Recovery in the number of cases post COVID-19
While the number of investigations closed in 2021 fell further from 27 in 2020 to 14 in 2021, this is perhaps a time-lag effect from the reduced activity during the pandemic. Active cases with the CMA in 2021 and 2022 to date show a recovery from 2020 levels. As of 31 May 2022, the number of cases being subject to review in 2022 was already equal to the number of cases being reviewed for the whole of 2021.
Number of open cases in the relevant year
The following factors should drive an increase in UK M&A activity levels in 2022 – as set out in our deals and business consulting trends view – and potentially increase in competition cases in 2022 and 2023:
- Increase in deals funded by private equity – PE has a record USD 2.3 trillion dry powder cash reserves, according to S&P Global
- Increased certainty – companies have largely adjusted to post-pandemic trading conditions and the challenges ahead are largely known
- The Treasury has indicated that capital gains tax won't be substantially reviewed until the next parliament – this longer runway is likely to support the existing flurry of M&A activity well into 2022 and beyond.
Lower-than-expected parallel CMA/EC investigations
In the first full year following the Brexit transition period, there have been 12 parallel CMA/EC merger investigations. This is lower than the anticipated additional 30 to 50 cases. However, this level of cases may have been impacted by COVID-19, which reduced M&A activity in 2020 in the UK and across Europe.
Continuation in the high level of anticipated mergers
In the UK, unlike other jurisdictions, merger notification is voluntary. Historically voluntary notifications have accounted for around 50% of merger cases, but in 2020 and 2021 anticipated mergers accounted for 70% of all merger cases.
Key factors to consider:
- Impacts of the CMA's wider jurisdictional powers over international deals that require upfront approval in many jurisdictions
- Voluntary notifications can result in fewer surprises.
- Parties may want to avoid the risk of the CMA imposing hold separate measures once the deal has completed, particularly in circumstances where the deal could have been cleared in other jurisdictions.
Penalties continue to rise for breaches in interim undertakings
The CMA requires merging businesses to be held separate during merger investigations. This can be done through an interim enforcement order (IEO) typically imposed at phase one, or other interim measures at phase two.
Should parties fail to adhere to interim measures, the CMA can impose a penalty of up to 5% of worldwide turnover. Since 2018 when the first penalty notice was issued, the frequency and size of fines has been increasing. With recent fines for Meta and Sports Direct being much more significant.
Accordingly, it's critical that merging parties:
- fully understand all aspects and implications of the integration taken place at the time of imposing the interim measures
- ensure it has an understanding of the CMA guidance on interim measures
- ensure it implements processes and controls to ensure it understands and has adequate oversight of areas that may impact the interim measures.
Greater use of monitoring trustee and hold separate managers
The use of monitoring trustees and hold separate managers in cases is increasing. In phase two cases closed over the last five years, a monitoring trustee was appointed in phase one in a greater proportion of cases - rising from 13% in 2017 to 50% in 2021. In 2021, of the remaining 50% of cases, a monitoring trustee was appointed at phase two in 25% of cases. 75% of cases.
Typically, in respect of completed mergers, a monitoring trustee is appointed at phase two if one has not already been appointed beforehand, unless there's no evidence of pre-emptive action or other risk factors as set out in the CMA's guidance.
The appointment of hold separate managers to manage the target businesses is also increasing. Hold separate managers are often appointed when the management team of a target is no longer with the business. Or where the CMA considers that the existing management team of the target would not be sufficiently independent. In respect of open cases as of 31 May 2022, there are three hold separate managers in place, dating back as far as 2020.
The trend in appointing monitoring trustees at phase one and hold separate managers perhaps indicates the CMA remains cautious as to whether merging parties are strictly adhering to the interim measures
Monitoring trustee and hold separate manager (HSM) appointments
Number of cases withdrawn or prohibited still relatively high
In 2021, 21% of closed cases were either prohibited or cancelled pending prohibition or following the rejection of undertaking in lieu. This remains in line with 2020 which saw 26% of cases prohibited, cancelled or withdrawn compared with much lower levels in 2019 of 9% (2018: 4% and 2017: 3%).
The recent prohibited, cancelled or withdrawn cases are across varied sectors. Suggesting companies are looking for consolidation opportunities in narrowly defined markets with insufficient competitors and remedies would mean the acquisition is unviable. With an uptick in M&A activity expected in 2022 as we navigate out of the pandemic, we may see a reduction in cases prohibited or withdrawn towards the end of 2022 and into 2023.
Percentage of cases prohibited or withdrawn
National Security and Investment regime
On 4 January 2022, the new National Security and Investment (NSI) regime came into force, which requires businesses and investors to notify of certain acquisitions across 17 sensitive areas to the Investment Security Unit (ISU). This replaces the Public Interest Intervention Notice regime under the Enterprise Act, which didn't require prior notification and instead allowed the Secretary of State to step in on acquisitions it believed to impact national security.
The NSI regime applies to acquisitions and investments on or after 12 November 2020. Government guidance on the National Security and Investment Act 2021 is available to assist companies in assessing whether acquisitions or investments require notification and what that could mean.
The regime is separate from the merger control regime, and a merger or acquisition could qualify under both regimes. The ISU could require an interim order to be put in place to ensure the businesses remain separate while the investigation takes place.