The Enterprise Act 2002 (“EA02”) affords the CMA broad discretion in asserting jurisdiction over mergers that may affect a UK market. Under the EA02, a relevant merger situation (“RMS”) exists where (i) two or more enterprises cease to be distinct; and (ii) either the UK turnover of the target exceeds £70 million (the “turnover test”) or the parties supply or acquire at least 25% of a particular good or service in the UK (the “share of supply test”).
The first limb of the RMS test can be satisfied by the acquisition of de jure control, of de facto control (where it is able to control another company’s policy without holding a majority of the voting rights) or of material influence (where it can directly or indirectly materially influence policy without having a controlling interest ). The material influence test continues to be subject to significant debate.
The second limb of the RMS test aims to ensure that a transaction has sufficient nexus to the UK. The share of supply test is designed to enable the review of transactions which, while they do not trigger the turnover test, are of competitive significance in the UK. This share of supply test has been central to the CMA’s expansive assertion of jurisdiction in a number of recent cases. In Amazon/Deliveroo the CMA took an expansive approach to the notion of material influence. In Sabre/Farelogix the CMA adopted an expansive interpretation of what constitutes the supply of services in the UK, and it also took an expansive approach to the share of supply test in each of Roche/Spark and Google/Looker.
Entities Ceasing to be Distinct
In asserting jurisdiction over Amazon’s proposed 16% minority investment in Deliveroo, the CMA acknowledged that a 16% minority investment would not give Amazon de facto (or de jure) control. However, the CMA found that Amazon would likely be able to exercise material influence. It did so by drawing on a combination of factors which are commonplace in commercial transactions, taking the position that the cumulative influence afforded by “factors that may not necessarily, in themselves, be sufficient to give rise to material influence” amounted to material influence.
Amazon’s shareholding was well below the 25% threshold typically considered to confer the ability to exert material influence. Nor would its shareholding enable Amazon to block special resolutions at a general meeting. However, the CMA found that certain rights enjoyed by Amazon and other provisions in Deliveroo’s constitution contributes to Amazon’s ability to exercise material influence. Further, the CMA concluded that Amazon would have the ability to influence other shareholders in matters of policy, having found that it was a “strategic investor” and “potential future acquirer” with “significant direct operational expertise” in areas that the CMA considered likely to be relevant to Deliveroo’s business.
In addition, the CMA took into account Amazon’s board representation. It argued that the knowledge and experience of Amazon’s appointee, as well as Amazon’s broader relevant knowledge could be expected to carry weight among Deliveroo’s voting directors, both in terms of influencing the outcome of board resolutions and earlier stage discussions relating to the policy of Deliveroo, despite the fact that there were six other voting directors (including Deliveroo’s founder).
Finally, the CMA took into account a number of commercial factors. First, an existing Amazon Web Services (hosting) agreement was considered to provide Amazon with an additional avenue of influence, since the CMA did not consider it realistic for Deliveroo to engage with other potential suppliers during the term of the agreement. Second, it found that the perception of Amazon as a suitable strategic partner for Deliveroo in future commercial arrangements would influence the weight afforded to Amazon’s views on Deliveroo’s policies. Third, the CMA considered there to be evidence that Deliveroo might seek Amazon’s input on an informal basis on commercial and operational matters (not only at board/shareholder level).
The CMA’s approach suggests that it will cast the net wide to identify factors that cumulatively confer the ability to exercise material influence. In its analysis, the CMA does not explain, for example, how the AWS hosting agreement which predated the transaction by some years could contribute to Amazon’s ability to exert material influence. Further, the CMA did not explain how the combination of the disparate individual factors it relied on would enable Amazon to exercise material influence.
The Share of Supply Test
Sabre / Farelogix
On 21 June 2019, the CMA launched an inquiry into the proposed $360 million acquisition of Farelogix Inc (“Farelogix”) by Sabre Corporation (“Sabre”). The transaction did not meet the turnover test. However, the CMA found that the share of supply test was met, since the Parties both supply IT solutions to UK airlines for the purpose of airlines providing travel services information which enables travel agents to make bookings. To establish that Farelogix had a UK share of supply, the CMA drew a supply connection between Farelogix and British Airways which hinged on British Airways’ relationship with American Airlines. Emphasising its wide scope of discretion in describing a specific category of goods or services for purposes of its jurisdictional analysis, the CMA relied on three agreements: a service agreement under which Farelogix supplies its “FLX Service” to American Airlines, an interline arrangement between British Airways and American Airlines, and a corresponding interline distribution agreement between Farelogix and British Airways to enable the latter to receive supply of the FLX Service. The CMA found that Farelogix was supplying the FLX Service to British Airways because it could market interline segments under its interline arrangement with American Airlines.
The CMA put forward two possible approaches to identifying revenue for the service provided to British Airways, namely the fee received by Farelogix from American Airlines to cover the FLX Service provided in relation to British Airways interline segments and the corresponding fee received directly from British Airways. The CMA disregarded the parties’ arguments that the British Airways Agreement merely concerned the establishment of an incidental technical communications connection (via a third-party provider), that Farelogix had not intended to supply the FLX Service to British Airways, and that British Airways had intended to receive the relevant services from American Airlines rather than Farelogix.
The CMA did acknowledge that only a few tickets including a British Airways interline segment were processed through the FLX Service in the relevant time period, such that the revenues were small. However, it noted that EA02 does not require a minimum increment.
On 21 October 2019, the CMA launched a review of Roche/Spark. While the transaction was cleared in Phase 1, it further illustrates the expansive approach to the share of supply test.
The CMA considered that Roche and Spark overlapped in the supply of certain types of novel prophylactic Haemophilia A treatments. Roche’s product, marketed as ‘Hemlibra’, is administered subcutaneously and aims to mimic the action of the clotting factor in healthy individuals. Spark on the other hand is developing two gene therapy products (SPK-8011 and SPK-8016) which involve a one-time administration: if successful, patients will produce their own “clotting factor”. Although only Roche was commercialising its treatment, with Spark merely being in the process of developing its competing treatment, the CMA found that the 25% share of supply threshold was satisfied on the basis of the number of employees working on those treatments in the UK. The CMA noted that significant competition exists between firms well before their products are fully commercialised, such that examining the share of supply on the basis of the number of employees was justified. The CMA further noted that Roche holds 12 UK patents in relation to the treatment of Hem A in the UK, with Spark also having one as well as a number of pending applications in the EU relating to SPK-8011 and SPK-8016.
In Google/Looker the CMA adopted a broad interpretation of the relevant goods that it considered the parties both supplied for purposes of the share of supply test. It found that both parties supply analytics tools which enable the analysis and visualisation of web analytics data, capable of automating the ingestion, analysis and visualisation of web analytics data. The parties unsuccessfully contested this characterisation of their services, arguing that Google offers a full web analytics solution, while Looker’s product lacks additional functionalities typically included in a full web-service, such as the collection and measurement of web analytics data. Though apparently not a bar to the CMA taking jurisdiction, the lack of substitutability of the products was subsequently made clear by customer responses confirming that they did not perceive Google’s products to be a viable alternative to Looker.
The CMA also found no merit in the argument that it had artificially grouped together individual functionalities of web analytics tools for which there is no independent demand.
The CMA is arguably exploring the limits of the RMS test.
Following Amazon/Deliveroo, the CMA appears to be affording itself ever broader discretion as to how the “material” threshold in material influence is to be assessed. It appears to be sufficient for minor factors (including those that are simply assumptions about the acquirer) to combined. This gives rise to two issues in particular. First, it affords the CMA broad discretion to assert jurisdiction where a substantial buyer appoints only a single board member (regardless of the materiality of the influence that it can exert relative to the other shareholders). Second, the CMA will point to expertise at a general level in inferring the ability to exert influence, and rely on that expertise to conclude that such an investor’s views would inherently carry more weight than those of other shareholders.
Sabre/Farelogix and Roche/Spark serve as reminders of the need to carefully consider whether there is any potential parameter which they could be relied on to identify a presence in the UK. Finally, Google/Looker provides a timely reminder that the “share of supply” test does not require the CMA to find a 25% “market share”, such that products and services that are not substitutes can be relied on to meet the threshold.