Brexit and mergers

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Hot Topic | Merger Control (3rd edition)


Losing the ‘one-stop-shop’: the real cost of a dual UK/EU merger process post-Brexit

With only a matter of months left before the UK officially leaves the EU, the Government is no clearer as to what a deal (if indeed there is one) will look like.  Meanwhile businesses across the country remain largely in the dark as to what Brexit will mean in practice.  This is particularly problematic for companies planning their corporate M&A strategy.  The statistics suggest that Brexit has not resulted in the expected downturn in merger activity.  However, if the UK is no longer a member of the European Economic Area (EEA), then there will be no ‘one stop shop’ for mergers at the EU level and a separate review may need to be carried out by the UK Competition and Markets Authority (CMA).  This means merger notification may be required to both the European Commission (Commission) and the CMA.  Although the UK regime is voluntary, notification is advisable if competition issues are likely to arise.  This will result in a significant increase in transaction costs, time and administration for UK companies faced with an additional merger filing.  There is also potential uncertainty as UK companies face possibly divergent or inconsistent decisions.

Brexit has not deterred UK M&A activity

Despite concerns that Brexit would have a dampening effect on M&A activity in the UK, the reverse appears to be the case.  This can be attributed in part to a weaker sterling following the Brexit vote, making UK businesses attractive targets.  According to a Bloomberg article in June 2018, overseas companies have completed 475 acquisitions of UK firms with a combined value of £174 billion since the referendum result in June 2016.  The equivalent period prior to the vote to leave saw 294 acquisitions worth £110 billion. (See Bloomberg chart below).  This equates to a 62% increase in UK M&A acquisitions in the two year period following the referendum.


Business confidence does not, therefore, appear to have been unduly affected by the UK’s imminent departure from the EU.  However, the uncertainly around what will happen post-March 2019 and the potential requirement for a dual track merger process may yet have an effect on corporate M&A strategy.

Increased scrutiny of mergers by the CMA

Following Brexit, UK turnover will be removed from the EU thresholds under the EU Merger Regulation (EUMR).  This may mean, in some cases, EU jurisdiction is removed for certain mergers involving companies based in an EU Member State but with significant activities in the UK.  However, this potential ‘Brexit bonus’ for UK focused companies needs to be weighed against other cases attracting scrutiny by the CMA as well as the EU where previously a merger may have been dealt with by the EU alone.

The removal of the ‘one-stop-shop’ for mergers will also mean the loss of entitlement for the CMA to ‘call in’ an EU merger (under Article 9(2) of the EUMR) where the effects of a merger are expected to be on a ‘distinct market’ in the UK.  In practice, requests by the UK have not been frequent. To date the UK has made eighteen Article 9(2) requests to the Commission, eight of which have resulted in a full referral, eight in a partial referral and two of which have been refused.  Most recently, its request was denied in M.7612 – Hutchison 3G UK/Telefonica UK (2016), where the CMA feared a significant adverse effect on competition in the UK mobile telephony market. Ultimately, the Commission prohibited the transaction in any event. In practice, the CMA will now have the opportunity to review the UK aspects of cases notified to the Commission under its own parallel review (provided its jurisdictional thresholds are met).

In a post-Brexit world, we can assume that many merging parties will have to deal with both a UK merger notification in addition to an EU notification. For global deals, this is likely to be alongside notifications in other countries, including the US and China.  So, what does this mean in practice? As the UK system is voluntary, companies can rest assured that in ‘no issue’ cases there are unlikely to be any additional burdens.  This is, of course, dependent on the UK merger control system remaining voluntary.  However, changing to a mandatory merger control system would require primary legislation.  Given the backlog of more urgent legislative matters, it seems unlikely the UK will opt to change from the status quo in the short to medium term.  The CMA has also provided written evidence to Parliament for the Select Committee Report on Competition and State aid in which it is acknowledged that significantly more transactions (approximately 30 to 50 more Phase 1 cases) are expected to be notified to the CMA per year after Brexit.  Changing to a mandatory system would only increase the number of notifications further.  The CMA also makes clear that despite the anticipated increase in merger caseload, and the need for additional resources, there is no need to change the current allocations of responsibilities as the current system works well.  In other words, “if it ain’t broke don’t fix it”.

The general perception is that an EU merger notification (Form CO) is significantly more burdensome than a UK merger filing, and a decade ago this was certainly the case.  Given the number of countries covered by the EU filing, that is unsurprising in multinational deals. However, the CMA has increasingly aligned its approach with the Commission in recent years, and now requires a significant amount of data and documentation at the outset of a merger investigation.  Indeed, the CMA is increasingly regarded as one of the most burdensome jurisdictions globally.  In the CMA’s written evidence to Parliament, it suggested that businesses could streamline potential dual review requirements by ‘agreeing to waivers [of confidential information] allowing the European Commission and the CMA to share and discuss information’, and confirmed that it would continue to ‘work on procedural efficiencies that minimise the burden of notification’.

However, regardless of best intentions relating to information sharing and streamlining procedures, the fact remains that companies will be faced with two parallel procedures in the UK and the EU, operating on different timetables. Length of pre-notification periods vary considerably between cases, and it is difficult to make firm comparisons between the Commission and the CMA. Suffice it to say that they are getting longer in complex cases in both jurisdictions (although the Commission has made some efforts in recent years to reduce the period in simple cases). There is also a risk that parties will treat the UK like other ‘local’ jurisdictions and choose to begin substantive discussion with the CMA on a draft filing only after the Form CO has been ‘settled’ with the Commission. Given the burden and length of the UK process, that may be a dangerous strategy. Once in Phase 1, parties may be faced with a modestly longer procedure with the CMA (up to 40 working days) than with the Commission (25 – 35 working days).  However, the real issue presents itself if a merger is referred into Phase 2.  The Commission normally has 90 working days to complete its Phase 2 investigation, although this can be extended to a maximum of 125 working days. In addition, the Commission frequently makes use of its ability to stop the clock to extend its period of investigation even further in Phase 2 cases. The CMA generally limits its Phase 2 investigations to 24 weeks (approx. 120 working days) but the period for the implementation of remedies extends the timetable by up to 36 weeks (approx. 180 working days).

Phase 2: structural differences preventing coordination

Even assuming Phase 2 is triggered around the same time in the UK and EU, there are structural differences that hamper a coordinated and consistent outcome in Phase 2 cases.

Dealing with the risk of confirmation bias

If a merger is referred to Phase 2, the chance of clearance in the UK has traditionally been higher than in the EU.  Some believe this is due to the genuinely ‘fresh pair of eyes’ provided for under the UK merger control regime. In cases referred for an in-depth Phase 2 investigation, the final decision-making authority is an Inquiry Group of at least three people, selected for each case from the independent group of experts appointed by the Secretary of State to the CMA’s panel.  Panel members are appointed through open competition for their experience, ability and diversity of skills in competition, economics, law, finance and business.  The CMA panel has a clear autonomy when it comes to decision making and all panel members must abide by a code of conduct which specifies the requirement to act independently of the CMA in Phase 2 inquiries.   The CMA staff will present analytical findings as objectively as possible or, in complex cases, will present a number of possible options for the panel to consider.  Importantly, the CMA staff is very careful not to tell the panel what to decide.

The Commission operates differently.  It has a dual role as both investigator and adjudicator which means that it will be largely the same team considering the merger at Phase 2 as at Phase 1.  While there are some administrative efficiencies from this approach, it is widely criticised for falling prey to ‘confirmation bias’.  The Commission has put in place a number of ‘devil’s advocate’ safeguards to attempt to address this concern.  These include the Chief Economist’s team, the Hearing Officer and a Peer Review team. The Legal Service and other associated Commission services will also be consulted.  However, it is generally felt that these safeguards are not effective.

As a result of these differences in the architecture of the two regimes, parties and their advisors are often more hopeful of their arguments gaining traction within Phase 2 under the CMA panel, than with dealing with the same case team at the Commission.  The difference has been significant in recent years (after a rash of unconditional clearances in the UK and virtually none in the EU), and at times in the past.  In the period 2014-17 (i.e. since the new CMA took office in 2014), the CMA has cleared unconditionally 48% of all mergers referred to Phase 2, compared to just 12% by the EU during the equivalent period. In 2017, no Phase 2 case was cleared unconditionally by the Commission. However, the difference over a ten-year period (2007-17) is less marked, albeit still substantial, with the UK and EU’s unconditional clearance rate at 47% and 28% respectively.

It remains to be seen whether this institutional difference will lead to significant divergence between the CMA and the Commission on the substance of decisions.

Statement of Objections v Provisional Findings

The Commission’s Statement of Objections (SO) and the CMA’s Provisional Findings (PFs) are superficially similar, in that they both set out the authorities current thinking on the merger.  The SO is a formal written notice from the Commission, containing the Commission’s preliminary conclusions and is typically drafted as ‘the case for the prosecution’. On issuing the SO, the Commission is under a formal obligation to grant the parties access to the file i.e. to all the evidence the Commission has gathered to date. The parties can reply to the SO and can request an oral hearing.  The PFs represent the CMA’s provisional decision (and as the statistics above indicate, this can just as often be a provisional clearance as a provisional objection). However, the SO comes earlier in the process (issued around day 40 of Phase 2) and importantly before the oral hearing, where the parties have their formal opportunity to exercise their right to be heard.  The PFs, on the other hand, come much later in the process and, in contrast to the Commission process, after the CMA hearing (and without access to the file).  In effect the PFs are a draft decision, and parties have very little scope to respond to the CMA’s concerns at this stage. This procedural mismatch has the potential to impede effective coordination between the CMA and the Commission.

On substance, however, the Commission and the CMA are not likely to be miles apart, provided of course the facts are similar on both sides of the Channel. The CMA is perhaps more attached to GUPPI analysis, which seeks to indicate the upward pricing incentive for merging parties, and inclined to take a disproportionate interest in, often very small, local markets. But such differences are largely confined to retail sector cases.


Under the UK merger control system, Phase 2 remedies are addressed at the very end of the Phase 2 process, once a finding of a substantial lessoning of competition (SLC) has been provisionally made.  The CMA will publish a notice of possible remedies either with, or following publication of the PFs.  The notice will contain details of remedies that may address the SLC effectively and is a starting point for discussion of remedies.  This process is built in since the judgement in Interbrew v The Competition Commission (2001) (Interbrew), in which the High Court held that the Competition Commission (the predecessor to the CMA) had failed to give Interbrew a ‘fair’ or ‘proper’ opportunity to discuss alternative remedies.  Interbrew resulted in changes to the UK merger timetable under the Enterprise Act 2002 (EA02) to enable sufficient consultation with the relevant parties prior to remedial action being taken.  Whatever the correct interpretation of the Court’s judgment, the effect is currently to prevent the CMA from negotiating and implementing remedies until an SLC finding is made.  The Commission is more flexible and often starts Phase 2 remedy discussions (and even negotiations) at the outset of Phase 2.  Unless there is a change to the UK’s current approach, the CMA could be faced with an EU or global remedy as a ‘fait accompli’ without a seat at the table to negotiate a remedy that fits the relevant market in the UK.  In practice there is already some adjustment within the CMA, and staff working groups will discuss remedies with parties on a hypothetical basis at an early stage.  However, those discussions do not currently involve the CMA panel so as to protect the integrity of their SLC finding in accordance with Interbrew.  Arguably Interbrew has been taken too far.  The changes under the EA02 were designed to allow consultation with the relevant parties, ensuring the CMA is fully informed before deciding on the most appropriate remedies and therefore reducing the likelihood of judicial review.  Arguably, there is still room to allow discussion of remedies earlier in the process without contravening the spirit of Interbrew, provided the parties are treated fairly and given a reasonable opportunity to discuss all potential remedies.

Failure to make changes to the current UK merger process and timetable could also have a significant impact on merging parties, with the unappetising  prospect of potentially divergent remedies being imposed in the UK and elsewhere. In Unilever/Sara Lee (2009), the Commission required divestment of one brand of deodorant (Sanex), while the South African competition authority required divestment of a different brand (Status).  This was predominantly due to the timetable differences under the two merger regimes: the Commission’s decision came after the South African authority’s.  Although the parties were not obliged to divest the Sanex brand in South Africa, it would not have been commercially viable to partially own a brand only in certain parts of the world.  The result was the divestment of two brands in South Africa, following two different authorities requiring two different divestiture conditions.

A dual process: co-ordination or conflict post-Brexit

The unanswered question is how the CMA’s panel system will work when the UK is reviewing large multinational mergers being simultaneously reviewed by the Commission, and potentially other jurisdictions such as the US.  Currently the UK does not need to coordinate with the Commission in merger cases; if the EUMR thresholds are met, it will be dealt with by the Commission under the one-stop-shop principle.  It is unclear how, post-Brexit, the CMA panel and Commission case team would cooperate in practice.  Although the panel group chair may get involved in discussions with the Commission case team, most of the coordination is likely to be handled by the CMA staff.   The CMA will therefore need to develop new procedures to ensure what is going on in other jurisdictions is communicated to the panel in a timely and effective fashion.

The CMA does cooperate with non-EU competition authorities on merger reviews, including in the US, Australia, New Zealand and Canada.  However, such cooperation is relatively rare, as large cross border deals tend to have a European community dimension and are therefore dealt with by the Commission, and not the CMA. Brexit will not only require close coordination with the Commission, but will increase the number of cases where coordination is also required with competition agencies in other jurisdictions around the world.

The CMA is very active in international fora such as the OECD and ICN, which facilitate discussion and cooperation on all aspects of competition enforcement worldwide, and this is only likely to increase post-Brexit.  However, cooperation with the Commission and other European competition authorities is currently through the European Competition Network (ECN).  The ECN provides a means of ensuring effective and consistent application of competition law throughout the EU.  Through the ECN, competition authorities inform each other of proposed decisions, take on board comments from others, pool their experience and identify best practices.  Post-Brexit, the CMA will (one assumes) no longer have a seat at the ECN table.  This has significant ramifications for post-Brexit mergers that trigger filings in both the UK and the EU as there is no obligation for the CMA and Commission to cooperate and coordinate. One would expect, however, the CMA and Commission to agree an MoU or Cooperation Agreement soon after Brexit, even in the event of a no-deal scenario (unless politics triumphs over practicalities yet again). That said, reading the tea leaves suggests that the level of cooperation will be no different to third country agreements that the EU currently enjoys with countries like the US and Canada, and will not reflect the unique position of the UK. After all, there is no other country outside the EU of such economic importance and as integrated within the European economy, and which is likely therefore to be as closely connected to the cases being considered by the Commission.

In practice, we would not expect to see an immediate divergence in merger policy between the UK and EU: if the facts are the same on both sides of the Channel, there is no reason why the CMA and the Commission should not reach the same conclusion.  However, it is the marginal cases that will test the limits, and where we may see conflicting outcomes.  The proof of the pudding, as they say, will be in the eating – but we can be relatively sure that, whatever the outcome post-Brexit, the implication of a dual merger process for business is a significant increase in costs.  And that will leave a bitter taste.