Consultation on UK’s M&A regime means big changes

THE government is about to launch a consultation on major reforms of Britain’s competition (antitrust) regime. The competition rules won’t be changed, but rather the institutions and procedures by which they are administered. The implications for British business and finance will nonetheless be far-reaching.

Three key elements of the likely proposals are worth highlighting. First, the government wants to amalgamate Britain’s two main competition authorities – the OFT (Office of Fair Trading) and the Competition Commission – into a single body. This was first mooted last autumn, but there are huge questions about how it will be achieved. Resolving these is critical to whether businesses will receive fair and effective treatment in UK “merger control” (competition scrutiny of M&A transactions) and “market investigations” (eg those on the supermarkets and airports sectors in the past few years).

FIRST PHASE
Currently, for both merger and market investigations, the OFT conducts an initial “first-phase” assessment to see whether there are any concerns about competition that require further investigation; and, if there are, the OFT then refers the matter to the Competition Commission for an in-depth “second phase”.

An advantage of amalgamation is reducing unnecessary duplication between the two phases, which would save costs. But for amalgamation to work, a couple of questions in particular need to be addressed. One concerns fairness: if the same single body is conducting both phases, it’s important to ensure that the final outcome at the second phase is not prejudiced by the concerns formed in the minds of officials at the first phase – so-called “confirmation bias”. There will need to be different people within the single body taking the decisions at the first and second phases – but without losing the savings benefits of amalgamation; administrative support and other overheads can still be shared. The other point is that, currently at the CC, businesses involved in second-phase merger or market investigations have the benefit of dealing face-to-face with senior decision-makers (the CC “members”), not just with junior case officers – reassuring them that their views are being given a fair hearing. It is desirable that this benefit should somehow be retained in the new system.

MERGERS AND INQUISITIONS
The second major proposal relates to merger notifications (filings). At present, the UK competition regime is unusual in not obliging companies in M&A transactions to notify the competition authorities. For mergers under UK jurisdiction, notifying the competition authorities is voluntary – although, if there are real competition concerns, parties who don’t notify take the risk that the deal may subsequently be investigated and ultimately unwound. The government is contemplating introducing a mandatory notification system. Possible advantages of mandatory notification include ensuring that anti-competitive mergers do not escape detection – but that needs to be balanced against the unnecessary regulatory burden of having to notify even mergers that raise no real competition concerns.

Third – the system for investigating alleged cartels and other illegal anti-competitive behaviour. Here, responsibility has always rested with just one competition authority in the UK, the OFT. But that poses a fairness problem. The same officials who first suspect the alleged illegality, and then start investigating it, are also responsible for pronouncing the final decision on whether the company has behaved illegally, and indeed for imposing penalties (including substantial fines). It is as if, in an alleged robbery, the investigating police were allowed to give the verdict – and indeed to pass sentence. This hardly accords with modern principles of fairness and justice – and there are signs that the government may use this opportunity to introduce new procedural safeguards, which would be a welcome development.

Next month’s consultation, then, heralds significant changes in the way UK competition law is applied – and an important opportunity for those affected to have their say.

Michael Grenfell is a competition law Partner at Norton Rose LLP