Background
Unlike other regimes, the merger control regime in the UK is voluntary and non-suspensory. There are no circumstances where a merger filing is mandatory in the UK. This means that merging parties are not obliged to notify their deal to the Competition and Markets Authority (CMA) before closing. Whilst the CMA will have jurisdiction to review the transaction if the relevant jurisdictional thresholds are met, the merging parties can proceed to closing unless the CMA opens a second-phase investigation.
Pre-DMCCA, the jurisdictional thresholds for the CMA to assert jurisdiction over a merger were:
- Turnover test: The target being acquired must have a UK turnover or more than £70m; or
- Share of supply test: The merging parties have a combined share of supply of 25% or more in any product or service in the UK. The test requires an increment to the share of supply.
New merger control thresholds
New safe harbour for small mergers
The DMCCA introduces a new de minimis threshold, exempting a merger from CMA scrutiny if each party's turnover is less than £10 million in the UK – irrespective of whether the share of supply test is satisfied and the parties are close competitors. This is a welcome change for smaller businesses, who will be shielded from CMA scrutiny where they are seeking to merge. It is also a welcome change for the CMA itself, as it will likely enable the authority to focus on more complex mergers without needing to review smaller, non-problematic ones.
Amendment to turnover test threshold
Under the DMCCA, the threshold for the turnover test has increased from £70 million to £100 million, while the threshold for the share of supply test remains the same (excluding ‘killer acquisitions’, discussed below). The uplift has primarily been introduced to reflect inflation. Again, this will be a welcome change for businesses, particularly those with annual turnovers ranging between £70 million and £100 million.
New jurisdictional thresholds to capture ‘killer acquisitions’
Several competition authorities have expressed concerns about ‘killer acquisitions’. These are essentially deals where established firms acquire nascent firms / startups to remove them as a possible source of future competition. The CMA is concerned that these deals have not been captured by the current UK merger control rules because it is usually the case that the target's turnover is too low to meet the turnover test, or the target has insufficient market share to meet the share of supply test. The concern regarding killer acquisitions is especially evident in the technology and pharmaceutical sectors. These deals often involve a highly innovative target being acquired by a larger company, which, in the eyes of the regulators, removes the target's potential innovation from the market, ultimately harming future competition. Indeed, in May 2024 last year, the CMA launched a market investigation into the veterinary sector, with one of the key concerns being that since 2013, 1,500 of the 5,000 vet practices in the UK had been acquired by the 6 largest corporate groups.
The DMCC introduces a new threshold to capture killer acquisitions, allowing the CMA to scrutinise mergers where:
- one party to the merger holds a 33% share of supply in the UK;
- that party has a UK turnover of at least £350 million; and
- the other party to the merger is a UK business that carries on activities (or part of their activities) in the UK or supplies goods or services in the UK.
Importantly, the new threshold can be met by a singular party. In other words, unlike the traditional share of supply test (which remains unchanged by the DMCCA), the new jurisdictional threshold does not require any increment to the share of supply. A singular party may satisfy the 33% share of supply threshold and minimum £350 million UK turnover requirement itself. In theory, either the acquirer or the target can meet these tests. However, in practice, the new threshold will likely be met by the acquirer, especially in the case of 'killer acquisitions' where a much larger firm merges with a significantly smaller one.
Acquirers caught by the new threshold may also be designated as having ‘Strategic Market Status’ (discussed below) and therefore will need to manage the requirements of this threshold against their mandatory reporting obligations. For the CMA, it is estimated that the introduction of this new threshold will result in an increase of between 2-5 Phase 1 cases per year.
Mandatory and suspensory regime for SMS firms
Unlike the voluntary and non-suspensory merger control regime that most firms in the UK will be subject to, companies active in digital markets in the UK and designated with holding “Strategic Market Status” (SMS) with respect to a specific digital activity, will be subject to a new mandatory and suspensory merger regime introduced by the DMCCA.
The ‘mandatory’ element of the regime means that SMS firms will be required to notify the CMA of any transaction which cumulatively:
- results in that firm or any member of its corporate group obtaining ‘qualifying status’ in a target that carries on activities in the UK or supplies goods or services to a person or persons in the UK. Obtaining ‘qualifying status’ means that the firm or a member of its corporate group increases its percentage of shares and/or voting rights beyond the following thresholds:
- from less than 15% to 15% or more;
- from less than 25% to 25% or more; or
- from 50% or less to more than 50%.
- involves a total deal consideration of £25 million or more.
The ‘suspensory’ element of the new regime means that, provided the above thresholds are satisfied, SMS firms will need to notify the CMA of the transaction before closing. In the event that an SMS firm fails to notify, the firm may be subject to fines of up to 10% of its worldwide turnover from the CMA.
Procedural changes
Fast track process
Merging parties can now request a 'fast-track' reference to Phase 2 without going through the pre-notification period or Phase 1 investigation. This is beneficial for businesses under time constraints or those expecting the CMA to view their merger as potentially leading to a significant reduction in competition, such as when the parties are large and close competitors. Additionally, unlike the current fast-track procedures, merging parties no longer need to concede that the prospective merger may raise competitive concerns to participate in the process. However, the CMA may refuse a fast-track request in certain circumstances, such as if the request is made too late in the proceedings or involves complex markets or analysis.
Extension of Phase 2 timeline
The introduction of the DMCCA allows the CMA and merging parties to mutually agree to extend the statutory timeline for a Phase 2 investigation by effectively 'pausing' the investigation, thereby adding flexibility to the process. Furthermore, in cases that have been fast-tracked to Phase 2 (as mentioned above), the CMA can extend the 24-week Phase 2 review period by up to an additional 11 weeks if it deems there are valid reasons to do so.
Publication of merger notices
To enhance transparency, the CMA is now required to publish merger notices on its website.
For more information on how the DMCCA could affect your business, please get in touch.
