This article is written by Amruta, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
In simple terms, merger control means scrutinizing mergers that pose a threat to the economy. During the liberalization era, few countries recognized the importance of merger control, and today, nearly 120 countries have competition/antitrust laws in place as per the Cartels and Anti-Competitive Agreements book by Sandra Marco Colino. Over the period, the global economy has seen changes and it is the need of the hour and a burden on the policymakers to track unfair trade practices in the business world which degrade the welfare of the consumers. The test for ascertaining the effects of the merger on competition is almost similar in every country with minor differences. Few countries have a mandatory information system while few have a voluntary setup. India, China, Indonesia, Japan, etc. have a mandatory pre-closing requirement whereas countries like Singapore, United Kingdom (UK), New Zealand, and Australia have a voluntary filing process in place.
Need for Merger Control
So, before talking about merger control in the UK, let’s take a look at why we need to control mergers in the first place. By correlating merger with marriage, just like marriages are made in heaven in a similar manner mergers are made in the Boardroom with the approval of shareholders and other authorities. But, the question is when we have the freedom to marry anyone, why isn’t the same freedom granted in terms of mergers? Why do entities have to approach authorities when they cross a certain combined number? Well, in simple terms the main reason for controlling the merger is safeguarding the competition in the economy. Merger control revolves around one basic principle i.e. to curtail the dominant position which in turn affects fair play in the competition. And once the merger disturbs the competition in the economy there is a devastating effect on the interest and welfare of the consumers.
Mergers concluding to a dominant position will lead to wealth creation for the shareholders but in the long run, will negatively impact the economy. The impact on the economy depends on the reasons for the merger. The merger which aims at improvising a product or service leads to a better economy, but the ones which curtail the competition by abuse of the dominant position by a stronger entity in the market thereby deleting the new entrants has a negative impact. When a strong force tries to throw away any other entrant from the market there is no scope for innovation and the consumers will have to bow down to whatever is offered by the stronger entity as they won’t be left with a choice.
One such well-known example is anti-trust suit against Facebook by the US federal government wherein the company is accused of abusing its dominant position and blocking entry to new competition. Instead of having a fair play, Facebook has over the years misused its position and acquired all those entities which were possible threats to its competition. All this being done at the expense of the consumers. Gladly the United States Federal Trade Commission (FTC) has started the investigation against the company. Ian Conner, director of FTC’s Bureau of Competition, has said in a statement that “Facebook’s actions to entrench and maintain its monopoly deny consumers the benefits of competition. Our aim is to roll back Facebook’s anti-competitive conduct and restore competition so that innovation and free competition can thrive.”
Facebook has by hook or crook maintained its dominant position in the social media world and this was clearly evident when the news broke regarding the acquisition of its competitors Instagram and WhatsApp which has left no option for the consumers as well as the advertisers in the social media industry. The lawsuit also mentions certain restrictive trade practices relating to application programming interfaces and one such example is vine app which was a short video application by twitter. It is high time that we acknowledge such trade practices and focus on the social media application which are often left unregulated. The US government has finally opened its regarding the impact of Information Technology industry and it will be interesting to see how the case unfolds.
But imagine the fate of the competition without control? There would have been chaos due to the dominant player exploiting its power without any authority to answer and the economy would have been at a standstill concerning innovation and improvisation.
One such piece of legislation in the United Kingdom is the Enterprise Act 2002 which curtails anti-competitive behaviours of the business and non-compliance of the same has severe consequences.
Introduction to merger control in the UK
Merger Control in the UK is regulated by the Enterprise Act, 2002 under Part 3 which was amended and took effect from 1st April 2014. Since the amendment, the merger and its effect on competition are regulated by the Competition and Markets Authority (CMA), abolishing the competition commission and Office of fair trading in the UK. Just like combinations are controlled in India by the Competition Act, 2002 the same way mergers are controlled by the Enterprise Act, 2002 in the United Kingdom.
Merger Authority in the UK
The independent and non-ministerial CMA is the regulator and investigating body for Mergers and their control. It comprises executive and non-executive members. Also, it has a Board of independent members having experience in different areas of business.
Apart from the above authorities, the UK government has the power to intervene in certain mergers which affect the public interest.
Process of Merger Control in the UK
The UK merger control regime is discretionary i.e. the parties to the merger are not under obligation to report the merger to the CMA but it has a legal duty to investigate the transactions. The entities may choose to inform the CMA if they cross a threshold limit or the CMA may on its own decide to scrutinize the merger in case of threat to the competition. Most of the regulatory bodies across the globe investigate mergers in two phases and the same is with the UK regime.
The 1st phase is to check if any merger has any adverse impact on the competition and if yes then the merger is thoroughly scrutinized in phase 2. The time frame to conclude its decision of phase 1 is around 40 working days and if an entity qualifies for phase 2 the same has to be completed in 24 weeks. All the entities selected by the CMA will have to go through phase 1 investigation but a few will go through phase 2 for a detailed check. After phase 2, CMA may suggest changes in the deal or may pass an order to prohibit the same. In a case where a merger has already taken place, the CMA may pass an order to unwind the deal. CMA has its own market intelligence wherein even though the merging entities do not notify the CMA about the transaction, it will on its initiative the investigation.
The CMA has the authority to issue initial enforcement orders (IEO) to the merged entities who are liable for phase 2 investigation. These IEO are issued to prevent the merged entities to take any further business integration steps pending the phase 2 investigation. It is done to avoid the business merging so that if any order is passed by the CMA to unwind the merger it would be easy to implement the same.
Government intervention in merger control
The CMA acts as a standalone body and the decision whether to approve or reject a merger in phase 1 is taken by the Executive director or any senior member of the board. The CMA will decide whether any merger should go through phase 2 investigation only when there is a negative impact on the competition i.e. if the merger decreases the competition in the market.
Once the CMA decides to conduct phase 2 investigation the same is done by an inquiry group(panel) consisting of not more than 5 members. A thorough analysis is conducted by the members and a decision is taken whether to reject the merger or to suggest any remedies. And in case the merger involves public interest in the relevant areas the Ministry of government has the authority to take over the investigation ahead. This power to intervene is usually exercised by the Secretary of the state especially for Business, Energy, and Industrial Strategy, and Secretary of state for Digital, Culture, and Media Sports. The CMA has an advisory role to the secretary of state in matters which involve public interest. The jurisdiction of the secretary of state is limited to certain sectors such as media, national security, finance, and the health sector. But the Secretary of the state can nevertheless intervene even when the merger does not involve the above sectors especially when it has a wider impact on the public interest.
Once the merger affects public interest the Secretary of state issues a public interest intervention notice (PIIN). The Secretary of state will take over the investigation right from phase 1 and will be the decision-making authority. The Secretary of state may either pass or prohibit the transaction in part or whole.
The Secretary of state will determine if the transaction:
- Be cleared at the end of phase 1 investigation after certain undertaking from the parties; or
- Referred to phase 2 for any concerns over public interest; or
- May decline to investigate the case because it lacks public interest.
The secretary of state will decide what remedies are to be followed by the entities to resolve the public interest issues, which may include prohibition on the transaction as well.
Earlier there were only 3 sectors in which the government could intervene i.e. media, finance, and national security but later health sector was also added by Enterprise Act 2002 (Specification of Additional Section 58 Consideration) Order 2020. The health sector was included considering the Covid-19 pandemic but the jurisdiction is not limited to the current scenario rather it extends to all the future health sector mergers which will impact the public interest. A more detailed report is awaited considering the change which will bring more transparency to the applicability of the regime to the health sector.
Offenses and Penalties
The CMA has the power to impose a fine, can initiate civil and criminal proceedings for non-compliance of the orders, impose interim measures, withholding, suppressing, or destroying information, etc.
On 24th September 2019 the CMA fined Paypal for its acquisition of iZettle. The fine was for breach of Interim enforcement order (IEO). When an IEO is issued to the merging entities, they have to stop any further integration activities until the investigation is completed. In this case Paypal failed to follow the same and hence was fined heavily.
Effect of the BREXIT
Finally, the UK separated from the European Union on 31st December 2020 officially. And with the exit, a lot of things have been changed. It has also impacted the merger control regime. The one-stop-shop regime where the mergers were under the purview of either EU or UK regime ceases. But in certain exceptional cases, the EU will be responsible for the merger control cases as mentioned in the withdrawal agreement.
For other mergers not mentioned in the agreement will come under the review of both EU and the UK regime which was not the case earlier. During the transition period of 1 year, the EU reviewed the merger and the review was also applicable to the impact of the merger on the UK, but now as the transition period is over the CMA and EU both will investigate the merger control which is evident from the Agreement on trade and cooperation between UK and EU. Because of this, the CMA has extended authority.
The UK merger control regime being voluntary the merging companies don’t have to wait for approval from the authority but on the other hand the CMA through its market intelligence tracks these mergers which may be a surprise and a shock as well. So, for the sake of avoiding any later hurdle, it would be better for the entities to submit the merger for review. Once the merger is in question it can be time-consuming and may impact the business especially if entities are already merged and the CMA orders to unwind the transaction they won’t have a choice but to follow the orders of the CMA.
The UK merger control regime seems more aggressive as compared to the Indian Competition Act, 2002. But considering the kind of market manipulation a monopolistic entity does it is the need of the hour for the parliament to be more vigilant on such combinations as at the end it is the consumers who suffer due to the lack of competition in the market and have to bow to these big giants in the economy.
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