26 July 2016

Merger control reform and challenges in the EU and UK

This article was written by Priya Patel (Trainee)

Both the European Commission (Commission) and the UK Competition and Markets Authority (CMA) are active competition authorities in their respective jurisdictions. This article discusses recently considered and currently proposed merger control reforms in the EU and UK.

1. EU merger control

(a) Previous consultation

Ten years after the current EU Merger Regulation (EUMR) came into force, in 2014, the Commission published a White Paper proposing several reforms to fine tune the EUMR. A public consultation followed, the results of which were published in March 2015. Two key proposals concerned (i) minority shareholding and (ii) EUMR simplification. While no legislative changes ultimately resulted from the review, consultation responses provide useful insights for potential future EUMR reform.

(i) Minority Shareholdings

The Commission consulted on possible options for extending the EUMR to cover situations where a company, by acquiring non-controlling minority shareholdings in another company, could have an anticompetitive influence over it. This issue arose in the Ryanair/Aer Lingus merger review (Case T-342/07 and Case T-411/07), where Ryanair acquired a significant minority share in Aer Lingus and subsequently made a bid for the entire share capital. The Commission blocked the merger, but lacked the power to order Ryanair to divest its minority shareholding. This is because Ryanair's shareholding did not confer de facto control over Aer Lingus and therefore fell outside the Commission’s jurisdiction.

The UK competition authorities also reviewed Ryanair's acquisition of the minority shareholding. Unlike the Commission, the predecessors to the CMA (Office of Fair Trading and the Competition Commission) had jurisdiction to review the merger as Ryanair’s shareholding met the UK “material influence” test which has a lower threshold than the EU “decisive influence” test. The UK Competition Commission decided that Ryanair’s minority shareholding had an anticompetitive influence and ordered Ryanair to reduce its shareholding in Aer Lingus to 5%. Ryanair appealed this decision to the Competition Appeal Tribunal and subsequently to the Court of Appeal which upheld the Competition Commission’s decision.

To bring such acquisitions within the Commission’s ambit, under EU law, the White Paper suggested a “targeted transparency” system. The White Paper proposal for reviewing minority-shareholding transactions was criticised as an ineffective use of the Commission’s resources, and particularly burdensome, as it could catch a disproportionate number of unproblematic mergers. Other responses, mainly by other national competition authorities, welcomed the possible reform, but only after significant changes and clarifications to ensure the additional regulations would not lead to greater uncertainty.

In March 2016, European Competition Commissioner Margrethe Vestager stated that she was not yet convinced that the EUMR needed changing. This reflects the general view that it will be difficult to establish a merger control system which is nuanced enough to detect acquisitions that actually have an anticompetitive effect, without disproportionately increasing the burden on companies, Member States and the Commission. There is no clear idea as to how such a system will or can be established on an EU-wide basis. However, the Commission is currently looking at other jurisdictions to understand how they address the issue of anticompetitive influence through minority shareholdings.

(ii) EUMR simplification

The Commission also consulted on possible measures for simplifying certain EUMR procedures, e.g. streamlining case referrals from Member States to the Commission and vice versa. The White Paper proposed abolishing the current two-step pre-notification referral procedure under Article 4(5) EUMR. Instead, the parties would notify the Commission of the transaction directly. The Commission would then forward it to the relevant Member State who could confirm whether or not it will oppose it. The Paper also suggested streamlining the post-notification referrals procedure under Article 22 EUMR.

The Commission’s suggestions for simplification of EUMR procedure received generally positive responses in the consultation. Commissioner Vestager separately commented on simplifying EUMR procedures, and suggested the possibility of removing formal notification for “non-issue mergers”.

In April 2016, Vestager reportedly suggested that some form of merger control ‘block-exemption’ could be an appropriate tool to ensure swift merger clearance, as 90% of notified mergers is cleared without conditions and only 1% is blocked. If a safe-harbour were adopted, detailed Commission guidance would be essential to provide certainty regarding when notifications for “non-issue mergers” could be dispensed with.

(b) Digital sector implications for EU merger control

Despite the overarching aim of simplifying regulation, the Commission, and particularly Commissioner Vestager, has identified a potential need for refined merger regulation in the digital industry. The high-profile acquisition of WhatsApp, by Facebook, in 2014 prompted Vestager to suggest reviewing the notification threshold system (which currently focuses only on merger parties’ turnover). The acquisition was valued at approximately US$22 billion, but WhatsApp’s turnover did not meet EUMR merger thresholds; therefore it did not need to notify the Commission. The Commission did ultimately review the merger following a pre-notification referral request by Facebook to benefit from the one-stop-shop review.

Vestager previously stated that the current turnover threshold approach has and will result in important mergers falling outside the scope of the EUMR. Therefore, Vestager suggested a system where additional factors, such as deal value or impact on innovation, should form part of the notification threshold. It should be a simple system that does not create uncertainty as to whether a merger needs to be notified.

The Commission is also following competition law developments in Member States, such as Germany, to assist its thinking. The German Monopolies Commission has previously suggested supplementing current merger control turnover thresholds with an additional transaction-value notification requirement, on the basis that in digital sector mergers the purchase price can be more reflective of the economic potential of an acquisition target than turnover. Amendments to German competition law, proposed by the Federal Ministry of Economics on 1 July 2016, seek to introduce a ‘deal value’ notification threshold to supplement existing turnover thresholds. The amendment will require mergers (not just in the digital sector) to be notified in Germany if the €25 million domestic turnover threshold is met but not the lower €5 million threshold, provided that the acquirer will pay €350 million or more for the target and at least one of the “other undertakings” (i.e. not the one with €25 million turnover in Germany) is active in Germany.

The changing economic landscape in the digital sector (as well as others) will likely lead the Commission to seek a more flexible merger review system in the future. From the Commission’s perspective, the system should be able to take into account all factors which contribute to the value of a company, thus more accurately assessing its significance in a market. In April 2016, a senior Commission official signalled plans to launch a future consultation on how to capture potentially anticompetitive transactions that fall below existing EUMR turnover thresholds.

Microsoft’s proposed US$26.2 billion acquisition of LinkedIn, announced on 13 June 2016, which also raises significant data-related issues, will likely renew the debate on appropriate EUMR notification thresholds for digital economy mergers.

2. UK merger control

On 21 March 2016 the CMA published findings and recommendations of its self-assessment of the Merger Notice and Initial Enforcement Orders (IEO) (an order to stop merging parties from further combining their business). Despite a general conclusion that both elements are used effectively, the review relevantly recommended: refining the CMA’s Merger Notice template to more clearly identify information that parties must submit; and improving its approach during the pre-notification period by ensuring information requests are proportionate and targeted in scope. It was also recommended that the CMA liaises with merging parties at an early stage, and improves IEO derogation process by refining its internal process and issuing guidance for greater clarity.

These CMA recommendations, once implemented, will hopefully reduce the burden faced by companies when interacting with the CMA, and somewhat speed up the UK merger clearance process. The CMA’s new guidance, once published, will set out the CMA’s more pragmatic and flexible approach to allowing IEO derogations and waiving merger notice questions that are not directly applicable in a transaction. The CMA intends to implement its recommendations by September 2016. The recommendations are consistent with the key commitments and initiatives of the CMA’s Annual Plan 2016/2017.

Separately, on 25 May 2016, the Department for Business, Innovation and Skills (BIS) started a consultation on both legislative and non-legislative changes to the UK competition regime. The review comes two years after the CMA became the unitary UK competition authority. The BIS proposals reflect many of the CMA reform recommendations discussed above, but go one step further by suggesting possible legislative amendments to bring about some of the reforms.

One of the changes proposed in relation to merger control, is to make requests for information (both before and during the Phase 1 investigation) more targeted in order to reduce the burden on businesses on the amount of information they have to provide. In addition to adopting the recommendation of its review on merger notices and IEO, BIS suggests legislative changes to further this idea. One legislative suggestion is to restrict the type of information the CMA can request and the frequency of such requests. Alternatively, to avoid unduly restricting the CMA, another proposal suggests amending primary legislation to include a "proportionality" obligation requiring the CMA to review information requests and report to ministers on how such requested information is being used.

The second suggestion is to refine the Phase 2 element of merger review by improving the inquiry panel system. BIS notes that other jurisdictions tend to have a different regime. To improve the efficiency of the Phase 2 panel, the consultation suggests revamping the entire system to reduce the length of appointment and size of the panel whilst also increasing their accountability to the CMA board. The proposals suggest that new inquiry groups are given greater guidance and direction as opposed to the day-to-day responsibility of an investigation.

While a sustained focus on improvement and procedural efficiency is admirable, suggesting further legislative changes just two years into the CMA’s life might be somewhat premature. Responses to the BIS consultation, which closed on 24 June 2016, will no doubt shed more light on potential risks and rewards of further UK competition law reform. BIS plans to publish the outcome of the consultation, including any recommendations, by autumn 2016.

3. Concluding remarks

Both the Commission and the CMA are continuously looking at ways to improve their merger control processes and ensure that they keep up with the changing economy. In seeking to ensure that merger control is effective in screening possibly anticompetitive mergers while not imposing undue burdens on business, both authorities will need to balance commercial pragmatism with targeted regulatory oversight. Some sectors, such as the digital industry, pose unique challenges to traditional merger notification mechanisms (e.g. turnover thresholds) and may need refinement in the foreseeable future.

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