Originally published 2 December 2008

Keywords: UK Competition Commission, CC, new guidelines, merger inquiries, Office of Fair Trading, OFT, Enterprise Act, substantial lessening of competition, SLC, price caps

On 26 November 2008, the UK Competition Commission ("CC") published new guidelines to explain its approach to the selection and implementation of remedies in merger inquiries referred to it by the Office of Fair Trading ("OFT") under sections 22 or 33 of the Enterprise Act 2002 ("the Act"). The new guidelines cover intellectual property remedies and behavioural remedies that were not covered in detail in the existing guidance. Interestingly, the guidelines include prohibitions as part of the discussion of structural remedies.1

When the CC concludes that a relevant merger situation has resulted, or may be expected to result, in a substantial lessening of competition ("SLC"), it is required to consider remedial actions and, in line with the provisions of the Act, "have regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects resulting from it". The CC will therefore consider remedies that are effective in addressing the SLC, the least costly and intrusive, proportionate to the SLC and its adverse effects and ensure some customer benefits following the merger.

Choice Of Remedies

In merger inquiries, the CC will generally prefer structural remedies to behavioural remedies. It is not alone in this preference. Most competition authorities prefer structural remedies because they require a minimum of monitoring.

As mentioned above, the CC includes in its definition of structural remedies both divestitures - the selling-off of parts of the combined business - and straightforward prohibitions. Both these options remedy the competition issue, although it seems so odd for the CC to categorise prohibition as a structural remedy, we might speculate that it is attempting to scare parties into considering seriously merger control outcomes before deals go ahead.

Behavioural remedies may be described as promises by the parties regarding their post-merger conduct. These can sometimes also be required to support structural remedies, for example to protect a divested business for a limited period, or to ensure the continuation of key supply contracts or other inputs.

  • Structural Remedies

The CC takes, as its starting point, divestiture of part of the acquired business and generally prefers divestiture to comprise a stand-alone business that can compete effectively rather than a mere collection of assets. The CC also tends to avoid divestiture of a mixture of assets from both merger parties (what is known as a mix-and-match situation). In all cases the merging parties will need to obtain the CC's approval in respect of a suitable prospective buyer. The CC will wish to satisfy itself that a prospective purchaser is independent of the merger parties, has the necessary capability to compete, is committed to competing in the relevant market(s) and divestiture to the purchaser will not create further competition concerns.

The CC will state in its report the period within which parties should complete the divestiture and although the length will depend on the circumstances, around six months is usual.

  • Behavioural Remedies

The CC has divided behavioural remedies into enabling measures (seeking to remove obstacles to competition or stimulating competition) and measures that control outcomes (restrict the adverse effects of an SLC rather than address the SLC itself).

Enabling measures include measures to prevent foreclosure arising from vertical mergers, remedies requiring third party access to assets (although the CC regards IP remedies as important enough to deal with separately), "chinese wall" measures to prevent a vertically integrated merged entity from accessing and acting on the commercially sensitive information of a competitor generated by e.g. the competitor's use of the merged company's facilities, and measures to restrain market power in a horizontal market context (e.g. specifically prohibiting the merged entity from selective discounting, bundling or tying, switching costs and entering into long-term/exclusive contracts).

Controlling measures such as price caps, supply commitments and service level undertakings, control or restrict the outcome of business processes. The CC will only use these remedies where other, more effective, remedies are not feasible or appropriate. In this way they may be regarded as a last resort. They aim to control the adverse effects expected from a merger, rather than addressing the source of the SLC. Proposed controlling measures need to specify in significant detail the products or services that are subject to control and the basis of the control. The remedies also need to specify how the control will deal with changes, such as the introduction of new products.

  • Intellectual Property Remedies

Remedies that provide access to intellectual property ("IP") by licensing or assignment of patents, brands or other IP rights may be viewed as a specialized form of asset divestiture. The key element is the extent to which any material link between licensor and licensee will exist following award of the licence. A remedy that requires an assignment or licence of an IP right that is exclusive, irrevocable and non-terminable with no performance-related royalties will effectively be treated by the CC as structural in form (it is essentially the unconditional giving-away of an asset) and therefore subject to similar consideration and evaluation as an asset divestiture. A licence that requires a licensee to rely on the licensor for updates of the technology or continuing access to specialist inputs or know how will be regarded as a behavioural commitment, which runs a higher risk of not being an effective remedy. Unsurprisingly, the CC will generally prefer to divest a business including IP rights, where this is feasible, rather than rely on licensing IP alone.

  • Recommendations To Government

Recommendations to Government or other persons to modify legal regulations or conduct, such as planning or licensing regulations, may, if adopted, act as enabling measures. It is difficult to see many cases where this type of remedy will play an effective role, given the speedy timeline of most merger transactions.

Summary Table Of Types Of Remedies That Will Be Considered By The Competition Commission

The Remedies Process

When a merger is referred to the CC, it will first consider whether interim undertakings or an interim order are necessary to prevent "pre-emptive action" by the merger parties. The CC may accept interim undertakings from the parties concerned to refrain from activity that would constitute pre-emptive action, or it may make an interim order to achieve the result it seeks.

The CC will then start to gather information on possible remedies and consider relevant options. The CC will consult on possible remedies only if it reaches a provisional finding of an SLC. In such cases, the CC will publish a notice of possible remedies either with or following publication of provisional findings. The notice will contain details of remedies that may address the SLC effectively and forms a starting point for discussion of remedies with the relevant parties to the inquiry. The CC will consider remedy options proposed by the merger parties and others in addition to its own proposals. The CC will then consult on this provisional decision with relevant parties prior to making a final decision. The CC will publish its final decision on the competition question and remedies together with supporting reasons and information in a final report.

Following publication of the final report, the CC has the choice of implementing remedies by obtaining undertakings from the relevant merger parties or making an order if an agreement is not forthcoming on a timely basis. The CC will then publish and update an administrative timetable regarding the implementation of remedies.

Trustees or third-party monitors (collectively "trustees") are used by the CC to assist in monitoring and implementation of undertakings or orders.

The Remedies Standing group ("RSG") within the CC is responsible for overseeing the implementation of any divestiture undertakings and the OFT is responsible for monitoring and enforcement of behavioural remedies. If a person fails to comply with the Undertakings/Order, compliance may be enforced by means of civil proceedings brought by the OFT or the CC for an injunction or for interdict in one of the UK courts. In addition, any person affected by the contravention of an undertaking or an order who has sustained loss or damage as a result of such contravention may also bring an action against the bound party.

It should be noted that the CC will follow a similar although not identical approach for anticipated mergers and completed mergers.

Footnote

1. It is unclear whether many companies contemplating a merger or acquisition would see prohibition as an acceptable remedy, aside from the targets of hostile takeovers.

Learn more about our Antitrust & Competition practice.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2008. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.