Brexit is likely to have a significant impact on the M&A industry. Perhaps the most significant consequence is losing the one-stop-shop under the recast EU Merger Regulation, which simplifies merger procedures across the EU and now no longer applies to the UK market. This is likely to have far-reaching consequences for thousands of businesses operating within both the EU and UK jurisdictions. To further complicate the situation, the institutional differences, as well as the different substantive merger tests used by the authorities, bear the potential to result in diverging assessments of mergers – or the application of inconsistent remedies, even in cases where the overall outcome is the same. As a result of this, companies that are seeking or would otherwise have sought a merger in the post-Brexit era are exposed to additional risks and uncertainties. Possible consequences may range from simply higher costs and longer administrative processes to negative effects on the brand and product portfolios. This uncertainty might impact the undertakings’ long-term strategies and potentially delay or even deter corporate transactions altogether, thereby harming the overarching purpose of mergers: Realising synergies while maintaining a high degree of competition in the market.
Differences in institutional timelines and architectures
One circumstance that is likely to cause problems in this regard is the difference within the timeframe, in cases where mergers are deemed problematic and have to enter phase 2 investigations (both the relevant EU rules and the UK’s merger rules allow for similar informal discussions before the pre-notification phase). The European Commission usually takes up to 90 working days to complete a phase 2 investigation (with options to ‘stop the clock’ or to extend the period to 105 working days), while the UK’s Competition and Markets Authority (CMA) takes 120 working days (24 weeks), which can be extended up to 36 weeks to implement remedies. Although this might not seem too different at first, it may disrupt the course of mergers, especially in cases where the assessments already diverge in the early stages of the investigations. This can be caused inter alia by the institutional differences in the composition of the decision-making bodies of the Commission and the CMA.
Past cases, such as Unilever/Sara Lee, have shown that these timing issues between different jurisdictions can have a harmful impact on both the strategy and portfolio of merging businesses. In the present case, both South African regulatory authorities and the Commission had ordered the compulsory disposal of two different brands as a remedy in their respective jurisdictions, leading Unilever to sell both of them as keeping them only in certain parts of the world was not commercially viable.
Differences in the substantive merger tests applied in the EU and UK.
A second problematic issue is that differences remain between EU’s and UK’s substantive mergers tests. The significant lessening of competition (SLC) test, used in the UK’s merger regime, aims to investigate possible effects on the market, such as rising prices. Although the assessment of market power is also important for the likelihood of these consequences, this is not as central for the SLC test compared to the Dominance test, which proscribed a ‘concentration which creates or strengthens a dominant position’ and was used by the EU until 2004. The Dominance test was thus mainly focused on the market structure (in particular market shares) of dominant single undertakings, which could behave relatively independently from competitors.
This changed under Council Regulation 139/2004, which introduced the hybrid significant impediment of effective competition (SIEC) test, combining elements of both the dominance and the SLC test. This allows the Commission to assess mergers based on effects, such as dynamic changes in competition, the potential reactions of competitors, and clashes with Articles 101 and 102 TFEU. At the same time, the finding of dominance is still sufficient to classify a merger as problematic, thereby avoiding legal uncertainties by leaving the old Dominance test case law in place. While this might have closed the perceived enforcement gap under the old merger regime, it left the Commission with a relatively wide scope of discretion in the application of the SIEC test, as it may focus on both the effects and/or the presence of dominance in the post-merger market.
The case 2005 Pernod Ricard/Allied Domecq demonstrated that the European Commission occasionally still relies on dominance in its assessment of mergers, despite having an overall positive effect on the market. This is problematic not only because mergers in relatively narrow, oligopolistic markets can often lead to non-coordinated effects (which the dominance assessment does not necessarily capture) but also because the EU and UK assessments of potential remedies are thus based on fundamentally different substantive merger tests. In Pernod Ricard, the Commission decided that certain brands must be divested to reduce the market share in certain geographic and product markets. However, had this happened after Brexit, it is likely that the CMA, using the SLC test, would have unconditionally cleared the merger, as the effects on the UK market were assumed to be positive, leading to contradictory measures in both jurisdictions.
Substantive issues arising for cross-border mergers after Brexit
Before Brexit, any merger with an EU dimension that reached the relevant turnover thresholds as defined by paragraphs 2 and 3 of the preamble of Council Regulation 139/2004 fell under the sole jurisdiction of the European Commission. This not only allowed companies to benefit from the fact that all administrative procedures related to a merger were handled by one authority (the so called one-stop-shop), but also that potential remedies were more predictable and did not contradict each other within the EU’s jurisdiction. Today, companies find themselves in a situation in which independent legal procedures inadvertently impact each other, potentially having calamitous consequences for both companies’ business and long-term strategies. Therefore, a company that has already obtained clearance for a merger from one authority cannot be certain to obtain the whole portfolio of products when the other competition authority has not decided on potential remedies.
As a result, both the CMA and the Commission might accept a merger in general, but the small discrepancies in the procedures and respective substantive tests could still lead to the enforcement of different remedies, as also acknowledged by the CMA in a statement. This leads to increased uncertainty and costs, as merging entities might be pushed to divest certain products or brands from their portfolios to competitors. In the end, this could lead to dissuasive effects on M&A transactions with an EU-UK cross-border element. Positive effects and efficiency gains sought through mergers could thus be reduced in both markets, leading to the loss of a global competitive advantage.
Continued cooperation through implementation of Article 361(4) TCA
For these reasons, both sides should aim to maintain close cooperation to mitigate the impact of Brexit and to provide coherent and predictable decisions. As the EU–UK Trade and Cooperation Agreement (TCA) provisions on the competition law are quite general; we deem that it is crucial to institutionalize this cooperation through a bilateral agreement as envisioned by Article 361(4) TCA as soon as possible. Regular consultations on mergers involving both markets (as well as cooperation in other areas of competition law) could help to minimise, although not eliminate, the negative effects of Brexit. Even if the UK no longer enjoys unrestricted access to the EU’s Internal Market, close business relations between the EU and the UK will not cease to exist overnight and remain important for both sides.
Lukas Schaupp, Candidate, LLM European Law, University of Edinburgh
https://www.linkedin.com/in/lukas-schaupp-70b204176/
Jakub Brejdak, Master of Law, University of Warsaw
https://www.linkedin.com/in/jakub-brejdak-000418169/