Merging the OFT and CC and controlling mergers

The Deparment for Business, Innovation and Skills (BIS) recently published its consultation on the proposed merger of the Office of Fair Trading and Competition Commission. This was initially announced in 2010 as part of the government’s “bonfire of the quangos” on the basis of being part of the programme of cutting public expenditure and increasing efficiency. However, the consultation goes beyond proposing mere institutional changes and looks at more substantive reforms to the operation of competition enforcement in the UK. Competition law has been blessed with significant political support at the beginning of each of the changes of government over the past 30 or so years (eg the Competition Acts of 1980 and 1998) as well as getting a second major update in the Enterprise Act 2002 and can be a useful barometer for the incoming government’s attitude to industrial economics. The Acts introduced by New Labour were heavily economics-based and took away all but vestigial political responsibility for decisions and contrast starkly with the Fair Trading Act and Restrictive Trade Practices Act from the time of Heath and Wilson. The consultation doesn’t propose a revolution of this sort and just as the 1998 Act could easily have been introduced whichever party won in 1997, so too here, even if there was no urgent economic need to reduce public expenditure.

 The consultation, as ever, is a hefty tome http://bit.ly/hfF4w3 and will take some digesting.

One element, where the government appears to be looking specifically for guidance from the consultation responses is on whether to reform UK merger control rules. The big potential change is from a voluntary notification scheme to a mandatory one – that is, rather than continuing to allow businesses to take a view as to the risk of competition concerns requiring all qualifying transactions to be notified, regardless of whether they actually raise any issues.

Moving to a single Competition and Markets Authority (CMA) would impact on the way in which mergers were investigated even without any other substantive changes. Bringing in mandatory notification would be a large substantive change. At present, there’s a clear distinction between the OFT and CC’s roles and approaches – something which becomes readily apparent to anyone, lawyer or client, who has received a “first day letter” from the CC seeking resubmission of all the information that would already have been provided to the OFT along with a whole host more, as well as the substantially more legalistic and uncommercial tone of dealings with the CC. CC investigations are costly and time-consuming so avoiding them is important for both the parties to a merger and the public purse. There’s inevitably significant amounts of horse-trading and negotiation on undertakings in lieu of reference to avoid the more detailed CC scrutiny.

Merging the two authorities into the CMA so that instead there was just a Phase I and Phase II system with the same investigators, as at the European Commission or a number of other EU regulators would change this dynamic. From personal experience this can lead to a less clear delineation between the types of investigation – so for example, during holiday periods it is not uncommon for the German Competition Authority to send mergers into Phase II investigations just because staff absences internally and amongst the businesses being consulted makes the Phase I timetable difficult to hit. This contrasts with the OFT practice of “stopping the clock” if necessary information is unavailable in time, but taking responsibility for its own staff availability.

The big advantage of a mandatory filing system would be that it would bring legal certainty into large M&A transaction. The voluntary notification system currently in place allows for a range of commercial approaches in negotiating deals – can a buyer get to the top of the queue by offering to buy without a merger clearance condition, can the deal be structured so that it doesn’t lead to third party complaints to trigger an investigation, would the OFT be interested in the deal anyway?

In a way it might be a shame to narrow down the commercial creativity of businesses in M&A deals but anyone who has been involved in a case where they’ve taken the risk and lost, getting investigated after completion, knows that it is a game of regulatory Russian roulette. One where, for a while, until the OFT stopped its regular “fireside chats” to give informal guidance on the likelihood of investigation, you might find that the OFT had loaded all six chambers of the revolver after showing it to you empty. It was sometimes more painful getting to a clearance of a completed deal than coping with being blocked – there are 6 or more months of fighting just to do what you believed you should have been allowed to do in the first place whereas there’s not as much pain in being blocked ahead of completion. 

So, losing that palaver won’t be mourned by many, particularly given that larger transactions may well in any case be caught by mandatory filing obligations in other countries (most regularly Ireland for transactions that appear to be ones between UK-only companies). Competition lawyers might lose out a little in terms of the fee rates they can charge as they won’t be able to price on the basis of the severe impact of a post-completion investigation, but this would be evened out by the larger number of notifications. Notifications would become commoditised services for non-contentious mergers and costs would be likely to fall over time.

There is of course a risk that introducing a mandatory filing regime will add costs to all M&A transactions and possibly dampen such activity. It is arguable that it would be better to have these costs shared across industry more broadly rather than falling heavily on a small number of businesses which gambled unsuccessfully with unconditional deals. What this might also lead to is an upwards creep of the merger notification thresholds so that only very large transactions need to be notified. Alternatively, it might lead to the CMA looking less critically at notifications generally than the OFT, putting the onus on affected third parties to take a more active role in demonstrating why particular mergers should be scrutinised more closely.

A possible impact of this is that consumer bodies and unions may become more aggressive in reviewing the impact of notified mergers. Provided that there’s no further extension of the public interest grounds on which the merger control rules can be overriden for political reasons (as with the clearance of the Lloyds/HBOS merger against the OFT’s inclination to refer it to the CC) this would be beneficial in focusing resources and scrutiny principally on those transactions which raise real economic concerns.

Is it news that Competition Law will apply to the NHS?

During Prime Minister’s Questions this afternoon, Ed Miliband asked the Prime Minister about the provisions of the Health and Social Care Bill which made the NHS subject to EU competition law. However, it wasn’t clear that he was making any particular point. Perhaps the allegation is that the NHS ought not to be subject to laws regulating economic activity. If that is the case, then that particular horse may well have bolted nearly a decade ago.

The NHS is already potentially subject to EU competition law. The European Court of Justice (ECJ) ruled in the Fenin case that the Spanish health service’s purchasing body could in principle have been abusing a dominant position on the market for the purchasing of pharmaceuticals contrary to what is now Article 102 of the Treaty on the Functioning of the European Union (TFEU). On the facts in that case the ECJ found that that particular body was not active on a market because it exercised so called “social solidarity” functions rather than economic ones and so was not subject to EU competition law. It is not at all certain that the much more marketised NHS, even prior to the reforms in the Bill would have fitted in the same definition.

Before the final judgment of the ECJ in Fenin the Office of Fair Trading investigated allegations of abuse of dominance by a NHS trust in the terms on which it purchased public care home services in the Bettercare case under Chapter II of the Competition Act 1998. For most practical purposes the provisions of Chapter II of the Competition Act and Article 102 TFEU are the same and the Competition Act requires the OFT to interpret it so that it is consistent with the caselaw under Article 102. The OFT concluded that the Competition Act did not apply on the basis that the NHS purchasing body was not an undertaking (ie that it was not carrying out economic activities). However, the Competition Commission Appeals Tribunal (CCAT, now renamed the Competition Appeal Tribunal or CAT) upheld an appeal by Bettercare and ruled that it would be possible for an NHS purchasing body to be an undertaking subject to competition law. The OFT then re-investigated the complaint, but as the final judgment had not yet been delivered in Fenin it was unable to conclude that the NHS Trust purchasing body was not subject to competition law. Instead, the case was closed on the basis that in any event, even if it were to be subject to competition law on the facts in the case there had been no abuse of a dominant position.

Fenin did not close the door on the NHS being subject to UK or EU competition law and the detailed analysis of the facts by the CCAT provide ample grounds on which NHS bodies can already be considered to be subject to that law distinguishing them from the finding of fact in Fenin.

So, the allegation made in Parliament is not really news in that respect. What is interesting is that the Bill, by giving Monitor concurrent competition law enforcement powers to the OFT and clearly envisaging that it could use them generally to investigate under both UK and EU competition law changes the prejudice or gut feeling that the OFT had in Bettercare that NHS purchasing bodies fall outside the scope of competition law.

Regulators tend to shy away from limiting their jurisdiction, particularly when they have been given a large new jurisdiction to play with. Monitor is therefore unlikely to be as squeamish as the OFT was in 2000-2003 in Bettercare about applying competition powers to activities of the NHS. It is worth noting however that the competition powers in Chapter 2 of the Bill also include specific provisions regarding procurement practices by the NHS (sections 63 and 64). This provides Monitor with an alternative enforcement mechanism in relation to cases like Bettercare – rather than investigating procurements for being conducted abusively in breach of competition law, it will be open to Monitor to take less draconian action. It may be that in practice, compliance with the regulations regarding procurement practices to be made by Monitor would be a good defence against abuse allegations. After all, it would be embarrassing for Monitor to find that it was easy to comply with its good practice regulations on procurement while behaving anti-competitively.

This may lead to the odd situation where legislation has made the NHS more clearly subject to competition law but at the same time has made it less likely in practice that competition law would be applied to the specific procurement transactions that have yielded most complaints. At least by the UK authorities. Where alleged anti-competitive behaviour might have a cross-border impact, perhaps the EU angle is relevant. Maybe the real allegation at PMQs was a UKIP-baiting “do you really want the eurocrats at the Commission to be investigating our NHS”?

Update

Interestingly, nearly six months after I wrote this blog post, the 38 Degrees campaign has been urging people to write to their MPs to get them to vote against the Bill partly on the basis of legal advice about the “new” applicability of competition law to the NHS. One MP has responded in detail to constituents emailing him in the terms suggested by 38 Degrees by pointing out that competition and procurement law already applied.

http://bit.ly/oLCRn4