With Brexit now just a few days away, deal makers are brushing up their knowledge of the UK's merger control regime. One notable feature of the system in the UK is the strict stance that the Competition and Markets Authority (CMA) has been taking on procedural breaches of its merger control rules. This Wilson Sonsini client alert addresses recent enforcement action by the CMA targeting pre-clearance integration between merging parties and offers guidance on how to mitigate the risk of unwittingly "gun-jumping" in the UK.
The UK's Voluntary Merger Control Regime
The merger control regime in the UK is, strictly speaking, voluntary and merging parties are under no obligation to notify the CMA of a pending merger.1 However, the CMA has the power—which it exercises—to "call in" deals that have not been notified and that it considers might harm competition in the UK. The agency also has a dedicated merger intelligence committee (MIC) that monitors the press and input from third parties (public bodies, competitors, or customers) for information on new transactions, sends information requests to the merging parties, and helps the CMA's mergers directorate determine whether a deal merits review. Cross-border deals notified in another European member state may also come to the CMA's attention through contact in the European Competition Network of national authorities. As UK legislation gives the CMA up to four months following completion of a merger or from the date on which the CMA first learns about a transaction to intervene, the rules encourage the purchaser in a potentially problematic transaction to engage with the CMA.
While the voluntary nature of the system logically means that there can be no suspensory effect, the CMA has the power to impose an "initial enforcement order" (IEO) or other interim measures on the parties to an anticipated merger and does so routinely for completed mergers. More often than not, these IEOs are essentially hold separate orders, which require the parties to cease or to undo integration efforts pending completion of the CMA's review. Compliance may be overseen by a CMA-appointed monitoring trustee. The CMA also has the power to unwind completed mergers and order a divestment where the outcome of its review is negative. Penalties for failure to comply include fines of up to 5 percent of a company's worldwide turnover.
Interim Measures
In June 2018, the CMA issued its first fine for breach of an IEO. In Electro Rent/Microlease (a completed merger involving testing and measuring equipment),2 the agency fined Electro Rent £100,000 (approx. $130,000) for failing to obtain the CMA's consent during its Phase II review before issuing a break notice terminating the lease of the only premises that Electro Rent had in the UK, despite the site being part of a proposed remedy package. While Electro Rent had discussed the break notice with the monitoring trustee and been told that it could proceed, the CMA ruled that only its consent was dispositive. Electro Rent's appeal to the UK's Competition Appeal Tribunal (CAT) was dismissed.3 The following day, the CMA levied a second fine of £200,000 (approx. $260,000), for Electro Rent's failure to seek the CMA's prior written consent before appointing the CFO of Electro Rent as a director of Microlease UK.4
The CMA's first Electro Rent/Microlease decision heralded a volley of fining decisions for breaches of IEOs (in December 2018,5 March 2019,6 and July 20197), and culminated in the CMA issuing its largest fine of £250,000 (approx. $325,000) for a single breach of interim measures in PayPal/iZettle on September 24, 2019.8 In this case, the CMA's MIC identified the transaction as warranting investigation in July 2018 and the parties received an IEO that the businesses be held separate on September 19, 2018. The parties completed their deal on September 20, after a derogation from the IEO was granted regarding integration planning provided it did not impact the UK. However, the parties were subsequently found to be in breach of the IEO when cross-selling campaigns intended to target customers based in France and Germany were shown to have caught 76 UK customers. The deal was ultimately cleared unconditionally after an in-depth Phase II review but the procedural fine—for what might be viewed by some as a trivial infringement—was maintained.
Unwinding Orders
In March 2019, the CMA issued its first order requiring parties to a completed merger to un-do various elements of their merger.9 The Tobii/Smartbox deal had closed in October 2018. Post-completion, the CMA called the merger in for review and imposed IEOs to cease any further integration activities. The CMA then referred the case to Phase II and issued an "unwinding order", stipulating that pre-closing acts which prejudiced the CMA's investigation be reversed. In practice, this meant that the merged entity had to un-do an agreement that Smartbox discontinue certain products and halt work on R&D projects. The CMA subsequently blocked the deal in August 2019.10
The CMA issued a similar unwinding order in Bottomline/Experian Payments Gateway, directing the parties, inter alia, to prevent access to all confidential information obtained from the other party and destroy information that had already been disclosed. This was the first time that the CMA had taken such a decision during the initial phase of a merger investigation. Bottomline was already subject to an IEO, designed to prevent any further pre-emptive integration actions.11
Variations to IEOs
A recent case, Ecolab/Holchem, involving two of the largest cleaning chemical suppliers in the UK (Ecolab, a U.S. company, and the UK's Holchem)12 illustrates the importance of strict compliance with IEOs even when this could mean a breach of other legislation, notably U.S. securities legislation. The parties completed their merger in November 2018, and on December 24, 2018 the CMA adopted an IEO requiring the two businesses to be held separate and operated as going concerns pending the completion of the CMA's merger inquiry. In the course of 2019, while the CMA was investigating the deal, Ecolab was forced to approach the CMA on several occasions to seek the variation of the IEOs inter alia a) to allow it to comply with the SEC's financial reporting rules, b) to make regulatory notifications needed in the context of Brexit, and c) to give statutory notices in relation to the closure of a facility in Scotland. The deal was ultimately approved subject to a partial divestiture in December 2019.13
Wilson Sonsini Insights
The CMA's hardened stance on procedural breaches of its merger rules is symptomatic of a growing enforcement trend among global antitrust agencies. Specifically, the CMA has learned how to use its interim measures tool box to impose the constraints and consequences of a mandatory and suspensory regime in a jurisdiction where, as a matter of law, filings are voluntary. The fact that many of the decisions have involved completed transactions is clearly designed by the CMA to send an unambiguous signal to purchasers not to play fast-and-loose with the CMA in hard or borderline cases. As shown by PayPal/iZettle, merging parties may also need to ensure that any global integration efforts do not have an impact on the UK market while the CMA's review is ongoing, even post-closing. The fines levied by the CMA to date have not come close to the 5 percent cap, but in its most recent guidance on interim measures, the CMA states that it "will not hesitate to make full use of its fining powers [and] will therefore impose proportionately larger penalties in future cases should this prove necessary in the interests of deterrence".14 For any deal with UK aspects, early engagement with antitrust counsel is crucial. As is clear from the Electro Rent and PayPal decisions, even unintentional or trivial breaches can be heavily penalized.
[1] For companies that wish to obtain informal comfort that the CMA is unlikely to investigate their deal, the CMA’s procedural guidance encourages them to file a briefing paper in which they explain why the deal does not raise concerns in the UK.
[2] Case ME/6676/17, Completed acquisition by Electro Rent Corporation of Test Equipment Asset Management and Microlease Inc., Penalty Notice of June 11, 2018.
[3] Electro Rent Corporation v. CMA [2019] CAT 4, Judgment of Feb. 11, 2019.
[4] Ibid., Penalty Notice of Feb. 12, 2019.
[5] The CMA imposed a fine of £300,000 (approx. $390,000) on Ausurus Group for two separate IEO breaches: i) directing customers and suppliers of the target to make payments into bank accounts of Ausurus Group without seeking the consent of the CMA; and ii) failing to give the managing director of the target business a clear delegation of authority to take decisions without consulting, or obtaining the permission of, Ausurus: Case ME/6712/17, Completed acquisition by Ausurus Group Ltd of CuFe Investments Ltd, Penalty Notice of Dec. 20, 2018.
[6] The CMA fined JLA £120,000 (approx. $156,000) for entering into an agreement with a third party to sell certain assets that it was due to acquire under the deal being reviewed by the CMA: Case ME/6792/17, Completed acquisition by JLA New Equityco Limited through its subsidiary Vanilla Group Limited of Washstation Limited, Penalty Notice of Mar. 8, 2019.
[7] The CMA imposed a fine of £146,000 (approx. $190,000) on Nicholls’ (Fuel Oils) Limited for three separate breaches of an IEO which covered: i) relocating staff; ii) using its assets to service the target business; and iii) failing to provide compliance statements on time: Case ME/6762/18, Completed acquisition by Nicholls’ (Fuel Oils) Limited of the oil distribution business of DCC Energy Limited in Northern Ireland, Penalty Notice of June 28, 2019.
[8] Case ME/6766/18, Completed acquisition by PayPal Holdings, Inc. of iZettle AB, Penalty Notice of Sept. 18, 2019.
[9] Case ME/6780/18, Completed acquisition by Tobii AB of Smartbox Assistive Technology Limited and Sensory Software International Limited, Unwinding Order of Feb. 28, 2019. Both the CMA and its predecessor have previously unwound completed mergers following in-depth reviews (such as in ICE/Trayport). However, this is the first time that the CMA has issued an unwinding order during its merger investigation.
[10] On Jan. 10, 2020, the CAT ruled on Tobii’s appeal against the CMA’s decision. The CAT decided that the CMA had not shown that the deal was likely to result in vertical input foreclosure, but upheld the decision on other grounds, and the divestiture order. Tobii AB (publ) v. CMA [2020] CAT 1, Judgment of Jan. 10, 2020.
[11] Case ME/6793/18, Completed acquisition by Bottomline Technologies Limited of certain assets of Experian Limited, Unwinding Order of Aug. 6, 2019.
[12] Case ME/6793/18, Completed acquisition by Ecolab Inc. of The Holchem Group.
[13] Case ME/6793/18, Completed acquisition by Ecolab Inc. of The Holchem Group, Final Undertakings of Dec. 23, 2019.
[14] Interim Measures in Merger Investigations, CMA 108, June 28, 2019 at page 45.
