What makes a merger important?
Is a merger ever too small for a competition authority to care? It happens often in an EU context when the only country with an issue is a small one, say, Luxembourg or Malta.
If there are no issues elsewhere, can we just ignore such a small market? The short answer is 'no'. The long answer is 'maybe', in some circumstances and only if you just sell in the UK.
The short answer
If your acquisition is notifiable at EU level, the size of the market containing the competition issue is not relevant. Your route to clearance will be to devise a remedy that deals with the concern.
In a small, non-core market that does not often present any commercial issue, although carving out a small market from the rest of the deal may present some practical hurdles.
For mergers only notifiable in the UK, the UK’s Competition and Markets Authority (CMA) has a discretion not to refer a merger for a Phase II detailed review where “the markets concerned are not of sufficient importance”.
Not important enough?
Legislation does not provide a definition of importance and the concept is quite elastic.
The CMA’s guidance states that to qualify the market’s annual value must not exceed £10m. If the market value is less than £3m, then the CMA will only refer exceptionally. For cases in between, the CMA will look at:
- Strength of the CMA’s concern that harm will occur as a result of the merger;
- Magnitude of competition lost by the merger;
- Durability of the merger’s impact;
- Transaction rationale and the value of deterrence;
- Absence of clear-cut remedies.
There is a low incidence of Phase II referrals at EU level (3%) compared to the UK 14%. By contrast, there is a much higher unconditional clearance rate of Phase II cases in the UK. This suggests that the CMA is very quick to refer cases that ultimately are found not to present any competition issues.
Merger clearance statistics: EU and UK
|EU cases since 2007||3,129|
|Phase I: Unconditional clearance||93%|
|Phase I: Clearance with remedies||4%|
|Phase II: Referrals||3%|
|Unconditional clearance in Phase II||36%|
|UK cases since 2007||783|
|Phase I: Unconditional clearance||71%|
|Phase I: Clearance with remedies||8%|
|Phase I: De minimis clearance||7%|
|Phase II: Referrals||14%|
|Phase II: Abandoned||21%|
|Unconditional clearance in Phase II||45%|
A UK 'de minimis' clearance looks like a good bet: almost the same proportion of cases is cleared on a de minimis basis as with remedies. However, securing merger clearances is not a game of chance. If one looks beyond the top line numbers, four distinct points emerge.
- Around a third of de minimis cases relate to the acquisition of local bus and/or rail services and are unlikely to be relevant to other industry contexts. The rest deal with either niche products/services or small local markets.
- The de minimis rule does not create an enforceable safe harbour. It simply provides the CMA with the discretion not to refer a case in which the cost outweighs the likely harm. It has a very large margin of appreciation in exercising its discretion.
- The decision of whether a case is de minimis is not linked to the parties’ costs but cost to the public purse. A case could be referred, even if a referral negates the deal synergies.
- If clear-cut undertakings in lieu can be devised that would resolve the CMA’s competition concerns, the CMA will seek such undertakings. If the problem can be fixed, it is never too small to ignore.
When is de minimis viable?
A de minimis analysis can be a viable route for truly small mergers, but typically it will require a number of additional features.
This is not a quantitative exercise but a qualitative assessment, combined with formulating a view on the availability of clear-cut remedies. When this is a possible route to clearance, it will require detailed analysis and advocacy.
In addition, the UK is fairly unusual in operating a de minimis exception (Germany being another). If one of the parties has sales outside the UK then it is important to analyse the impact in those jurisdictions and feed this into your overall competition strategy.
The UK regime has been so successful that the CMA is currently looking to increase the thresholds to £15m and £5m respectively. So we are likely to see more of the exemption in future.
Read the full version of this article in the March 2017 edition of CA magazine.