CMA opens up on Phase 2 Mergers: what you need to know about the Draft Guidance under consultation
The Draft Guidance was published following a call for information on Phase 2 merger investigations that took place over the summer of 2023.
Some of the changes in the Draft Guidance simply reflect changes to the CMA’s practice, recent judgments of the Competition Appeal Tribunal (the Tribunal) and legislative changes since the current version of the guidance was prepared. However, several proposed changes also result from the evidence gathered during the call for information and these can be broadly split into three categories:
- engagement between the merger parties and the CMA;
- access to file; and
Engagement between the merger parties and CMA
The CMA received feedback that merger parties wanted more opportunities to engage with the CMA case team and the Inquiry Group (a panel of independent experts who are the decision makers at Phase 2), in particular at the start of the Phase 2 investigation. The CMA is proposing to make the following changes to its procedural timetable in response to these requests.
- Site visits would become initial "teach in" meetings – these meetings will be used to provide the Phase 2 case team and Inquiry Group with a ‘teach in’ on the merger parties’ businesses and the markets in which they operate. This will enable merger parties to have early engagement with the CMA’s Phase 2 decision makers and give their perspective on market dynamics and the issues raised by the CMA case team at Phase 1.
- The CMA would no longer publish issues statements in Phase 2. Instead, merger parties (and any third parties who wish to add their views) will provide their views in writing on the Phase 1 decision at the start of the Phase 2 process.
- The CMA case team would periodically hold update calls with the merger parties. This is intended to enable merger parties to speak to the CMA as and when its thinking evolves, and the CMA hopes that this will also encourage earlier engagement on possible remedies (see further in the remedies section below). The Inquiry Group would be invited to attend at least one meeting on possible remedies.
- A new interim report would replace the CMA’s current approach of publishing working papers and provisional findings. This report would be published at an earlier stage than the provisional findings. The CMA hopes that, although the interim report is necessarily more provisional than the provisional findings (as it comes earlier in the process), it would enable the parties to understand the Inquiry Group’s substantive concerns at an earlier stage, which will give them more time to engage with those concerns and, where appropriate, consider remedies that might address them.
- The main party hearing would be revamped. The merger parties would be able to address the Inquiry Group’s provisional assessment (as outlined in the interim report) by presenting to the Inquiry Group at the main party hearing. The main party hearing would also be a full hearing on the merits, rather than being focused on further information gathering by the CMA. It is intended that this meeting would be more interactive than it is at present. The merger parties would also have an opportunity to respond to the interim report in writing following the main party hearing.
- The CMA has proposed a new Phase 2 Remedies Form, which merger parties would submit to outline their remedies proposal within 14 days of publication of the interim report. By introducing such a form at this particular stage of the merger investigation, the CMA hopes to encourage the parties to engage on remedies earlier in the Phase 2 process. As the CMA no longer plans to produce a remedies working paper, the Phase 2 Remedies Form would presumably form the basis of discussions between the CMA and the parties.
- The CMA would produce an interim report on remedies approximately 4-6 weeks before the end of Phase 2, on which the merger parties would have seven days to comment. The CMA would use one of the informal update calls prior to issuing the interim report on remedies to update the parties on the views of the Inquiry Group and explain the extent to which those views have changed since the interim report. Following receipt of the parties’ response to the interim report on remedies, the Draft Guidance envisages further calls between the CMA and the merger parties. Engagement is possible until the CMA determines a final date, after which the CMA will not consider any further representations and will focus on publishing its final report.
The proposals suggest that the CMA has listened to feedback and is seeking to provide more opportunities for more and earlier engagement. That said, for these efforts to be fruitful, the CMA will need to be clear and transparent about its concerns as early on as possible (ideally even before the interim report is published) so that merger parties can, in turn, directly address those concerns and, where appropriate, offer remedies in order to resolve them.
Arguably, more could also be done to strengthen the independence of the Phase 2 process. Currently when Phase 2 starts, a new case team is put together to consider the transaction and this team will typically include some of the case team members from Phase 1. It is questionable whether it is necessary to retain members of the Phase 1 case team, who are familiar with the case and the issues that the CMA was considering at Phase 1, in the Phase 2 case team. Not retaining members of the Phase 1 case team would ensure that the assessment of the Inquiry Group begins with a truly clean slate in which the issues identified in Phase 1 are explored without any perceived bias or preconceptions. This would enhance the procedural fairness of the merger review process and is also likely to result in more effective and constructive engagement between the merger parties and the CMA during Phase 2 investigations.
Access to file
The CMA stated during the conference launching the consultation that, despite calls from many external legal advisers, it would not be providing merger parties with access to its case file during Phase 2 investigations. In circumstances where the CMA is aiming for more transparency and better and more effective engagement, and describes itself as “evidence-led”, this appears to us to be a missed opportunity.
Access to file, and in particular access to the submissions of third parties including the merger parties’ competitors and customers, is standard practice in merger investigations conducted by competition authorities in other jurisdictions. For example, the European Commission and several other European authorities routinely permit merger parties to access their case files during Phase 2 investigations. This enables the parties to address the evidence head on. Without such access in the UK, merger parties are left, to some degree, to speculate about the submissions or evidence that they may need to rebut.
The CMA’s reasoning for not introducing access to file is that it needs to balance the interests of the merger parties and the interests of third parties, from whom the CMA requests information and cooperation during a merger investigation. Merger parties need sufficient transparency to address the concerns raised against them and exercise their rights of defence while third parties, who are not involved in the transaction and are being asked to hand over sensitive information to the CMA, could be discouraged from cooperating if the information they provide is more readily disclosed.
The current position is that the CMA only provides confidential evidence that goes to the 'gist' of its case. According to a recent judgment of the Tribunal, determining the 'gist' “is acutely context sensitive”, and the CMA notes in the Draft Guidance that it has a wide margin of appreciation in deciding what the gist of the case is. In practice, this means that important confidential evidence is often not provided to the merger parties (or even just to their advisers), or it is provided too late in the CMA’s timetable to give the parties an opportunity to respond to it. Although this is widely considered to be unsatisfactory, the CMA is not proposing to change its current disclosure practices.
Whilst it is important to balance the interests of different parties, protections could be put in place (for example, through the use of confidentiality rings and data rooms) to facilitate greater disclosure for the merger parties without compromising the confidentiality of information provided by third parties. Indeed, confidentiality rings are used by the European Commission as part of its merger investigations and access to file procedures, and they are routinely used in other legal settings in the UK, such as court proceedings.
Perhaps a halfway house would be to allow the merger parties to request key documents that they consider are necessary in order to address the CMA’s theories of harm (to be identified from the CMA’s reasoning in the interim report and informal discussions). Indeed, the CMA’s teams conducting cartel investigations are already testing different approaches to access to file which are focussed on limiting disclosure to key documents that are specifically requested by parties involved in the investigation, thereby making the process more streamlined and proportionate. Enabling the merger parties to review the information obtained by the case team would enable the Inquiry Group to test the robustness and reliability of third-party evidence, which can often be critical to the outcome of an investigation. It would also enable the merger parties to have informed discussions and more effective engagement with the Inquiry Group whilst further enhancing the transparency and fairness of Phase 2 investigations.
Finally, the new Draft Guidance proposes a change in focus on remedies. Although there is an opportunity under the current guidance for merger parties to engage with the CMA early in Phase 2 to explore remedies, experience suggests that this does not typically happen, in particular because parties may be concerned that early engagement on remedies may undermine their case in relation to the substantive merger assessment.
The CMA appears to be hoping that by adding additional prompts into the Phase 2 timetable at various junctures for discussions on remedies (in the form of informal calls, discussions following the submission of any Phase 2 Remedies Form and/or discussions following the production of the interim report on remedies), the merger parties will engage on remedies earlier in the process, giving the CMA more time to assess and refine possible remedies to address its concerns.
Whilst moving the discussion of remedies earlier in the process does not directly address the reasons why merger parties do not engage sooner under the existing guidance, the CMA is hoping that the additional feedback, transparency and engagement that it is willing to provide will assist in that regard. The CMA has stressed that any early engagement on remedies will be on a without prejudice basis (as has always been the case).
Increased engagement between the CMA and merger parties on remedies would be a positive development. However, merger parties are only able to meaningfully engage on possible remedies once they properly understand the concerns of the Phase 2 case team and the Inquiry Group, so there is an important interrelationship between facilitating earlier discussion on remedies and the efficacy of the changes proposed to improve the overall level of engagement between the CMA and the parties.
Whilst many of the CMA’s proposals set out in the Draft Guidance are welcomed, particularly regarding additional and earlier engagement on substantive concerns and remedies, it is not yet clear whether these changes go far enough to provide the level of transparency that merger parties and their advisers have been calling for. Unless the CMA is prepared to set out its thinking in a sufficiently detailed manner, there will be a limit to how much responsive engagement can take place between the merger parties and the CMA, especially in the early stages of an investigation. Moreover, the concern remains that the CMA’s decision not to provide access to file, or even a more limited access to key documents as standard practice in merger cases, will continue to hamper the ability of merger parties to engage at the level of detail that could ultimately lead to more effective resolutions for all sides.
The CMA’s consultation closed on 8 January 2024. Macfarlanes submitted a response to the consultation. To the extent that you have any questions arising out of the Draft Guidance, we would welcome any discussions on this topic.