On 1 January 2021, with the end of the Brexit transition period, the UK entered the real world of Brexit. This has immediate implications for merger control both in the UK and the EU. Any companies involved in deals need to be aware of the impact.
As of 1 January 2021 the EU Merger Regulation (EUMR) with its one-stop-shop regime, under which a transaction is either subject to the EUMR or to the UK merger control regime, but not to both, ceases to apply in the UK.
The Agreement on Trade and Cooperation (TCA) agreed between the UK and the EU contains very little detail on merger control but it is clear that from now on the two regimes will apply in parallel. Businesses previously used to dealing with the European Commission (Commission) under the EUMR regime will now also need to consider the UK merger control regime as a separate third country regime, and we have highlighted below some of the ‘need to knows’ of the regime.
The new Trade and Cooperation Agreement between the UK and the EU – the end of the one-stop-shop regime
The new Trade and Cooperation Agreement (TCA) agreed on 24 December 2020 contains little detail on merger control or competition law in general. The parties agree to maintain a competition law which “effectively addresses mergers, acquisitions or (for the EU) concentrations which may have significant anti-competitive effects”, applying “to all economic actors irrespective of their nationality or ownership status”.
It is therefore clear that the one-stop-shop regime of the EUMR no longer applies to the UK and that both merger control regimes will run in parallel. Many transactions involving UK activities that would previously have been subject solely to review by the Commission under the EUMR will now also be subject to the UK merger control regime.
We saw this happen only 6 days into the new arrangements, when on 6 January 2021 the CMA published a preliminary invitation to comment on the high profile anticipated acquisition by NVIDIA Corporation of the Intellectual Property Group business of Arm Limited. This USD 40 billion deal would previously have fallen within the exclusive jurisdiction of the Commission under the EUMR.
The UK merger control regime – what businesses need to know
As a result of Brexit the CMA is no longer prevented from scrutinising transactions that are subject to the EUMR and the CMA will therefore have jurisdiction over many more transactions. The CMA has estimated that it will see an increase of 40 to 50% in the number of cases it will review. Businesses will need to consider carefully whether their transaction may be subject to UK merger control, in particular in light of the CMA’s recent expansionist approach to jurisdiction, and should familiarise themselves with the key features of the regime.
- Voluntary regime: the UK merger control regime is one of the few voluntary regimes and parties are free to complete their transaction without prior merger clearance by the CMA, but the CMA has a statutory duty to monitor merger activity and it has the power to call-in transactions which have not been notified to it up to four months after completion. The way in which the CMA is conducting that monitoring function and is exercising its power to call in transactions, has moved the UK much closer to a de facto mandatory notification system. Very few businesses will therefore choose to complete their transaction without prior engagement with the CMA in the hope that the deal will remain under the radar.
In addition, the CMA routinely imposes Initial Enforcement Orders (IEOs) in completed mergers which it is investigating, to prevent merging parties from taking pre-emptive business integration steps that might prejudice the ability of the CMA either to refer a merger for a detailed phase 2 review, or to impose appropriate remedies. In essence, an IEO imposes an obligation on both parties to refrain from taking steps to integrate their respective businesses. Complying with these IEOs is invariably very burdensome and failure to comply with the terms of an IEO can result in a fine of up to 5% of worldwide turnover.
- Filing fee: unlike EUMR filings where there is no filing fee, under UK merger control all mergers which qualify for reference for a phase 2 investigation (irrespective of whether a reference for a phase 2 investigation is made) are subject to a fee. The level of the fee varies according to the value of the UK turnover of the business acquired and ranges from £40,000 to £160,000.
- Control: the jurisdictional test under the UK merger control regime is very different from that under the EUMR which applies a single test for control of ‘decisive influence’. The UK regime has three levels of control: material influence, de facto control and legal control, and acquisition of control at each stage can trigger new jurisdiction.
- Share of supply test: if the turnover test (UK turnover of the target exceeds £70 million) is not met the CMA can take jurisdiction over a transaction where the merged entity will supply or purchase 25% or more of goods or services of a particular description in the UK or in a substantial part of the UK (share of supply test). The test is very flexible and leaves wide discretion for the CMA in describing the relevant goods or services. In recent years the CMA has taken an increasingly expansionist approach to the share of supply test in order to assert jurisdiction over transactions it wants to review, no matter how tangential the UK nexus. In Sabre/Farelogix (currently on appeal before the Competition Appeal Tribunal) the CMA took jurisdiction over a transaction involving two US based companies where the target did not generate any revenue in the UK.
- Timetable: the UK merger control timetable is longer than that of the EUMR (and most other leading merger control regimes) and businesses may need to consider factoring in a longer long-stop date. This will also make it harder to facilitate coordination with other regulators as it will not always be possible to consider filings, assessment and remedies within the same timeframe.
- Deal documentation: a single EUMR condition precedent will no longer be sufficient and the parties should consider including a separate UK condition precedent where relevant.
- Foreign direct investment: businesses should also be aware that the UK is about to introduce, over the coming months, a new and distinct regime for the review of FDI in the UK. The new regime will introduce a mandatory notification for acquisitions of 15% or more in companies active in 17 specified sectors. For other sectors notification will be voluntary but, as currently drafted, the legislation includes a retrospective call-in power of up to five years allowing for post completion review of non-notified transactions. For more details see our blog post here.
Impact on EU merger control
The impact of Brexit is not limited to the UK and the fact that the UK is no longer an EU Member State will also have consequences for EU merger control. UK turnover will no longer be taken into account in order to determine whether the EUMR jurisdictional thresholds are met, and as there are many international businesses for whom much of their EU turnover is generated in the UK, this can be expected to result in fewer transactions meeting the EUMR thresholds and qualifying for review by the Commission. Instead, businesses will then need to determine which EU Member States have jurisdiction to review their transaction and where they will need to file.
The UK can also no longer be taken into account for pre-notification referral requests (under Article 4(5) EUMR) for a transaction below the EUMR thresholds but subject to merger control in at least three Member States to be reviewed by the Commission, which in turn can be expected to reduce the number of transactions for which a referral to the Commission is possible.
The EUMR will still apply in some cases due to transitional arrangements under the terms of the Withdrawal Agreement
The EUMR will continue to apply to the territory of the UK in some limited situations due to transitional arrangements. The Withdrawal Agreement, complemented by CMA and Commission guidance, sets out the key rules on this (for more detail see our blog posts here and here). Article 92 of the Withdrawal Agreement, which deals with ongoing administrative procedures, provides that after the end of the transition period the Commission continues to be competent for administrative procedures initiated before the end of the transition period (‘continued competence cases’). Article 92(3)(c) specifies that, for the purpose of the EUMR, proceedings shall be considered as having been initiated at the moment the transaction has been formally notified to the Commission or where the Commission has accepted (or is deemed to have accepted) a referral request from Member States for a transaction to be reviewed by the Commission or where no Member State has objected to such a referral request made by the parties.
The Withdrawal Agreement also provides that the Commission remains responsible for monitoring and enforcing remedies imposed in or in relation to the UK in cases already decided and for continued competence cases, but that the Commission and the CMA can agree for that responsibility to be transferred to the CMA.
Cooperation between the CMA and the Commission
Some of the burden on businesses resulting from the EU and UK merger control regimes running in parallel can be alleviated by cooperation between the two competition authorities. In the context of merger control, where it is often in the interests of the parties to agree confidentiality waivers for information to be shared with other reviewing agencies, cooperation between both authorities is expected to continue. The TCA also recognises the importance of cooperation and provides for the parties to enter into a separate agreement on cooperation between the Commission, the competition authorities of the Member States and the UK’s competition authorities, including conditions for the exchange and use of confidential information. There are a number of precedents of administrative cooperation agreements between the Commission and competition authorities of third countries (e.g. with the United States Department of Justice and Federal Trade Commission), which provide a precedent for a similar arrangement with the CMA.