On 26 January, 2021, TransPerfect Legal Solutions (TLS) kicked off a virtual conference on EU and UK competition regulation. This article is the first of a three-part series highlighting the major takeaways from each session of the conference.
The opening panel featured four panellists, three of whom are partners at leading global competition practices: Matthew Sinclair-Thomson from Kirkland & Ellis, Anna Mitchell from Linklaters and Frédéric de Bure from Cleary Gottlieb. The other panellist was Eleni Gouliou, Director of Mergers from the Competition and Markets Authority, who brought the experience and vantage point of the region’s most in-demand regulator.
This session provided three key takeaways for how merger control proceedings have been impacted by Brexit.
Brexit has increased the significance of the CMA.
Thanks to Brexit, practitioners must now think about the UK element of any global deal. Whilst question marks remain over the CMA’s jurisdiction, it is clear that the EU’s “one-stop shop” will be eliminated and parallel proceedings will fast become the norm.
Practitioners may be well-versed in the CMA’s thresholds and share of supply tests, but the elasticity of the latter will prove increasingly significant and difficult to predict. The magic share of supply that gives the CMA jurisdiction is 25%. However, not only will the CMA look at standard antitrust and economic markets, as well as the supply or purchasing of products, it will also look at non-standard metrics such as number of employees or patents held. The CMA’s approach is varied and wide-ranging, and is a counterpart to the voluntary nature of the UK’s merger control regime.
Briefing papers are a valuable tool when parties think they might attract the attention of the CMA’s Merger Intelligence Committee (MIC). A briefing paper should be five pages long and explain the deal in simple terms, proactively covering any further action that may be required. Once reviewed, the CMA can call the deal in for review or reply with, “No further questions at this stage.” That reply gives parties reassurance to proceed as planned; however, whilst seldom invoked, the CMA reserves the right to intervene later. The CMA receives one to two briefing papers a week and stresses that they’re not substitutes for the advisors’ or parties’ self-assessments.
To ensure a smooth transition from the one-stop shop, the CMA has cooperated with the Commission and other national regulators. It has encouraged open discussions around timetable alignment, with new proposals allowing for greater flexibility in fast tracking a case. Jurisdictional and procedural guidance have been updated, and revisions to the merger assessment guidelines are pending. After acknowledging the need for improved consistency, proposed long-term changes include modifying the CMA’s phase 2 deadline from 24 weeks to 120 working days.
With more parallel proceedings comes greater risk of divergent outcomes. For legal practitioners and their clients, it will always create uncertainty. To mitigate this, the CMA maintains it will clearly communicate with the different regulators on the substantive aspects of any review. However, its duty is to UK consumers and that will ultimately determine how decisions are made. In cases with marked differences, the CMA points to the dynamics of the mergers in question and the different regulations, markets and players involved.
The CMA has no quota of deals it needs to review.
The CMA has recently been accused of taking an interventionist and aggressive approach to its work. Its elastic share of supply tests allow it to assert jurisdiction in more deals than other regulators where typical thresholds aren’t met. Furthermore, 25% of deals that the CMA has recently reviewed were referred for phase 2 investigation, and 70% of those were blocked, unwound or abandoned.
This is not a deliberate strategy by the CMA to be tougher than other regulators. It does not control the deals put before it and there are other explanatory factors. The current M&A market is more bullish, with corporate decision makers having a higher risk tolerance and failed deals being less of a stigma. Although big ticket M&A may have taken a COVID-19 hit, private equity firms are more active than ever before. This increased deal flow leads to subsequent scrutiny. There have also been other historic peaks in merger control activity so it simplifies matters to assume an attitude onto a particular regulator.
The CMA is also tightening up work by absorbing lessons from previous deals and feedback from documents like the Furman report. For example, the CMA was found to be systemically over-optimistic in assessing entry and expansion, which informed a more sceptical and probing approach to timings and likeliness of entry. With a renewed focus on stronger evidence gathering, more deals are being investigated thoroughly.
From a European perspective, there’s a question as to whether the CMA’s interventionism suggests a change in attitudes toward industrial policy considerations. This could mark a significant development in the European merger control debate. The UK often acted as a moderator between member states, with counterparts like France promoting more interventionist powers on the grounds of industrial policy and others being staunchly against. With the UK no longer having a seat at the table, there may be a renewed push to soften competition rules, making it all the more important that the CMA and Commission work together.
Brexit and COVID-19 will have long-term impacts on EU M&A.
Removing UK revenue will result in many deals not meeting Commission thresholds, further increasing the number of national filings and parallel proceedings. It is difficult to pre-empt how the Commission will develop and promote its referral mechanisms. The bolstering of Article 22 allows EU member states to refer deals for Commission review where they don’t have jurisdiction and standard threshold tests aren’t met. This will be necessary to ensure anti-competitive “killer deals” aren’t overlooked, proving particularly significant for fast-moving markets and targets who are yet to generate significant revenues.
The converging impact of COVID-19 and Brexit is evident in the development of Foreign Direct Investment (FDI) regimes. Brexit is considered a signifier of the trend toward nationalism, and COVID-19 is causing governments to introduce measures that protect their national industries. Across the EU, FDI regimes are quickly being adopted and strengthened. In France, there’s been FDI in healthcare, transportation and media, and the concept of food sovereignty has recently been developed. The question on how subsequent filings will be articulated remains unanswered.
As the UK went into lockdown in March 2020, the CMA published two pieces of guidance. The first provides practical steps for filings during the pandemic, and the second looks at the failing firm defence. The CMA is conscious of the difficulties that COVID-19 presents and is open to discussing those, but thresholds for assessment have not shifted and the CMA won’t advocate for an anti-competitive deal just on the grounds of the current crisis. Mergers cause long-lasting structural change to the market and each deal is uniquely considered, taking into account the economic outlook.
This all leaves us with more complexity for clients. What’s certain is the future of regulation is currently in the hands of the CMA. It has the capacity and potential to become the leading global regulator and [re]shape the merger control landscape. However, its modernisation and expansion must not come at the cost of its primary duty – to protect UK consumers and promote a business-friendly market. Not a big challenge at all!
You can view a recording of this panel here.