Merger Controls First Edition - J Sagar Associates

Ashurst LLP United Kingdom
were given by FirstGroup plc in 2004 (when it acquired the Scotrail rail franchise) to prevent it from altering the
service levels and fares on specific bus routes around Edinburgh and Glasgow. The scope of these undertakings was
reduced in 2010 when FirstGroup demonstrated that many of those routes were now loss-making due to reduced
passenger numbers and/or increased operating costs. The loss-making routes were either removed from the scope of
the undertakings, or changes to the routes were permitted. Similarly, price cap undertakings given in 2002 by FirstBus
in relation to its acquisition of another Scottish bus operator were amended by the CC because the original price cap
mechanism was based on a GB-wide index which was no longer appropriate. In the intervening period, the Scottish
government had taken over responsibility for a previously GB-wide bus grant and was now paying at a different level
to the England and Wales version of the grant. As a result, the price cap was constraining FirstBus to price increases
which were below cost increases. The price cap mechanism was therefore amended to incorporate an appropriate
Scottish index; and
• finally, undertakings may require adjustment to reflect changes in the legal environment. The Centrica undertakings
discussed above also required amendment to ensure that they complied with the requirements of the EU Third
Internal Energy Market package.
It is very important for the parties which have given undertakings that review and amendment is possible. These processes
are essential to ensure that the undertakings do not themselves begin to distort competition over time. Detailed reviews
will be undertaken by the OFT but the final decision is taken by the CC. Parties to undertakings may make a request to
the OFT for variation or termination of undertakings but the OFT is also under a general statutory duty to keep undertakings
under review and so can launch a formal review of undertakings on its own initiative. However, it must also be noted that
the OFT applies its overarching “prioritisation” criteria to undertaking reviews and so may refuse to consider a request for
variation or termination if it considers that its limited resources would be better deployed on other tasks.
Reform proposals
In early 2011, the UK government published a major consultation document which raises for discussion major reforms to
many aspects of the UK competition regime, with a view to any resulting changes coming into effect in 2013.
One of the most significant proposals, stated to be the preference of the government, is to merge the OFT and CC into a single
body, with the current working title of the Competition and Markets Authority (CMA). However, there is considerable debate
about how such a combined body would be structured. Much of the debate reflects the current UK institutional separation of
first stage merger reviews (undertaken by the OFT) and the more detailed second stage investigations (undertaken by the CC),
which is seen as a source of robustness and quality of decision-making, which eliminates the risk of confirmation bias. As
noted above, in the 3 years ending 31 March 2011, 58 per cent of mergers referred to the CC were cleared unconditionally, and
in the year ending 31 March 2011, all referred mergers were cleared unconditionally. At this stage, it is difficult to predict the
outcome as regards the structure of the new body, although it does appear likely that if the proposals are adopted, a group of
“independent” second stage decision-makers in merger cases will be retained.
The UK was one of the first jurisdictions in Europe to have merger control legislation and it has always rested on a
presumption that merger activity is positive for the economy. Intervention should therefore only take place where it is
clear that a particular merger can be expected to have significant adverse effects. This presumption underlies the voluntary
nature of the UK regime, with no obligation to notify, and no obligation to wait for clearance before completing the merger.
This approach was retained through subsequent legislative overhauls in 1973 and 2002 and remains a fundamental and
distinguishing characteristic of UK merger control to the present day. It results in a regime where no notification costs or
transactional delays are imposed on the parties to innocuous, issue-free mergers of whatever scale. In more contentious
mergers, the UK regime allows the parties to negotiate who will bear the competition risk (put at its simplest, the risk of
prohibition of an uncompleted merger falls on the seller, and the risk of prohibition of a completed merger falls on the
purchaser, whilst in practice parties often negotiate detailed risk-sharing mechanisms). Refinancing and debt/equity
adjustments which do not change the competitive impact of the merger can be done without the delays inherent in merger
notification or clearance.
However, over the last few years, most second stage mergers reviewed by the CC have been completed mergers, some of
which were prohibited and proved difficult to unwind. A former Chairman of the CC, Peter Freeman, started to debate publicly
(first in a speech in December 2004) whether a system of compulsory notification would be preferable (without, at that stage,
expressing any firm view himself in favour or against). By 2008 (in a speech in May 2008), and after further difficulties in
dealing with the parties to completed mergers, he was in favour of moving to a compulsory regime.
The UK is, in 2011, very unusual in having a voluntary regime. The vast majority of EU merger regimes are heavily
inspired by the EUMR approach of mandatory notification and clearance before completion may take place. There is a
drive, at EU level, to promote soft harmonisation of merger control legislation with all Member States following the EU
merger control model.
The government has acknowledged these national and EU-level concerns and the current reform proposals include the
possibility of moving to a compulsory notification system in the UK. Two alternatives are proposed:
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