Martin McElwee is a partner in the London and Brussels antitrust, competition and trade teams at Freshfields Bruckhaus Deringer LLP. His practice covers all areas of competition law, including merger control, market studies, antitrust investigations and state aid. He has a particular focus on financial services clients.
Martin’s recent work in the UK merger control arena includes advising Thermo Fisher Scientific on its acquisition of Gatan, Wincor Nixdorf AG on its acquisition by Diebold, Incorporated and Aberdeen Asset Management on its merger with Standard Life.
He has also acted for Poundland on the Phase II clearance by the Competition and Markets Authority of its acquisition of 99p Stores and Rexam plc on the Phase II clearance by the European Commission of its acquisition by Ball Corporation.
Daniel Wylde is an associate in the London antitrust, competition and trade team at Freshfields Bruckhaus Deringer LLP. His practice includes EU, UK and multi-jurisdictional competition law matters, including merger control, large-scale investigations and behavioural mandates.
Daniel was seconded to the Competition and Markets Authority in 2018 to assist with its preparations for the UK’s proposed departure from the European Union and the future UK competition regime.
GTDT: What have been the key developments in the past year or so in merger control in your jurisdiction?
Martin McElwee and Daniel Wylde: Despite fears of reduced market activity in the run-up to the UK’s proposed exit from the European Union, the Competition and Markets Authority (CMA) has had another busy year in the merger review space, undertaking nine Phase II inquiries and 53 Phase I merger inquiries, according to statistics published on 6 March 2019. For the third year in a row there was an uptick in the number of Phase II referrals, with 11 cases referred this year compared to nine and five in 2017–2018 and 2016–2017 respectively. By contrast, the number of cases concluded on the basis of remedies following a Phase I review was significantly lower in the past year, with only two cases concluded in this way, compared with 12 cases in 2017–2018.
Notable cases included the Phase II reviews of Experian/ClearScore, SSE/Npower and PayPal/iZettle, the clearance decision in the Fox/Sky review, which had been referred to a Phase II inquiry on public interest grounds related to media plurality and broadcasting standards, and the ongoing Phase II review of the proposed Sainsbury’s/Asda groceries merger.
The UK government made its anticipated changes to the merger regime in June 2018 to amend the threshold tests for businesses developing military and dual-use technology, computing hardware and quantum technology. Under the changes, the UK government can now intervene on national security related grounds where the target’s UK turnover is more than £1 million, as opposed to the standard £70 million.
The CMA also continues to actively prepare for various Brexit-related scenarios, including consulting on guidance for a ‘no deal’ scenario following the UK government’s publication of its competition statutory instrument (SI). Under the SI, in a ‘no deal’ scenario, the CMA will gain jurisdiction for any ‘live’ case currently under review by the European Commission (Commission), which would also trigger the UK merger thresholds, provided the Commission has yet to make a decision in that case.
The CMA is encouraging parties engaged in ‘live’ merger review processes with the Commission to proactively reach out to them if the merger would also trigger the UK thresholds. For many of the cases in this bucket, the CMA has allocated ‘shadow’ case teams to run a pre-notification process so as to be able to move quickly to a formal review process in the event of a ‘no deal’.
The CMA’s use of initial enforcement orders (IEOs) has been up on 2017–2018, with 25 in the past year in comparison to 20. The CMA appears to be continuing to take a strict approach to the application of IEOs and derogations. The CMA has also imposed fines in two cases (Electro Rent and EMR/MWR) for failure to comply with an IEO.
GTDT: What lessons can be learned from recent cases to help merger parties manage the review process and allay authority concerns at an early stage?
MM & DW: Although down on the previous year, the proportion of cases reviewed by the CMA that have been considered to raise complex or material competition issues (ie, cases where the CMA held a case review meeting (which typically involves the CMA setting out its concerns to the parties at Phase I)) remained relatively high: 43 per cent of all Phase I cases went to a case review meeting compared to 48 per cent in 2017–2018. In addition, the rate of Phase II referral also remains relatively high at around 21 per cent, compared to around 3 per cent for the Commission in 2018. Divestitures were also required in four of the nine Phase II cases completed last year, on top of one prohibition decision and one abandonment.
The continued high proportion of cases getting more detailed review is at least partly illustrated by the continued success of a more pragmatic approach when deciding which cases to investigate formally through the CMA’s merger intelligence function and in particular through the use of briefing papers. The CMA continues to welcome such briefings from companies, so that it can advise on whether a potential merger is likely to require a formal review. This approach is also an effective way for the CMA to control its workload and use its resources efficiently, which will become increasingly important with its increased workload post-Brexit.
Agreeing an appropriate administrative timetable with the CMA remains vital. In the Sainsbury’s/Asda merger review, the parties ended up successfully applying to the UK competition appeals court (the Competition Appeals Tribunal, or CAT) on the basis that the deadlines imposed by the CMA for responding to its working papers, alongside its proposed scheduling of the main parties’ hearing (while having to work to respond to the working papers in parallel) was unfair. The CMA had sent the parties 21 working papers in total, some of which were only circulated 10 calendar days before the CMA’s deadline for responses (although this was later extended to 20 calendar days), a deadline that coincided with the scheduled date of the hearing.
The CAT ruled that, given the complexity of the case and the importance of being able to respond to working papers, even the CMA’s extended deadline for responses was unfair. However, the CAT did not agree with the parties’ proposed new deadline, instead suggesting a brief extension (a matter of days). The CAT also considered the scheduling of the hearing to be ‘unfair’, in light of the working papers response deadline; however, it did note that it is not necessary to wait until the parties have had an opportunity to respond to working papers before scheduling the main party hearings in Phase II.
The CMA continues to actively utilise its powers to impose strict and far-reaching IEOs to prevent parties integrating a completed merger while it undertakes its review.
While there is little flexibility in the CMA’s Phase I timetable, the Sainsbury’s/Asda case highlights the need to engage and work closely with the CMA with respect to the Phase II administrative timetable for your case and identify any possible crunch points in advance.
As mentioned, the CMA continues to actively utilise its powers to impose strict and far-reaching IEOs to prevent parties integrating a completed merger while it undertakes its review. The CMA expects the acquirer (and the acquirer’s advisers) to keep a close eye on the target to ensure compliance, and has shown a greater willingness to impose a monitoring trustee at Phase I if it is not confident in the parties’ ability to comply. It is therefore important that clients are made aware of the strict obligations under an IEO and that the relevant individuals internally are briefed on the requirements and consequences of a failure to comply; for example, Electro Rent were fined £100,000 for a failure to comply with an IEO.
GTDT: What do recent cases tell us about the enforcement priorities of the authorities in your jurisdiction?
MM & DW: In line with its publicly stated enforcement priority to protect vulnerable consumers, a number of the key mergers the CMA has taken an in-depth look at in the past year have been consumer-facing, including Sainsbury’s/Asda, Experian/ClearScore and SSE/Npower. In particular, despite the findings of its relatively recent energy market investigation and the modest shares of the parties, the CMA took the SSE/Npower case through a full Phase II review before issuing an unconditional clearance decision. This, coupled with an in-depth look at the personal credit score checking market, shows that the CMA can be expected to continue to properly kick the tyres on all mergers that could affect vulnerable consumers.
Digital and new technology mergers also appear on the list of cases where the CMA has shown more of an interest in 2018–2019. One example is the Experian/ClearScore case mentioned above, where the CMA expressed concerns in its provisional findings that the merger could harm the continued development of digital products to help people understand their personal finances. The CMA is also currently undertaking a Phase II review into the completed acquisition by PayPal of iZettle, a provider of mini chip card readers and software for mobile devices, among other things, aimed at small businesses across Europe and Latin America.
These in-depth reviews of digital mergers are in line with the CMA’s broader enforcement priorities, as set out in its 2019/20 annual plan, as well as public statements that have been made by a number of senior individuals within the organisation. In its annual plan, the CMA notes that online mergers can present greater challenges in predicting whether there will be harm to future competition, and accordingly it must continue to grow its understanding of such issues and develop the framework it uses. In particular, as with the Commission, the CMA is conscious of ensuring mergers such as Facebook/Instagram and Facebook/Whatsapp, which previously went largely under the radar, are subject to an effective merger review.
Although eventually superseded by a successful bid from Comcast, the UK government did clear the proposed acquisition by Fox of Sky following the CMA’s Phase II review report. The case had been referred to Phase II on public interest (media plurality) grounds, despite having been cleared (as regards its competition aspects) unconditionally at Phase I by the Commission. The clearance was conditional on undertakings from Fox to divest Sky News to Disney. In addition to Fox/Sky, the UK government also intervened in the CMA’s Trinity Mirror/Northern & Shell media merger review on the public interest grounds of free expression of opinion in newspapers and sufficient plurality of views in newspapers. The latter case was eventually cleared at Phase I.
These two public interest cases show how mergers in the media sector are still likely to raise public interest concerns and could be subject to intervention from the UK government.
GTDT: Have there been any developments in the kinds of evidence that the authorities in your jurisdiction review in assessing mergers?
MM & DW: In the CMA’s Phase II review of the Sainsbury’s/Asda merger, there has been much focus and discussion around the CMA’s use of the Gross Upward Pricing Pressure Index (Guppi) to measure the incentives to raise prices unilaterally post-merger (in the absence of merger-induced efficiencies, entry and repositioning).
In Sainsbury’s/Asda, the CMA has used a Guppi threshold significantly lower than that traditionally used in similar retail mergers, including the Tesco/Booker Phase II review from a year earlier. By using a lower threshold, the CMA has identified significantly more areas of concern.
The merging parties, as well as some other interested third parties, have called on the CMA to provide more information as to the variables for its calculations. In particular, the use of lower thresholds in this case are said to have possible far-reaching impact across the retail and consumer goods sectors. The CMA has, however, made clear that it does not have a one-size-fits all approach for Guppi thresholds and that each case will depend on the facts, with the interpretation of Guppi expected to be assessed afresh in each case.
We are also finding that the CMA is increasingly requesting email searches and big document trawls at Phase I, in particular in complex cases. The CMA increasingly uses its power to issue compulsory information requests (section 109 notices) for parties’ internal documents at both Phase I and Phase II, rather than relying on voluntary provision of evidence under informal requests. Indeed, in its guidance on requests for internal documents in merger investigations, published in January 2019, the CMA states that it is likely to use section 109 notices as standard in future investigations where internal documents are requested in both Phase I and Phase II.
It is important to bear in mind that there are both civil and criminal penalties for non-compliance with such compulsory requests for information. For example, in November 2017 Hungryhouse was fined £20,000 in the context of the Just Eat/Hungryhouse merger.
It is also worth highlighting that the CMA has recently created a data, technology and analytics (DaTA) team within the organisation, staffed with data scientists, including a Director of Data Science. In its annual plan for 2019–2020, the CMA states that it will strengthen the DaTA team further, to improve its capture and use of data and increase its understanding of how firms use data and algorithms to determine what implications this may have for consumers and competition.
GTDT: Talk us through any notable deals that have been prohibited, cleared subject to conditions or referred for in-depth review in the past year.
MM & DW: Predictably, the largest and most high profile merger review for the CMA in the past year has been that of the proposed Sainsbury’s/Asda merger, a merger of two of the UK’s largest supermarket chains. The CMA’s review has not failed to live up to the hype either, with the case having raised a number of interesting procedural and analytical points, the latter leading to interventions from a number of interested third parties, as well as criticism from the parties themselves. At the time of writing, the CMA has provisionally found significant concerns at Phase II at both a national and a local level. In particular, the CMA has raised concerns that the deal could lead to higher prices in-store and online, a reduction in product range and quality, as well as a poorer overall shopping experience.
In response to the CMA’s provisional findings, while maintaining their objections to the CMA’s approach (as mentioned previously), the parties have offered to divest a number of supermarkets and petrol forecourts, as well as making various commitments related to lowering prices and paying small suppliers promptly. Whether these proposed remedies will prove sufficient to appease the CMA’s concerns remains unanswered.
The case examples of Experian/ClearScore, TopCashback/Quidco and Mole Valley Farmers/Countrywide show the continued willingness of parties to abandon transactions where the CMA has issued negative provisional findings, or suggested significant concerns in the early stages of a Phase II inquiry. This is often the case where there is no obvious remedy for the CMA’s concerns, as was the case in the digital Experian/ClearScore and TopCashback/Quidco cases. In this regard, it is worth noting that the CMA and its predecessor (the Competition Commission), have only reversed a provisional finding of a substantial lessening of competition in five cases, with only one occurrence in the past 10 years (the 2017 Central Manchester University Hospitals/University Hospital of South Manchester case). Where provisional findings have been reversed, this is usually as a result of new evidence or significant changes in circumstances.
In addition, it is also worth highlighting that the CMA issued its first ‘unwinding order’ in the Tobii AB/Smartbox case in February 2019. The CMA’s order, which was issued after it considered there were reasonable grounds for suspecting action taken might prejudice its Phase II review, required the target to, among other things, recommence the sale of certain products in the UK that had been discontinued shortly before the merger, as well as reinstating a number of research and development projects that were similarly stopped prior to the merger. The case shows that the CMA is willing to use the full set of tools available to it to ensure its investigations are not prejudiced by the actions of the parties.
GTDT: Do you expect enforcement policy or the merger control rules to change in the near future? If so, what do you predict will be the impact on business?
MM & DW: As Brexit approaches, the CMA continues to gear up to handle the review of merger control cases that previously fell under the jurisdiction of the Commission and the one-stop-shop. The CMA estimates this to be approximately 30–50 additional Phase I cases per year, with five to seven of those estimated to go to Phase II. While Brexit uncertainty remains, the CMA and businesses are somewhat left in limbo as to when the CMA could gain jurisdiction for these cases.
As mentioned, in a ‘no deal’ scenario, the UK government’s competition SI provides for CMA jurisdiction immediately on exit for any merger which hits the UK thresholds and where the Commission has not yet taken a decision. This would inevitably end up with businesses running parallel processes in Brussels and London, with the CMA’s review timetable likely to be significantly behind that of the Commission (both because the CMA would gain jurisdiction late and because of the CMA’s lengthier administrative process). In a ‘no deal’ scenario, there could accordingly be issues for deal timetables and long-stop dates, which businesses will need to consider.
Beyond the immediate implications of Brexit, the CMA has also recently been vocal about the need for change in the UK competition regime, including with respect to merger control. In a letter to the UK government, the recently appointed Chair of the CMA, Andrew Tyrie, has set out a wish list of possible reforms to the UK competition regime. Of particular note in the merger control context is the proposal to move the UK’s current voluntary regime to a possible hybrid regime, where a mandatory and suspensory filing would be necessary where the merger hits a threshold set at a level to catch the kinds of multinational mergers reviewed by the Commission and the US agencies. The voluntary regime would remain in place for mergers under that threshold. One of the key drivers for the proposal appears to be ensuring that the CMA is at the top table for any remedies discussions the merging parties may be having with the Commission, US or China in relation to these larger multinational deals.
In addition, the report of the UK Digital Competition Expert Panel led by Jason Furman, published in March 2019, has also called for a more forward-looking merger assessment framework to better assess developments in the technology and digital space. Proposals include that companies with ‘strategic market status’ should be required to notify the CMA of ‘all intended acquisitions’, and that a ‘balance of harm’ merger test be introduced to allow the CMA to weigh up both the likelihood and magnitude of the impact of the merger.
The extent to which the reforms mentioned in this report, as well as those set out in the letter from Andrew Tyrie, could be on the table could become clearer following the outcome of the UK government’s five-year review of the UK competition regime. While reforms may not be imminent, businesses should definitely continue to watch this space, in particular if the UK were to leave the EU in a ‘no deal’ scenario.
Finally, as mentioned above, the government has also now expanded its powers to intervene in deals from a national security perspective. Although the CMA has indicated that it does not anticipate many deals that may fall under the expanded regime to raise competition concerns, deals in these sectors will be closely scrutinised and the likelihood of intervention by the Secretary of State is higher. Further, these new rules are a first step in a package of proposals designed to strengthen the UK government’s powers to intervene in foreign investments on national security grounds and to protect critical national infrastructure.
The Inside Track
What are the most important skills and qualities needed by an adviser in this area?
With the constantly evolving global political and economic environment, it is vital as a merger control adviser to remain flexible and dynamic, in order to consider all the possible angles an authority could take to approach its review of a merger. This is particularly the case as more and more markets are digitalised and authorities look to take new and innovative approaches to looking at cases.
Being on top of the procedure is also key, as has been highlighted in a number of cases in the UK over recent years. In particular, being able to advise clients on what are often grey areas, such as gun-jumping risks and compliance with IEOs, is important to enable clients to strike the right balance for integration planning in advance of receiving clearance.
What are the key things for the parties and their advisers to get right for the review process to go smoothly?
Besides working seamlessly as a team, responsiveness and accuracy of information provided is key to ensuring a smooth process with the CMA. More often than not, delays are caused by parties providing insufficient information to allow the CMA to reach the decisions it needs to make. If the lawyers, client and economists (as well as any other advisers) are joined up, the process of identifying and extracting the relevant information can be a smooth and timely process, resulting in less delays.
What were the most interesting or challenging cases you have dealt with in the past year?
We are currently working on the CMA’s Phase II review of Thermo Fisher’s acquisition of the Gatan electron microscope peripherals business from Roper. This is a fascinating case about a market that has developed very rapidly and where the pace of scientific development is leading market dynamics.
Martin McElwee and Daniel Wylde
Freshfields Bruckhaus Deringer LLP
London and Brussels