In Part Five of our DMCC Bill in Focus series, we will consider the impact of the Bill on the UK merger control regime.

Since its introduction to Parliament in April 2023, the Digital Markets, Competition and Consumers Bill (the Bill) continues to attract a lot of attention. With the Competition and Markets Authority (CMA) investigating significantly more mergers following Brexit, the merger control reform aspects of the Bill refocus the CMA’s efforts in ensuring scrutiny of transactions with the most potential to harm UK competition.

The Bill aims to achieve this refocus through a combination of deregulation of general merger control requirements (to capture fewer benign deals) as well as new regulatory measures which aim to address gaps in current jurisdictional thresholds. The perceived gaps concern potentially problematic mergers between current non-direct competitors operating in different supply chain segments or adjacent markets (vertical and conglomerate mergers).

The current UK merger control regime is voluntary and non-suspensory, meaning that there is no legal requirement to notify a merger to the CMA prior to completion and parties are not prevented from completing and implementing a transaction in advance of receiving merger clearance from the CMA. The voluntary aspect of the regime is a key factor in ensuring that the CMA only investigates a small portion of mergers so as to allow minimum interference with UK businesses and less costs for the CMA.

Except in respect of mergers with national security considerations or other narrow public interest dimensions, for the CMA to have jurisdiction under current merger control rules, it must be anticipated that two enterprises will cease to be distinct (typically, this is because one business acquires another) and, either:

(a) The business that is being acquired must have a UK turnover of more than £70m (the Turnover Test); or

(b) The merger would result in the creation or enhancement of at least a 25% share of the supply of particular goods or services in the UK, or a substantial part of the UK (the Share of Supply Test).

As regards the Share of Supply Test, to qualify, the merger must result in some increment to the share of supply, however widely or narrowly the relevant frame of reference is drawn; it is not enough, currently, for one party to have a share of 25% or more, if the other party has none.

Target turnover threshold increases

The Bill will amend the general jurisdictional thresholds for mergers so that the threshold for the Turnover Test will increase from £70m to £100m.

This is an effort to bring fewer benign cases within the CMA’s jurisdiction and reduce unnecessary burdens for businesses when carrying out mergers which are unlikely to impact competition. It is reflective of a much-needed update to allow for inflation (noting the £70m turnover threshold has been in place since it was introduced in 2003).

The Share of Supply Test will remain unchanged by the Bill save in respect of “killer acquisitions” (see below).

Safe harbour

A new “safe harbour” will also be introduced by the Bill, meaning that mergers will be exempt (regardless of share of supply) where no party to the merger has more than a £10m UK turnover.

This change is aimed strengthening the CMA’s ability to reliably capture potentially problematic transactions whilst reducing the burden on (smaller sized) mergers which are considered less likely to be harmful. This measure will no doubt offer welcome certainty to smaller businesses seeking to merge.

Public interest interventions in media mergers are not affected by the increase in the Turnover Test and the introduction of a small merger safe harbour.

The Secretary of State will retain the ability to intervene in mergers where at least one of the enterprises concerned is a media or newspaper enterprise and where the target’s turnover is over £70m as well as where at least one of the enterprises concerned is a media enterprise or a newspaper enterprise and the Share of Supply Test has been met, even if none of the enterprises has UK turnover of over £10m.

New “acquirer-focused” threshold to target “killer acquisitions”

Within the Impact Assessment of the reforms to merger control, it was cited that competition may have weakened since 2008 in several sectors. One of the key issues recognised by the UK Government was that “killer acquisitions” can escape CMA intervention due to gaps in current jurisdictional thresholds.

A killer acquisition involves a scenario where a large firm (Firm A) acquires a small innovative firm (Firm B) in an adjacent market to the one in which Firm A’s main activities currently fall. The aim, and/or consequence, of this acquisition may either be the elimination of Firm B (as a future rival) or the elimination of innovations that threaten Firm A.

While the larger acquiring firm in question may disagree with the deal being categorised in these terms (they may argue that the acquisition unlocks investment opportunities that would not exist otherwise) the CMA views killer acquisitions as a threat to future competition and innovation, given that they could disincentivise Firm A to pursue innovations that they would otherwise have needed to in order to compete with Firm B as a rival. Firm A may even shut down a rival Firm B product rather than allowing it into the market, limiting the range of products available to the consumer.

Acquisitions of this nature can occur across the economy but are thought to be particularly prevalent in the pharmaceutical and digital sectors.

As a result of these concerns, a new jurisdictional threshold has been introduced by the Bill which appears to be directed at tackling killer acquisitions (and other mergers involving significant market players) which may harm competition in the UK. The threshold applies in the following circumstances:

  • one of the parties to the merger has an existing share of supply of at least 33% of goods or services supplied in the UK or a substantial part of the UK;
  • this party also has a UK turnover of over £350m; and
  • a different party to the transaction (typically the target) is a UK business or body, carries on activities (or part of their activities) in the UK or supplies goods or services in the UK.

Whilst the threshold does not distinguish which party must have the 33% share-supply, in practice, the new threshold is more likely to apply to acquirers (and this is reflected in various supporting documents including the “Explanatory Notes” to the Bill which refer to this as an acquirer-focussed threshold).

This 33% share of supply threshold crucially differs from the general Share of Supply Test in that it does not require any increment in the share of supply as a result of the proposed merger – i.e. there does not need to be any overlap in terms of the parties’ activities for a merger to be in scope of these new rules; a party can satisfy the 33% requirement in itself. This provides the CMA with the ability to more reliably investigate mergers between non-direct competitors where needed.

It is estimated that the new threshold will result in 2-5 additional Phase 1 cases per year (although this may be offset by the inevitable decrease in cases subsequent to the increased target turnover threshold and, potentially to a greater degree, implementation of the safe harbour).

This new “acquirer focused” threshold is also likely to capture acquisitions by firms which have been designated “SMS” firms and may also be subject to mandatory reporting (see below). These firms must therefore be particularly vigilant in applying these rules concurrently with general merger control requirements when engaging in merger activity. 

New mandatory “duty to report” for SMS firms

In Part Four of this series, we looked at when a firm would be designated as a Strategic Market Status (“SMS”) firm and some of the consequences of such designation.

One key development is the introduction of mandatory notification obligations for SMS-designated firms where a deal meets certain control and value thresholds. Unlike normal merger control rules, this includes cases where an SMS firm simply increases its shareholding without acquiring control of the target. These new rules are designed to improve transparency and give the CMA much clearer visibility of the kind of merger activity that SMS-designated firms are engaged in.

Under the proposed rules (and in contrast to the general voluntary UK merger control regime which will continue to apply for mergers not meeting the relevant requirements) SMS firms will be required to report mergers (prior to completion) which result in an entity within the SMS corporate group increasing the percentage of shares and/or voting rights it holds in a “UK-connected body corporate” to or beyond any of the following “qualifying status” thresholds:

  • from less than 15% to 15% or more;
  • from less than 25% to 25% or more; and
  • from 50% or less to more than 50%;

but only where the merger has a total consideration value of “at least £25m” for the voting or equity share (broadly defined and calculated to include direct, indirect and deferred consideration).

For joint ventures, the qualifying status requirement is simply that 15% of shares and/or voting rights in the venture vehicle (which is expected or intended to be classed as a UK-connected body corporate) will be held by an entity within the SMS corporate group. The value of consideration contributed to the joint venture (including capital and assets) must also be at least £25m to trigger the reporting duty.

Note, for both categories of reportable event (target and joint venture) a body corporate is UK-connected if it, or any of its subsidiaries carries on activities in the UK or supplies goods or services to any person in the UK.

Mergers involving SMS firms which meet the above criteria will need to be reported to the CMA in a prescribed form before completion (or establishment of the relevant joint venture vehicle). The report submitted will likely be less detailed than a full merger notice, but nonetheless, must give the CMA adequate information to be able to decide whether to open a Phase 1 merger investigation or make an initial enforcement order. Following receipt of the report, the CMA will have 5 working days to confirm if it accepts that the report is sufficient.

Following acceptance, there is then a further 5 working day “waiting period” (beginning with the first working day after notice of acceptance) during which the deal cannot complete.

If an SMS firm fails to notify a reportable merger without a reasonable excuse, the CMA can impose fines up to 10% of the firm’s worldwide turnover under Part 1 Chapter 7 of the Bill.

Procedural changes

The Bill will also introduce several procedural changes to the UK merger control regime:

Enhancement of the fast-track procedure

On request of the merging parties, a Phase 2 reference can be fast-tracked without any acceptance of, or investigation into, the existence of a substantial lessening in competition (SLC) or Phase 1 investigation.

This may be particularly useful in allowing parties to receive a quicker outcome where the potential for a merger to create a SLC is high (and therefore likelihood of a Phase 2 investigation is high) for instance when it involves two firms with a large market share.

This should streamline merger review procedures and timelines by removing certain statutory duties on the CMA that currently limit the usefulness of the existing non-statutory fast-track procedure.

Timeline extension

The Enterprise Act 2002 will be amended to enable the CMA and parties to mergers or public interest mergers to mutually agree to extend the statutory timeline for Phase 2 investigations (timelines currently require the CMA to publish its report within 24 weeks from the date of the merger reference) by stopping the clock.

While the legislation does not set out the specific circumstances in which the CMA and the parties involved in a merger can agree an extension, it is most likely to be useful in support of early consideration of remedies and/or in multi-jurisdictional mergers to align case timetables where the merger is being considered overseas in parallel to the CMA’s assessment.

The precise length of an extension period will need to be agreed between the CMA and the merger parties.

Online publication of merger notice

In addition to the more substantive procedural changes, there will be a requirement for the CMA to publish merger notices online (e.g. on the CMA website) instead of in the London, Edinburgh and Belfast Gazettes.

What will these changes mean in practice?

The updates to merger control being introduced by the Bill represent a shift in focus by the CMA and a reaction to increasingly complex and fast-moving markets. Broadly, the measures seek to improve market efficiency and consumer outcomes and reduce costs and timetables for merger reviews with greater clarity regarding jurisdiction.

The Bill proposes some interesting changes for all merging businesses with measures impacting the full range of small to supersized market players. The Bill should offer greater certainty for smaller merging parties, increased scrutiny and reporting for significant merging parties and a more effective toolkit for the CMA to tackle mergers between current non-direct competitors. In particular, significant market players and designated SMS firms should be prepared for increased compliance burdens.

The Bill is currently progressing through the House of Lords before amendments are considered and it is given royal assent. The Bill is not expected to be in force before Autumn 2024 and further amendments may yet be introduced. We recommend all parties considering in engaging in M&A monitor the progress of the Bill through Parliament and carefully consider how changes to the rules could affect future transactions.

Contributors: Charlotte Mapston and Meghan Sugrue

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Written by

Charlotte Mapston

Charlotte Mapston

Date published

14 December 2023

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