Mergers

Question 1

When do Merger Controls apply?

In other words, what is the CMA’s jurisdiction to investigate Mergers?

Answer 1

When a Relevant Merger Situation (RMS) has arisen.

P. 541; §23 – EA 2002.

Question 2

When does a Relevant Merger Situation arise?

In other words, what are the Relevant Merger Thresholds (RMTs)?

Answer 2

When:
1. Two (or more) Enterprises, including Associated Persons, cease to be distinct (Completed Mergers, CMs) or will cease distinction (Anticipated Mergers, AMs); and
2. Either the Target’s annual UK turnover exceeds £70m (the ‘Turnover Test’); or
3. The Merged Entity’s (ME) market share in a particular product will be or exceed 25% (the ‘Share of Supply Test’).

Additionally, for Completed Mergers only:
* The Enterprises have not ceased distinction for more than four months before any reference to Phase 2 (the ‘Four Month Rule’).

The Merging Enterprises are hereafter called the ‘Parties’.

P. 541; §23-24 – EA 2002.

For companies trafficking in artificial intelligence, cryptographic authentication, advanced materials, military equipment, quantum technology, or computing processing units, the Turnover threshold is reduced to £1m, and the Share threshold is met if the Target’s sole market share is 25%.

See Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (SI 2018/578); Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (SI 2018/593).

Question 3

What is the definition of an Associated Person?

Answer 3

• A trustee;
• A spouses, partner, or relative;
• A person carrying on a business in partnership;
• A person acting together to secure or exercise control of any Enterprise or assets.

P. 562; §127(4) – EA 2002.

Question 4

What is the definition an Enterprise?

Answer 4

The activities, or part of the activities, of a Business.

P. 542; §129(1) – EA 2002.

Question 5

What is the definition of a Business?

Answer 5

A professional practice, including any non-gratuitous Undertakings.

P. 542; §129(1) – EA 2002.

Therefore, Enterprises are simply any for-profit commercial activities.

Question 6

When are Two Entripses considered to have ceased Distinction?

Answer 6

When they are brought under common ownership or control, of which there are three types.

P. 542; §26 – EA 2002.

This need not be a Merger or Acquisition; albeit rare, economic arrangements with similar competitive effects may be satisfy the RMTs. (See Cineworld, OFT Decision of 17 March, 2008).

Question 7

What are the Three Types of Common Ownership or Control?

Answer 7

• De Jure Control: A singular controlling interest in the Target, i.e. greater than 50% of voting rights.
• De Facto Control: Unilateral control of the Target’s policy without De Jure Control, whether through quorum, Shareholders’ Agreements, etc.
• Material Influence: The ability to materially influence the Target’s policy of behavior in the market.

Notably, a transition between Types may constitute a separate RMS if it may realistically cause an SLC.

‘Policy’ here means management, strategy, etc.

P. 549-550; §26(4) – EA 2002.

In practice, De Jure Control and Material Influence are the types most often cited, as the latter’s overlap with De Facto Control is great and it is relatively easier to prove.

Likewise, Board representation or legal and commercial agreements with the Targets may be materially influential. See. P. 557-558.

Question 8

When may an Acquirer be regarded as having Material Influence over the Target?

Answer 8

In descending order of likelihood:
* 25% (or more) of Voting Rights, as this bestows negative power during Special Resolutions.
* 15%-25%, depending on shareholding distribution, voting history, ancillary rights, and extenuating circumstances.
* Less than 15%, with no such case to date.

P. 551-557.

Notably, successive share purchases during a single two-year period are treated as having occurred simultaneously on the date of the last transaction preceding their merger. See §27(5), §29 – EA 2002.

Question 9

When may a Transfer of Assets be considered an Enterprise?

Answer 9

3. The TUPE Regulations apply;
4. There is a transfer of goodwill;
5. Customer records are being transferred;
6. The Transfer is supported by consideration; or
7. The Assets include sites that facilitate business activity.

P. 543.

Notably, Purchasers need not acquire all of an Enterprise’s components from a single party. Also, for reference, the TUPE Regulations govern the transfer of employees’ T&Cs during M&As.

Question 10

When may a Transfer of Intangible Assets be considered an Enterprise?

Answer 10

When it is possible to identify
turnover directly related thereto.

P. 546; Project Canvas, ME/4477/10, OFT Decision of 19 May, 2010, at [16].

Question 11

If the Target is Liquidated, do the Assets purchased therefrom constitute an Enterprise?

Answer 11

Yes, provided that:
1. The Assets provide the Purchaser relatively more value than an ordinary market purchase of similar production factors; and
2. This added value is because of the Assets having been previously combinatorily employed with each other by the Target.

This is called the Test of Economic Continuity.

P. 545; Société Coopérative v CMA [2015] UKSC 75, at [29].

In other words, if the Purchaser acquires relatively more value because of an economy scale, scope, etc., the Assets constitute an Enterprise.

Question 12

What are the relevant Qualifications when applying the Share of Supply Test?

Answer 12

1. The Parties must horizontally overlap.
2. The Test must be applied practically, enough to allow the Parties to determine whether a Merger qualifies for review.
3. The CMA’s product and market definitions must be reasonably in line with the commercial reality of the Parties’ activities.

P. 571-578.

This test is applied rather flexibly in practice, qualifiers notwithstanding.

Question 13

Regarding Completed Mergers and the Four Month Rule, when does the relevant Time Period begin?

Answer 13

When either:
* Material facts about the Merger are made public; or
* The CMA is provided therewith.

P. 581; §24 – EA 2002; Lebedev v Secretary of State [2019] CAT 21, at [60]–[69].

‘Material facts’ denotes the Parties’ identities and whether the transaction is anticipated or completed, and ‘made public’ denotes general knowledge or ready ascertainability.

Question 14

Regarding Completed Mergers and the Four Month Rule, can the relevant Time Period be temporarily halted?

Answer 14

Yes, if the CMA sends a §109 information request that is ignored or incompletely answered.

P. 583.

Followingly, the CMA would send a §25(2) notice stating that the clock is stopped until a satisfactory response is received.

Question 15

Must Parties notify the CMA of a Merger?

Answer 15

No. Notification is entirely voluntary.

P. 585.

Question 16

For the Parties, what are the Commercial Advantages and Disadvantages of Notifying the CMA of a Merger?

Answer 16

Advantages:
* Hastens the review process, particularly if a Merger will likely be flagged.
* Presenting favourable arguments is preferrable to answering hostile questions.
* Certainty of regulatory clearance and preemption of Interim Enforcement Orders (IEOs) that halt trading.

Disadvantages:
* Attract attention that would have otherwise been avoided.

P. 585-588.

Question 17

What is an Interim Enforcement Order?

Answer 17

A precautionary measure to pause or unwind actions that may prejudice the Investigation or consequent remedial action.

P. 616-618.

The CMA must employ them reasonably and proportionately.

Examples include closing sites, selling equipment, firing employees, etc.

Question 18

On what Grounds may the CMA issue an Interim Enforcement Order?

Answer 18

Reasonable suspicion of an Anticipated or Completed Merger.

P. 618.

Accordingly, the establishment of an RMS proper is not necessary. Standard practice is to impose IEOs on all Completed Mergers and Anticipated Mergers that will complete during the Investigation, although mere Anticipated Mergers are also susceptible.

Question 19

When with the CMA grant a Derogation from an Interim Enforcement Order?

Answer 19

• When it is instrumental to the Parties’ continued viability or competitiveness, or
• When it is presented with compelling evidence against the risk of prejudicial action.

P. 624.

Question 20

What is the Standard for determining whether a Relevant Merger Situation should be progressed to Phase 2?

Answer 20

Whether the CMA reasonably believes:
* It may be the case;
* That a Merger may cause an SLC;
* Based on an objective view of the facts.

This is also known as the Doubly May Test.

P. 541; §22(1), §33(1) – EA 2002, IBA Health v OFT [2004] EWCA Civ 142.

If this standard is satisfied, the CMA is under a duty to refer it forward.

Question 21

What are the Statutory Exceptions to the CMA’s Duty to Refer?

Answer 21

5. The Four Month Rule applies.
6. The SOS has issued an intervention notice under §42(2) – EA 2002.
7. The CMA has accepted undertakings in lieu of a reference (UILs).
8. The relevant market(s) is not of sufficient importance to justify making a reference;
9. Any relevant customer benefits outweigh the SLC and its adverse effects;
10. Regarding AMs, the relevant arrangements are not sufficiently far advanced or likely to proceed to justify a reference.

P. 595; §22(2), §32(2) – EA 2002.

Question 22

Regarding the Duty to Refer, how does the CMA determine whether a Market is of Sufficient Importance?

Answer 22

By performing a cost-benefit analysis of intervention, factoring in:
* Market size.
* Projected gain:loss ratio.
* Duration of prospective SLC.
* Magnitude of prospective SLC.
* Probability of prospective SLC.

P. 598.

Regarding market size, £15m generally justifies the cost of intervention, whereas £5m-£15m will depend on whether UILs are available, and below £5m will generally not.

Question 23

Regarding the Duty to Refer and Markets in Size between £5m-£15m, when will the CMA accept UILs rather than Investigate?

Answer 23

When UILs can cleanly and efficiently resolve the prospective SLC and neutralize the risk of Customer harm.

P. 599.

The CMA is partial to accept UILs becauase they are more cost-effective than full-blown Investigations.

Question 24

Upon Escalation to Phase 2, what must the CMA prove?

Answer 24

That, on the balance of probabilities:
* The Merger constitutes an RMS; and
* Has, or will, cause an SLC.

P. 656.