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If you're doing a deal, then don't forget to plan ahead for merger control

Recently, there has been a noticeable increase in the amount of M&A activity in the betting and gambling sector within the UK. The need to address merger control requirements is one of the myriad of issues that merging companies must address, and a failure to do so could have significant adverse consequences. This article provides a high-level overview of the key merger control issues that will need to be considered in any transactions involving companies operating in the EU.

Which competition authorities have jurisdiction?

The starting point in any merger notification analysis is to identify the territories that might have jurisdiction to review the transaction.  Within the European Union a merger will be subject to the exclusive jurisdiction of either the European Commission or national competition authorities, with jurisdiction being determined by the turnover of the parties involved.  There are however procedural mechanisms by which mergers can be transferred from the jurisdiction of the European Commission to national competition authorities, and vice versa.

Turnover thresholds for EU merger control

For EU merger control there are two alternative sets of threshold tests; if either is met then a merger must be pre-notified to the European Commission.

(a)           The combined worldwide turnover of all the undertakings concerned exceeds €5,000 million and the Community-wide turnover of each of at least two undertakings concerned exceeds €250 million; or

(b)          The combined worldwide turnover of all the undertakings concerned exceeds €2,500 million and the Community-wide turnover of each at least two of the undertakings concerned exceeds €100 million and in each of at least three EU Member States,

(i) the combined turnover of all the parties exceeds €100 million and

(ii) the individual turnover of at least two of the parties concerned exceeds €25 million.

Even if one or both of these sets of thresholds are met, the European Commission will not be the appropriate body for notification where each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover in one and the same EU Member State. 

If, because the relevant turnover thresholds are not satisfied, the European Commission does not have jurisdiction over a merger, then it is necessary to identify the individual territories in which the merging parties have turnover or activities in order to establish whether national merger control laws may apply, whether in the EU or outside of it. 

It will also often be necessary to ascertain whether the merger control laws of countries outside the EU will apply and require some form of notification.  In some countries, the merger control laws are drafted so as aggressively to assume jurisdiction over transactions that in practice will have very little impact on or connection with the country concerned, potentially with sanctions for a failure to notify. 

Impact on timing

The EU's merger control laws and those in most countries within the EU require mergers to be pre-notified for clearance before they can be completed, with sanctions potentially being applied where these obligations are not met by the merging parties.  Even in countries where there is no requirement to pre-notify it may be advisable for the merging parties to do so if third party complaints (especially if by customers) are likely.

The process of evaluating merger control issues, notifying and awaiting merger control clearance, whether from the European Commission or from individual countries, can, even in comparatively uncontroversial transactions, lead to delays in the corporate timetable of at least three months. 

In developing any merger timeline, account will need to be taken of the time involved in preparing the merger submission and of dealing with a competition authority once formal notification has occurred.  Where a competition authority expects a notifying party to engage beforehand with it in pre-notification discussions, to agree the form of notification and to work through areas where data will be needed by that authority, then the timeline will need to be expanded accordingly.

Before a formal decision is adopted to approve or prohibit a transaction, EU merger control and many national merger control laws require the merging businesses to be run independently of each other.  This can create commercial difficulties for the notifying parties, especially if the staff or customers of the merging parties react adversely by transferring their allegiances to competing operations.  Completing a merger before receiving formal merger clearance can however lead to fines and in some cases the transaction itself may be void.

Substantive assessment of a proposed merger

So how will competition authorities within the EU analyse a proposed transaction in the betting or gambling sectors? 

The starting point in any merger control analysis will be to try and identify what is the relevant product and geographic market.  There have been a number of previous mergers in which competition authorities have defined the market in a "bricks and mortar" context, but it is less certain how markets would be defined in relation to online operations.  There have however been mergers in which the UK's competition authorities have previously reached the following market definitions:

  • Betting is a separate market from other forms of gambling and leisure activities,
  • On- and off-course betting are separate markets,
  • Off-course betting through a licensed betting outlet is a different market to telephone betting, and
  • Online bingo is not in the same product market as licensed bingo clubs.

These previous cases do not convincingly indicate how the UK's competition authorities (and also other competition authorities in the EU) would define product markets for online businesses.  For example, would online betting and online gambling be thought to represent separate product markets?  Equally, if online gambling is considered to represent a separate product market, then would it be interpreted widely or narrowly - e.g. is online poker a separate product market from online bingo?  Parties notifying a merger to a competition authority would be expected to advance (and justify by reference to supporting evidence) market definitions on these issues.

The issue of geographic market definition would also need to be considered, even if online operations were considered as a separate market(s).  In this context, regulatory issues will be an important factor when deciding what the relevant geographic market may be in any particular case.

Having decided the issues of product and geographic market, a competition authority would then review a merger to assess whether it might lead to consumer detriment; for example, in the form of higher prices, or lower levels of service quality, choice or innovation. 

Beware the documentation!

Merging parties and their advisers need to be careful when preparing background documentation (for example, business plans or Board papers) that considers the potential impact of a proposed transaction on the market.  It is not unknown for the individuals involved to produce documentation that exaggerates the potential impact of the transaction on customers and competitors.  If those statements come to the attention of a competition authority reviewing a merger (and several authorities require the parties to provide copies of such background papers) then that may complicate, or potentially even undermine, the securing of merger clearance from that authority.

A company contemplating a merger should ensure that the staff involved in the process understand clearly the need to minimise the quantity of written documentation produced and to be careful in the tone and content of such documents as are produced.  This need for caution extends to documents prepared for the merging parties by non-lawyers (e.g. accountants or corporate finance advisers) because they are unlikely to benefit from legal privilege.  Such documents might be intended to assess the potential impact or benefits of a transaction, or may be an overview of the relevant market before and after the transaction.  Particular care should be taken about describing the possible impact of the proposed transaction on the merging parties' pricing or margins, or about the general impact of the proposed transaction on customers and competitors.

Managing information exchanges between merging parties

As mentioned above, EU merger control and many national merger control laws prevent the merging businesses from completing a proposed transaction before merger clearance has been granted by the competition authority that has jurisdiction to review that transaction.  In practice, this means that the merging parties should act independently in the market and should not discuss or disclose to each other their commercially sensitive information. 

This can give rise to difficulties at two stages: first, when the parties are in negotiations with a view to trying to agree the terms of a transaction; and secondly, in the period between signing an agreement and completion occurring. 

In any negotiations before signing an agreement an acquirer may wish to inspect details of the target's commercially sensitive data, for example, relating to their operating costs, margins, customer details, and future commercial intentions.  Where an arrangement is closer in form to a true merger of equals, both sides may wish to exchange such commercially sensitive data with each other. 

Before parties engage in such exchanges, they should consider whether providing the data would be likely to reduce the intensity of marketplace competition, or inhibit the parties' ability and incentives to compete with each other (as intensively as they were doing beforehand) in the future if the transaction should fail to proceed.  To try and avoid offending this basic principle, some simple steps can help, such as:

  • Disclosing information where possible in an averaged format, or at a low (i.e. non-granular) level of detail, or disclosing only historical data,
  • Disclosing information progressively in stages, with more commercially sensitive data only being disclosed as discussions progress and a transaction becomes more likely to be agreed between the parties,
  • Disclosing data only on a need-to-know basis to a limited number of individuals within the organisation, subject to the terms of confidentiality agreements, and avoiding disclosure to individuals who may use the data in the ordinary course of business, and
  • For data that could be regarded as especially confidential or commercially sensitive, the parties may provide data to an independent expert third party such as an accountancy firm, subject to a confidentiality obligation, for review and analysis.

Ultimately, identifying merger control issues and obtaining the necessary clearances is one of many issues that will need to be considered on any transaction, and the potentially tough sanctions for failing to follow the proper formalities emphasise the importance of the issue.  There is a trade-off for the merging parties between undertaking the merger control appraisal process too early in a situation where the deal may not proceed and costs are needlessly incurred and management time wasted, and leaving the appraisal process until such a late stage that the overall progress of the transaction is needlessly delayed or complicated.  A properly coordinated merger control strategy can avoid those potential downsides.

By Guy Lougher, a partner and head of the national EU and Competition Law Group at international law firm Pinsent Masons

July 2011

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