What do you need to know?
Following a call for information earlier this year, the UK’s Competition and Markets Authority (CMA) has now announced the changes it intends to make to its merger review process. The majority of the changes are to the Phase 2 process, which is only encountered in a minority of formal reviews, namely those where the CMA believes the merger could lead to a substantial lessening of competition – at the time of writing, of the 72 transactions qualifying for investigations under the merger provisions of the Enterprise Act 2002 since 1 January 2022, 17 (24%) of these were referred to Phase 2 (whereas around 10% of non-simplified merger review procedures lead to a Phase 2 review in the EU). These changes largely seek to make the Phase 2 process more interactive, with a view to arriving at acceptable remedies proposals sooner in the process. The proposed changes follow a period of criticism of the CMA’s approach to merger enforcement and reflect a desire to improve the effectiveness of the UK merger review process. The proposed changes are being consulted on until 8 January 2024.
Why is the CMA revising its Phase 2 procedures?
The amendments are being introduced against the backdrop of the UK’s exit from the EU. Post-Brexit, global deals that could affect competition in the UK and would previously have been the reviewed by the European Commission under its “one-stop-shop” principle are now often reviewed by the CMA in parallel, giving rise to divergent outcomes on clearance or acceptable remedies with surprising frequency. As the CMA’s responsibility has increased, so too has the brightness of the spotlight on its approach to merger enforcement which has also exposed the fact that the EU and UK merger processes are often not in sync. As explained below, some of the CMA’s proposals bring the UK process closer to that of the European Commission, suggesting that limiting (procedural) divergence could be a key driver behind these changes.
Strategic Steer reinforces the need for efficiency and proportionality
In parallel with the CMA’s review of, and proposed changes to, its Phase 2 procedures, the UK government has published a revised “strategic steer”. The strategic steer outlines the “government’s expectations for how the CMA should approach its work”. The CMA is expected to have regard to the steer when it sets its strategy and when it makes decisions on where to focus and prioritise its finite resources. In particular, the Strategic Steer states that the CMA should focus on “creating a pro-competition, pro-growth, pro-investment environment”.
The UK government also wants the CMA to reduce the burden on businesses engaging with the CMA and taking a proportionate approach to interventions, with the additional proposal by the government to introduce a statutory duty of expedition in relation to the CMA’s functions. To some extent, the CMA has pre-empted the steer of reducing the burden on business by making several changes that bring the CMA’s process closer to that of the European Commission’s, creating greater efficiencies for merging parties subject to parallel reviews. The government’s steer also notes the continuing focus on digital markets and sustainability, and the CMA’s cooperation with other competition authorities as well as UK sector regulators.
The importance of well-functioning competition regimes as a prerequisite for attracting investment is therefore recognised in both the UK government’s position, as well as the CMA’s review of its Phase 2 procedures.
What are the proposed changes, and how will they change the Phase 2 process?
- Streamlining.
The proposed changes will streamline the beginning of the Phase 2 process. The Phase 1 decision will be the foundation of the Phase 2 review and there will be earlier opportunity for substantive dialogue with the Phase 2 panel. This could perhaps provide an incentive for parties to try to fast-track a more difficult case to Phase 2 rather than spend time on the Phase 1 review.
The CMA proposes to abolish the Phase 2 issues statement which sets out the theories of harm on which it will focus. Instead, the CMA will use its Phase 1 decision to identify any issues to be assessed in Phase 2, and then invite initial submissions in response as the beginning of the Phase 2 process. We note the parallel with the EU regime, where parties are first notified of any concerns raising serious doubts as to its compatibility with the common market at the simultaneous conclusion of Phase 1 and initiation of Phase 2.
Further, the CMA’s provisional findings will be replaced with an Interim Report setting out its views on jurisdiction and substance, with the main change being that this will be published sooner in the Phase 2 process. Whilst these may make the assessment less definitive throughout the process, they would helpfully speed up the review process by enabling the Inquiry Group to identify, discuss and assess complex factual and competition issues earlier during its review.
- Increased engagement.
The CMA intends to make several changes to increase the frequency and quality of engagement with merging parties. It intends to: (i) introduce an ‘initial substantive meeting’ as an additional opportunity at the beginning of the Phase 2 process for the parties (and potentially third parties) to present their case to the Inquiry Group in person; (ii) hold an expanded ‘centrepiece’ main party hearing in which the merging parties and/or their advisers will be able to respond to the Interim Report in person through extended oral submissions; (iii) formalise the ‘teach-in’ process at the outset of the Phase 2 investigation, putting the merging parties before the CMA to explain their business operations and how the relevant markets function from a commercial point of view; (iv) increase the frequency of informal update calls throughout Phase 2 (with a view to, amongst other things, encouraging remedies discussions at an earlier stage); and (v) provide for direct engagement between the CMA and the merging parties’ economic advisers.
- Remedies.
Further proposed changes would: (i) introduce an early opportunity to engage with the Inquiry Group where the parties table a detailed remedy proposal, and establish additional prompts for merging parties to consider “without prejudice” remedies discussions earlier in the process; and (ii) where relevant, give the power to hold at least one meeting to discuss remedies with a view to arriving at an acceptable remedies proposal sooner. This will address received feedback that remedies are discussed at too late a stage in the review – i.e., that the remedies are discussed after the decision whereas other regimes, such as the European Commission’s, take this into account before ruling on clearance. Companies will benefit from increased multi-jurisdictional harmony and a more efficient process overall. The CMA is also proposing to hold a new final remedies call with the merging parties.
- Access to File
The CMA ultimately decided not to increase transparency by granting access to the file of third party views on the reviewed transaction. Other regimes, such as the European Commission, do grant access to file, which we view as a beneficial measure enabling constructive discourse around potential remedies to obtain clearance. Amending the merger review process to allow full access to the file is a frequent request from market participants, but the CMA noted that the Competition Appeal Tribunal has consistently affirmed that the CMA’s approach is appropriate, and that granting full access would reduce third parties’ incentives to cooperate.
Conclusion
The proposed changes are intended to shift the Phase 2 process from the current inquisitorial approach to a more cooperative and interactive approach. Many respondents expressed the wish for earlier direct engagement with the Inquiry Group to accelerate the process of getting the CMA acquainted with the transaction and the parties’ activities. Taking a step back, the CMA notes that realising the full range of benefits these amendments could bring will require merging parties (and their advisers) to invest in the process by engaging constructively with the opportunities presented by the revised Phase 2 process, for example by proposing credible remedies offers (rather than holding back their “best and final” offers).
In addition to increased engagement with merging parties, another important potential impact of the changes is earlier engagement between the CMA and other international competition authorities, such as the European Commission and the U.S. Federal Trade Commission. The CMA notes that as a result of its amendments, the Inquiry Group will be able to issue-spot in the UK sooner and thereby engage with other regulators sooner, allowing it to recognise similarities and differences in market conditions in the jurisdictions of these other authorities. The CMA claims that this will lead to greater transparency and will also help merging parties to prepare multi-jurisdictional remedies. However, whether a greater alignment of the CMA Phase 2 process with the in-depth review in other jurisdictions will lead to an increased alignment on substance and remedies remains to be seen. Following several high-profile examples of divergence in merger review outcomes between the UK, EU and U.S. (including, most recently, Microsoft/Activision), the CMA’s Chief Executive has cautioned that it “is inevitable that there will be instances of divergence – whether that reflects differences in market features, evidence base, differences in our statutory duties and legal frameworks or, on occasion, differences of judgment”.
Next steps
The CMA’s proposed changes do not necessitate any statutory amendments. Rather, they will be incorporated into the CMA’s broader revision of its merger guidance, alongside further updates to reflect the CMA’s recent experience in Phase 1, and judgments from the Competition Appeal Tribunal. The consultation on this guidance is open until 8 January 2024.