Representing the most significant reform to UK competition and consumer protection laws for over 20 years, the DMCC Act introduces substantial changes in relation to:
- Digital market regulation
- Merger control and competition law enforcement
- Consumer protection (discussed here)
In this briefing, we highlight the key takeaways relating to competition law enforcement and merger control that will be of interest to a wide range of organisations in the life sciences sector.
Changes to the UK merger control regime
The UK merger control regime remains voluntary and non-suspensory. This means that the question of whether to notify the Competition and Markets Authority (CMA) about a merger which qualifies for review involves an assessment of a range of factors, including the risk of the deal resulting in substantive competition concerns and whether the subject matter of the transaction is likely to be of interest to the CMA.
A merger qualifies for review when two or more “enterprises” cease to be distinct and
- The UK turnover of the target exceeds £70 million or
- The merger creates or enhances a share of supply of 25% or more in goods or services in the UK (or a substantial part of it).
The non-suspensory nature of the regime also means that there is no obligation to wait for clearance from the CMA before completing a transaction.
The DMCC Act does, however, bring about a change to the merger control thresholds, which is aimed at capturing so-called “killer acquisitions.” These are acquisitions in which small, innovative, start-ups are acquired, often for a high value. The CMA (like many other competition authorities) have been concerned that these deals have not been caught by the UK merger control rules as they stand, because the target often generates little or no turnover or has little in terms of existing market shares. This “enforcement gap” has been a particular concern for deals in the life sciences sector; an acquisition of a highly innovative target removes that innovation from the market, thereby adversely impacting on future competition.
The DMCC Act seeks to address this by introducing a new threshold, enabling the CMA to review acquisition where:
- At least one merging party has an existing share of supply of 33% in the UK and UK turnover of at least £350 million
- The target has a UK nexus
The test operates in such a way that the buyer alone can meet the threshold, without there being any increment at all to its market share; and the concept of a “UK nexus” is potentially extremely low, and the 33% share of supply threshold is potentially broad.
The CMA has demonstrated that it has a wide discretion when applying the existing “share of supply” test; for example, in Roche Holdings, Inc/ Spark Therapeutics, the CMA found that both firms were active in the supply of Hem A treatments in the UK, notwithstanding that the US based target, Spark, was not engaged in the commercial supply of any goods or services in the UK, not generating any UK turnover. The CMA considered that the 25% threshold in the “share of supply” test was met by reference to the number of UK-based employees engaged in activities relating to certain Hem A treatments.
The changes bring about some welcome clarity in other respects, which may be helpful for smaller deals in the sector:
- There's an uplift in the turnover threshold, from £70 million to £100 million to take account of inflation
- There's a new safe harbour for small deals. Where each party has a UK turnover of less than £10 million, the deal will be exempt from the merger control regime, even if the share of supply test is met
The DMCC Act will also bring about changes to the merger control processes aimed at making them more efficient, including a fast-track reference to an in-depth phase 2 enquiry upon request from the merging parties and the ability to extend the phase 2 timetable by consent.
Changes to CMA investigations and powers of enforcement
The DMCC Act will see an expansion of the territorial scope of the UK’s competition rules on anti-competitive agreements. These rules will apply to agreements implemented outside the UK which have an effect within the UK. This change brings the UK into line with the rules of other important jurisdictions, such as the European Union. However, there will be no change to the territorial scope of the rules prohibiting the abuse of a dominant position; to fall within the scope of the prohibition, businesses must have a dominant position in the UK.
The DMCC Act will also introduce:
- enhanced investigative powers for the CMA, including powers to issue information notices and compel companies domiciled outside the UK to produce documents held outside of the UK in certain circumstances (where the person is party to a merger, or subject to a competition investigation, or has a UK connection); and
- enhanced penalties for procedural infringements, with fines for companies moving from a fixed cap of £30,000 to a cap of 1% of global turnover; whilst daily penalties are increased to 5% of global daily turnover. This change will also bring the CMA’s powers in line with the powers of other competition authorities, such as the European Commission.
This raises the stakes significantly in terms of compliance with the CMA’s processes and procedures, such as responding to a formal request for information during a merger inquiry, or during an investigation; the risk of non-compliance now carries a potentially eye-watering penalty.
Comment
For organisations in the sector planning transactional activity (including joint ventures which in certain circumstances can be caught by the UK merger control regime), the addition of a new threshold means an early assessment of whether the transaction may qualify for review by the CMA will be critical. This will enable an assessment of risk and appropriate regulatory strategy to be formulated early in the planning stages, thereby “smoothing” the regulatory path.
The new rules relating to investigations and procedural infringements are of relevance to all organisations in the sector. The sector is likely to remain an enforcement priority for the CMA, meaning that all organisations should take the opportunity to familiarise themselves with the rules before they come into effect later in the year.
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