Competition, Regulation & Networks Briefing October 2014 Contents Briefing Control – Procedural Aspects EU Merger Control UK Merger Control Annexes Contacts EU & UK Merger Control 01 01 03 05 08 Briefing Control – Procedural Aspects Merger control issues should be considered early in any transaction timetable to allow the parties to ensure that they have the necessary clearances prior to the expected completion date and to identify potential obstacles – and solutions – to completion. Approximately 100 countries operate merger control regimes. Many have mandatory merger control regimes with strict tests to determine whether a merger should be notified, based on the parties’ turnover or shares of supply/market shares. Parties should therefore seek advice in all jurisdictions where the merger may produce a change in the market status quo. Failure to notify a merger can result in fines. The European Commission can fine companies up to 10% of their worldwide group turnover for merging without notifying the Commission. This note sets out the thresholds for notifications in the EU and the UK and provides an introduction to EU and UK merger control procedures. This note does not deal with substantive aspects of merger control1 , namely whether any merger that needs to be notified may give rise to competition concerns. EU Merger Control 1 2 Detailed information on the substantive test against which the CMA assesses mergers (the ‘substantial lessening of competition’ test) can be found here: Merger Assessment Guidelines (OFT1254/CC2), Mergers: Exceptions to the duty to refer and undertakings in lieu of reference guidance (OFT1122), and Merger Remedies: Competition Commission Guidelines (CC8), adopted by the CMA. Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ 2004 L24/1. wfw.com The European Commission has exclusive jurisdiction under the EU Merger Regulation (the “EUMR”)2 to investigate qualifying mergers and joint ventures within the EU. Therefore mergers that meet the EU notification criteria only need to be notified to the European Commission and do not have to be notified to the competition authorities in any of the 28 EU member States, unless the merger (or part of the merger) is referred by the Commission down to national authorities. Mergers notified on a national level may also be referred by the national authorities up to the Commission. 02 COMPETITION, REGULATION & NETWORKS The EUMR applies to concentrations with an EU dimension. There are two elements to this test: (1) is there a concentration? and (2) does it have an EU dimension? A concentration arises where there is a change in control on a lasting basis. This includes a change in the quality of control (such as where one jointly controlling shareholder exits a joint venture). Temporary changes of control will not meet this test, although the Commission has found joint ventures lasting no more than eight years to be concluded “on a lasting basis”. Currently, the EUMR only applies to ”acquisitions of control” rather than acquisitions of non‑controlling minority shareholdings, however following consultation there are proposals for reform at EU level. The proposals suggest a procedure for those minority shareholdings which are likely to raise potential competition issues i.e. acquisitions creating a ”competitively significant link” between the buyer and the target to be notified via a less onerous procedure than for qualifying mergers.3 3 4 5 http://ec.europa.eu/competition/ publications/cpb/2014/ 015_en.pdf The UK government may take steps in respect of mergers notified under the EU Merger Regulation to the Commission that affect national security, and other legitimate non‑ competition interests. “Working days” does not include weekends or Commission holidays. Commission holidays are listed here: http://ec.europa.eu/competition/ mergers/information_en.html Whether a concentration has an EU dimension is determined by the parties’ turnover. See Annex 1 for a detailed guide to the turnover test under the EUMR. As a starting point, though, a merger will not have to be notified to the EU unless the merging parties have: > a combined worldwide turnover of more than €2.5bn; and > at least two of the merging parties each have a turnover exceeding €25m in each of at least three EU member States. If these thresholds are not met, the parties will not have to notify the merger to the European Commission, although the parties may request that the merger is reviewed by the Commission if the merger meets the notification requirements in three or more member States. Similarly, a merger that is notified to the European Commission may be wholly or partially referred back to national authorities where the merger will affect competition in a distinct market in a particular member State4 . The parties acquiring control are responsible for ensuring that an EU merger is notified to the Commission. Notification is by way of a Form CO, which is a detailed questionnaire including information on the parties, their customers and competitors, and the affected product markets and geographic markets. There is no formal deadline for submission of a Form CO, although parties may not complete a concentration with an EU dimension without clearance from the Commission. As a matter of best practice, the Commission should be contacted as soon as possible when a transaction is sufficiently defined and in any event immediately following the public announcement of a proposed merger. Draft Form COs are usually sent to the Commission prior to notification to ensure that the final version submitted is considered complete. There are two phases to an EU merger investigation. Phase 1 starts the day after the submission of a complete Form CO. This phase runs for 25 working days5 and can be extended by a further 15 working days if commitments are submitted by the parties. The merger may be cleared by the Commission within the Phase 1 period. If the Commission has “serious doubts” about whether the merger would “significantly impede effective competition”, the Commission will open an in‑depth Phase 2 investigation. The Phase 2 investigation lasts for 90 working days and can be extended up to 125 working days. See Annex 2 for a detailed timeline. COMPETITION, REGULATION & NETWORKS 03 During that Phase 2 investigation, the Commission will decide whether the merger would significantly impede effective competition. If so, the Commission will either block the merger or approve the merger subject to commitments that address the Commission’s concerns. UK Merger Control This note provides an overview of the UK merger control regime in light of the recent reforms. Following the introduction of the Enterprise and Regulatory Reform Act 2013 (ERRA13) the UK merger control rules have been revised on a procedural level. This included institutional reforms with the Office of Fair Trading and the Competition Commission being replaced with a single competition authority, the Competition Markets Authority (CMA). Among the reforms there were proposals to move from a voluntary merger control regime to a mandatory merger control regime however the voluntary notification system has been retained.6 The CMA has jurisdiction where two or more enterprises cease to be distinct and: > the target has an annual UK turnover that exceeds £70 million (the “Turnover Test”); or > the merging parties will together supply or acquire at least 25% of a particular description of goods or services in the UK, or in a substantial part of the UK, and the merger leads to an increment in share (the “Share of Supply Test”); or 7 > the merging parties are water or sewerage undertakings and either party has an annual turnover greater than £10 million (the “Water Enterprises Test”8 ). The ERRA13 also permits intervention by the Secretary of State in exceptional cases where public interest issues arise. Currently these are limited to national and public security, media plurality and the stability of the UK financial system however the Secretary of State has the power to add further public interest considerations by statutory instrument. Unlike the EUMR, the UK merger control regime does not apply to completely new enterprises, such as joint ventures where no ongoing business is transferred from the parent companies or any third party. Parties are not required to notify relevant merger situations to the CMA prior to completion but should be mindful that the CMA may commence an own‑initiative investigation into completed mergers and at any time within four months of completion of the merger. For mergers that are not made public prior to completion, the four month period commences from the time that the merger is made public or the CMA is informed of the merger. The CMA may then order the parties to de‑merge if the completed transaction can be expected to result in a substantial lessening of competition in a UK market.9 6 7 8 9 The UK is unusual in having a system of voluntary notification. Other jurisdictions with voluntary systems include Hong Kong, Indonesia, New Zealand, Singapore and Venezuala. The Share of Supply Test is not a market share test. The OFT has wide discretion for determining the relevant goods or services and is not required to define relevant economic markets. Mergers between water or sewerage undertakings in England and Wales are subject to mandatory reference for Phase 2 investigation where they exceed this £10m threshold. The Water Act 2014 (given Royal Assent on 14 May 2014) contains amendments to this mandatory reference regime which will come into effect during 2015/16. E.g. in 2005 Emap was ordered to divest ABI (a company with an annual turnover of only £5.4m), which it had acquired without submitting a notification. Watson, Farley & Williams October 2014 04 COMPETITION, REGULATION & NETWORKS 10 An independent group of experts selected from a panel appointed by the Secretary of State. Parties may notify mergers to the CMA under the formal statutory merger notice procedure or through an informal submission. Under the formal statutory merger notification procedure, the parties should submit a merger notice form, including details of the parties and the transaction, and information on affected markets. There is a 40 working day initial period for the CMAʹs Phase 1 investigation to begin, and this would be on the first working day after it confirms to merger parties that it has received a complete Merger Notice or (in the case of an own‑initiative investigation) that it has sufficient information to begin its investigation, whichever the earlier. Where there are material issues the parties may choose to notify the merger informally i.e. outside the statutory notification period. Parties can seek informal advice from the CMA without triggering an actual investigation leading to a public decision, although such action is discouraged where it may not offer anything over and above views of external advisers. Although the informal procedure may lead to a longer Phase 1 review, it can provide a better opportunity for competition concerns to be addressed in Phase 1. Parties can also engage in official “pre‑notification discussions” for cases where the parties intend to proceed to notify the merger. The filing of a Merger Notice represents a partyʹs formal notification of a merger to the CMA. The CMA must decide, within 40 working days of receipt of a completed merger notification, whether a duty to refer the merger to Phase 2 arises or whether, if not, the merger can be cleared, with or without conditions. This duty to refer arises where the CMA considers that the merger is more likely than not to result in a “substantial lessening of competition”. Prior to referral parties are given a chance to offer “Undertakings in Lieu of a Reference (UILs)”. The CMA will then consult upon the proposed UILs and decide if they address the competition concerns identified. If so the CMA will accept the UILs and clear the transaction, if not it will refer it to a Phase 2 investigation. Following the reforms the CMA’s powers have increased and it can issue an interim order at any time to prevent or unwind pre‑emptive integration of the parties which remains in force until the merger is either cleared or remedial action is taken. The CMA is also able to issue a formal information request notice or a request to give evidence as a witness, failure to comply with either of these results in an extension of the timetable until the request is satisfied. If the CMA does refer the merger to the Phase 2, the Inquiry Group10 for the merger will need to decide (within 24 weeks) whether the merger is found to result in a substantial lessening of competition. If the CMA does not find an SLC the transaction will be cleared. If an SLC is found the CMA has a further 12 weeks to implement any necessary remedies. A detailed timetable is included in Annex 3. Finally, for mergers subject to the City Code, offers automatically lapse if a Phase 2 investigation occurs before the first closing date or the date when the offer is declared (or becomes unconditional) whichever is the later. COMPETITION, REGULATION & NETWORKS 05 Watson, Farley & Williams October 2014 06 COMPETITION, REGULATION & NETWORKS COMPETITION, REGULATION & NETWORKS 07 Watson, Farley & Williams October 2014 08 COMPETITION, REGULATION & NETWORKS Should you wish to discuss any of the matters raised in this briefing, please speak with a member of our team below or your regular contact at Watson, Farley & Williams. Contacts Emanuela Lecchi Partner London [email protected] +44 20 7814 8427 Kristina Cavanna Associate London [email protected] +44 20 7863 8965 All references to ‘Watson, Farley & Williams’ and ‘the firm’ in this publication mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a ‘partner’ means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This publication is produced by Watson, Farley & Williams. 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