In June 2019, the CMA published its Merger Remedy Evaluations Report (the Report) – the latest in a series of case evaluations conducted to develop the CMA’s expertise, policy, and practice on merger remedies. The Report notes that its findings will be “used to inform the way in which the CMA approaches remedy design and implementation in subsequent cases.” The Report contains useful guidance for parties on the types of remedies that the CMA is prepared to accept or may require.
A preference for structural remedies
Divestments represent the “clear majority” of remedies in UK mergers – only one in six remedies agreed or imposed over the last year were behavioural. Structural remedies are generally considered superior to behavioural remedies “in terms of their effectiveness, risk profile, and durability.” The Report identifies three lessons learned from the CMA’s implementation of divestiture remedies.
First, the CMA will carefully consider how the scope of the divestiture package affects the type and number of potential buyers. If the CMA has doubts about the viability of a potential divestiture package, the Report recommends that a “more onerous” fall-back remedy should be proposed.
Second, the Report confirms the importance of a thorough purchase suitability assessment. The assessment should include both a “stress test” of the buyer’s financial viability to ensure it can withstand changing economic conditions, as well as a detailed examination of the buyer’s intentions, specific plans for the business, and how the purchase fits within its overall strategy. The Report emphasises that the interests of the divested business’s management should be assessed: if the management are opposed to the sale, this increases the risk of an inefficient sale process and makes it more appropriate to use a monitoring trustee.
Third, the Report highlights the importance of the CMA carefully overseeing the divestiture process in line with clearly-defined timetables. Where parties miss milestones, the CMA is more likely to appoint a monitoring trustee. The Report also stresses the importance of including a provision to appoint a monitoring trustee to sell the divestiture package at no minimum price.
Behavioural remedies are suitable in narrowly-defined circumstances
While expressing a preference for structural remedies, the Report notes that behavioural remedies can provide an effective solution to competition concerns “if sufficient care is taken over the design and implementation of behavioural remedies and if active and informed monitoring arrangements are put in place.” The following five elements should be borne in mind when proposing a behavioural remedy.
First, behavioural remedies have a greater chance of being accepted in industries where the pace of change is slow. The Report notes that the behavioural remedies in the Arqiva case – where the CMA accepted remedies involving guaranteed price reductions – were effective partly due to the “stability of the industry.”
Second, behavioural remedies are more likely to operate satisfactorily where the merging parties compete in a regulated environment and the CMA can delegate aspects of the monitoring to a dedicated regulator. Given the need for ongoing monitoring of behavioural remedies, the Report notes that there is a “strong benefit of involving either the industry regulator or a third-party monitor to ensure compliance.” The Report points to its successful behavioural remedy in Centrica¸ where Ofgem had a central role in monitoring the remedies.
Third, like divestiture remedies, the Report highlights the importance of including a credible contingency remedy option to ensure that the parties give effect to a proposed behavioural remedy. This could include enforcement of the remedy by order or the implementation of a more intrusive divestiture remedy.
Fourth, price cap remedies are unlikely to be effective in markets where bidding is involved, because they may result in bids coalescing around the price cap. Price controls can also force firms that are unable to compete with the controlled price out of the market or deter new entry.
Finally, the Report notes that it is difficult to design behavioural remedies that will be effective indefinitely. At the time of accepting a behavioural remedy, the CMA should be clear that a future event is likely to arise that would remove the need for the remedy.
Interim Measures
The UK merger system is fairly unusual because it is does not require mandatory pre-notification: parties can close transactions without receiving clearance. This can give rise to risks for the CMA if, where a merger has already completed before the CMA has carried out its investigation, the parties take steps that might prejudice the CMA from taking remedial action.
The CMA has powers to put in place interim measures to prevent such steps during the course of an inquiry, such as imposing hold separate arrangements, using monitoring trustees, and appointing hold separate managers. The Report notes that the CMA has learned over time to “put in place stronger interim measures so as to allow effective remedies to be implemented if needed later on”. The CMA’s recent practice shows its increased readiness to penalise companies for breaching procedural rules consistent with recent action by the European Commission and national agencies in the EU. [1]
The Report’s discussion of past cases likewise emphasises the need for effective and robust enforcement of interim measures – and it notes the problems that can arise from taking too little action. The main risk identified is that firms “may be able to run the business in such a way as to undermine the effectiveness of a divestiture package.” The Report therefore notes the importance of putting measures in place to protect against this and to ensure that compliance with such measures is actively monitored. Overall, the Report – together with the CMA’s recent practice – suggests that the CMA will continue to take a robust approach on interim measures and to closely scrutinize compliance with its procedural rules.
Conclusion
The Report continues the CMA’s work in reviewing past cases with a view to improving its future decision making. It contains some valuable insights for parties looking to design suitable remedy packages in the merger context. The Report notes that, as the UK leaves the European Union, the CMA’s workload will increase and this will have an additional impact on its remedies work, including a greater need for international cooperation on multi-jurisdictional mergers. The Report considers that the lessons learned from its evaluations “will help ensure that the interests of UK consumers are safeguarded” through this potentially turbulent period.
[1] See UK Competition Newsletter, February 2019, UK Clamps Down on Gun Jumping.