EU and UK extend toolkit to force review of M&A transactions
Policy change to facilitate EU referrals
Within the EU, mergers and acquisitions must be notified to the European Commission and national competition authorities when the acquiring company and target company surpass certain turnover thresholds. What effect an undertaking has on competition is not necessarily reflected by the size of its revenue these days. Think of online platforms that offer zero-price services to consumers, with a view to generating revenues at a later stage. Or vaccine developers with future value in the pipeline. Consequently, these transactions often fall outside merger control.
In 2017, this led to both the German and Austrian legislatures introducing a value transaction threshold as an alternative to the turnover threshold. The European merger control regime allows not only companies, but also member states to request a referral to the Commission. This happened in Apple/Shazam. In the EEA, this transaction was only notified to the Austrian competition authority, but Austria then requested a referral and six other member states joined. Previously, the Commission had adopted a policy of only taking cases that would meet national notification thresholds.
However, on realising that small - but important – mergers may escape merger control scrutiny, the Commission has now changed its policy, through what some would call a legal loophole. In the fall of 2020, Commissioner Vestager stated that the Commission planned "to start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level – whether or not those authorities had the power to review the case themselves." Under Article 22 of the EU Merger Regulation, the referral itself forms the legal basis for the Commission's competence to review a transaction, even when it does not meet national notification thresholds.
It is therefore advisable to assess whether a transaction might influence competition in markets within the EEA and, if so, to assess the likelihood of referral to the Commission in the absence of formal notification requirements.
UK interventionism
Post Brexit, the CMA is also casting its jurisdictional net increasingly wide. This is possible as a result of fairly elastic (and, at times, indiscriminate) jurisdictional tests which capture a wide spectrum of transactions, even where the target business has a minor or debatable UK dimension.
The CMA's robust exercise of its market intelligence function to "call in" transactions up to four months after closing – coupled with imposing interim enforcement orders (IEOs) designed to freeze integration – has made the UK's merger regime's "voluntary & non-suspensory" classification a misnomer. Recently, the consequences of ignoring the jurisdiction of the CMA were made crystal clear in the case of the FNZ/GBST merger. This merger was not notified, closed without review and, as a result, now has to be completely unwound due to competition concerns unearthed by the CMA.
CMA tendency to assume jurisdiction
To better appreciate the CMA's sweeping take on establishing jurisdiction, it is important to consider the distinction between two events which might trigger a transaction having to be notified.
First, in the event of a merger or takeover, enterprises "cease to be distinct", which is the UK equivalent of the EU "change of control" test. Control may arise as a result of "material influence" over a company, which is a lesser – but nonetheless applicable – form of control under the UK regime. Acquisitions of minority shareholdings are usually not regarded as mergers warranting review under the EU Merger Regulation. However, they can be caught more easily by the UK's merger control regime since the CMA has a large remit to look into the acquisition of minority stakes by applying the material influence test.
Second, the UK "share of supply" test supplements the traditional turnover-based monetary threshold and gives the CMA jurisdiction where the parties to a merger will supply or acquire at least 25% of a particular good or service in the UK. In this respect, the share of supply test can be applied much more narrowly than a market share test.
With the split from the EU, the CMA can now use its wide power to assert jurisdiction in a huge number of transactions, even those with a more limited nexus to the UK.
"Material influence" test can be triggered by minority shareholdings
The ability to exercise material influence is the lowest level of control that may bring a transaction under the CMA's jurisdiction. The threshold for material influence is usually met if a shareholding of more than 25% is acquired or consolidated. Nonetheless, this is no longer a safe harbour in the UK and material influence can be established with lower levels of shareholding. According to the CMA's recently revised guidelines on jurisdiction, "even shareholdings of less than 15% might attract scrutiny where other factors indicating the ability to exercise material influence over policy are present".
A recent example is the Amazon/Deliveroo case, which concerned the acquisition of a 16% shareholding. The CMA held that material influence would arise from Amazon's investment in the food delivery platform. It based its findings holistically, on many factors, including that Amazon could appoint one out of eight directors and one observer to the board besides enjoying superior rights attached to its preferential shares in the event of Deliveroo's liquidation. Amazon's status as a strategic investor, as opposed to other investors who were largely venture capitalists, to the CMA implied that other shareholders and management would give a lot of weight to Amazon's views. The CMA referred to Amazon as a "credible future acquirer" and pointed to available evidence that existing venture capital shareholders would most likely look for a viable opportunity to exit.
According to the CMA's reasoning, this would likely enhance Amazon’s ability to influence strategic matters, including how a future sale might be effected. Additionally, the expertise that Amazon brought to this deal (both commercial and operational) from running an online business in sectors directly relevant to Deliveroo contributed to its influence, filtering through to its sole representative on the board. This approach to material influence by the CMA is based on numerous factors, applied in a case-specific manner. Other cases have demonstrated that even a shareholding below Amazon's 16% level can also lead to material influence. In 2015, Ryanair was required to sell down its 30% stake in Aer Lingus to 5% as a result of material influence concerns.
Share of supply assessment can cause significant legal uncertainty
The UK's share of supply test is different from a "regular" market share test. It does not necessarily presuppose the existence of a relevant market and the threshold is therefore more easily met than a market share test. Furthermore, as with the material influence test, the CMA seems to have an all-embracing discretion in setting the boundaries to the applicable frame of reference for gauging if a merger leads to an increase in the share of supply. This "broad discretion" was confirmed by the CMA in its recently revised guidelines on jurisdiction, in which it listed that it may premise share of supply calculations on "any other criterion". These may include, for example, the number of patents or employees in the UK, in addition to conventional considerations such as UK turnover. Thus in Roche/Spark, the share of supply test was fulfilled despite the target not initiating product commercialisation in the UK. The stipulated 25% ceiling was considered to have been reached by looking at the commercial reality of the parties' activities as some employees were engaging in R&D and some UK patents had been secured. Similarly in Sabre/Farelogix (a case which is now on appeal), jurisdiction was claimed by proposing the existence of a convoluted indirect supply channel to a single UK customer (British Airways), despite the target not generating any revenue directly in the UK.
No escaping the CMA's radar
A combined application of these two tests implies that if the CMA sets its sights on reviewing a particular transaction, it will usually succeed. If the CMA wants to review a transaction, it may liberally apply the material influence test to demonstrate the requisite change in control. Equally, if it wants to review a transaction not meeting the UK merger review turnover thresholds, it may resort to a broad application of the "share of supply" test.
Negating UK voluntary regime by extensive review of non-notified transactions
Most merger control regimes in the world have a mandatory notification regime. The UK formally has a voluntary regime, which allows transactions to be closed without notification and approval. Nevertheless, the CMA routinely sends initial enquiry letters about transactions that have not been notified. As a result, the CMA is exercising its powers to require notification, effectively creating a mandatory regime for any merger that shows at least some signs of being worthy of review.
Negating UK suspensory regime by extensive use of IEOs
In addition to mandatory notification, most merger control regimes in the world require transactions to be suspended until the competent competition authority approves the transaction. Consequently, a transaction can only be closed after regulatory approval (a position governed by a condition precedent in the transaction documentation). The UK formally has a non-suspensory regime, which allows transactions to be closed before approval.
Nevertheless, when the CMA starts to investigate a completed transaction (notified either voluntarily or of its own accord), it can impose interim enforcement orders (IEOs) requiring parties to suspend their transactions. Given the systematic increase of IEOs being deployed by the CMA, whether the UK's merger control regime remains truly non-suspensory remains doubtful. A leading example is the CMA's decision to belatedly call-in Facebook’s acquisition of Giphy. The social media behemoth challenged the IEO on the ground that it had gone too far, although with little success as the UK Court confirmed the CMA's wide discretion to impose IEOs.
These orders can be highly intrusive and are being devised to maintain the status quo by stopping parties from taking any post-merger integration activities. To ensure compliance, the CMA frequently fines erring parties up to 5% of their aggregate worldwide turnover.
Include the UK in the deal timeline
Post Brexit, the CMA is gearing up to review more international transactions although it has communicated that it is willing to “take a back seat” on transactions with no unique UK implications. As such, the statutory obligation cast on the CMA to monitor merger activity, together with its power to call in non-notified transactions, is becoming a potent combination for global deal making now that the Commission's "one-stop shop principle" no longer applies in the UK.
Merger parties should consider the need to communicate with the CMA well in advance and anticipate a mandatory and suspensory regime, particularly in deals with an obvious UK nexus. This will streamline deal management, particularly in international transactions with multi-jurisdictional ramifications. When in doubt about the applicability of the UK regime, parties can consult with the CMA using a briefing paper. If these doubts persist, the only way to create full legal certainty is to formally notify the CMA of the transaction.