In or around 2020, material changes are expected to be made to the Competition (Jersey) Law 2005 (the "Law") as it relates to the regulation of mergers and acquisitions. This briefing examines the nature and extent of the recommendations for overhauling Jersey's merger control regime ("Recommendations") which were published in September 2016 by the Jersey Competition Regulatory Authority (the "JCRA"). We anticipate that these Recommendations will play a key role in shaping the amendments to the Law.
Current merger control regime
Jersey's merger control regime prohibits the implementation of certain mergers and acquisitions until they have been approved by the JCRA. Broadly, this means that (i) share sales involving a change of control of the target, (ii) business sales involving the transfer of the whole or a substantial part of the assets of the target, and (iii) the creation of full function joint ventures, require the prior approval of the JCRA if any of the following jurisdictional thresholds are met or exceeded:
Horizontal merger: this is where the parties operate at the same level in a supply chain, and the transaction will result in the combined buyer/target group acquiring or enhancing a share of 25% or more of that market in Jersey;
Vertical merger: this is where the parties operate at different levels in the same supply chain in Jersey or elsewhere and one party already has a 25% or more share of supply or purchase in Jersey; or
Conglomerate merger: this is where, regardless of whether the parties operate in the same supply chain, one or more of the parties has an existing share of supply or purchase in Jersey of 40% or more - unless either (a) the target has no activities and no tangible / intangible assets in Jersey, or (b) (i) the 40% share of supply belongs to the seller and is not being sold as part of the transaction and (ii) any restrictive covenants / confidentiality provisions in the transaction documents do not last for more than 3 years and are limited to the target's market.
Obtaining the JCRA's prior approval for a transaction meeting any of these prescribed thresholds is a mandatory requirement. If the approval is needed but not obtained before the transaction is implemented, the transaction is automatically void insofar as it purports to transfer Jersey shares and/or assets and the JCRA has no power to approve or validate it retrospectively.
The current merger control regime is discussed in more detail here.
Difficulties with the current regime
As noted by the JCRA in its Recommendations, "the Jersey regime is out of line with best practice, in that the jurisdictional threshold test is currently based on the parties' so-called "share of supply" of particular goods or services in Jersey". The share of supply test is generally more compatible with a voluntary merger control regime (such as that operated in the UK), rather than a mandatory one (as operated in Jersey).
Consequently, the share of supply test has created a number of issues in Jersey since it was introduced in 2005:
there has often been uncertainty about whether the jurisdictional thresholds are met because (i) the share of supply test is subjective in nature, and (ii) there is frequently a lack of publicly available information by which the parties to a transaction can estimate their respective and combined shares of supply in the local market;
this uncertainty has been compounded by the fact that, as noted above, a transaction requiring the prior approval of the JCRA is automatically void insofar as it purports to transfer Jersey situs shares and assets if the necessary approval is not obtained;
as a result, parties (and their advisers) seeking legal certainty have frequently asked the JCRA for its view on whether the jurisdictional thresholds are triggered in any particular case, even though the Law does not allow the JCRA to provide formal guidance in this context upon which the parties can rely; and
many transactions, including large multinational transactions requiring merger approval in Europe and elsewhere, have been unintentionally caught by the jurisdictional thresholds, resulting in the JCRA's approval being required even where it is clear from the outset that no substantive competition concerns arise in Jersey.
Mandatory turnover test
The Recommendations propose that the existing share of supply test be replaced with a narrower, more objective test based on turnover (the "Turnover Test"). Under the Turnover Test, the prior approval of the JCRA would be mandatorily required if the following thresholds are met or exceeded:
- the combined turnover of the parties in the Channel Islands is more than £5 million; and
- the annual turnover in Jersey of at least two of the parties involved in the transaction is more than £2 million.
Although this mirrors the equivalent test used under Guernsey's current competition law, the Recommendations suggest that the rules for calculating the turnover of financial institutions should more closely reflect the EU, rather than the existing Guernsey, position.
The introduction of a Turnover Test of this nature is aimed at alleviating many of the difficulties that have arisen under the current merger control regime in Jersey. The Recommendations also propose that if the JCRA's approval is needed but not obtained under the new Turnover Test, the transaction in question should not be automatically void if no substantive competition concerns arise from the JCRA's perspective.
Calling in a transaction based on share of supply
Whilst the proposed Turnover Test would appear to be a helpful development, the Recommendations also acknowledge that the proposed monetary thresholds of £5 million (Channel Islands turnover) and £2 million (Jersey turnover) may result in the JCRA not being able to consider the competitive effects of transactions involving smaller businesses which nevertheless have significant local market shares. This raises potential concerns in a small island economy where, depending on the market, the barriers to entry can be high.
Accordingly, the JCRA wishes to have the ability, within a limited period, to call in for review low value transactions involving parties who have a high share of supply in the local market. Although such transactions would not be automatically void in these circumstances, the JCRA would have the power formally to assess the competitive effects of a transaction (and order remedial action where necessary) even if the Turnover Test is not met.
For parties in this position who want certainty that their transaction will not be subject to the JCRA's intervention, the Recommendations in effect open up the possibility of them seeking the JCRA's approval for the deal voluntarily based on their shares of supply and the prevailing conditions in the local market.
As noted above, the merger control provisions currently apply to share sales, business sales and full function joint ventures which meet any of the applicable jurisdictional thresholds. However, as part of the Recommendations, the JCRA has suggested that certain specific types of financial services transaction should be removed from the remit of the new merger control rules, including those involving:
- the temporary holding of securities by financial institutions with a view to resale;
- the acquisition of control by insolvency officers in an insolvency situation; and
- operations by financial holding companies which are designed solely to maintain the value of investments.
The proposal to exclude specific types of transaction in this way, if adopted in the changes to the Law, will help to reduce the number of cases requiring the JCRA's approval and increase the ease and speed with which such transactions can be implemented in the island.
Simpler, cheaper process
At present, the overall process for obtaining the JCRA's approval for a transaction generally takes approximately 6 weeks from submission of the pre-notification draft of the application to the JCRA, assuming all relevant information is provided to the JCRA in a timely fashion and no material competition law issues arise.
Under the Recommendations, the JCRA has proposed the introduction of shorter prescribed form application and a shorter timetable for approval. This would apply to all notifiable transactions if it is clear to the JCRA during the pre-notification phase that no competition concerns are likely to arise (albeit that the
JCRA would reserve the right to require a full submission if any such concerns materialised during its assessment). The associated filing fee payable to the JCRA in respect of the new short form application would also be reduced.
Although the Recommendations contain no details in terms of the likely reductions to the timetable and the filing fee, by way of comparison the existing fast track application procedure which is available in Guernsey for credit and financial institutions takes approximately 3 weeks and the reduced fee is £500.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.