Brexit's implications for merger control

Author: | Published: 26 Sep 2016
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The EU’s one-stop shop principle for concentrations faces an uncertain future following for the UK’s Brexit decision. Several scenarios could play out

Ever since the UK's vote to leave the European Union in the referendum of June 23 2016, newspapers and bulletins in the UK and internationally have been filled with articles analysing the potential impact of Brexit.

Among the myriad of questions that arise as a result of the outcome of the UK referendum is what the implications will be for merger control. In particular, what will the impact be for:

  • the one-stop-shop principle that lies at the heart of EU merger control?
  • the test that will be used to assess transactions going forward - in particular, will post-Brexit UK seek to apply a stronger industrial policy-based approach to mergers and acquisitions than is currently the case? and
  • the institutions that will be called upon to review mergers that fall within their jurisdiction?

The end of the one-stop-shop?

One of the core principles of the EU Merger Regulation (EUMR) is that the European Commission is exclusively competent to investigate concentrations (i.e. mergers, acquisitions and certain types of joint ventures) that exceed either of the two turnover thresholds set out in articles 1(2) and 1(3) EUMR and therefore have a "Community dimension". This "one-stop-shop" principle is highly valued by the business community as it reduces the regulatory burden. This has become all the more important given the proliferation of national merger control regimes over the last decade. The question therefore arises whether transactions involving both the UK and the EU would, post-Brexit, lose this significant benefit.

The answer to this question, as with most Brexit-related questions, depends on what form the post-Brexit UK/EU relationship will take. The various possible options and permutations that have been mooted broadly fall in one of the following three categories:

  • The UK leaves the EU but adopts a Norwegian style solution by becoming member of the European Economic Area (EEA) and thus retains full access to the single market.
  • The UK and the EU adopt a solution which allows the UK some, but not full, access to the single market (this could entail the adoption of a Swiss type arrangement, or a UK specific deal).
  • The UK withdraws from the single market and falls back on World Trade Organization principles.

"If the UK were not to become a member of the EEA, the one-stop-principle would likely cease to apply, irrespective of whether the UK were to seek a degree of access to the single market, or withdrew fully from it"

If the UK becomes an EEA member, the changes to merger control as a result of Brexit would be relatively limited. In accordance with article 57(2) of the EEA Treaty, the Commission has exclusive competence to assess, in certain circumstances in cooperation with the European Free Trade Association (EFTA) Surveillance Authority, the impact within the EEA of a transaction that meets the EUMR thresholds and therefore has a Community dimension. However, UK turnover would no longer be taken into account to calculate whether the thresholds set out in EUMR are met. The following scenarios can therefore be distinguished. First, the turnover generated by the relevant parties worldwide and in the remaining 27 EU member states is sufficient to meet the EUMR thresholds. In such a situation, the current regime where the Commission has exclusive competence to investigate the deal would continue to apply and the Commission's investigation would cover the effects of the proposed transaction in the EEA, including the UK. Secondly, where the proposed transaction does not meet the EU thresholds, it would fall within the jurisdiction of the UK's Competition and Markets Authority (CMA) if the jurisdictional criteria of UK merger control are met, unless the transaction has an EFTA (but not EU) dimension as defined in article 57 and annex XIV to the EEA Treaty. In that case, the EFTA Surveillance Authority would be competent to review the transaction. To date, there have been no transactions with an EFTA (but not EU) dimension, but accession of the UK to the EEA would, at least in theory, increase the chances of this happening.

If the UK were not to become a member of the EEA, the one-stop-principle would most likely cease to apply. This is irrespective of whether the UK were to seek a degree of (but not full) access to the single market, or withdrew fully from it. In this scenario, a significant number of transactions would likely fall within the jurisdiction of an additional competition authority, the CMA. However, not all transactions falling within the scope of UK merger control rules would lead to an extra investigation; given that the UK regime is voluntary parties would be able to opt not to notify their transaction, although the CMA has the power to open an ex officio investigation. If the parties would decide to notify, a fee would be payable. This is in contrast with the EU system where no filing fee applies.

Where a transaction would be reviewed simultaneously by the CMA and the Commission, the two authorities would almost certainly cooperate closely to avoid significant divergence in the assessment of the transaction or possible remedies, as the Commission currently does with a number of other authorities across the globe such as the US Department of Justice and the Federal Trade Commission, Brazil's Administrative Council for Economic Defence (known as CADE), and others. However, while such cooperation would certainly be both helpful and desirable, it would not replace the advantages of the current one-stop-shop regime.

Towards a greater industrial policy?

In accordance with article 2 of the EUMR, the substantive investigation of a proposed transaction focusses on whether or not it would result in a "significant impediment of effective competition" (commonly referred to as the SIEC test). The test is therefore narrow in scope and does not include wider policy considerations, such as, for example, employment, environment or privacy protection. Article 21(4) EUMR allows member states to adopt measures that are required to safeguard national security, media plurality or prudential rules. However, the application of article 21(4) is strict and the Commission has in the past taken action against what it considered to be unjustified member state intervention. For example, when the Portuguese government sought to prevent Secil and Holderbank from acquiring the Portuguese cement company Cimpor on the grounds that it would be against Portuguese economic policy, the Commission required the Portuguese government to withdraw its objection as none of the three grounds identified in article 21(4) EUMR applied.

The Commission has also consistently made it clear in statements and speeches that it intends to remain vigilant to ensure that the mechanism of article 21(4) EUMR is not used as a pretext to impose national protectionist measures.

"The UK has been a strong advocate of an effects based M&A assessment while certain other continental EU jurisdictions have tended to be more structuralist in their approach"

In her speech of July 11 2016, when it was confirmed she had won the conservative party leadership race and would therefore replace David Cameron as UK prime minister, Theresa May stated that: "[B]ecause as we saw when Cadbury's – that great Birmingham company – was bought by Kraft, or when AstraZeneca was almost sold to Pfizer, transient shareholders – who are mostly companies investing other people's money – are not the only people with an interest when firms are sold or close. Workers have a stake, local communities have a stake, and often the whole country has a stake. It is hard to think of an industry of greater strategic importance to Britain than its pharmaceutical industry, and AstraZeneca is one of the jewels in its crown. Yet two years ago the Government almost allowed AstraZeneca to be sold to Pfizer, the US company with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax. A proper industrial strategy wouldn't automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain."

Can it therefore be expected that post Brexit, the UK will adopt a more industrial policy focussed approach to possible transactions? A number of politicians have certainly called for this in the past. Cadbury's takeover by Kraft prompted then UK Treasury spokesman for the Liberal Democrats Vince Cable to call for the re-introduction of a wider public interest test. In 2014, in his then role as business secretary, Cable was reported in the press as seeking to strengthen the takeover rules which he had concluded were inadequate in the light of Pfizer's bid for Astra Zeneca. Chucka Umunna, then Labour shadow business secretary agreed and offered cross-party support for an initiative to change the law.

The scope for a more industrial policy based approach will depend on the form the UK-EU arrangement takes post-Brexit. If the UK becomes an EEA member, the EUMR rules will continue to apply to most transactions that currently fall within its scope and any possible change in policy would apply only to transactions that are caught by UK merger control rules. There would be greater scope for a wider public interest based approach to mergers and acquisitions if the UK and EU come to a looser Brexit arrangement.

However, even if that were the case, and the UK were to allow for increased public interest based intervention, it is likely that in practice such intervention would remain limited. Indeed, it is noteworthy in this context that the UK Enterprise Act replaced the public interest test that was provided for in the Fair Trading Act with a more narrowly focussed substantial lessening of competition test. Intervention on public interest grounds is possible, but only where concerns arise relating to national security, plurality of the media or stability of the UK financial system. The UK therefore independently adopted a position that is very similar to that of the EUMR. Moreover, on July 18 2016, the Japanese company Softbank acquired the Cambridge-based technology company ARM without any concerns being raised by the UK government. On the contrary, the transaction was hailed as being "in the national interest". While Softbank's chairman and CEO was reported as having made a phone call to the UK's new prime minister and chancellor of the exchequer, offering a series of legally binding assurances to maintain ARM's headquarters, double its UK-based staff over the next five years and increase its overseas headcount, the enforceability in practice of such assurances is uncertain. It therefore remains to be seen how aggressive the UK will actually be in pursuing a "proper industrial strategy".

Institutional impact of Brexit

Absent membership of the EEA, Brexit is likely to lead to a substantial increase in the number of cases reviewed by the CMA. However, concerns have been raised as to whether the CMA would be able to cope with such an increase of cases as it merger team is currently already fairly stretched. A considerable increase in the volume of cases may even eventually lead to a revision of the UK's jurisdictional criteria as a way to limit the number of transactions capable of review.

But the CMA is not the only institution potentially impacted by Brexit. If the UK were to become an EEA member, given the size of the UK market, there may in the future be a number of cases that have an EFTA (but not EU) dimension. As the EFTA Surveillance Authority is competent to review such transactions, an expansion of their merger team may be required.

Finally, the UK has been a strong advocate of an effects based assessment of mergers and acquisitions, while certain other continental European jurisdictions have tended to be more structuralist in their approach. There is therefore at least a potential risk that post-Brexit the Commission's assessment may over time shift towards such a more formal approach.

As is clear from the issues discussed above, while it is easy to raise the question as to what the impact of Brexit on merger control is likely to be, it is very difficult to predict with any degree of certainty what the likely outcome will be. At one end of the spectrum, the impact on merger control may be limited if the UK opts to become a member of the EEA. However, if no such solution is adopted, the impact will be more pronounced. The degree to which merger control will change in practice will, however, only become clearer when the likely contours of the post Brexit UK/EU framework become more defined.

By Geert Goeteyn, partner in Shearman & Sterling's Brussels office