Mergers: when a CMA investigation is likely

What is a ‘merger’?

A merger is where two or more companies or entities are combined to form one body. Sometimes, one company acquires another by way of a purchase, whilst in other cases, the companies pool their interests together. In the case of mergers,a new entity or company is not actually formed.

What’s the law on UK mergers?

Mergers in the UK are governed by the Enterprise Act 2002 (amended by the Enterprise and Regulatory Reform Act 2013. Mergers which quality for review will be subject to investigation by the Competition and Markets Authority (CMA). They are subject to review if their annual UK turnover of the enterprise which is being taken over exceeds £70 million, or where the merger creates a 25% share in a market for goods and services in the UK or a substantial part of it.

Under the Enterprise Act, there is no statutory requirement to notify the relevant authorities when a merger takes place. Voluntary notification can, however, be given – and is considered preferable.

When is an investigation by the CMA likely?

The CMA is responsible for the investigation of mergers which qualify for review. Investigation is deemed necessary in some cases because if the two or more companies merging into the same entity serves to reduce competition in the marketplace, the quality of products or services may diminish, the price may be kept high and technical development may slow down. If this were to be the case,the risk is a substantial lessening of competition.

Though notification of a merger is voluntary, the CMA will open an investigation on its own initiative following, for instance, market intelligence or where there has been a complaint.

What happens on an investigation?

The CMA normally makes interim orders preventing any potentially prejudicial action, such as integrating the merging business.This may include initial enforcement orders on companies to monitor, prevent or reverse pre-emptive action during a merger investigation. It will usually do so when it opens an investigation into a completed merger. Such an order remains in place until the transaction is cleared or the required remedial action is implemented.

A completed merger can be required by the CMA to be unwound if the regulator has reasonable grounds to believe the parties are integrating their businesses. This is Phase 1 of the investigation by the CMA, and it must be started within 40 days of either notification of the merger, or when the CMA receives enough information about the merger to start its investigation.

In Phase 2, the CMA can order that the completed transaction is terminated. This may, for instance, be through disposal of the acquired businesses or assets – probably at lower than market value or otherwise unfavourable terms.

The CMA can also order that the buyer acquires no further shares in the target company without the CMA’s consent. And if a completed merger is referred to the CMA, the merged entity must obtain the CMA’s consent before further integrating the businesses. It can even prohibit the completion of the merger. Where it deems necessary the CMA can accept undertakings from the parties to take the necessary action to prevent or unwind pre-emptive action.

Clearing the merger

If, after investigation, the CMA believes that the merger does not or will not have the effect of substantially lessening competition, the merger will be cleared and no action will be taken. However, it may still impose undertakings on the merger which must be followed by the companies involved.

What’s the EU approach to investigations?

Mergers under EU Law are governed by the EU Merger Regulation. The criteria for investigation is similar than that under UK law as it is concerned with turnover, in this case both worldwide and European wide.If the merger involves companies which have a worldwide turnover of €5 Billion and where the aggregate community wide turnover of at least two of the companies involved is more than Euro €250 million then the European Commission (EC) will investigate the mergers.

In these cases, mergers require prior notification to, and clearance by, the EC. Subject to limited exceptions, the EC has exclusive jurisdiction over concentrations with a Community dimension. There are, however, exceptions such as where the Member State notifies the EC of a national interest issue, or there are issues of national security.

If my company is taking part in a merger, should I be aware of the legislation?

If the company which you own or are involved with has a UK, EU or worldwide turnover which corresponds to the above amounts, you should be very aware of the law. You should particularly be aware that although notification in the UK is voluntary, it is risky (particularly if the merger potentially raises competition issues) not to notify as the CMA could in some cases be more likely to open an investigation into the merger.

If you suspect that a merger involving your company fall within the review criteria, you can take one of these courses of action:

  • Voluntary notification to the CMA to obtain clearance
  • Apply under the statutory merger procedure to obtain clearance
  • Obtaining informal advice on competition matters from the CMA