On 6 November, the CMA published new draft guidance on jurisdiction and procedure in UK merger cases (Draft J&P Guidance) and on the CMA’s mergers intelligence function. On 17 November, it published new draft guidance on the substantive assessment of mergers in the UK (Draft Substantive Guidance). The draft sets of Guidance incorporate developments in the case law, reflect the evolution of the CMA’s policies and procedures, and take account of changes in the legal framework concerning public interest mergers. Together, they confirm the CMA’s expansive approach to asserting jurisdiction and reinforce a more interventionist and less formalistic approach to assessing mergers, especially in digital markets, that has been evident in the run-up to Brexit.
Draft Jurisdiction and Procedural Guidance
The Draft J&P Guidance would replace the CMA’s existing guidance, which was published in 2014. The most significant changes are described below:
Share of Supply Test. The Draft J&P Guidance reflects the approach taken in recent cases, including Roche/Spark, Sabre/Farelogix and Mastercard/Nets, emphasizing the CMA’s broad discretion in applying the share of supply test. The Draft Guidance explains that the CMA will consider the “commercial reality” of the merging companies’ activities when assessing how products or services are supplied, “focusing on the substance rather than the legal form of arrangements.” The CMA will consider any “reasonable description” of products or services when deciding whether the test is met, which does not necessarily have to correspond with a recognized industry standard, and whether “sufficient elements of common functionality” exist between the merging parties’ activities. The Draft J&P Guidance states that the CMA may decide to aggregate intra-group and third party sales when applying the share of supply test, even if these sales are treated differently for the purposes of its substantive assessment.
While the description of the share of supply test set out in the Draft J&P Guidance largely builds on the CMA’s current and recent practice, it does little to provide clarity to parties considering whether a transaction qualifies for review. The CMA has signaled that it will continue to assert jurisdiction in any case that it suspects raises competition concerns even where the UK nexus is limited or the parties’ UK activities are small.
Fast-Track Processes & Conceding a substantial lessening of competition. The CMA has for a long time allowed merging parties to request a fast-track Phase 1 procedure in cases that are likely to require an in-depth investigation. Under this process, parties can agree not to contest the CMA’s findings at Phase 1, allowing the transaction to proceed more quickly to a Phase 2 investigation. The CMA has previously considered requests for a fast-track process only in exceptional circumstances. Under the Draft J&P Guidance, the CMA will consider requests in all cases and will allow parties to request a fast-track process either during pre-notification or early in Phase 1. It will also consider requests for a fast-track process in cases where the parties intend to offer Phase 1 remedies (undertakings-in-lieu of a reference) rather than contest the CMA’s findings. In fast- track cases, the merging parties must agree to accept that the test for Phase 2 reference is met and waive their right to challenge that position during Phase 1.
Under the Draft J&P Guidance, merging parties will be able to make formal concessions that a transaction would result in a substantial lessening of competition (SLC) in one or more markets at Phase 2. This approach is intended to allow the CMA more time to focus its assessment on other markets or to align its consideration of remedies with that in other jurisdictions. Merging parties will be required to accept in writing that the CMA has evidence that establishes an SLC and agree to waive their right to challenge this finding in Phase 2. This added procedural flexibility should shorten the CMA review process and facilitate coordination between the CMA and other agencies. The potential time saving may, however, be small in the context of a long multi-jurisdictional merger review process. The envisaged process also requires companies to concede that a merger raises prima facie competition concerns, and may therefore be used only rarely.
Use of formal interviews. The Draft J&P Guidance includes new guidance on the CMA’s use of formal notices to require individuals to give evidence by interview. The CMA has long had the power to require the production of information in this way but has rarely done so. The Revised J&P Guidance emphasises the fact that failure to comply with a formal notice can result in penalties, stating: “[t]his is a more formal process than an ordinary information- gathering call with the merging parties (or third parties), and a failure to comply with such a notice can result in enforcement action…”
The Draft J&P Guidance signals a likely increase in the use of formal interviews in future cases but provides little guidance on the specific circumstances in which the CMA will use these powers. One motivation for this change of policy appears to be concerns about under-enforcement of merger control rules in digital markets. This has in turn led to calls for the CMA to use a wider range of evidence when seeking to understand the rationale for transactions. The powers are not, however, limited to digital markets and they could be used in any merger investigation.
Coordination in multi-jurisdictional mergers. The Draft J&P Guidance explains that the CMA will “communicate and coordinate extensively with other authorities in reaching decisions on the competition assessment and remedies.” For that purpose, merging parties are encouraged to discuss the process and timing of multi-jurisdictional reviews at an early stage and to provide confidentiality waivers. The CMA may take merger control proceedings in other jurisdictions into account when considering whether to open an investigation and may decide not to do so where remedies imposed or agreed in those proceedings would be likely to address possible competition concerns in the UK. These revisions reflect the expansion of the CMA’s role post-Brexit, when it will be called upon to review more global transactions in parallel with other agencies, including the European Commission.
Draft Substantive Guidance
The Draft Substantive Guidance updates the CMA’s existing guidance, which was published in 2010. In addition to reflecting case law developments, changes in policy and legislation, the CMA has “largely adopted” the findings made in the Furman and Lear reports. Both reports suggested there had been under-enforcement of merger control rules in digital mergers.
Overall, the Draft Substantive Guidance signals that the CMA intends to adopt a less formalistic approach to merger review, allowing the CMA greater flexibility in its substantive assessment. The CMA will, for example, no longer place significant reliance on market definition or market share thresholds, and will instead seek to assess a transaction’s impact on competition by looking at all available evidence in the round. The proposed changes may make it easier for the CMA to intervene in transactions.
The most significant changes are described below.
More flexible approach to market definition. The Draft Substantive Guidance states that, while market definition plays an important role in merger assessment, the CMA will focus on considering what competitive constraints the merged entity would face both within and outside the relevant market. This approach is likely to be most relevant in differentiated markets where the boundaries of competition are less clear and in digital markets where the CMA and other agencies have expressed concerns that a strict approach to market definition does not allow them to capture some potentially harmful transactions.
Substantive lessening of competition. The Draft Substantive Guidance explains how the CMA will decide whether a transaction would result in a substantial lessening of competition. As a starting point, the Draft Guidance seeks to describe what “substantial” means in this context. Applying various case law, the CMA explains that “substantial” does not necessarily mean “‘large’, ‘considerable’ or weighty’ in absolute terms, and is capable of meaning ‘not trifling’ at one extreme and ‘nearly complete’ on the other.” The Draft Guidance suggests that even a small lessening of competition in a market that is large or otherwise important to UK customers, or where there was limited competition to begin with, may be considered “substantial.” The Draft Guidance also contains the following additional guidance:
- When considering closeness of competition in undifferentiated markets, the Guidance states that it “does not apply any thresholds to market share, number of remaining competitors or any other measure to determine whether a loss of competition is substantial.” This is a significant change from the current guidance, which indicates that a combined share below 40% is unlikely to give rise to
- In differentiated product markets, the Guidance posits that “the smaller the number of significant players, the stronger the prima facie expectation that any two firms are close competitors, and therefore the less detailed analysis is necessary to further assess closeness between them.” It is questionable whether this presumptive approach to assessing competition is consistent with the CMA’s duty to determine the effects of a transaction on a “balance of ”
- The Guidance includes a list of scenarios that are likely to give rise to an SLC.
Wider evidence base. The Draft Substantive Guidance confirms that the CMA will rely on a broad range of evidence. It gives the CMA considerable latitude in interpreting evidence and placing weight on any piece of evidence. Although there is no “prescriptive list of evidence,” the Draft Guidance explains that the CMA will look to internal documents and deal valuation when assess a transaction’s rationale. The Draft Guidance explains that the CMA will allow itself a wide margin of appreciation when assessing evidence relating to fast-moving markets, where traditional forms of evidence may be less available. In these cases, the CMA may consider the expected number of competitors post-merger, similarities between their (developing) products or services, and the views and expansion plans of other market players.
Adopting a recommendation from the Lear report, the Draft Guidance explains that “the presence of some uncertainty will not in itself preclude the CMA from finding competition concerns on the basis of all the available evidence.” While it is clear that the CMA will (and should) consider all available evidence, the Draft Guidance raises questions as to how much weight the CMA will in practice place on different types of evidence, including the testimony of competitors who may have a commercial interest in opposing a merger. It is also questionable whether placing reliance on “uncertain” evidence simply because no compelling evidence is available could represent a sufficient basis for intervention.
Competition on non-price parameters. The Draft Guidance explains that competitive harm is not limited to rising prices but can also arise from a reduction in innovation or the range and quality of products and services, including in markets where services are offered to consumers free of charge. The Draft Guidance mentions privacy, sustainability, add-free content, the ability to interact with a large base of other users, and brand reputation as relevant competitive parameters.
Greater flexibility in assessing the counterfactual. Under the Draft Guidance. the CMA will vary the time horizon used for assessing a transaction against the competitive counterfactual depending on the market in question. In particular, the CMA points to digital markets where it argues that successful entry can take longer than two years. The Draft Guidance also explains that uncertainty about future developments will not in itself lead the CMA to assume that the pre-merger situation is the most appropriate counterfactual. This would in principle allow the CMA to intervene on the basis that competition might develop in a certain way absent the transaction, even where those developments are uncertain.
Assessment of two-sided platforms. Following recommendations in the Lear Report, the Draft Guidance signals greater flexibility in the way the CMA will assess competition in two-sided markets. The CMA may consider competition on each side separately or include both sides in one assessment. Its approach will depend on how competition works in practice (whether competition primarily focuses on one side or both), competitive conditions in the market (including the number and strength of alternatives available), and the presence of network effects.
Assessment of potential competition and innovation. The Draft Guidance includes a new section describing the CMA’s approach to potential competition and innovation. Responding to findings in the Furman Report, the Draft Guidance explains how the CMA will assess whether a merger would harm competition in innovation. The Guidance envisages two scenarios. First, a merger with a potential entrant may remove future competition on innovation. In these cases, the CMA’s assessment may focus on the parties’ internal documents, business forecasts, and valuation models, and the likely characteristics of the potential entrant’s future product or service. Second, a merger could involve parties already engaged in a dynamic competitive process (i.e., competing to innovate in order to protect or expand future profits). The Draft Guidance gives the example of two pharmaceutical companies engaged in researching treatments for the same medical conditions. In these cases, the CMA will consider the impact of the loss of dynamic competition even if the outcome of that competitive process is uncertain: where dynamic competition gives customers the chance of benefitting from better quality or a wider variety of products in the future, a reduction in this dynamic competitive process could be considered harmful to consumers.
The Draft J&P and Substantive Guidance would give the CMA significant flexibility to intervene in mergers. The changes are particularly targeted at transactions in digital markets where the CMA, along with other agencies, is grappling with the challenge of how to differentiate pro-competitive (or competitively neutral) transactions from those that would have anticompetitive effects. That challenge arises in part from the fast-moving nature of digital markets and the difficulty of predicting likely future developments using traditional forms of evidence. The Draft Guidance would allow the CMA greater flexibility in the types of evidence it considers and the way in which it assesses that evidence. The absence of limiting principles would, if adopted by the CMA and endorsed on appeal by the Competition Appeal Tribunal, make it easier for the CMA to challenge mergers than in the past.
 A transaction qualifies as a relevant merger situation under this test if the merger creates or strengthens a 25% share of supply or purchases of goods or services of the same description in the UK.
 For example, the CMA recently accepted a request to fast-track the proposed joint venture between Liberty and Telefonica to an in-depth Phase 2 review (Liberty Global/Telefonica, decision of 11 December 2020). Other instances where cases were fast-tracked to a Phase 2 review include Sainsbury/Asda (2018), Central Manchester University Hospitals/University Hospital of South Manchester (2017), and Tesco/Booker (2017).
 Draft J&P Guidance, ¶9.8(c). Most recently, the CMA used this power in its investigation of Amazon/Deliveroo.
 Draft J&P Guidance, ¶7.6.
 Draft revised Merger Assessment Guidelines, Consultation Document 17 November 2020, ¶1.6 https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/935598/Consultation_Document_-.pdf
 Unlocking digital competition, the Report of the Digital Competition Expert Panel, March 2019.
 Ex-Post Assessment of Merger Control Decisions in Digital Markets, Final Report, May 2019.
 For example, the Furman report recommended that: “The CMA’s Merger Assessment Guidelines should be updated to reflect the features and dynamics of modern digital markets, to improve effectiveness and address under enforcement in the sector.” The Lear report concluded that: “There is a concern that merger policy has put too much weight on the risk of incorrect intervention (type I error) compared to the risk of incorrect clearance (type II error) when assessing mergers in the digital sector, leading to increased concentration in digital markets.”
 Draft Substantive Guidance, ¶2.9.
 Draft Substantive Guidance, ¶2.8.
 Draft Substantive Guidance, ¶4.9.
 Draft Substantive Guidance, ¶¶2.10, 2.26 and 3.14.