The CMA’s efforts to make dynamic, forward-looking assessments of parties’ overlaps will only increase post-Brexit.
Dealmakers must be alert to the increasingly interventionist approach of the UK’s Competition and Markets Authority (CMA), including on transactions with a limited nexus to the UK. Until now, the European Commission has acted as a “one-stop shop” for large-cap transactions. But the end of the Brexit transition period means that from the start of 2021, acquirers may face parallel EU and UK investigations — with the effect that the CMA will play a more prominent role in reviewing global deals.
This is likely to increase the regulatory burden on acquirers, including for non-problematic cases, since the CMA has no equivalent to the EU’s “short form” procedure allowing for a more truncated and less burdensome notification in simple cases. Further, for potentially problematic cases requiring remedies, differences in process and the need for regulatory buy-in are likely to create challenges in ensuring that remedy offers can successfully straddle the EU and UK systems effectively.
Brexit and an Expansive Approach to Jurisdiction Brings More Deals In-Scope
The CMA’s increasingly interventionist approach has resulted in an increase in the number of cases being referred for an in-depth investigation.
The CMA believes that it may need to review up to 50 additional notifications each year as a result of Brexit. The increase in workload is also the result of the CMA taking an expansive approach to jurisdiction. Cases such as Sabre/Farelogix and Roche/Spark demonstrate that the CMA is making dynamic, forward-looking assessments of parties’ overlaps, even in cases in which the target had no revenues directly attributable to the UK. Further, the CMA can and often does investigate acquisitions of “material influence”, such as E.ON/RWE and Amazon/ Deliveroo, both of which involved influence being conferred by a circa 16% shareholding.
Use of Initial Enforcement Orders Poses Challenges for PE
In the UK there is no requirement to obtain clearance prior to closing. However, the CMA’s powers give it considerable leverage to investigate deals that are of interest to it. Indeed, the UK’s “voluntary” merger regime operates increasingly like a mandatory regime, not least because of the CMA’s use of hold separate orders or Initial Enforcement Orders (IEOs). The “quasi-mandatory” nature of the UK regime means that acquirers will have to make difficult judgment calls in relation to filing strategy in the UK. The CMA will invariably impose an IEO on any completed transaction that it investigates.
From a PE perspective, the key takeaway is that the starting point is for an IEO to apply to all global operations of the entire organisation. In the case of a typical private equity acquisition structure, that would now include the newco stack, the investing fund, affiliate funds, and advisory entities. An IEO freezes any further integration of a completed transaction, and may even require that any integration that has already taken place be reversed. The order also places significant restrictions on the acquirer to “preserve the competitive structure of the market”.
Derogations can be agreed and accepted in advance to ensure that the operative provisions of the IEO only extend to the overlapping portfolio company(ies) and the actual acquiring fund. However, this process can take time, is subject to negotiation, and the CMA does not always accept requested derogations.
While the new environment is challenging for acquirers, deal teams can mitigate the risks, and early engagement with the CMA is vital.