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UK merger control

The Enterprise Act 2002 (the "Act") contains the main domestic legislation on the control of mergers involving one or more UK businesses. There are special provisions dealing with newspaper mergers and media mergers. Certain mergers in regulated sectors may also be governed by relevant industry Acts. The Act applies to "merger situations" involving two or more enterprises, of which at least one is carried on in the UK, or by or under the control of a company incorporated in the UK. Merger Situations Covered by the Act A relevant merger situation occurs when an "enterprise ceases to be distinct". This happens when enterprises are brought under common ownership or control, or where there are arrangements whereby one or more enterprises ceases to be carried on. A merger can therefore arise either where there is a change of control in a company (for example upon a sale or issue of shares), or where there is a change of control or ownership of a business. There are three levels of influence over an enterprise: I. The acquisition of the ability to exercise material influence A shareholding of 25% (with equivalent voting rights) enabling the shareholder to block special resolutions, will usually amount to material influence, even if all other shares are held by one person. A shareholding of between 15% and 25% (with equivalent voting rights) may give material influence, depending on the size of the other shareholders. A shareholding below 15% (without any additional voting rights) is unlikely to involve material influence, unless the target is a large listed company with no other substantial shareholders. The acquisition of the ability to control policy This amounts to de facto control. It arises when the acquirer has a sufficiently large shareholding and/or other rights in the target to enable it, in practice, to control the policy of the target, even though it has less than 50% of the voting rights. The acquisition of a controlling interest This is outright or legal control, which normally means a shareholding with more than 50% of the voting rights in the target.

II.

III.

A merger situation arises either when control, at whatever level, is first acquired by the party concerned or when an entity which already has some control (at the material influence or de facto control level) acquires a higher level of control. Jurisdictional Thresholds A merger may be investigated by the Office of Fair Trading and referred to the Competition Commission for a detailed investigation if it:

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I. II.

creates or strengthens a share of supply of more than 25% in the UK or a substantial part of it (the share of supply test), and/or involves the acquisition of a target company which has a UK turnover of more than £70 million (the turnover test)

It is important to note that the term "share of supply" is not synonymous with market share. Generally when competition lawyers refer to market shares they are assuming that the market has been properly defined and a share calculated on that basis. The share of supply test allows the Office of Fair Trading to consider segments of the market that may be considerably narrower than the market would be if it were actually defined. The UK operates a voluntary merger control system and so there is no obligation to notify the transaction if the thresholds set out above are met. However, where the thresholds are met the Office of Fair Trading may take jurisdiction over the transaction which may result in the transaction being notified to the Competition Commission. Therefore, notifications are often made to ensure that the Office of Fair Trading will not decide to refer the transaction. The Role of the Office of Fair Trading The Office of Fair Trading is responsible for the initial investigation and, if necessary, for referring a merger to the Competition Commission for detailed investigation. The Secretary of State for Trade and Industry will only be involved where a case raises defined public interest issues. Subject to a few exceptions applicable only in limited circumstances the Office of Fair Trading will have a duty to refer a relevant merger situation to the Competition Commission where it holds a reasonable belief that there is a reasonable prospect that the situation has, or may be expected, to result in a substantial lessening of competition within any market or markets in the UK for goods or services. The exceptions to the duty to refer cover transactions that are still not certain to go ahead, transactions in small markets (less than £10 million in value) and transactions in relation to which sufficient countervailing customer benefits can be identified. The Substantial Lessening of Competition Test The substantial lessening of competition test (the "SLC test") is a purely competitionbased test. According to the UK Guidelines on Mergers, the Office of Fair Trading views competition as "a process of rivalry between firms seeking to win customers' business". When this process of rivalry is effective, it compels firms to deliver benefits to customers in terms of prices, quality and choice. When rivalry is reduced, the effectiveness of the process may diminish and this will have a knock-on effect on customers. The Office of Fair Trading acknowledges in its Guidelines that many mergers may be pro-competitive or neutral, having no effect on the competitive situation on the market. A merger may be expected to lead to a substantial lessening of competition when it is "expected to weaken rivalry to such an extent that the competitive process would no longer deliver a similar level of customer benefit as it would without the merger", where such post-merger effects are expected to be sustained for more than a short period of time. The application of the SLC test will depend on the specific facts of each relevant merger situation, the parties to the transaction and the market structure in which the transaction takes place. Notification to the Office of Fair Trading The Act does not require mergers to be notified for prior clearance and in this regard the system is voluntary. However, even if a merger is not notified the Office of Fair Trading

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may become aware of it from the press, other media or following a complaint. Once it has become aware of a merger, the Office of Fair Trading is obliged to consider whether the Act applies to it and often sends a questionnaire to the parties, asking them to provide sufficient information to allow the Office of Fair Trading to determine whether it has jurisdiction. The parties to a merger may ask for confirmation from the Office of Fair Trading that it does not intend to make a reference to the Competition Commission for a detailed investigation. There are three ways of obtaining the Office of Fair Trading's view on a merger: I. By making an informal notification to obtain clearance. There is no binding timetable for this procedure, although the Office of Fair Trading 's administrative guidelines state that it should be able to issue a decision within about 40 working days. By applying under the statutory merger notice procedure for clearance. The official merger notice form should be used. The Office of Fair Trading must respond within 20 working days, subject to extension by up to 10 working days. This procedure may not be generally favoured as the Office of Fair Trading does not like to be bound into the mandatory timetable specified by the Act. By obtaining informal advice from the Office of Fair Trading, before knowledge of the transaction is made public, as to what the likely competition issues will be. However, informal advice cannot bind the Office of Fair Trading . Informal advice will be based on the information provided by the parties and cannot account for the views of third parties and, as a consequence, may not be able to provide the parties to the transaction with sufficient comfort.

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Fees In common with many other merger control systems around the world the UK system provides for fees which are paid to the Office of Fair Trading when a formal merger notice is submitted or, otherwise, at the point when decision on referral to the Competition Commission is taken. There are three bands of fees depending on the value of the UK turnover of the enterprises being acquired: £15,000 where the value of the turnover is less than £20 million; £30,000 where the value of the turnover is more than £20 million but less than £70 million; and £45,000 where the value of the turnover is more than £70 million. Investigation by the Competition Commission The Competition Commission is normally asked to complete its investigation into a merger within 24 weeks, with a possible extension of a further 8 weeks. The announcement of a reference automatically prohibits a purchaser acquiring any further shares in the target (if it is a company). The Office of Fair Trading can also make an order, or require undertakings from the parties, preventing them from doing anything which might prejudice the Competition Commission's investigations. In particular, the purchaser is likely to be prevented from taking any steps to consolidate the target or acquired business with its own business. If the Competition Commission considers that a merger is likely to have serious anticompetitive effects and therefore submits an adverse report, it must indicate what steps must be taken to alleviate those effects. The steps required may include divestment, the giving of undertakings (if the merger has already been completed), or a prohibition on

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completing a merger. The steps are enforced by the Office of Fair Trading. The parties can appeal any remedies required for a clearance. If the merger has been completed and divestment is ordered, the purchaser must identify a new purchaser for the relevant business or assets within a specified period of time. Importantly, the purchaser would have to accept whatever price was on offer (this is known as a "fire sale") and, in addition, would probably have to obtain the Office of Fair Trading's prior approval of the new purchaser. The explanation of UK merger control set out in this document contains summaries of complicated issues and should not be relied upon in relation to specific matters. You are advised to take legal advice on particular problems and we will be happy to assist.

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