The UK Government announced recently that parts of the Digital Markets, Competition and Consumers Act 2024 (the “DMCC Act”) relating to digital markets and enhancing the competition powers available to the Competition and Markets Authority (the “CMA”) are intended to come into force in December 2024 or January 2025. The UK Government intends to pass Secondary Legislation needed to bring this into force in the coming months. The CMA will also need to issue guidance on how it will utilise its new powers, and has already begun to consult on a number of aspects.
The existing jurisdictional thresholds in the UK are not sector specific and require that, for the CMA to have jurisdiction to review a transaction, the acquired business must have generated £70 million revenues in the most recent financial year or the combining businesses have an overlapping share of supply of goods or services in the UK of at least 25% of a given market. While the UK’s merger control notification regime is voluntary in principle, the CMA is very active in monitoring for and calling in deals where it considers that it may have jurisdiction and there is a potential substantive competition issue to review. The CMA also encourages and reviews a large number of informal briefing papers where there are questions around jurisdiction or other possible issues.
The new rules coming into force will have a significant impact on transactions over which the CMA can exert jurisdiction:
- A new set of thresholds will come into force which will give the CMA jurisdiction to review deals where at least one party (e.g. potentially just the acquirer) has a 33% UK share of supply in any market and UK turnover exceeding £350 million.
- While the generally applicable merger control thresholds above remain part of a voluntary notification regime, the DMCC Act will introduce a mandatory notification requirement for companies designated as having Strategic Market Status (“SMS”).
- The existing jurisdictional thresholds will be amended to raise the revenue threshold and provide a safe harbour for transactions involving smaller companies.
We explore each of these amendments below, which may significantly expand the impact of the UK’s merger control regime as it relates to companies active in digital markets.
The new, alternative set of thresholds
A significant new set of thresholds has been introduced, which capture transactions where at least one party (e.g. potentially just the acquirer) has a 33% UK share of supply in any market and UK turnover exceeding £350 million. For these thresholds, there is no requirement for an overlap between the activities of the acquirer and the target in the UK - an acquirer with a 33% share of supply in any market and sufficient revenues will fall within the scope of the CMA’s jurisdiction irrespective of the activities of the target. This results in a situation where, for a given acquirer, every transaction it undertakes could be subject to CMA review.
The CMA has informally suggested that it intends to apply these thresholds to so called “killer acquisitions” – where companies with the ability to do so purchase nascent targets with minimal existing revenues with the aim of securing or removing a potential future competitor. In line with current priorities of the CMA, it is expected these will target certain markets, including the digital sector, where such nascent startups are prominent. However, the CMA has been clear that it will not (through its guidance or practice) fetter its discretion in this regard and therefore the risk of CMA review under these new thresholds pervades multiple industries.
The merger control implications of SMS designation
As part of the DMCC Act’s provisions, the CMA will have the ability to designate certain entities active in digital markets as having SMS, which will bring those entities under closer competition law scrutiny. While this could apply to a broad range of companies which engage in “digital activities”1 in the UK, there are a number of other criteria that need to be met for the CMA to designate, following an investigation, that a company has SMS, including:
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“substantial and entrenched market power”;
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strategic significance (including having at least one of the following: it has achieved a position of significant size or scale in respect of the digital activity; a significant number of other undertakings use the digital activity in carrying on their business; its position in respect of the digital activity would allow it to extend its market power to a range of other activities, and/or its position in respect of the digital activity allows it to determine or substantially influence the ways in which other undertakings conduct themselves); and
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in the most recent 12 month period for which the CMA is able to make an estimate, that company’s group’s total global turnover arising out of any of its activities exceeds £25 billion or total UK turnover arising out of any of its activities exceeds £1 billion.
It is therefore expected that the targets of the CMA’s initial investigations for SMS status will be the largest global tech companies. Companies in the digital space designated with SMS will be subject to conduct requirements and possible CMA interventions, but also a mandatory merger control requirement for acquisitions.
Undertakings designated as having SMS must report to the CMA all acquisitions of businesses or creations of joint ventures which carry on activities in the UK or supply goods or services to persons in the UK, where:
- the designated undertaking increases its share or voting rights in the undertaking above thresholds of 15%, 25% or 50%, and
- the consideration provided for the acquired shares or voting rights (or, in the case of a joint venture, the consideration plus all capital and assets provided by the designated undertaking to the joint venture) is at least £25 million.
In contrast to the voluntary reporting obligations under the wider UK merger control regime, this reporting obligation is mandatory and must take place prior to closing. Following receipt of the report, the CMA will have five working days to determine whether to open an investigation under the standard merger control regime in the Enterprise Act 2002. The parties cannot close the transaction during this five working day period.
Amendments to the existing merger thresholds
The existing general merger thresholds will also be amended upwards to require the target of an acquisition or the business contributed to a joint venture to have generated £100 million in revenues in the preceding financial year (up from £70 million). A safe harbour will be added for transactions where both parties’ UK turnover is below £10 million.
The slight increase to the revenue threshold and the new safe harbour for very small deals may not make a significant dent in the number of transactions in digital markets that are caught by the CMA’s jurisdiction, particularly given the new thresholds and digital market specific rules coming into force which likely signal an increase in scrutiny.
What this means in practice
These new powers significantly expand the ability of the CMA to exert jurisdiction over transactions, in particular in the digital/tech sector.
While it remains to be seen in practice how these new powers are deployed by the CMA, there is certainly an increased risk to companies of a certain size in the UK that their deals which previously did not trigger UK merger control considerations could now fall within scope. At the least, this could require more engagement with the CMA – in turn this could mean that the closing of deals is delayed by an increased number of CMA merger reviews.
The changes discussed above are accompanied by significant procedural reforms, including a new fast-track mechanism to Phase 2 which does not require the parties to concede a substantial lessening of competition, and the ability to agree extensions by mutual consent with the CMA (e.g. to discuss remedies). This greater procedural flexibility is welcome. However, the expansion of the CMA’s jurisdiction will nevertheless likely necessitate more formal and informal approaches to the CMA by digital market participants conducting deals with a UK nexus.
If you think you may be impacted by the change in the UK rules, please contact us for further advice.
References
1 For the purposes of the DMCC Act, the following are “digital activities”:
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(a) the provision of a service by means of the internet, whether for consideration or otherwise;
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(b) the provision of one or more pieces of digital content, whether for consideration or otherwise;
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(c) any other activity carried out for the purposes of an activity within paragraph (a) or (b).
