Out-Law Guide 8 min. read
23 Apr 2014, 4:48 pm
This guide was last updated in April 2014
This will change how mergers and acquisitions are regulated. There will be more routine pre-notification of mergers, despite the fact that the merger control regime remains voluntary in theory, with the CMA being able to suspend or even reverse integration between the merging parties in relation to completed transactions and being able to prevent transactions from completing. Breach of these prohibitions can result in fines of up to 5% of group turnover.
The CMA also has the power, enforceable by fines, at Phase I to require merging parties and third parties to provide it with data and documents. Merging parties should therefore be more careful when discussing possible transactions in any pre-merger documentation.
The fundamental legal principles of UK competition law are largely unchanged, so the definition of what is a merger and when it may be deemed problematic, and the scope of and the sanctions for breaching the prohibition on anti-competitive agreements and abuse of a dominant position are unchanged. However, the CMA has stronger powers of investigation and is likely to take a more proactive and much tougher approach to enforcing UK competition law.
In the area of merger control there will be a number of important changes to procedure and practice. Although there is no legal obligation to pre-notify mergers to the CMA there will be a material shift in market practice towards doing so. The CMA will be more demanding in terms of the data and documents it will require from merging parties and third parties and the timescales in which they must be provided. There is a real risk of fines being imposed on companies that do not comply with the CMA’s requirements.
More time, data and documents are needed to notify transactions to the CMA
The process of notifying mergers to the CMA is likely to take longer as it becomes more prescriptive about the type and quantity of data and documents that must be provided with any merger notification. In any merger timetable a period of not less than two weeks should be allowed for pre-notification discussions with the CMA, in addition to the time involved in preparing the notification document, to avoid the risk of a formal notification being rejected as incomplete by the CMA. In potentially problematic cases, it is likely that much longer than two weeks will be needed for pre-notification discussions with the CMA. Your business should also be warned at an early stage that any internal documentation produced, including emails, and any non-legally privileged documentation prepared by your advisors in relation to a possible merger may need to be disclosed when notifying a transaction to the CMA.
Much tougher Hold Separate regime, which may require the reversal of integration steps or even prevent completion
While completing a transaction without obtaining clearance is still an option in the UK there is a materially increased risk of Hold Separate Orders (Hold Separates) being imposed by the CMA on merging parties in such circumstances, which would prevent the parties from further integrating an acquired business.
The CMA also has the power to issue Hold Separates preventing the parties from even completing a merger. Where a merger has completed the CMA can require at the first stage of the merger review process (Phase I) - i.e. before it has even decided if a merger should be referred for an in-depth investigation (Phase II) - the reversal of any integration steps already taken. These measures must be taken seriously because the CMA can impose fines for failure to comply, of up to 5% of the combined worldwide turnover of the merging companies.
Fines if merging parties or third parties fail to provide data and documents
The CMA has additional administrative powers to require merging parties and third parties including suppliers, customers and competitors to provide data and documents in a particular format and timescale at Phase I and also during an in-depth Phase II merger investigation. If the CMA’s requirements are not met in full, or if inaccurate data are provided, the CMA can impose fines on a daily or one-off basis.
Not notifying or completing a merger without prior CMA approval: the risks
The CMA has a four month period from the later of the date of the transaction’s completion or public announcement in which to decide whether the merger should be subject to an in-depth investigation. The CMA is likely to continue the OFT's practice of proactively looking for non-notified mergers and learning of transactions through complaints from third parties such as competitors and customers.
The risks of not proactively notifying a transaction for clearance in advance are, essentially:
Hold Separates are an interim mechanism put in place by the CMA whilst it carries out an investigation, that prevent any further integration between the two merging parties. They last for the duration of the investigation. They are designed to ensure that the CMA’s freedom to prohibit or take action against anti-competitive mergers is not limited by the parties completing the acquisition and quickly integrating the businesses. Hold Separates usually prevent the purchaser from taking any further steps to integrate the target business until a final decision has been taken on whether to approve or prohibit a transaction. Given that the CMA has 40 working days in which to decide whether to open an in-depth investigation, which would then last another 24-32 weeks, Hold Separates could be in force for up to 10 months. The imposition of Hold Separates does not in itself imply that the CMA will ultimately conclude that the transaction raises competition concerns.
Hold Separates require, among other things, strict Chinese walls between the merging parties, the maintenance of separate management and sales teams, and prevent the exchange of confidential data between the merging parties. Where a transaction has completed, Hold Separates also require the purchaser to maintain the target business as a going concern, even though the purchaser is prevented from being actively involved in the management or operation of the target business. The CMA has published its standard Hold Separates.
Unlike the OFT the CMA has the power to impose Hold Separates in relation to an anticipated transaction as well as a completed transaction. This means that Hold Separates may also be imposed if there is a delay between signing and completion to stop the parties from taking steps to integrate the business, for example to prevent the exchange of commercially sensitive information, joint commercial negotiations with customers or the loss of staff from the target business. The CMA may even, in certain cases, order the parties not to complete the transaction. Any transaction planning should therefore take account of the possibility that the CMA may prevent completion from occurring, and prevent the target business from disclosing to the purchaser any confidential information about its operations, until after the CMA has decided whether to refer a transaction to a Phase II investigation.
Under previous rules the OFT very rarely tried to force a reversal of integration that had already taken place post-completion and before Hold Separates came into force. The CMA has a broad power at Phase I as well as at Phase II. It is currently unclear precisely when the CMA will use this power. The CMA’s guidance refers however to the CC having previously required, during in-depth Phase II investigations, measures to unwind integration, including the following:
Problematic mergers will be vulnerable to the risk of being referred for an in-depth Phase II investigation lasting an additional 24 to 32 weeks and, ultimately, to the risk of the transaction being prohibited and needing to be unwound, either in full or in part.
Options for managing these risks
There are essentially three options for managing these risks.
If there are any significant overlaps between the merging parties, it would be preferable to pre-notify the CMA of the transaction and make completion conditional on clearance at Phase I by the CMA. Pre-notification is especially advisable if a transaction will be subject to the Takeover Code, or is otherwise likely to attract publicity in the trade or financial press or complaints from third parties, including competitors and customers. Hold Separates can be extremely burdensome for the business and any breach of Hold Separates could lead to fines of up to 5% of the combined worldwide turnover of the merging companies being imposed.
If completion must be simultaneous with signing, post-notification to the CMA would be an option to avoid four months of uncertainty, and should reduce the risk of having to reverse integration, but unless there are only very minor overlaps between the businesses and very low market shares the likelihood of being able to persuade the CMA not to impose Hold Separates is low.
Each transaction is different and will raise its own specific issues. It is therefore essential that you contact your competition law advisors at the earliest possible stage of a proposed transaction to discuss whether it is likely to qualify under the merger control rules, the risks of not proactively notifying it to the CMA and the options open to your business for managing these risks.
It is also essential to bear in mind that, although the UK has adopted a voluntary merger notification system, most jurisdictions around the world have adopted a mandatory merger notification system which generally means that completion must be suspended until clearance from the relevant competition authorities has been obtained. National competition authorities outside the UK are increasingly aggressive in fining companies that have failed to pre-notify transactions that are subject to mandatory notification obligations.