "fresh pair of eyes" following a Phase 2 merger reference or a market investigation, mitigates the risk of institutional confirmation bias while minimising any political interference in decision-making. As the panel is independent from and not answerable to either the CMA board or Parliament, the system insulates Phase  2 decision-making from the (adverse) views formed by CMA staff during the Phase 1 process and, more widely, from any political pressure. The panel system has rightly come to be recognised as establishing a gold standard for in-depth merger and market investigations.

Under the proposed reforms, the independent panel system will be replaced by sub-committees containing a mix of senior CMA personnel, who will be directly accountable to Parliament, and independent experts. This reform risks reintroducing precisely the institutional confirmation bias and risk of political interference the panel was designed to prevent.

The quid pro quo of the current panel system is that there is no right of appeal "on the merits" of Phase 2 decisions – they can only be reviewed on judicial review standards. Under the proposed reform of the panel system, which will remove a significant constraint on the CMA executive's decision-making power, there is no proposal to introduce a merits-based appeal process or grant access to file rights. This risks leaving the UK regime notably lacking in key checks and balances found in most peer merger control regimes. M&A deal teams working on transactions with political salience or strategic importance may potentially face an increased risk of procedural unfairness.

Jurisdictional thresholds

At present, the CMA has legal jurisdiction to review transactions that result in two or more enterprises ceasing to be distinct, including through the acquisition of material influence over decision-making policy of another enterprise. Jurisdiction requires satisfaction of any one of three alternative tests:

• the merging parties together supply at least 25% of a particular category of goods or services in the whole, or part of, the UK (the share of supply test);
• the UK turnover of the target enterprise exceeds £100 million (the turnover test); or
• one party must have a UK turnover of over £350 million and a share of supply of over 33% of a particular product or service whilst the other party need only have a UK nexus (the hybrid test).

The reforms propose changes to both the material influence test (used to assess whether two or more enterprises have ceased to be distinct where only a minority of voting rights are being acquired) and the share of supply and hybrid tests, but neither goes far enough in isolation to provide much additional clarity for deal makers or advisers.

On material influence, the test is assessed on a case-by-case basis, with only a few examples provided in CMA guidance. This creates genuine difficulty in assessing whether minority investments or strategic partnerships fall within scope. The proposed closed statutory list of relevant factors risks being over- or under-inclusive. A non-exhaustive statutory list, which makes clear that factors are indicative rather than determinative of material influence, would better balance predictability with flexibility.

When applying the share of supply test, the CMA currently has a very broad discretion in defining the relevant set of overlapping goods or services. It is proposed that the current open-ended formulation of the test be replaced with a closed list of defined criteria. While only a small change and while the CMA will still have significant latitude in applying the share of supply test, this reform seems sensible. 

The Christmas pause

The government proposes to pause statutory time-limits over the Christmas holidays, in line with some international merger control systems. Osborne Clarke supports this change across all CMA work and considers there is merit in following the European Commission's approach, closing from Christmas Eve until the first working Monday in January.

Osborne Clarke comment

Taken together, the proposed reforms reflect a tension at the heart of the government's business agenda: its desire for the CMA to be a faster, more proportionate competition regime sits uneasily alongside proposals that would concentrate decision-making power within the CMA executive and leave significant areas of jurisdictional uncertainty unresolved.

While the consultation contained some sensible proposals, particularly regarding Phase 1 remedy timelines and the Christmas clock-stop, there is concern on the issues that matter most: namely, the retention of the voluntary notification system and the proposed abolition of the independent panel system. The government's proposals represent either a missed opportunity or, in our view, a step in the wrong direction.

If the independent panel system is replaced by the sub-committee proposal, the loss of decision-making independence must be compensated for by more meaningful structural safeguards, such as full merits review on appeal to the Competition Appeal Tribunal and a robust access-to-file process. Deal teams should approach the reformed landscape with caution, recognising that increased efficiency in some areas may come at the cost of reduced procedural protection in others.

If you would like to discuss what the proposed reforms may mean for your transactions or your business, please contact a member of Osborne Clarke's Competition team.

This article is based on Osborne Clarke's response to the UK government's consultation on "Refining Our Competition Regime," submitted on 31 March. It represents the views of Osborne Clarke LLP and does not constitute legal advice.