The UK’s Competition and Markets Authority (CMA) recently decided that the proposed takeover of Sky by 21st Century Fox (Fox) would not be in the public interest. The decision was based on media plurality concerns with the CMA wanting to ensure a diverse range of viewpoints are made available to consumers.
This proposed takeover was ongoing when The Walt Disney Company (Disney) made a bid to take over Fox, the latter of which owns 39% of Sky. If the Disney takeover is successful and if the Fox takeover of Sky is also authorised by the CMA (a final verdict is expected in June this year), Sky will come under the full ownership of Disney. The Takeover Panel also ruled that if only the Disney takeover is successful, they will be required to make a full takeover bid for Sky.
So, how could the merger rules affect you? A company looking at a potential merger or acquisition in the UK, in a similar sector, should consider the importance of the CMA’s competition rules. Alternatively, a company could be affected by a merger of similar businesses and want to know if, and how, it will be protected to ensure competition remains fair.
A merger may qualify for investigation by the CMA where:
- two or more enterprises (the activities of a business) cease to be distinct; or
- there are arrangements in progress or in contemplation which, if carried out, would lead to enterprises ceasing to be distinct;
- and either:
- the combined enterprise would have a market share of 25% or more in the UK or an existing market share of 25% or more would be enlarged; or
- the UK turnover of the target business exceeds £70 million.
The review process
When investigating a merger, the CMA follows a two stage process. The first stage is an initial review of the merger to establish whether it raises any competition concerns – the ‘phase one’ investigation. The second stage, the ‘phase two’ investigation, is an in-depth review of more controversial mergers.
Following the phase one review the CMA is under a ‘duty to refer’ mergers for a phase two investigation where that merger has resulted, or is likely to result, in a substantial lessening of competition in a UK market. The CMA can investigate a merger based on its own initiative using information available in the public domain or following notification from one of the parties to the merger. It is also possible for a third party to challenge a proposed merger.
It is not compulsory to notify the CMA of a merger (which contrasts with many other jurisdictions) but it is still important, at the earliest possible stage of a merger, to consider any potential merger control issues and, if you think there could be a risk, to notify the CMA. Even without being notified, the CMA may still become aware of the merger and could place it under review (even post-completion). So if a company does not notify the CMA and an investigation follows, not only might there be legal issues and sanctions to overcome, there is also the possibility of delays to completion, additional legal fees, investigations and/or fines and the prospect that the transaction may not be allowed to proceed or, if it has already been completed, it could be reversed.
Where there is a ‘public interest’ in a merger, such as the proposed takeover of Sky, the Secretary of State can step in and is given the power to refer the merger for a phase two investigation. ‘Public interest’ is limited to matters of national security, plurality and other considerations relevant to the media, and the stability of the UK financial system.
Protecting national security
Last month the Government published proposed amendments to the merger control regime, which are likely to be implemented soon. Changes are to be made to the merger control tests which will apply to the following:
- the military and dual use sector (this covers products which have both military and civilian uses); and
- companies whose business involves activities relating to computer processing hardware and/or quantum-based technology.
The Government highlighted that advances in technology are usually driven by small businesses and that mergers involving these smaller entities pose a real risk to national security. Therefore the proposals are to reduce the £70 million threshold to £1 million in these cases and to remove the requirement for the merger to increase the shares of supply to over 25%. The existing thresholds will continue to apply to all other sectors. If a merger satisfies these new requirements the Secretary of State will have the power to intervene and potentially prohibit the merger on grounds of national security.
The UK’s merger control regime is vast and complex and each merger is different. It is therefore crucial to consider the regime’s relevance in light of every transaction. If in any doubt, you should seek guidance.
This blog post was written by Katherine Hornsby. For further information, please contact:
Sophie Brookes, partner, Corporate team
T: 0161 836 7823