[co-author: Laurine Signoret]
On April 7, 2021, a dedicated digital markets unit (DMU) within the UK Competition and Markets Authority (CMA) was launched in 'shadow' mode. The DMU will be tasked with enforcing the ex ante competition regime proposed by the CMA in December 2020 through its Digital Markets Taskforce—whenever it is legislated for. For now, the CMA will continue its enforcement drive against tech firms using existing tools, while the DMU focuses on operationalizing and preparing for the new regime.
The regime targets large tech firms and platforms which have "Strategic Market Status" (SMS) and will focus on:
- Implementing distinct merger control rules, requiring the reporting of all transactions to the CMA;
- Subjecting SMS firms to a legally binding code of conduct; and
- Supporting intervention against anticompetitive behavior.
Under the proposal, the DMU would have investigative and sanctioning powers like the CMA's existing powers, including the ability to levy fines of up to 10 percent of a firm's global turnover. It will work closely with Ofcom, the Financial Conduct Authority, and the Information Commissioner's Office (the UK's communications, financial, and privacy regulators) through the Digital Regulation Cooperation Forum, which facilitates cooperation in regulating digital markets.
Alongside the new SMS regime, the UK has proposed a revamp of its national security and investment (NSI) rules that would see mandatory notification of some transactions, including certain tech deals. Coupled with the existing "voluntary" merger regime (which the CMA has pushed to its jurisdictional limits), these proposals mean dealmakers considering any transaction with a UK nexus—however limited—will need to be prepared to navigate an increasingly fragmented and complex regulatory environment across the UK and the EU.
Strategic Market Status
Under the CMA's proposal, the new DMU would be responsible for deciding which companies have "strategic market status"—a lower threshold than the existing concept of dominance under UK law. This designation would be based on an "evidence-based economic assessment as to whether a firm has substantial, entrenched market power in at least one digital activity" and whether that confers on it a strategic position. The CMA believes the standard market definition exercise for assessing market power fails to recognize the "interconnected nature" of digitals products and services and underemphasizes the importance of dynamic competition.
In assessing whether a firm has a "strategic position" the CMA proposes a non-exhaustive list of factors including its size and scale, whether it acts as a gateway to customers or its activity is an important input for other business, and whether it can leverage its market power into other activities.
The CMA notes that only a small number of digital firms would be expected to meet the SMS test and recommends that the DMU provide formal guidance as to its designation process (including that it will prioritize firms that have an annual UK revenue of over £1 billion). Where a firm meets the SMS test in relation to a digital activity, the associated remedies would only apply to that subset of the firm's activities, but the designation would apply to the entire corporate group. The separate SMS merger regime, however, would apply to all transactions regardless of sector.
SMS Merger Rules
Any firm determined to have SMS by the DMU would be subject to a separate merger regime under which all transactions would need to be reported to the CMA "within a short period after signing." Those that meet certain thresholds would be subject to mandatory notification, with a prohibition on pre-clearance completion. The CMA has proposed transaction value as a threshold, coupled with criteria to establish UK nexus (such as revenues, assets, or end-users). Failure to comply with the reporting and notification requirements would result in fines.
In contrast to the standard merger regime, the SMS regime would only apply to "clear-cut acquisitions of control" (including both de jure and de facto control) and would not extend to acquisitions of material influence as these require a case-by-case analysis, which the CMA deems unsuitable for a mandatory regime with sanctions for failure to notify.
While retaining the existing substantive test, the CMA proposes using a "lower and more cautious standard of proof" at Phase II, meaning the CMA could intervene where there is a "realistic prospect" that a merger gives rise to a significant lessening of competition (compared to the current balance of probabilities test).
The Conduct Police
The CMA recommends the establishment of an enforceable code of conduct for SMS firms. This would outline how a firm is expected to behave in relation to the activity motivating its SMS designation, with the DMU designing tailored principles and accompanying guidance for a firm to deliver on three user-oriented objectives (fair trading, open choice, and trust and transparency).
Separately, the CMA recommended that the DMU also oversee pro-competitive interventions to address the sources of market power. Such intervention could include imposing interoperability requirements on digital firms and improving consumers' ability to control and share data.
No Jurisdiction, No Problem: EC Imports UK Approach to Merger Control
At the European level, the European Commission (EC) unveiled its own set of proposals to regulate digital platforms on December 15, 2020—a mere week after the CMA's advice to the UK government (see Wilson Sonsini Alert). The Digital Markets Act (DMA) envisages a new competition-style enforcement framework targeting online platforms designated as "gatekeepers" by the EC and will address issues such as self-preferencing, data portability, and interoperability. With respect to merger control, the DMA would require gatekeepers to inform the EC of every acquisition involving a target in the digital sector, regardless of whether EU thresholds are met.
Separately, in September 2020, the Commissioner for Competition, Margrethe Vestager, announced that the EC would "start accepting referrals from national competition authorities of mergers that are worth reviewing at the EU level—whether or not those authorities had the power to review the case themselves." This marks a significant policy reversal as the EU regulator had historically discouraged national agencies from doing so. In an acknowledgement of the uncertainty now facing merging parties, on March 26, 2021, the EC issued guidance addressing the circumstances in which it will accept such referrals (see Wilson Sonsini Alert).
The National Security and Investment Bill
In November 2020, the UK government published a proposal for a new NSI regime. If approved by Parliament, the National Security and Investment Bill would establish a Committee on Foreign Investment in the United States (CFIUS)-like framework whereby acquisitions of UK entities or assets in 17 sensitive sectors would be subject to mandatory notification, with a voluntary regime for others. The mandatory sectors include a heavy focus on the tech industry, with communications, data infrastructure, computing hardware, and artificial intelligence all included. These are covered in detail in the government's consultation response.
The NSI regime is designed to supplement the existing merger control regime. Acquisitions of more than a 15 percent stake or voting rights in an entity would trigger notification, along with certain acquisitions involving a buyer moving to a significantly higher level of interest. There will be no turnover or market share safe harbor, unlike the thresholds for merger control.
Under the voluntary mechanism, parties will be encouraged to notify "trigger events" they consider may be of interest from a national security perspective, which will include the acquisition of material influence (a lower threshold than for the mandatory regime). This will be accompanied by a "call-in" mechanism, similar to the CMA's powers, to enable the government to review non-notified transactions for up to five years post-completion. The government's Impact Assessment estimates that the new NSI regime will result in 1,000-1,830 transactions being notified per year. A new Investment Security Unit has been set up within the Department for Business, Energy, and Industrial Strategy and is already providing informal guidance to companies on the NSI regime's application.
Sanctions for non-compliance with the regime would include fines of up to five percent of a company's worldwide turnover or up to £10 million—whichever is greater—and imprisonment of up to five years. Transactions completed prior to clearance would be void.
Wilson Sonsini Observations
The current merger control regime in the UK is, strictly speaking, voluntary, but the CMA's unfettered discretion in using its controversial share of supply test to claim jurisdiction, coupled with its powers to "call in" even completed deals and impose hold-separate orders, make it closer to mandatory in practice.
The SMS regime and NSI Bill mark a further shift towards a mandatory system, particularly for tech firms, and will make an already complicated regulatory landscape more burdensome. The government will consult on the DMU's powers and new rules for digital companies this year and legislate "as soon as parliamentary time allows." An independent report provided to the government in February with proposals to revamp the UK's competition regime (the Penrose Report) may delay legislative debate, as it highlighted the danger of regulatory creep with the DMU and the need for its powers to be "ring-fenced tightly." In practical terms, this means a new regime may still be a year away and subject to change depending on the results of the government's consultation.
The NSI regime is expected to enter into force by the end of 2021, subject to Parliamentary approval.
Given the CMA's already aggressive interventionist nature and deal mortality rate, the proposal for a new sector-specific mandatory regime, and the NSI Bill, it will be crucial for parties contemplating deals in 2021 to conduct a comprehensive upfront analysis and factor in the impact of a UK review on deal timetables, long-stop dates, conditions precedent, and risk allocation.
