What’s on the horizon for merger control in the current UK competition law review?
Global | Video | October 2021 | 11:57
Video Details
| Ian Giles | Richard, good to see you again. This is part two of our discussion of the UK’s competition reform proposals that BEIS are testing with the market at the moment. And they have been very diligent in consulting a huge range of stakeholders on this, so they are taking this very seriously, and as we have been talking about before it follows on obviously from Penrose and from Tyrie and various other Governmental focuses on what should happen with the regime. On the merger control side, the UK regime is generally seen as being an outlier from the international norm in terms of being a voluntary regime and having the “share of supply” test, in addition to a turnover-based test. And, in the current proposals, what we have seen is some changes to the thresholds. Do you want to talk through what the key changes are and what your thoughts are? |
| Richard Whish QC | Well, yes, we are a voluntary system and there are two bases of jurisdiction at the moment – one is that you exceed certain turnover thresholds, which is fairly conventional, but also we have the so-called share of supply test. So, if I have, for example, 28 per cent of a market and I am proposing to acquire somebody and that will take me from 28 to 29 per cent of that market, then jurisdiction exists. Now the question that arises there is, suppose CMA sees a merger that it thinks might be problematic in terms of future competition because this is acquiring a start-up that might be a potential competitor, so basically I am buying out my future competition. Query – is it desirable, in principle, that that should be looked at? And, if so, is the share of supply test adequate to deal with that case or do you need some alternative basis for jurisdiction? And, of course, the share of supply test might not be appropriate because if the start-up doesn’t inhabit my existing market there can be no increment. So the proposal is that a new test should be introduced which tries to establish a clear nexus between the acquirer and the UK, and that in those circumstances jurisdiction should exist. Now I presume you are going to ask me whether I think this is a good idea or not? I have sympathy for it, quite frankly, because I think the existing share of supply test can be rather stretched and taken further perhaps than is legitimately the case in order to try to get jurisdiction. Well, why are we not just honest about it and say that this so-said “killer acquisition” – it’s a pejorative term that I don’t like – but people know what I mean, why don’t you just say that there are circumstances in which it would be appropriate at least to give the CMA the power to call in and look at a merger? That’s what this is intended to address. |
| Ian Giles | It’s very interesting when you look at the comparison with other regimes internationally. I mean, the Germans introduced the value threshold so that they can look at any deal which is big enough to involve a significant purchase price, the Europeans have obviously been thinking hard about this and have not yet landed on quite how they want to change their rules – apart from Article 22, which I believe you have spoken to my colleague Jay about on a separate video – and then, in the UK, we have seen a few pretty controversial share of supply test cases, like Sabre/Farelogix and Roche/Spark, where the overlap between the parties wasn’t obvious. This test is, as you say, so it’s saying 25 per cent share of supply and £100 million revenues in the UK for a party, which would be the purchaser, and that party then, any acquisition it makes is within the jurisdiction. But it remains a voluntary regime, so you can make your assessment, you can choose not to file, to file a briefing paper or to jump straight in with a full filing. |
| Richard Whish QC | Well, yes, and it seems to me, if we are going to have that then obviously the system there has to be voluntary. You could not possibly make anything like that mandatory – well, you could possibly, but it would be a very unwise policy, it seems to me, because you would draw in too many merger notifications and that is undesirable in practice. So I think it has to be voluntary. It does seem to me that it places a premium on the advice of the competition advisers who would basically be being paid to advise “in my experience do I think this is the kind of case that a merger authority would be interested in looking at?” And, of course, a serious practical point is therefore that the conditions in the share purchase agreement would have to be appropriately drafted to cover this kind of eventuality, because I think that there have been cases in the past obviously where, you know, there was a bit of a lacuna shall we say. |
| Ian Giles | Yes, indeed, and what you do see now, as standard, is that people draft for briefing papers, so SPAs say “subject to a briefing paper being submitted to the CMA and comfort being received in the appropriate format dah, dah, dah, de dah”, so that has become standard. But, I think, if people know what the rules are, then obviously, they can draft around that. I think it is the uncertainty that creates the issues. Related to that, you hear a lot of complaints about one aspect of the voluntary regime which is the initial enforcement orders, the complexities that come with that, the burden on business, the need to seek derogations, the lack of flexibility of the CMA case teams in doing that, the number of derogations which can be 10s, 20s and 30s in some cases, and whether that is all, again, an indicator that we would be better with a simpler mandatory style regime. What do you think about that? Do you think that those thoughts align? |
| Richard Whish QC | Well, I understand where people are coming from. But, I mean, as we have already said, you can’t have a mandatory system for the share of supply or for this new jurisdictional basis, so this would have to be mandatory above certain thresholds but voluntary in other cases. I can see how this all could become really terribly complicated. And it seems to me that, where you have seasoned advisers who do this work day in day out, it seems to me, as a general proposition, that our system kind of works, and God knows how it works, but somehow it works. So whether it is sensible to go to a mandatory system, I am not actually persuaded by that at this stage. Whether the IEO business can be simplified, streamlined, I think that is the sort of thing that people on the inside of these cases need to sit down and work out. I am not privy to that highly procedural side of things. I hear complaints all the time, I mean, in principle, it seems to me terrible to think that human endeavour and financial resources all get diverted over here into the relatively boring story of the IEOs, whereas the real thing is the actual merger investigation over here. But whether stuff can be done around that, I don’t know. I mean, you the practitioners and the CMA know the answer to that better than I do. |
| Ian Giles | I think, again, it points to the fact that companies need to be more cautious in going ahead with deals under the voluntary regime… |
| Richard Whish QC | I am continually surprised… I maintain a table of all the current Phase 2 cases that the CMA is conducting. I am always surprised about the percentage of Phase 2 cases that are of completed mergers. And I have noticed in recent years that, at any one point in time, probably 50 per cent of the cases being looked at are completed. I mean, I continue to find that surprising. I daresay that there are a variety of different reasons as to how cases end up like that, but I do find it surprising. |
| Ian Giles | Can I ask one more question on these reforms which is around the panel system? So the UK, obviously previously with the OFT and the Competition Commission, and now even within the CMA has prided itself, and I think generally been respected internationally for having the “second pair of eyes” built into the administrative procedure. It’s not like the US where you have to go and prosecute your case. But you have that separation. And the current proposals seem to be trying to streamline the number of panel members, make them more full-time posts, make them feel potentially more like CMA employees who are within the kind of thinking of the management of CMA in an executive function, as opposed to independent panel members, which was always one of the attractions. What are your thoughts on that? |
| Richard Whish QC | Well, my first thought is, I do think that the fresh pair of eyes approach is a good one, in principle, because that avoids the problems of confirmation bias etc. The question here is how many fresh pairs of eyes should there be? That is to say, how many panel members should there be, and I think I am right in saying that at the moment there are about 20 or 21 of these people available. Query – should that number be reduced? And, of course, these are proposals, this is a consultation at this stage, should that number be reduced? I am completely open-minded about this. I can see that perhaps you could get more coherence of decision-making when you have a smaller number, and it’s more collegiate etc. However, I can also see that you want a certain amount of flexibility. Do you really want these people to be full-time paid employees, as opposed to part-time members, because that might affect the mix of people that you can attract and whatever? I see the CMA, actually, in its response to the Government, is basically arguing for the status quo. If they had said that they would like a smaller body, more professional, more collegiate etc., well, I would attach significance to that. But, at this stage, they seem to think that the current seem is working, not least because it means that there is scope to bringing in, not just competition lawyers, competition economists etc., but a broader mix of people from academia and business and so on. I am open-minded, but it is an interesting debate. |
| Ian Giles |
Yeah, I think that’s right. I think the breadth of input from different sources is something that has been important with the panel system, so I’d be keen to see that continue. But there’s obviously a lot at play still on the mergers side, so we’ll see what happens on these developments. And it is notable that, obviously, in the post-Brexit world where the UK is now starting to run cases in parallel with Brussels, that there will be pressure on them to align on timelines and on approach. And that will be something that, I think, will have, well, that will be a major theme of what comes out of this consultation. |
| Richard Whish QC | Indeed. |
| Ian Giles | Thank you very much, Richard – really good to talk to you. |
| Richard Whish QC | Pleasure. |
| Ian Giles | Thanks. |
Head of Antitrust and Competition, Europe, Middle East and Asia
Email
ian.giles@nortonrosefulbright.com