UK: The Enterprise Act - Merger Control Provisions

Last Updated: 15 May 2003

On 20 June 2003 the merger control regime currently contained in the Fair Trading Act 1973 will be replaced by the new merger control regime in the Enterprise Act 2002. Changes to the current regime include the following:

  • an amended jurisdictional test for determining whether transactions are subject to the UK merger regime, which includes a turnover-based (rather than an assets-based) test;
  • a new substantive test against which transactions are judged;
  • the removal of ministers from merger decisions, subject to a reserve role in cases involving exceptional public interest issues;
  • new timetables both for the first stage consideration of mergers by the Office of Fair Trading ("OFT") and for any subsequent Competition Commission investigation;
  • the power, in certain circumstances, for the Competition Commission to impose monetary penalties; and
  • a new route for appeals, which can be made to the Competition Appeal Tribunal.

In addition, there are a number of subsidiary provisions that may affect the decisions companies make in respect of whether or not to notify proposed mergers for clearance.

These elements of the new regime are discussed further in the paragraphs below.

The new jurisdictional test

The Enterprise Act amends the current jurisdictional test so that a merger may be investigated by the OFT if two or more enterprises cease to be distinct and:-

  • the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million (the "turnover test"); or
  • as a result of the two enterprises ceasing to be distinct, there is an aggregation of shares of supply so that the merged entity will have a share of supply or purchases of at least one-quarter of a particular description of goods or services in the UK (the "share of supply" test).

(Section 23 Enterprise Act 2002)

The turnover test replaces the assets-based test set out in the Fair Trading Act 1973, although the share of supply test is unchanged.

Whilst it is thought that the turnover test provides a more accurate measurement of the real economic value of the transaction, It is understood that the OFT considers it unlikely that the change in the jurisdictional test will lead to any significant change in the number of transactions notified for clearance.

The new substantive test

The Enterprise Act replaces the public interest test against which transactions are currently judged with a new "substantial lessening of competition" test (the "SLC test"). Under the provisions of the new legislation the OFT is under a duty to refer a merger to the Competition Commission for investigation where it believes that the jurisdictional test is met and the merger " has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services".

The OFT has published a consultation document in respect of the new substantive test, and the Competition Commission has published its own guidelines in respect of the merger control provisions of the Enterprise Act, which include its views on how the new test will work.

The OFT’s consultation document on the merger provisions of the Enterprise Actindicates that under the SLC test the test for reference will be met if the OFT has a reasonably held belief that, on the basis of the evidence available to it, there is at least a significant prospect that a merger may be expected to lessen competition substantially (it considers this to be the same standard of proof as is currently adopted under the provisions of the Fair Trading Act 1973). It also notes a number of broad principles which it will use to assess whether a merger may be expected substantially to lessen competition, namely, the proper definition of the relevant market, the characteristics of pre- and post-merger competition (which may indicate concerns about possible loss of rivalry), the likelihood of new entry or expansion by existing competitors; other factors such as buyer-power, any "failing firm" situation, and efficiency gains that (notwithstanding the loss of a player) might increase rivalry within the market as a whole.

The Competition Commission’s Guidelines on merger references under the Enterprise Act note the Commission’s own approach, in the event of a reference. They make it clear that, for the Commission to reach an adverse decision in relation to a merger or a proposed merger, it must be satisfied that the merger has resulted in an SLC, or it must expect such a result. The Guidelines also state that the Commission will usually have such an expectation if it considers that it is more likely than not that the SLC will result. The Competition Commission will approach its analysis by looking at, first, market definition and, second, whether the merger would increase the market power of the merging firms (on a similar basis to the OFT although, obviously, it will make a more detailed investigation).

The introduction of the SLC test represents perhaps one of the most significant changes to the merger control regime, and a departure from the more general public interest test applied by the Competition Commission under the Fair Trading Act 1973. Whilst even under the public interest test competition concerns tended to be paramount, the SLC test makes it absolutely clear that the test to be applied is a competition test and that if the OFT has no belief that the merger situation in question has resulted or may be expected to result in a substantial lessening of competition, then it must be allowed to proceed (regardless of other issues that might have been taken into account under the Competition Commission’s duty to exercise its powers in the public interest, e.g. effects on employment .

The duty to refer

The Enterprise Act provides that the OFT shall make a reference to the Competition Commission if it believes that it is or may be the case that a relevant merger situation has been created (i.e. the jurisdictional test is met) and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition in any United Kingdom market for goods or services (i.e. the SLC test is met).

There are a number of exceptions to this duty to refer. For example, the OFT may decide not to refer a merger if it does not consider the market sufficiently important, or if there are customer benefits that outweigh any substantial lessening of competition. The OFT may also be prevented from making a reference if it receives a "public intervention notice" or a "special intervention notice" from the Secretary of State, in which case the decision will be made by the Secretary of State.

It is uncertain how the new duty to refer will, in practice, be applied and, in particular, how and in what circumstances the OFT will exercise its duty to refer. Nonetheless, it would seem that the duty is more stringent than the Secretary of State’s discretion to refer mergers which met the jurisdictional test set out in the Fair Trading Act 1973, which it replaces. The change in emphasis would appear to be consistent with the decision to depoliticise and remove some of the discretionary elements (and the resulting uncertainty) from decisions to refer mergers for investigation by the Competition Commission and, arguably, the OFT may be obliged to apply a more rigorous approach, which may have the effect of providing greater certainty of outcome for the parties. It is, however, debatable whether the change in emphasis will have any effect on the number of referrals made to the Competition Commission.

The "customer benefits" test

The OFT retains a discretion not to refer a merger when it believes that any substantial lessening of competition will be outweighed by benefits to consumers. Customer benefits may also be taken into account by the Competition Commission when deciding on remedies. As is clear from the explanatory notes issues in respect of the Enterprise Act, this could extend to clearing a merger without conditions in circumstances where the customer benefits are sufficiently important and nothing can be done about the competition problems without eliminating the relevant customer benefit.

Section 30 of the Enterprise Act defines relevant customer benefits in terms of lower prices, higher quality, greater choice or greater innovation (which may be on the market affected by any SLC, or another market). The relevant customer benefit identified must be expected to accrue as a result of the merger and within a reasonable time, and must be unlikely to occur without the merger. The benefits must accrue to "relevant customers", who are for these purposes customers of the merging enterprises, customers of such customers and any other customers downstream of the customers of the merging enterprises (including future customers, on the basis that in some circumstances a merger may lead to the development of new products or services and the creation of new markets).

It is thought that, in fact, customer benefits are so narrowly defined, and involve the fulfilment of fairly strict criteria, such that they will rarely justify a decision not to make a reference (or not to require remedies).

The removal of the Secretary of State

Under the Fair Trading Act 1973 the Secretary of State had a pivotal role in deciding whether transactions should be referred to the Competition Commission for investigation. In addition if the Competition Commission reached an adverse view in respect of a merger it had investigated, then the Secretary of State had the final say on remedies. Although the Secretary of State would, as a rule, follow the views and recommendations of the OFT and the Competition Commission, the possibility of political interference could not be excluded. Under the provisions of the new regime, the OFT alone will decide whether to make a reference to the Competition Commission and, in the event it reaches an adverse view, the Competition Commission will determine remedies. The possibility of political intervention is limited to cases that raise defined "public interest" issues.

Public intervention notices

The new legislation allows the Secretary of State to intervene in a merger situation under consideration on public interest grounds by means of giving a "public intervention notice" to the OFT if he believes that it is or may be the case that public interest considerations are relevant to the merger situation in question. In such circumstances, the OFT prepares a report to the Secretary of State, and the Secretary of State has the discretion to refer the matter to the Competition Commission for investigation (although in deciding whether to make a reference the Secretary of State is bound by the OFT’s views in respect of the effects of the transaction on competition). In respect of such matters the Competition Commission’s terms of reference will take into account any admissible public interest considerations and whether the merger situation operates or may be expected to operate against the public interest. Currently national security (including public security) is the only public interest consideration that has been identified for these purposes, but the legislation would allow the Secretary of State to add to this and to intervene in other circumstances.

The Secretary of State may also intervene in a merger case by giving a "special intervention notice" to the OFT if he believes that it is or may be the case that one or more public interest considerations is relevant to the consideration of the merger in question, and at least one of the enterprises concerned was a United Kingdom entity or under the control of a United Kingdom entity, and a person carrying on one or more of the enterprises concerned was a government contractor involved in defence work. The special intervention procedure applies in respect of mergers where the jurisdictional thresholds of the turnover and share of supply test (see above, under the jurisdictional test) are not met, giving the Secretary of State the possibility of intervening in circumstances where he might not otherwise be able to do so.

The current government is unlikely to make use of these reserve powers outside merger cases involving defence issues. However, the provisions of the Enterprise Act would permit a government, if it so chose, to adopt an aggressive intervention stance on wide public policy grounds.

Timetable

Under the new legislation the OFT will have 20 working days (extendible by a further 10 working days) (i.e. 30 days instead of the current 35 days) to consider a merger notified on a statutory merger notice, or will work to a non-binding timetable of 40 working days where mergers are notified other than by means of a formal merger notice.

Where no notification is made the OFT may decide to investigate at any time within 4 months of completion or of material facts coming to its attention (if this is later).

If a reference to the Competition Commission is made, then the Competition Commission will have a maximum of 24 weeks to complete its investigation and make its decision on remedies. This may be extended by a maximum of 8 weeks in very exceptional circumstances, namely where parties have failed to provide or been late in providing information. In addition, the Competition Commission will be bound to publish the reasons for any such extension. Detailed negotiations on remedies may however take place after this period.

Integration of merging enterprises

The Enterprise Act includes various powers that allow the OFT and the Competition Commission to accept undertakings or impose orders preventing the further integration of merging businesses, where the merger is under consideration by the OFT, or the subject of an investigation by the Competition Commission.

Certain of these are in line with provisions in the Fair Trading Act 1973 or, even if they are confer a "new" power, reflect existing practices by providing, for example, for statutory undertakings in circumstances where, in the past, non-statutory undertakings might have been sought. These types of provisions may be seen as merely confirming, simplifying or sanctioning the pre-existing regime.

Nonetheless, it would seem that some of the provisions could act as a disincentive to parties who might otherwise have decided to take advantage of the fact that pre-notification of mergers is voluntary in the United Kingdom. They might be less inclined to "take the competition risk" and complete a qualifying merger without first obtaining clearance. For example, the new legislation automatically prohibits the parties to a completed merger that is referred to the Competition Commission for investigation from taking any further steps to integrate the businesses without the consent of the Competition Commission. Under the old regime the Competition Commission would have had to seek undertakings or make an interim order.

In addition, and perhaps more significantly, the OFT may accept legally binding undertakings or make an order (an "initial enforcement order") in respect of a completed merger where it is merely considering whether to make a reference to the Competition Commission, but has not yet reached a definite conclusion. Undertakings may be sought that parties will not carry out any action that might prejudice the merger reference or any merger inquiry; initial enforcement orders may only be made where it is believed that action is planned that could prejudice any investigation. These provisions could act as a very strong disincentive on undertakings to complete a merger without first obtaining merger clearance, given the prolonged period of uncertainty that could be involved.

Overall, it may be that these new powers to seek undertakings and make orders will discourage parties to mergers which qualify for investigation from entering into transactions without seeking clearance, and from completing transactions without ensuring that they have obtained the requisite clearance, such that there is a resulting increase in the number of notifications made and clearances issued.

Penalties

For the first time, the Competition Commission will itself be able to impose fines for the late provision of information, and for failure to provide information requested. This applies in the context of both merger and market investigations. The power to impose fines is subject to appeal to the Competition Appeal Tribunal.

Section 109 of the new legislation contains the Competition Commission’s power to give notice (a "Section 109 Notice") requiring a person’s attendance to give evidence, or the provision of documents or information by a particular date. Notices have to comply with certain requirements and, in particular, must include the possible consequences of failure to comply.

The Competition Commission’s powers in respect of failure to comply with a Section 109 Notice include the direct imposition of fines, without the need to apply to court. (Where a person intentionally alters, suppresses or destroys evidence that will, as under the Fair Trading Act 1973, remain a criminal offence). This should help obtain prompt compliance, although it is nonetheless expected that reasonable requests for extensions will continue to be granted.

The Enterprise Act also imposes an obligation on the Competition Commission to publish its Statement of Policy in respect of fines. The Competition Commission has, under the legislation, a certain amount of discretion in respect of how it sets fines, and may impose daily or fixed rate penalties, or a combination of the two.

The Competition Commission’s Statement of Policy makes clear that, in deciding whether to impose a penalty, the Commission will take into account matters such as whether there is a reasonable excuse for failure to comply with a Section 109 Notice and/or whether any obstruction or delay in compliance was intentional. If so, factors the Commission will consider will include the extent to which the failure or non-compliance might have affected the Commission’s efficient carrying out of its functions, or adversely affected other persons in relation to the Commission’s functions, whether imposing a penalty would encourage compliance, any reasonable excuse and whether the person who has not complied with the notice obtained, or was trying to obtain, some advantage or benefit from his failure to comply. In any event, the amount of any penalty will be " reasonable, appropriate and thus proportionate in the circumstances. All the circumstances of the case, […], will be taken into account when deciding the amount of penalty and other factors such as the resources available to the person concerned both in terms of staff and advisory resources and financial resources". The Commission will also consider aggravating or mitigating factors and will impose a penalty that does not exceed the maximum allowed by order of the Secretary of State.

Appeals

The Enterprise Act provides for the right to challenge decisions of the OFT, the Competition Commission or the Secretary of State in respect of references or possible references before the Competition Appeal Tribunal, so that they are heard by competition law specialists. In the past parties have had to rely on judicial review of merger decisions before the ordinary courts, which has to date generally proved difficult. It may be that appeals to the Competition Appeal Tribunal will have a greater chance of success.

Mergers in specialist sectors

The Enterprise Act retains specialist merger regimes for transactions in the water and newspaper industries.

By Victoria Ripley

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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