The CMA published on 16th June its final version of its Merger De Minimis Guidelines following earlier consultation with stakeholders. The Guidelines set out the criteria which the CMA will have regard to when exercising its discretion under UK merger control legislation to clear mergers in small markets.
Under the Enterprise Act 2002 the CMA is under a statutory duty to refer a completed or anticipated relevant merger situation to an in-depth Phase 2 investigation where it believes that it is or may be the case that the merger may be expected to result in a substantial lessening of competition in any market or markets in the UK for goods or services. However, there are a number of exceptions to this statutory duty to refer.
One of those is where the market or markets concerned are not of sufficient important to justify the making of such a reference. In these cases the CMA has discretion not to refer a merger to a Phase 2 investigation. The conduct of a Phase 2 Investigation which usually lasts 6 months can be an extremely costly and time intensive exercise. It is estimated that such an inquiry usually costs the public purse in the region of £400,000.
The Enterprise Act 2002 does not set out the criteria which the CMA must have regard to when exercising its discretion not to refer in these circumstances. This is left to the CMA’s judgment. The Guidelines therefore set out in more detail how the CMA interprets the De Minimis exception and sets out guidance as to how it intends to exercise its discretion.
The original version of the Guidelines on the De Minimis exception was set out in a guidance document entitled “Mergers: Exceptions to the duty to refer and undertakings in lieu of reference guidance”, which was published by the Office of Fair Trading (OFT) in 2010. This was later adopted by the CMA (the 2010 Guidelines). The CMA launched an internal review in January of this year to consider its approach to the De Minimis exception and in particular the level of thresholds below which transactions are likely or may be considered to be of minor importance and therefore not subject to a reference to a Phase 2 investigation.
Consultation and Responses
Following that internal review the CMA published a Consultation on proposals to amend the 2010 Guidelines by raising the applicable thresholds for categories of transaction where the De Minimis exception will generally not apply, and when it would be more likely to apply. The justification for the increase in the thresholds was on the basis that the CMA believes that in light of previous practice these levels are appropriate. In addition the new Guidelines will help reduce the CMA’s costs as well as reduce the burdens on businesses.
The responses to the Consultation were generally in favour of the specific increases to the thresholds recommended although a number of commentators made the point that the levels of thresholds remain very small by comparison to other developed competition regimes.
Other responses focused on Brexit and how the thresholds could or should be increased substantially over what was being currently proposed to take into account the likely substantial increase in the number of mergers the CMA would have to investigate post Brexit. However the CMA in response stated that the proposed increases in the thresholds were not intended as a response to Brexit or any potential future increases in the CMA’s caseload. It maintains that the proposed increases were merely a reflection of the OFT and CMA’s experience in applying the exception since the 2010 Guidance was issued. Nevertheless it conceded that the De Minimis exception may have a role to play in the future when addressing the implications of Brexit.
Other observations centred upon the earlier application of the exception at Phase 1. The CMA considered that the proposed changes to the thresholds would have the benefit of reducing the CMA’s costs and reducing burdens on businesses of a Phase 2 reference. The earlier application of the increased exception by both by the parties and the CMA was central to achieving these aims.
It was hoped the new thresholds will make it easier for parties to self-assess their transaction in relation to the lower threshold and take a view on whether notification to the CMA was appropriate. This is because the application of the exception is not contingent upon an assessment of a substantial lessening of competition.
The CMA also singled out the work of the Merger Intelligence Unit and how early inquiry to it by the parties would help get a steer from the CMA as to whether they are interested in a particular market or not. The CMA has also issued separate guidance on its mergers intelligence function and how to engage with them.
Finally, views were expressed that in making the delicate balancing exercise on whether proceeding with a Phase 2 reference was justified or not the CMA should not just take into account the public costs of an inquiry (approx.. £400,000) but also the costs incurred by the parties in representing themselves before the CMA Panel. However the CMA disagreed. It stated it was up to the parties whether they wanted to engage in merger transactions and if they did they must bear the costs of it. It was not appropriate to consider their costs alongside those of the CMA or the public purse in making the judgment about whether a merger was of insufficient importance to refer to a Phase 2 inquiry.
The New Guidelines
The CMA published its revised guidance on 16th June 2017. This revised guidance updates and replaces Chapter 2 of the 2010 Guidelines. The new Guidelines introduce the following changes
The threshold over which the CMA considers that the UK market(s) concerned will generally be of sufficient importance to justify a reference are to be increased from £10 million to £15 million. There is a lower threshold for transactions below which the CMA will generally not consider a reference justified. This threshold is increased from £3 million to £5 million. Again this relates to the value of the UK market.
The new Guidelines do not introduce any other substantive changes to its approach to the De Minimis exception. Therefore the primary purpose was to avoid references being made where the costs involved would be disproportionate to the size of the market(s) concerned.
The Guidelines make clear that the CMA applies its de minimis discretion with regard to a general broad cost/benefit analysis taking into account how much the public costs of a Phase 2 reference would be. The costs shouldered by the parties are not part of their consideration.
Therefore the Guidelines tell us that the benefits of a Phase 2 reference are likely to outweigh the public costs where the market(s) concerned have a total value of over £15 million.
However the CMA would refer a merger on a market with a total value of less than £5 million in only exceptional circumstances and where the direct impact of the merger in terms of customer harm was particularly significant and/or where the merger is one of a potentially large number of similar mergers that could be replicated across the sector in question.
So what is the position if it the total value of the UK market concerned?
Where the annual value of the relevant UK market(s) is between £5 million and £15 million, the CMA will consider whether the expected customer harm flowing from the merger is substantially greater than the average public cost of a reference to Phase 2. In making its decision the CMA will have regard to the size of the market concerned, its view of the likelihood that a substantial lessening of competition will occur and its assessment of by how much and for how long competition would be weakened by the transaction. The CMA will also have regard to the ramifications of its decision not to refer in any particular case and whether similar transactions could be replicated across the country which taken together would have a major effect on the competitive landscape.
The new Guidelines are likely to result in more mergers in small markets being given clearance even if they result in a substantial lessening of competition.
Indeed since the Guidelines have been issued the CMA has already taken a decision based upon them. On 26th June the CMA took a decision to clear a merger in a niche specialist market on the grounds the merger related to a market which fell within its De Minimis guidance. This was despite the merger resulting in a reduction of competitors from 3 to 2 which could have had the effect of substantially reducing competition. The CMA justified the clearance on the basis that the size of the UK market was less than £5 million.
These Guidelines will relieve a number of transactions in smaller markets of being subject to the onerous costs of a Phase 2 investigations. Whilst welcome, they should not be seen as a green light to blatantly anti-competitive mergers as parties should proceed with caution as the thresholds contained in the notice are advisory and subject the CMA’s discretion.
This article first appeared in Governance + Compliance.