5
MODERNISING THE MERGER REGIME
| The Government is committed to introducing a new merger regime with final decisions taken by independent competition authorities on the basis of a competition test. |
| There will also be procedural and other improvements, building greater transparency into the process. |
| The Government has now finalised the few remaining areas of policy the conclusions are set out in this chapter. |
5.1 The Government announced in 1999 its intention to reform the merger regime by taking most decisions out of the political arena. In October 2000, following a wide ranging consultation exercise, the Government announced its main conclusions on the way ahead1. It also triggered further consultation on certain points of detail. This covered such matters as the treatment of consumer benefits in a competition-focused regime, and the development of the Competition Commission's procedures for identifying remedies. Following this consultation, the Government has taken a number of further decisions2 set out below.
5.2 Government policy in recent years has been to take merger decisions primarily on competition grounds. Practice has also been for the Government to follow the advice of the competition authorities in most cases. The reform proposals build on these developments. They have two central elements. Firstly, decisions on the vast majority of mergers will be transferred from Ministers to the OFT and the Competition Commission. Secondly, the test against which mergers are assessed will be changed from a broad-based "public interest" test to a new competition-based test. The Government is also committed to procedural and other improvements, such as the introduction of maximum statutory timetables for investigations, and building more transparency into the process.
REMOVING MINISTERS FROM THE DECISION-MAKING PROCESS
5.3 Removing Ministers from most decisions will bring the UK's merger regime into line with best practice in other countries. Decisions will be taken by those best qualified to make them namely the expert competition authorities in line with one of the Government's principles for competition policy.
5.4 This change will clarify arrangements and make decision-making more predictable. Business will no longer need to factor in the possibility that decisions will be influenced by political considerations.
Exceptional public interest cases
5.5 The new regime will, however, allow Ministers to continue to take final decisions on the small minority of mergers raising defined exceptional public interest issues. National security, covering essential defence interests and other public security concerns, will be defined as an exceptional public interest from the outset. Ministers will be able to define further criteria subsequently, but only by statutory instrument subject to the affirmative resolution procedure in both Houses of Parliament.
| Box 5.1: How will the new merger regime work? |
| Final decisions on most mergers will be taken by independent competition authorities rather than Ministers. |
| The test they will apply will be to determine whether the merger results in a substantial lessening of competition rather than the current public interest test. |
| Exceptionally, where competition considerations point the other way, it will be possible for the authorities to clear a merger or allow it to proceed with less stringent competition remedies where they believe it will bring overall consumer benefits. |
| The Secretary of State for Trade and Industry will continue to decide the small minority of mergers which raise defined exceptional public interest issues. |
| National security will be defined at the outset as an exceptional public interest issue. It will be possible to define further exceptional public interest issues by statutory instrument using the affirmative resolution procedure. |
| The new regime will retain a two-stage approach to merger investigations. The OFT will carry out first stage investigations which will be sufficient to decide most cases. The Competition Commission will continue to carry out second stage, in depth investigations where necessary. |
| There will be statutory maximum timetables for both first and second stage investigations by the competition authorities. There will also continue to be the option of an administrative timetable at stage one. |
| The criteria used to determine which mergers qualify for investigation will be modernised to focus more efficiently on cases that may raise concerns. |
| The UK's system of voluntary rather than compulsory pre-notification of mergers will be retained.
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Interim measures in advance of legislation
5.6 The reforms announced last October require legislative change. At the time, the then Secretary of State for Trade and Industry announced that he would take steps in advance of legislation to reduce Ministerial involvement in current merger decisions. His policy would, save in exceptional circumstances, be to accept the advice received from the OFT on whether or not to refer merger cases to the Competition Commission. The interim policy has worked well. Since October, the Secretary of State has taken more than 150 decisions on whether or not to refer mergers to the Competition Commission. On each occasion, the Secretary of State has accepted the Director General of Fair Trading's advice on reference.
5.7 The Government announced last autumn that it would consider whether it is appropriate to take an additional interim step so that Ministers follow the recommendations of the Competition Commission on remedies in all but exceptional circumstances. Since then, the Government has announced that it will introduce an Enterprise Bill in the current Parliamentary session. Given this, the Government believes there is no need to take this additional interim step.
THE COMPETITION TEST AND THE TREATMENT OF CONSUMER BENEFITS
5.8 In the new regime, mergers will be assessed against a test of whether they will result in a substantial lessening of competition. Making competition the focus of the assessment will ensure that the underlying economic arguments can be brought to bear on the analysis of a merger in a clear and straightforward manner.
5.9 The Government recognises, however, that there will occasionally be circumstances where a merger which results in a substantial lessening of competition can, nonetheless, bring overall benefits to consumers. The challenge is to identify a framework which allows such benefits which will arise only infrequently to be taken into account without undermining the central importance of the competition analysis.
5.10 In October, the Government sought views on how to take this issue forward. In the light of comments received, the Government has decided to proceed as follows:
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The competition test will be at the heart of the assessment carried out by the competition authorities. The authorities will be required to reach a clear view on the competition aspects of each case. A merger will be cleared unless the authorities expect it would result in a substantial lessening of competition in any UK market.
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Where a merger fails the competition test, the authorities will have to take steps to remedy the competition problem.
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However, the authorities will exceptionally be able to clear a merger or allow it to proceed with less stringent competition remedies than would otherwise be the case where they believe that the merger will bring overall benefits to UK consumers affected by the merger.
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The authorities will be able to take account of consumer benefits which take the form of lower prices, or greater innovation, choice or quality of products or services. They must expect such benefits to materialise within a reasonable period and be satisfied they would be unlikely to happen without the merger.
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Consumer benefits will cover benefits to end-consumers, but will also extend to customer benefits in upstream markets where the immediate beneficiaries of a merger are other businesses.
THRESHOLDS FOR INVESTIGATION
Turnover threshold
5.11 Mergers currently qualify for investigation if they create or enhance a 25% share of supply of a particular good or service in the UK as a whole, or a substantial part of it; or involve the acquisition of gross worldwide assets in excess of £70 million. The Government has already announced that it will replace the assets test with one based on turnover. With service industries and intangibles of increasing importance, a turnover test represents a sounder measure of the economic significance of a merger.
5.12 In October, the Government invited comments on its proposal that the turnover test should be based on the total UK turnover of the target company with the level set at £45 million. We will proceed with the new turnover test. Provision will be made in the legislation for the threshold to be reviewed and amended as necessary.
Mergers in linked markets
5.13 The two main jurisdictional tests should ensure that almost all economically significant mergers are capable of investigation. The October document, however, asked whether there might be a gap in coverage. This could happen where a company with a powerful position in one market acquired a smallish company in a different but linked market, and thereby levered market power into the related market. This could risk foreclosure depriving existing or potential competitors of outlets. Such a merger might not qualify for investigation on either share of supply or turnover grounds.
5.14 The Government therefore asked whether the share of supply test should be changed to ensure mergers between companies in separate but linked markets could be subject to scrutiny. This could be done by adding an additional limb to the share of the supply test which would be satisfied if either party already had a 40% share of supply in a market affected by the merger.
5.15 Consultation has revealed potential difficulties with such a test. The main concern is that it would be poorly targeted bringing a large number of mergers which could have no adverse effect on competition within the merger control regime. Better targeting requires a robust definition of a "linked market". Unfortunately, it is not a precise term and could create uncertainty about whether mergers would qualify for investigation.
5.16 There is no firm evidence of a significant gap in the existing and proposed thresholds. The Government therefore believes that action to tighten the jurisdictional net would be disproportionate and will not add an additional jurisdictional threshold.
REMEDIES
5.17 The Fair Trading Act currently specifies the kinds of remedies which can be imposed following merger and monopoly investigations. Although some of the permitted remedies are very far-reaching, such as divestment of all or part of a business, some less radical remedies are not permitted.
5.18 The Government will correct this situation. It will update the existing list of possible remedies including for example a remedy to require a company to grant licences and a remedy to require companies to publish information in a specified manner. The Government invites views on these and other possible modifications.
5.19 The Government also believes that adjustment to the list of available remedies should be possible without the need for new primary legislation. Economic thinking moves on and with it, views about the correct set of remedies which should be available to address competition problems. The Government will introduce a new power which allows the Secretary of State, acting on the advice of the Competition Commission and the OFT, to amend and add additional remedies by statutory instrument.
PROCEDURES
Timetables and inquiry procedures
5.20 The new regime retains a two-stage approach to merger investigations. The OFT will conduct the first stage investigation to decide whether a reference is necessary. The Competition Commission will continue to carry out such references via a second stage, in depth investigation.
5.21 There will be statutory maximum timetables for both first and second stage investigations. These will help provide a more certain and predictable mergers framework for business, in line with best practice overseas.
5.22 The statutory timetable for first stage investigations will be reduced from 35 to 30 working days for businesses who want to pre-notify their mergers on a Merger Notice. The option of an administrative timetable at stage one will also continue, for which the target will be reduced from 45 to 40 days.
5.23 In October, the Government sought views on the duration of second stage Competition Commission investigations. It invited comments on the benefits of reducing the timetable to a definite maximum of 16 working weeks, against the case for developing procedures for identifying remedies which could require longer. It also asked whether and for how long the Commission should be able to extend its investigation where an unexpected event occurs late on in the process. In the light of comments received, the Government has decided:
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There will be a set statutory maximum timetable for Competition Commission inquiries of 24 weeks. This will allow procedures to be adopted which strike the right balance between speed, thoroughness and fairness. There will be powers to shorten the timetable, if experience shows that this is feasible.
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In exceptional circumstances, the Competition Commission will be able to extend the maximum timetable by up to 8 weeks. It will be required to publish the reasons for the extension.
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The Government believes that the Competition Commission should determine its own procedures, given its independent status and role as final decision-taker in the new regime. The procedures will need to be accommodated within the maximum timetable set out in the legislation, and ensure the best possible decisions within that timetable.
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To ensure the Competition Commission's procedures are clearer and more certain the Chairman will have a duty to set rules of procedure binding on inquiry panels.
5.24 Separately, the Chairman of the Competition Commission has said that he will make a procedural rule at the outset of the new regime requiring inquiry panels to publish their provisional findings on the competition aspects of a merger along with the key parts of the analysis before turning to the consideration of remedies. He has not ruled out subsequent change in the light of experience. The Government strongly welcomes these plans.
Obtaining information
5.25 The Government has looked carefully at the adequacy of the Competition Commission's formal powers to obtain information from merging parties and from third parties. It is vital that the Competition Commission can access information on a timely basis. We have already proposed that the competition authorities should be able to suspend the statutory timetables if companies fail to provide required information by a specified date. We will proceed with this arrangement.
5.26 The Government has looked further at whether the Competition Commission needs additional powers to secure compliance with requests for information. Initiating contempt of court proceedings is an appropriate sanction in certain serious cases of non-compliance which we will retain. However, it is a lengthy and complex process which does not fit well with the fixed deadlines of a merger inquiry.
5.27 We will therefore give the Competition Commission a new power to impose monetary penalties on parties and third parties for the late or non-provision of information. This will be modelled on the equivalent power under the EC Merger Regulation.
Powers relating to completed mergers
5.28 The UK's merger regime allows mergers to be completed without the need for prior notification. We will retain this option. Businesses will continue to be able to confirm agreements speedily if commercial circumstances require it, and if they are prepared to accept the risks of subsequent investigation. The system can, however, sometimes lead to difficulties in identifying effective remedial action for a completed merger which subsequently fails the merger test where irreversible action has been taken by the companies concerned.
5.29 The Government will address this problem by giving the OFT a new power to prevent parties to a completed merger from taking further steps to integrate their businesses before a decision has been taken on whether a reference is required.
Voting rules
5.30 At present, Competition Commission inquiry panels need a two-thirds majority to take decisions on whether a merger operates against the public interest. In the case of panels of five, this means that a 3:2 decision would not suffice even though it would be closer to two-thirds in percentage terms than a 4:1 decision. A simple majority rule would solve this particular difficulty without making any difference to the majorities required for panels of three, four or six members. However, as the Competition Commission will have final responsibility for decisions in the future there are arguments for maintaining the two-thirds majority rule.
5.31 The Government invites views on whether to replace the current requirement for a two-thirds majority with a requirement for a simple majority. The same arrangements will need to apply for the new merger regime and the new regime for investigating markets.
1 "Mergers: The Response to the Consultation on Proposals for Reform" (URN 00/805), published October 2000 is available on the DTI's website: www.dti.gov.uk
2 A summary of responses to the October 2000 consultation on detailed aspects of the new merger regime, and the full list of the Government's conclusions is available on the DTI's website: www.dti.gov.uk
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