Competition & Markets Authority review of its new merger procedures: a pat on its own back with some areas for improvement
Two years on from its creation, the CMA has been looking at how things are going with its new merger procedures and has published a short paper setting out its findings. The results provide useful practical insight into the workings of the CMA that merging parties would do well to heed when considering the costs and timescales of notification.
The reforms to UK merger control procedures introduced in April 2014 were not dramatic but made some important practical changes. These included the mandatory use of a prescribed form of Merger Notice for parties wishing to notify a merger to the CMA and enhanced powers for the CMA to make orders preventing the integration of the merging businesses before completion of the CMA's review (Initial Enforcement Orders or IEOs). These formed the basis for the CMA's review.
Merger Notices and pre-notification
The CMA reviewed around 20% of cases considered up to December 2015 and consulted merger control practitioners. In general, the CMA found that the new Merger Notice was working well. However, concerns were raised about the duration of the pre-notification process – a perennial bugbear in merger control which seems to have been exacerbated by the introduction of the new, more formal, procedures.
The CMA found that:
- On average, pre-notification lasted 33 days for all cases in April to December 2015, taken from the date of receipt of the first draft Merger Notice (however incomplete). From submission of a materially complete draft Merger Notice, the average length of pre-notification was 11 days. The current target is to conclude pre-notification in 20 working days (four weeks) from first submission.
- Pre-notification tends to be longer in cases involving: (i) completed mergers; (ii) multiple products or geographic markets; (iii) industries that have not previously been analysed by the CMA / OFT; and (iv) an assessment of an alternative counterfactual.
- For half the pre-notification period, the case rests with the CMA.
- In most cases, the CMA sent more than one follow-up request for information (RFI) in pre-notification. In more than 50% of cases there were more than two RFIs in pre-notification and, on average, an RFI had around 13 questions. The most frequent follow up questions relate to internal documents, share of supply data and competitor and customer contact details.
Practitioners also raised concerns about disproportionate information requests that often relate to theories of competitive harm that should have been ruled out at the outset. The CMA's analysis showed that it was only rarely that theories of harm analysed at the outset were not included in the final decision, noting that they had introduced more senior support to case teams at an early stage to help with scoping and tailoring the issues in pre-notification.
The CMA concluded that, while it has become more targeted in its information requests, the length of the pre-notification process could be reduced. It is therefore proposing:
- Clarification of the Merger Notice guidance notes and minor changes to the Merger Notice template.
- Incremental changes to the pre-notification process, including:
- earlier engagement with company management in cases of markets not previously assessed by the CMA;
- engagement with third parties (subject to the parties' consent) during pre-notification in order to better scope and eliminate theories of harm;
- more proactive engagement after sending enquiry letters in the case of completed mergers, including explanations for the investigation;
- continuing to pro-actively engage with small and medium sized businesses seeking merger control clearance; and
- being open to early discussions in relation to using the procedure for fast track referral to Phase 2, where appropriate.
Initial Enforcement Orders
IEOs are routinely made by the CMA at the beginning of reviews of completed mergers, usually within two to three working days of the CMA being notified that the merger has completed. The CMA sees IEOs as important to prevent pre-emptive integration that could make the implementation of remedies more costly and difficult.
Comments from practitioners, however, suggest that IEOs are burdensome to comply with and can make it difficult for the target business to continue to operate viably during the merger review process. Of particular concern is an impression that the CMA is inefficient and inflexible in granting derogations from IEOs.
Whilst not accepting this criticism, the CMA is proposing a number of incremental improvements to the process for imposing and granting derogations from IEOs:
- Publication of a guidance note on the CMA's approach to derogations.
- Improved internal process for dealing with derogation request whilst encouraging parties to make any derogation requests early.
- A medium term project (i.e. over the next two years) to consider whether there might be objective circumstances in which IEOs would be disproportionate for certain completed mergers.
Incrementally does it
Incremental changes are great. Add them together and you get a big change with nobody even noticing; if a few go wrong, no harm is done. No wonder the CMA is so keen. But whether these minor tweaks to the CMA's merger processes, some of which it is doing already, will make much difference remains to be seen. The statutory 40-working day period for Phase 1 merger decisions, combined with the low threshold for referral to Phase 2, mean that UK merger filings look set to remain a costly and time-consuming process.