Brexit: What next for merger control?

Article source: Herbert Smith Freehills (Here)
Author: Joel Rheuben

After a prolonged and difficult period of negotiation, the United Kingdom will finally leave the European Union on 31 January 2020. Immediately following the UK’s departure, the UK and EU will enter into a transition period (Transition Period) while the UK and EU negotiate their future relationship. The Transition Period will be governed by the Withdrawal Agreement that was negotiated between the EU and the UK in October 2019 and has now been approved by both sides.

Under the Withdrawal Agreement, the Transition Period is due to expire at the end of December 2020, unless extended. Although it looks unlikely that the UK and EU will be able to agree all of the details of a comprehensive new trade agreement before this date (European Commission President Ursula von der Leyen has said that it will be “impossible”), UK Prime Minister Boris Johnson has ruled out any further extension. Accordingly, the Transition Period is unlikely to last beyond 2020.

From an EU competition law perspective, little is likely to change in the near-term during the Transition Period. Japanese companies should, however, be aware of the implications of Brexit after 2020. This article outlines the key impacts on merger control in the EU and UK before and after the Transition Period.

What has happened up until now?

Merger control at the EU level is governed by the EU Merger Regulation (EUMR), under which the European Commission has jurisdiction to review merger transactions (including share and asset acquisitions, and certain types of joint ventures) where these have an “EU dimension”. At the same time, almost every EU Member State, including the UK, has a national system of merger control for reviewing transactions with more limited national effects.

While the UK remained a member of the EU, the EUMR was directly applicable as law in the UK. As a consequence, companies with operations in the UK and elsewhere in the EU have benefited from the “one stop shop” principle of merger control enshrined in the EUMR. Under the “one stop shop” principle, where a merger meets the thresholds for an EU merger filing, parties are only required to notify the merger to the European Commission, without needing to also notify to national competition authorities (NCAs) under national rules.

Where the European Commission has jurisdiction for reviewing a merger, NCAs (including the UK’s Competition and Markets Authority (CMA)) are unable to review the merger in parallel. The European Commission and NCAs can, however, refer cases back and forth between one another. In particular, where the European Commission has jurisdiction over a merger, NCAs can request to take responsibility for reviewing aspects of a merger that impact on their own national markets (so-called “Article 9 Referrals”, named after the relevant provision of the EUMR).

What will happen during the Transition Period?

The Withdrawal Agreement provides that, during the Transition Period, the EUMR will continue to apply as though the UK were still an EU Member State. In particular, the “one stop shop” principle will continue to apply in respect of the UK for any mergers formally notified to the European Commission before the end of the Transition Period.

The CMA will therefore be unable to review such mergers without making an Article 9 Referral application. At the same time, it is likely that the CMA will be reluctant to cede jurisdiction to the European Commission on mergers with a significant impact on the UK. The CMA has also substantially increased staff in its mergers unit in preparation for Brexit, and therefore already has additional “manpower” for merger review. This could mean an increase in Article 9 Referral applications by the CMA during the Transition Period.

Japanese companies with substantial activities in the UK should therefore consider consulting with the CMA on the risk of an Article 9 referral application before notifying to the European Commission.

Companies should also note that, as of 11:00 pm GMT, the UK will cease to be a Member State of the EU. Accordingly, references to competition authorities of an “EU Member State” (for example in competition conditions precedent under share purchase agreements) may no longer apply to the CMA.

What will happen after the Transition Period?

Following the Transition Period, the European Commission will no longer have jurisdiction over the UK aspects of any mergers with impacts in Europe. This is likely to lead to more parallel merger filings, whereby the CMA reviews mergers in relation to the UK, while the European Commission reviews them in relation to the remaining 27 Member States of the EU. The CMA has estimated that Brexit will lead to an increase in merger reviews by up to 40% in the UK.

At the same time, the number of EU merger reviews may drop, given that parties’ turnover in the UK (currently one of the largest economies within the EU) will no longer be counted in determining whether the relevant thresholds have been met.

Not all mergers that are notifiable in the EU will be notifiable in the UK, and vice versa. In particular, the UK has a voluntary system of merger control. This means that transactions without any plausible effect on competition in the UK (such as offshore joint ventures that will be active only in Japan) that are commonly caught by the EU rules will not need to be notified to the CMA.

On the other hand, the CMA has jurisdiction to review acquisitions of a “material influence” over other companies, which is a lower standard than the “decisive influence” standard in the EU. This potentially captures minority share acquisitions without control rights in certain circumstances.

Japanese companies will also need to pay close attention to deal planning, as the CMA’s review processes and timetables differ in some substantial respects from those of the European Commission. This includes merger filing fees of up to GBP 160,000 (filing in the EU is free).

Helpfully for deal planning, the Withdrawal Agreement prevents potential “cliff-edge” scenarios that might have occurred in the event of a “no deal” Brexit, whereby mergers under review by the European Commission on Brexit date could immediately be subject to review by the CMA. Provided that mergers are formally notified to the European Commission before the end of the Transition Period, the European Commission will retain exclusive jurisdiction even after the Transition Period.

For more information on the potential impact of Brexit on other aspects of competition law, including antitrust investigations, private damages claims, and state aid, please contact one of our competition law specialists, or see our Brexit Hub.

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