Surprise, surprise

Why are so many companies surprised to find their mergers investigated by the CMA?

It’s partly down to the elasticity with which the CMA exercises its ‘share of supply’ jurisdictional test.

Over the past year of two I have featured some persuasive articles on this in my UK Merger Spotlight.

Perspective

It’s important, however, to keep a sense of perspective:

The share of cases examined under the share of supply test is well towards its CMA low, as the diagram here shows.

Growing Unease

Maybe there are other reasons why unease among merging companies and their advisers has been growing about ‘share of supply’ cases?

Here are three:

1. Collapse in Phase 1 ‘share of supply test’ clearances

As the following diagram shows, since mid-2019 the proportion of ‘share of supply’ cases cleared at Phase 1 has nose-dived.

By contrast, the proportion of clearances among cases investigated under the CMA’s £70m turnover test has continued to climb – up to a CMA record of nearly 75%.

2. More referrals of ‘share of supply’ cases for in-depth Phase 2 investigation

The proportion of ‘share of supply’ cases referred for a Phase 2 investigation during the second half of the CMA’s case portfolio has been double what it was in the first half. (Meanwhile the proportion for ‘turnover test’ cases has stayed about the same).

3. Worsening outcomes at Phase 2 for ‘share of supply’ cases

The proportion of ‘share of supply’ cases cleared at Phase 2 has also dropped sharply between the two periods (though here there has also been a smaller but significant drop in the proportion of turnover test cases cleared at Phase 2).

In 2020, these three developments have culminated in

• ‘Share of supply’ cases accounting for three quarters of the Phase 2 investigations completed to date
• Just one clearance  among these ‘share of supply’ Phase 2 cases and
• Over half prohibited by the CMA or abandoned by the parties.

So What?

1. Increases pressure for change

Well, for a start, the ‘share of supply’ case outcomes may explain some of the current criticism of the UK’s ‘voluntary’ notification regime.

Some would like the UK to move to a more ‘mandatory’ notification regime, with no share of supply test or with a share test that gives the CMA much less discretion. (It would, of course, be ridiculous to think that some such calls might also have anything to do with views on Brexit !)

2. Demonstrates the contribution of the ‘share of supply’ test

Second, the figures bring home how important the ‘share of supply’ test has been and continues to be to the UK merger control regime.

There is considerable onus therefore on those who advocate change to show how the contribution that the ‘share of supply’ test has made to the protection of UK consumers can be preserved or enhanced in any new system without adding unduly to the burden on merging parties or the taxpayer.

3. Provides important lessons for merging firms

And finally, for companies who may be considering merger in coming months the figures show how important it will be to take ‘share of supply’ test considerations fully into account in assessing UK merger control risk.

On this point it’s worth noting too that over a third of ‘share of supply’ cases examined so far this year were selected for investigation by the mergers intelligence function (a much higher proportion than for turnover test cases).

Especially in the new post-Brexit environment it is important for companies – even those with limited activities in the UK – to consider more carefully whether the CMA might take an interest in their deal, even where potential grounds for that interest might not be immediately obvious.

If that happens maybe the ‘share of supply’ test will spring fewer surprises in 2021 ?

In January 2021 I will be running a Merger Insight briefing discussing:

”The Extra Questions Merging Companies Need To Ask About The UK Share Of Supply Test.”

Details will be posted here. Do drop me a line if you would like to register interest now.

Thank you for reading this article — I hope you enjoyed it. Please do share it far and wide — there are handy sharing buttons nearby.