Raaah, aren’t the bankers evil? Crashing the economy and all that. Then giving themselves massive bonuses. Pure evil. Something must be done. It is time for a reckoning. Hard to disagree and so a nice easy run for Ed Miliband in his recent speech. The weird thing is that the speech actually committed a Labour government to doing things which were already happening, doing things it didn’t have the power to do without primary legislation, and doing things which might lead to answers it didn’t like.
One of the odder parts of yesterday’s Queen’s Speech was the announcement of the Groceries Code Adjudicator Bill. This was odd because it is the sort of Bill that normally loses out in the annual Cabinet bunfight over which department’s Bills will get introduced in that session of Parliament. It is as far from being a populist crowd-pleaser as you can get in legislative terms. Continue reading
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.