Mergers: When two companies are combined into one

Definition of a Merger

A merger is when two or more companies or entities are combined into one company or entity. This can be done through one of the companies acquiring the other through purchase or for them to pool their interests together.  In the case of mergers no new entity or company is formed.

UK Law

Mergers in the UK are governed by the Enterprise Act 2002 and will usually be investigated if the annual UK turnover of the enterprise which is being taken over exceeds £70 million or in the case that 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.

UK Investigating Authorities

Under UK Law the following authorities will investigate mergers which fulfil the above criteria:

  • Office of Fair Trading

  • Competition Commission

The Office of Fair Trading (OFT) is the body which will initially investigate the merger in the first instance and then makes a s competition on a particular market as a rivalry between two or more companies seeking to win the business of the end consumers, or consumers. Companies will thus compete against each other on price, quality of the product, technical development etc. If the two or more companies merging into the same entity serves to reduce this rivalry on the market then the quality of the product may diminish, the price may be kept high and technical development may slow down. If this were to be the case then there would be a substantial lessening of competition.

Course of Action

Following examination by the OFT one of the following courses of action will be undertaken:

  • Refer it to the Competition Commission for further investigation

  • Clear the merger

  • Clear the merger, subject to particular undertakings in lieu or reference to the Competition Commission.

Refer to the Competition Commission

If the OFT deems that a merger has resulted or will result in the substantial lessening of competition the Competition Commission will then investigate to further establish whether it has in fact resulted in a substantial lessening of competition. If this is the case then the Competition Commission will take such action it considers reasonable and practicable to address any adverse effects which may arise or have already arisen from the merger.

The Competition Commission is likely to take the following action:

  • Divestment – reduction of an asset or the sale of a business

  • The giving of undertakings which must be accepted for the merger to proceed

  • A prohibition on completing the merger

It is then the job of the OFT to ensure that the directions given by the Competition Commission are followed.

Clear the merger

If after investigation the OFT believes that the merger does not or will not have the effect of substantially lessening competition then the merger will be cleared and no action will be taken.

Clear subject to undertakings

In the case that the OFT does not believe that the merger requires referral to the Competition Commission but that certain aspects of it may lessen competition they will impose certain undertakings on the merger which must be followed by the companies involved. If these undertakings are not followed then the case will then be referred to the Competition Commission.

European Markets

As is the case with other areas of competition if the merger is simply concerned with UK companies and only affects competition on the UK market it will be dealt with by the UK authorities. However, if it affects competition on the European market it will be dealt with under the provisions of European Union Law.

EU Law

Mergers under EU Law are dealt with by the European Community Merger Regulation (ECMR) – Council Regulation 139/2004.

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 Euro 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 will investigate the mergers.

The European Commission will take into account the views of the individual European Union Member States when investigating the mergers with the OFT rather than the Competition Commission providing the requisite views from the UK.

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 then you should be very aware of the legislation. If that is the case you do not need to notify any of the investigating parties of the merger.

If you feel that a merger which your company or enterprise is involved in may fall foul of the legislation then you can undertake any of the three following courses of action:

  • Voluntary notification to the OFT to obtain clearance

  • Application under the statutory merger procedure to obtain clearance

  • Obtaining informal advice from the OFT.