Over the last years merger control in the UK has evolved considerably. Leaving aside the move from a public interest to a competition test, the OFT has overhauled its procedures and processes with the stated aim of retaining a first class merger regime in world of change.

The authors examine whether we have now arrived at a stage at which we ought to pause and ask the question of whether the current voluntary regime provides an optimal solution for increasingly complex and global transactions.

The Competition Commission is thinking openly about a change to a mandatory merger regime and BERR is currently examining proposals to issue a consultation paper on improvement of the competition regime. The OFT also seems to be worried about some failings of the system. There seems to be a growing concern that it missing potentially harmful mergers that have not been notified and that pre-completed mergers can be used to harm competition pending any OFT review.

The authors believe that other weaknesses of the system such as an inconsistent approach de minimis markets and a highly restrictive approach to informal guidance could be rectified in a more fundamental re-modelling of the regime. A system could be devised that provides the increased certainty of outcome with the current flexibility of a voluntary regime.

Whether this is can provide an improvement will, however, depend largely on the implementation and the approach to be taken by the OFT. Ultimately, it will require an authority that can confidently identify cases that do not raise concerns and that has the procedural tools to terminate such cases early.

1. Too Little of a Good Thing - The OFT's de minimis Notice
The OFT has a general duty to refer a merger to the Competition Commission where it believes that the merger may cause a substantial lessening of competition. However this duty is not absolute but subject to the discretion, provided by the statute, not to refer if the OFT believes that the affected markets are not of sufficient importance to merit such a reference. (Sections 22(2) and 33(2) of the Enterprise Act 2002.)

The first attempt at such an exemption (published in 2003) set the threshold for sufficient importance at £400,000. Markets of such a small size were hard to find, with the result that the OFT did not apply the exception in any live cases.

In a renewed effort to breath life into the exception the OFT revised its guidelines November 2007 by raising the threshold to a more meaningful £10 million level and by introducing additional qualitative elements. The OFT will nevertheless examine sub-threshold transaction if (i) market shares (and entry barriers) are high (ii) there is evidence of pre-existing coordination (iii) the case involves novel issues; or (iv) there is a strong impact on vulnerable consumers.

The OFT applied the notice in a number of cases. The first three involved the acquisition of rail franchises, essentially on the basis of (i) the unique nature of issues raised in cases involving the award of rail franchises; (ii) the small scale of the issue involved; and (iii) the very limited adverse impact on consumer welfare. (For a detailed discussion of the provisions of the revised notice and subsequent cases see Houwen CLI 8 April 2008, p.8.)

More importantly, there OFT excluded the application in three recent cases involving markets below its £10m threshold.

In Dunfermline Press the OFT decided that it would not apply the de minimis guidance where the competition problem identified could be remedied through the adoption of undertakings in lieu. Such an approach seems to rest uncomfortably with the statutory language that provides for the power to accept undertakings only in circumstances where there is a duty to refer i.e. where the case is not de minimis.

In BOC/Ineos the total value of the affected market was only around £5.5 million with high combined market shares (70-80%). The OFT did not apply the notice on the basis of the market shares combined with "the potential for future coordination". This cuts across its own guidelines, which require evidence of existing coordination.

A cynic may speculate that the fact that the parties were part of large worldwide groups may have influenced the OFT. There is certainly no suggestion in the decision that the case raises any potentially important or novel issues in terms as set out in the OFT's guidelines.

A less cynical explanation may be that the OFT still finds it difficult to let go of such cases where in other circumstances it would have little problems in making a reference. The issue with this approach, however, is that this does nothing for legal certainty thereby undermining the rationale for the de minimis guidelines.

In Nufarm/A.H. Marks, the total size of the problem market was £3-8 million involving a merger to (almost) monopoly. The OFT's reasons beyond high market shares were (i) that the market size was at the higher end and that it was not persuaded that entry was sufficiently likely. The market size reason seems to us conceptual inconsistent with in set a de minimis level.

Moreover a large proportion of customers had no concern (although some did) and where there was no evidence in the parties' internal documentation that the acquisition was motivated by the acquisition of market power (rather than cost synergies as claimed by the parties).

More generally one has to question the value of a notice that is disapplied in at least as many cases as it is applied. In our view, it provides little, if any, help to parties planning transactions.

2. Compounding uncertainty: Informal Guidance
The OFT's very restrictive approach to informal guidance means that the parties have very little scope to reduce such uncertainty in dialogue with the OFT.
Informal guidance is now available only in cases that raise novel issues and only on a 'one-shot basis' (i.e. not an iterative process). The OFT has rejected a large majority of requests for informal guidance. This suggests that the threshold for guidance is now so high that that any case which meets the threshold the advice is likely to lead to negative guidance.

As a result, it seems that the informal guidance process provides little to increase certainty in complex cases generally.

3. Avoiding Gun-Jumping: Completed mergers and hold separates
Increasingly, the OFT has sought hold separate undertakings in completed mergers (e.g. Stagecoach, Global Radio and Spire Healthcare to name but a few) which suggests a real concern that in many cases further integration would harm competition in the long run. There is also some ongoing debate whether hold separates are sufficient as an interim remedy (see Peter Freeman Key Challenges at the Competition Commission, lecture at King's College London, 28 March 2008 - page 5).

Moreover, the OFT seems to fear that a number of potentially harmful cases are not notified and therefore avoid any regulatory scrutiny. In March of this year, the OFT has created a new screening unit for monitoring un-notified merger activity. While the OFT has screened the papers for many years, the introduction of a more structured approach suggests a concern that the OFT is not catching all relevant completed mergers.

It is therefore legitimate to ask whether a mandatory regime would avoid such issues.
4. Caveat Emptor: Key features of a mandatory merger regime
Even if one accepts all of the above as failings in a system, would they be solved by a mandatory system? And, if so, would that not through out the baby with the bathwater?
The authors believe that a mandatory regime would not necessarily require a complete overhaul of the existing framework and could be designed to retain specific advantages of the current system.

The following few paragraphs sets out some cornerstones of a possible system and the issues it would address.

First, a mandatory system would address the issue of having to unravel completed mergers that work against the public interest by giving the OFT notice of all mergers above certain thresholds. This means that the OFT's efforts will go into deciding cases, rather than searching for potential 'under the radar' cases.

Second, in order to work properly, this would probably mean departing from the market share test and adopt a stricter turnover based test. This ought to deal with the issues identified in the OFT's current de minimis approach by removing jurisdiction below a quantitative threshold.

It will clearly be a challenge to set the threshold at an appropriate level. This involves a trade off between the notification burden on business and the likelihood of detecting otherwise harmful but unnotified mergers.

The authors believe that even a relatively low threshold can work if (i) the authority has appropriate screening mechanisms in place that will allow it to identify 'no issues' cases; (ii) it has the ability to do this on the basis of relatively basic information and (iii) it has the institutional flexibility to adopt simplified clearance decisions in such cases. This works, for example, in the United States, Canada or Germany where the authorities regularly provide early termination decisions.

Third, this probably means that the OFT's current approach to informal guidance and in particular pre-notification needs to align itself to the Brussels process by moving away from a focus on collecting data towards discussion on the issues (or absence thereof). This would often need to be an iterative process in cases that sit at the threshold between simplified and normal procedure and those that are candidates for a reference.

Fourth, the introduction of a suspension requirement should be treated as a separate question. The German approach clearly demonstrates that a suspension requirement can clearly work even at low jurisdictional thresholds if a high number of no issue cases can be dealt with speedily. Other jurisdictions (e.g. Italy) demonstrate that it is equally possible to retain the benefits of a system that allows the purchaser to take on the antitrust risk even where there is an obligation to notify.

Moreover, we believe that the issues surrounding hold separate undertakings are less pronounced when the transaction has been notified and where the OFT has the opportunity to put in place such undertakings speedily after completion.

One could also think about a hybrid system, whereby, akin to the original ECMR, a suspension obligation exists, but only for a short initial period (say two weeks) during which the OFT can asses whether the case is a simplified one (in which case the parties can implement) or not (in which case they extend the suspension requirement).

Clearly, any of the above will have significant effects on both the authorities and on the parties to transactions and will require a significant amount of debate and thought. They are not intended as a blueprint for such a change but as points to consider in a more detailed debate of whether the current merger control regime optimises the trade-offs that invariably have to be made.

Maybe BERR's consultation provides a forum for such a debate.

John Schmidt is a partner specialising in competition law at leading UK law firm Shepherd and Wedderburn LLP.

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