UK merger control law – The goalposts are moving

23 / 04 / 2018

There are plenty of things to worry about when planning a merger. But top of the worry list must be the possibility of governmental or regulatory intervention, either to block the merger before it occurs, or (even worse) to require that it be unscrambled ex post facto. True, this nightmare scenario seldom happens at the moment. But it could become a more frequent occurrence if and when the government’s planned changes to UK merger law are implemented.

As so often in law reform, it all boils down to moving the goalposts. So we shall cast a beady eye on where the goalposts stand at the moment, and how far they are due to be shifted.

The current position

Most of us know that the principal competition law regulator in the UK is the Competition Markets Authority (CMA). And many of us are aware that the CMA’s jurisdiction includes (amongst other things) the power to review a transaction if there are reasonable grounds to suspect that a “relevant merger situation” (RMS) will thereby arise. For an RMS to exist, various criteria must be met, the best-known being the satisfaction of either (or both) of two tests under the Enterprise Act 2002 that are generally called “the Turnover Test” and the “Share of Supply Test” respectively. The former is met if the target’s annual UK turnover exceeds £70m; and the latter is met if the transaction results in a combined share of supply of goods or services of any description of at least one-quarter in the UK, or in a substantial part thereof.

The proposed reforms: why?

The government plans to make radical changes to each of these two tests. Why? Because it wants to enable the Secretary of State to intervene to address national security-related issues raised by transactions, and also to expand the CMA’s jurisdiction to review them. But before you say “That doesn’t affect us, we’re not in the security industry“, it is important to realize that the sectors to which the changes are intended to apply include not just the development or production of items for military (or military and civilian) use, but also quantum technology and computing hardware (together Relevant Enterprises). Between them, a surprisingly wide range of industries could be affected by these changes.

The proposed reforms: what will change?

How far, then, will the goalposts applicable to a Relevant Enterprise move? The alteration to the Turnover Test is swingeing – in sharp contrast to the £70m threshold mentioned above, the test in respect of a Relevant Enterprise will be met if the target’s annual UK turnover exceeds just £1m, a radical change.

The alteration to the Share of Supply Test is more subtle, but potentially no less significant. It will be met if, pre-merger, at least one-quarter of all the goods or services by virtue of which the target was a Relevant Enterprise were supplied to or by the persons carrying on the Relevant Enterprise in a substantial part of the UK. In other words, when applied to Relevant Enterprises, the test may be met even if the share of supply or acquisition does not increase as a result of the merger.

Conclusion

The changes outlined above will not oblige parties to an RMS involving a Relevant Enterprise to notify it to the regulators; it will continue to be the case (as now) that approaching the CMA for approval or guidance is voluntary only. But it will mean that the task of self-assessment – i.e. assessing whether a transaction constitutes an RMS and, if so, whether there is a realistic prospect of a substantial lessening of competition – will become even more important than before.

And if the task of self-assessment sounds unappealing… call in the experts!