(7 min read)
The Digital Markets, Competition and Consumers Act 2024 (DMCC Act) has now received Royal Assent. In this first part of our briefing series on the DMCC Act, we focus on what the reforms mean for future transactions from a UK merger control perspective.
Over a year since its introduction in Parliament, the eagerly anticipated DMCC Act received Royal Assent on 24 May 2024. The DMCC Act establishes a new regulatory regime for large digital platforms, as well as comprehensively reforming existing competition, merger control and consumer law in the UK. You can view our May 2024 briefing here.
This first part of our briefing series focuses on changes to the existing UK merger control regime. While most of the DMCC Act is not yet in force (pending the publication of separate implementing regulations), we anticipate that the new merger rules will become operational by Autumn 2024 – although the recently announced UK general election may cause some delay. In the meantime, companies should familiarise themselves with the new regime and carefully consider the impact on their near-term M&A pipeline.
Businesses contemplating UK acquisitions in the coming months should be aware that:
- The UK merger control regime remains voluntary and non-suspensory. There is one limited exception: a mandatory deal reporting requirement for the few largest digital platforms, who will be specifically identified by the CMA over the coming months;
- The Competition and Markets Authority (CMA) will have a significantly increased jurisdictional reach over deals between non-competitors, thanks to the introduction of a new threshold aimed at capturing most UK-connected deals of acquirers with significant UK turnover; and
- The CMA will no longer be able to intervene in deals between very small UK businesses with turnover of £10 million or less, even if the parties are close competitors.
Changes to merger control thresholds - New ways for the CMA to assert jurisdiction over transactions
What are the new UK merger control thresholds?
- Once the merger control provisions of the DMCC Act are in force, the CMA will have three (not two) alternatives ways to assert jurisdiction over deals. Click on the link to our handout at the bottom of the page for a summary.
- First, there is a new acquirer-focused share of supply threshold, which is triggered where:
- one party has a share of supply of at least 33% and a UK turnover of above £350 million; and
- another party has a connection with the UK (" UK nexus") – this would be established in situations where the party in question carries on activities in the UK or supplies goods or services into the UK (as well as the more obvious scenario of a party being a UK-registered business).
- Secondly, the existing 25% share of supply threshold remains, but now includes a safe harbour for small and micro businesses, so that the CMA cannot assert its jurisdiction to review transactions where each party has a UK turnover below £10 million.
- Thirdly, the existing target turnover threshold of £70 million is being increased to £100 million to account for inflation.
My deal meets one of the new thresholds. Will I need to wait for CMA approval before closing the transaction?
- No. The UK merger control regime remains voluntary and non-suspensory. This means parties can close their deals without notifying the CMA and without prior CMA approval. The one new (limited) exception is the mandatory deal reporting requirement for firms designated as having strategic market status under the new regulatory regime for digital "gatekeepers" (see below and in our summary handout accessible at the bottom of the page).
- However, whilst the UK regime remains voluntary, the CMA still has the power to call-in deals for review based on its own market intelligence. Businesses should continue to base their CMA engagement strategy on the substantive competition risk presented by the transaction and choose between the options of formally filing, submitting an informal briefing paper or no CMA engagement, and may need to reflect the level of risk in Share Purchase Agreement conditions.
What is the rationale behind introducing a second share of supply threshold?
- The aim behind the new "acquirer-focused" threshold is to make it easier for the CMA to review deals between non-competitors (e.g., expansion into adjacent markets or investments into different levels of the supply chain), as well as suspected "killer acquisitions" involving a nascent rival - even where the target has no (or very limited) revenues and competitive presence in the UK. While the CMA successfully asserted jurisdiction over such deals already prior to the DMCC Act, it had to find creative ways to establish an apparent "overlap" between the parties under the existing 25% share of supply test. This required complex fact-gathering, took up significant staff time and resources, and left the CMA exposed to the risk of legal challenge. With the new threshold, the CMA will find it easier to quickly and clearly establish jurisdiction, without having to undertake this resource-intensive work.
Will the CMA now be able to claim jurisdiction over most deals in the UK?
- The new 33% share of supply threshold significantly extends the CMA's jurisdictional reach over deals between non-competitors. Large UK acquirers (i.e., those with UK turnover above £350 million) may indeed find that they trigger the 33% share of supply threshold by default, as no overlap or increment in a robustly defined economic market is required to meet the test. In many cases, it will be hard to conclusively establish that an acquirer does not have a 33% share on some cut of the market or permutation of supply, particularly if the CMA continues to apply the share of supply threshold within narrow segments or local geographic areas. The UK nexus requirement for the target is also easily met.
- UK acquirers caught by the "one-party" threshold will certainly find it more difficult to argue the CMA lacks jurisdiction to review a transaction. However, in practice, the strategic approach to UK merger control risk remains unchanged. As the UK regime remains voluntary, in practice it is only those deals that raise substantive competition issues that will be at risk of being called in by the CMA for an investigation.
Do acquisitions of a low-turnover business now get a "free pass" on UK merger control?
- Where each party to the transaction (including the entirety of the buyer's corporate group) has UK turnover of £10 million or less, the CMA will indeed not have jurisdiction - even if the deal gives rise to a prima facie substantive competition issue. This is good news for small and micro businesses who will no longer have to incur legal costs in considering the appropriate UK merger control strategy. However, the benefit of the safe harbour is going to be limited in practice, as the buyer's group turnover also needs to be below the threshold. It will not prevent the CMA from scrutinising PE buy and build strategies (e.g. recent vet sector deal reviews) and investments by international conglomerates in a low-turnover UK business.
A more streamlined phase 2 process and stronger prodedural powers
Will the new Phase 2 process be more tolerable and less resource intensive for businesses?
- The DMCC Act introduces a number of procedural changes to the Phase 2 process and timeline. Click on the link to our handout at the bottom of the page for a summary.
- The reformed Phase 2 process is still an in-depth investigation by the CMA, carrying significant time and cost implications for businesses. However, the changes to the Phase 2 statutory timeframe are intended to allow for a less pressured process and better engagement with the CMA on both substance and remedies, and dovetail with other, more significant procedural improvements that were recently introduced in the CMA's updated guidance – for example, issuing interim findings earlier in the process and providing opportunities for more frequent, direct touchpoints with decision makers.
Can the CMA request information and documents from a non-UK group company?
- Yes. The DMCC Act provides a clear statutory basis for the CMA's powers to require the production of documents and information held outside the UK from a party to the transaction or another person with a UK connection. Higher limits for penalties will also apply – companies can be fined up to 1% of global turnover and up to 5% of global daily turnover for failure to comply with formal information requests, breaches of undertakings and non-compliance with orders imposed by the CMA during a merger investigation. The CMA's stronger information gathering powers make the timely risk assessment and planning of transactions with a UK connection all the more crucial.
Mandatory deal reporting for the largest digital platforms
Which digital businesses will be required to notify the CMA of a planned transaction?
- The DMCC Act introduces a new mandatory, pre-completion merger reporting requirement but only for the few largest digital platforms with very significant global or UK turnover, who have been designated as having strategic market status. Click on the link to our handout at the bottom of the page for a summary. Failure to comply with the requirements could result in penalties of up to 10% of global turnover.
- As the reporting thresholds will be easily triggered, in practice these platforms will need to report most of their UK-connected share acquisitions and new joint venture formations (including non-controlling minority investments) to the CMA prior to completion. Alternatively, instead of making the report, they may choose to submit a full merger notice and undergo a formal Phase 1 review in the usual way.
How will I know if my business is a digital platform with strategic market status?
- Having strategic market status means having substantial and entrenched market power and a position of strategic significance in relation to a "digital activity" (which is defined very broadly and includes for example, the provision of any service via the internet, or the supply of digital content). There is also a high turnover threshold (>£1 billion in the UK or >£25 billion globally). Only the largest, globally prevalent digital platforms will meet these criteria. Once the DMCC Act is in force, the CMA will conduct individual assessments to identify companies with strategic market status, and publicly consult on its designation decision. It will therefore be very clear, in the coming months, whether a business is, or is not, subject to the reporting obligation.
My business is a digital platform that is likely to be subject to the mandatory reporting rules. Will I need to suspend completion until the CMA approves the transaction?
- Yes, but only for a short 5 working day waiting period (unless the CMA consents to completion earlier). The waiting period starts on the first working day after the CMA confirms the report contains sufficient information (which it must do within 5 working days from notification). By the end of the waiting period, the CMA will inform the acquirer that:
- it has no further questions about the transaction at that stage – much like with the current briefing paper process, this can be taken to indicate a "soft clearance"; or
- it has decided to launch a formal merger review, as there is a reasonable chance the deal might raise prima facie competition problems; or
- that it is continuing to assess whether to open an investigation (in this case, acquirers should expect a request for further information from the CMA).
- The waiting period therefore falls short of being truly suspensory as digital firms designated as having Strategic Market Status will still be able to close the deal even if the CMA ultimately decides to formally investigate (in which case, the parties will need to be prepared for a so-called initial enforcement order – a form of hold-separate / "freeze" order routinely issued by the CMA in virtually all completed mergers). For deals where the risk of the CMA opening a formal investigation cannot be clearly ruled out, it will therefore be important to reflect the possible CMA outcomes in deal conditions precedent. These can be drafted flexibly, with completion being conditional only on the CMA confirming it has no further questions (for lower-risk deals) or in the alternative, a CMA clearance decision following a Phase 1 review.
