Ahead of the entry into force of the Digital Markets, Competition and Consumers Act 2024 (DMCCA) later this year or in early 2025, the CMA is consulting on changes to key guidance documents which explain the procedures it follows when exercising its merger and antitrust enforcement powers.
Background
In August, the CMA published its draft consultation on updated versions of its key mergers guidance documents, including the jurisdiction and procedure guidance (CMA2) and interim measures guidance (CMA108) (together, the Mergers Guidance).1 In parallel, the CMA is consulting on its Competition Act 1998 (CA98) investigations guidance (the Investigations Guidance)2. A significant proportion of the amendments to the Mergers Guidance and the Investigations Guidance encompass changes that will be introduced by the DMCCA.3
While various changes are proposed in the Mergers Guidance and Investigations Guidance, this article will focus on: (i) amendments which provide further colour on how the CMA will use the new powers given to it by the DMCCA; and (ii) key updates that reflect current CMA policy. The CMA's consultation on the Mergers Guidance and Investigations Guidance has just closed, and the CMA will now consider the responses provided and make any relevant amendments.
Mergers Guidance updates
CMA's jurisdiction under the DMCCA
Under the DMCCA, the CMA's jurisdiction to review a relevant merger has been expanded. In particular, the DMCCA introduces an "acquirer focused" or "hybrid" test. This enables the CMA to review an acquisition where: (i) one party has a share of supply/purchase of goods or services of at least 33% and UK turnover of over £350m; and (ii) the other party has a UK nexus. The Mergers Guidance provides an insight into how the CMA will apply this in practice.
- Acquirer focus: despite the DMCCA not distinguishing between the acquirer or the target for part (i) of the "hybrid" test, the Mergers Guidance acknowledges that the "hybrid" test is inevitably acquirer focused, as transactions where the target has a UK turnover exceeding £350m would, in any event, fall within the CMA's existing jurisdiction under the separate turnover test.
- Expansive interpretation of the UK nexus test:
as noted above, part (ii) of the "hybrid" test requires
that a party (which in practice will be the target) has a UK nexus.
The Mergers Guidance explains that the CMA will adopt a
"purposive" (read: expansive) approach to this condition.
Under the DMCCA, there are three situations where the test is met:
- The target enterprise is carried on by a body corporate or unincorporate formed or recognised under UK law. The Mergers Guidance suggests that it will be enough for these purposes if the target group includes a UK subsidiary, regardless of its centre of gravity. In the case of an asset sale, this test cannot be satisfied.
- At least part of the target's activities are carried on in the UK. This is a broad test, as the CMA has noted that it is not necessary for the target to be supplying any goods or services in the UK at the time of the merger. Furthermore, the CMA will consider whether a "preparatory step" has been taken "towards potentially supplying goods or services in the UK" to determine if the test is satisfied. Examples provided by the CMA include having an office, branch or "any kind of facility" in the UK, and even as little as having "intellectual property rights in the UK".
- The target supplies goods or services to person(s) in the UK. Under the Mergers Guidance, there is no actual requirement for there to be any sales of a product to UK consumers. For example, it is enough for the target to supply digital content or digital services by means of the internet or provide services by "making them available to potential users" in the UK. The latter suggests that the CMA will view a target as having a UK nexus simply by virtue of there being a possibility of its services being procured by UK customers.
Extraterritorial requests for information
Given the expansive approach to jurisdiction described above, it is perhaps unsurprising that the Mergers Guidance indicates that the CMA also intends to adopt an expansive interpretation of its new power to compel the production of information held overseas under section 109 of the Enterprise Act 2002.
While this power requires the subject of the request to have a "UK connection" or a connection to one of the merger parties, the CMA intends to interpret these concepts broadly. For example, the Mergers Guidance notes that it could capture overseas investors in and minority shareholders of one of the merger parties. It could also capture third party businesses with no UK sales that provide a key input for a good or service supplied in the UK or that make content or other intellectual property available to UK users.
Phase 2 fast-track process
The DMCCA codifies in statute the ability for merger parties to request a "fast-track" reference to Phase 2. Previously this was only a matter of CMA administrative policy. In particular, the DMCCA provides that, where a transaction will or might give rise to a relevant merger situation, the parties have the right to request that the CMA "fast-track" the case during pre-notification or at any point in the Phase 1 process (unless a reference has already been made or the CMA is legally prevented from referring the merger). In a notable change from the current administrative fast-track process, the DMCCA removes the need for the merger parties to concede that the merger may give rise to competition concerns.
The Mergers Guidance expands upon the relevant DMCCA provisions – explaining the types of situations in which the CMA will accept a fast-track request and how this will impact the CMA's information gathering powers. In particular, the Mergers Guidance notes that the CMA may need to gather some evidence before making a decision as to whether to accept a request. However, the Mergers Guidance also acknowledges that the CMA does not need to explore whether the merger will result in a substantial lessening of competition (SLC) at this stage. The Mergers Guidance also makes clear that the CMA may decline a fast-track request where:
- it has been made too late in the proceedings to achieve the desired administrative efficiencies;
- it would hinder the CMA's ability to align its proceedings with other jurisdictions; or
- the merger involves highly complex markets or assessments, or where there is significant uncertainty on key points (e.g. market definition or areas of overlap between the parties), such that further investigation in Phase 1 would be beneficial.
Interim measures
The Mergers Guidance also provides a welcome update as to when the CMA is likely to consider Interim Measures (IMs)4 necessary. Generally, this reflects the CMA's increased use and more stringent enforcement of IMs, including in respect of anticipated mergers.
Helpfully, the Mergers Guidance provides an extended series of examples of when IMs may be considered necessary in a review of an uncompleted merger, including: where one merger party has begun to offer a service combining both merging parties' services or products; where the merging parties have begun implementing measures (such as redundancies) which may adversely affect their competitive capability; and where they are failing to incentivise key staff to stay with the business.
Additionally, the Mergers Guidance provides further direction for merger parties on how to comply with IMs. This includes a recommendation to review any ongoing contracts or contract proposals involving both merger parties (and to disclose any such arrangements to the CMA), and guidance on actions related to staff recruitment and retention (such as redundancy and performance improvement plans) which could breach IMs and therefore will likely require a derogation from the CMA before implementation.
Such amendments give merger parties greater certainty as to how they can effectively comply with IMs, and show that the CMA is alert to updating its policies to reflect lived experience. Other changes to the Mergers Guidance include amendments which provide greater clarity as to how the CMA will target (and potentially limit the impact of) IMs when the acquirer is a fund.
Investigations Guidance updates
Duty to preserve documents
Under the DMCCA, individuals and companies will be subject to a duty5 to preserve documents relevant to investigations under the CA98 where they know or suspect such an investigation is being or is likely to be carried out. When triggered, this duty will place a positive obligation on firms to suspend customary deletion of relevant custodians' data.
The Investigations Guidance explains that relevant documents are those connected to the subject matter of the investigation. This is an intentionally wide interpretation, and includes not just inculpatory or exculpatory documents, but also documents containing background information that provides an insight into market conditions etc. The Investigation Guidance advises, as a matter of good practice, that businesses should take a "broad view" of what may be relevant for document preservation purposes and ensure that they have appropriate document preservation policies that are fit for purpose in the context of a CA98 investigation.
The Investigations Guidance is silent as to when an individual or employer will be deemed to know or suspect that an investigation is being or is likely to be carried out. However, the Explanatory Notes to the Digital Markets Competition and Consumer Bill (as introduced in April 2023) suggest that the threshold in this regard is a relatively high one. Examples provided in the Explanatory Notes include situations in which a business receives a case initiation letter from the CMA and so is aware that its conduct is under investigation, or where relevant parties are "tipped off" that a cartel participant has blown the whistle to the CMA. This suggests that the threshold would not be met simply by virtue of another business in the same sector being the subject of a dawn raid.
Extraterritorial requests for information
The uncertainty as to whether the CMA can exercise its powers under section 26 CA98 to require the production of documents or information held outside of the UK was settled by the Court of Appeal judgment in BMW/VW6. Additionally, the DMCCA introduces an express power for the CMA to require the production of documents held outside the UK, provided the recipient of the request has a "UK connection" or their activities are being investigated under section 25 CA987.
In light of these developments, the Investigations Guidance directly references the Court of Appeal's judgment, and notes that "the expression "any person" in section 26 includes any person with or without a territorial connection to the United Kingdom."8 It also makes clear that the CMA considers that the new extra-territorial power introduced by the DMCCA is an addition to, and does not delineate or limit, the inherent extra-territorial nature of section 26 CA98. The CMA could therefore seek to compel the production of information held outside the UK even where the new legislative test is not met.
Other clarifications regarding information requests
The Investigations Guidance makes clear that where information requests are addressed to a specific entity, they will also apply to the undertaking as a whole. While this may seem an obvious point to make, it is an important reminder that companies with complex corporate structures (including overseas subsidiaries) cannot thereby escape the jurisdiction of the CMA. Separately, and aligning with the new duty of expedition introduced by the DMCCA, the Investigations Guidance suggests that the CMA may be less inclined to share information requests in draft than was previously the case, noting that whether it will do so will depend on the circumstances of the matter in question.
Revised settlement policy
Following an informal consultation held earlier in the year in respect of the CA98 settlement procedure, the Investigations Guidance explains that the CMA will increase the discounts on offer to settling parties: in non-cartel cases, parties may be able to benefit from a discount to fines of up to 40% if settling pre-Statement of Objections (SO), and up to 25% if settling post-SO. For cases involving cartels, the maximum discounts remain at 20% and 10% respectively.
Conclusion
The proposed amendments to the Mergers Guidance and Investigations Guidance are indicative of an adaptive and forward-looking approach by the CMA. While many of the amendments to the Mergers Guidance and the Investigations Guidance implement changes introduced by the DMCCA, other changes signal the CMA's intent to use its new powers expansively, as well as bring the guidance in line with existing CMA practice. Overall, they underscore the CMA's commitment to grappling with an evolving competitive landscape and a more assertive regulatory approach by the CMA.
Footnotes
1. Other draft consultation mergers documents contain only minor or consequential amendments and we have not focused on these in this article. Please see the CMA consultation page for more information.
2. Please see the CMA consultation page
3. Please refer to our previous article that summarises the key changes to the mergers and investigations regime introduced by the DMCCA.
4. Measures imposed by the CMA on parties during the merger review process to prevent or unwind pre-emptive action.
5. Previously, there was a limited duty under the CA 98 not to intentionally or recklessly destroy/ falsify/ conceal documents once individuals have received a CMA notice to produce a document.
6. CMA v BMW AG and VW ([2024] EWCA Civ 1506). See this previous article for further information.
7. This power was included in the DMCC Bill as introduced in April 2023, a little over two months after the Competition Appeal Tribunal ruled that the CMA's information requests did not have extraterritorial effect.
8. See paragraph 6.2 of the Investigations Guidance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.