Determination of references

Clauses 33-39

118.     These clauses set out the functions and duties of the CC once a merger has been referred to it. The clauses have similarities with existing provisions in FTA 1973, but reflect the removal of Ministers from the decision-making process, the new status of the CC as the determinative body in all cases other than ones raising defined public interest considerations, and the switch from a 'public interest' test to a 'substantial lessening of competition' test for the assessment of mergers.

Clause 33: Questions to be decided in relation to completed mergers

119.     This clause sets out the questions that the CC has to decide as part of a reference. Its first task is to decide whether a relevant merger situation has been created. In doing so, it is confirming (or otherwise) the OFT's initial belief in making a reference under clauses 20 or 31 that a relevant merger situation has been or may be created. If it has, the CC has to decide whether the merger will result in a substantial lessening of competition. This competition-based test will be the central provision of the new regime. It replaces the public interest test in section 84 FTA 1973. In general, under the new regime, the CC will only have grounds for remedial action if the CC finds that the merger has or may be expected to result in a substantial lessening of competition. (The only exception to this will be in certain public interest cases considered under the procedure set out in Chapter 2.)

120.     The term 'substantial lessening of competition' is not defined in the Bill. However, it is intended that advice and information on the operation of the competition test will be provided by the CC (and the OFT) under clause 102. This requires the competition authorities to publish general advice and information about how they will consider references and how the relevant provisions will operate.

121.     The concept of a substantial lessening of competition and its application in the context of a reference inquiry will be for the CC to explain in detail in its guidance. Similar language is used in the legislation controlling mergers in a number of other major jurisdictions, including the US, Canada, Australia and New Zealand. The concept is an economic one, best understood by reference to the question of whether a merger will increase or facilitate the exercise of market power (whether unilateral, or through co-ordinated behaviour), leading to reduced output, higher prices, less innovation or lower quality or choice. A number of matters may be potentially relevant to the assessment of whether a merger will result in a substantial lessening of competition. The matters may include, but are not limited to:

• market shares and concentration;

• extent of effective competition before and after the merger;

• efficiency and financial performance of firms in the market;

• barriers to entry and expansion in the relevant market;

• availability of substitute products and the scope for supply- or demand-side substitution;

• extent of change and innovation in a market;

• whether in the absence of the merger one of the firms would fail and, if so, whether its failure would cause the assets of that firm to exit the market;

• the conduct of customers or of suppliers to those in the market.

122.     If the CC decides that there is a substantial lessening of competition, it is also required to decide whether to take action to remedy, mitigate or prevent the substantial lessening of competition or any adverse effects resulting from that loss of competition. Adverse effects in this context are the undesirable consequences that flow from the loss of competition such as higher prices or reduced choice for customers. In deciding what action should be taken, however, subsection (4) requires the CC to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and the adverse effects resulting from it. The reference to a 'comprehensive solution' will require the CC to consider remedies that address the substantial lessening of competition itself (e.g. the features arising from the merger that give rise to the creation of market power) because it is generally more effective to tackle the cause of any problems at their source rather than by tackling the symptoms or adverse effects.

123.     This clause is closely linked with clause 39, which sets out the factors that the CC must bear in mind in choosing remedies.

124.     Subsections (6) and (7) allow the OFT to frame references in a way that requires the CC to limit the questions that it has to consider in deciding whether a relevant merger situation has been created. For example, the reference can be framed in a way that does not require the CC to consider whether the turnover of the enterprise being acquired is over the relevant turnover threshold. In those circumstances, it would consider only whether the share of supply test had been met. Conversely, it can be asked to consider only whether the turnover threshold has been met. The CC can also be required to limit its consideration of whether the share of supply test has been met to a particular part of the UK.

Clause 34: Questions to be decided in relation to anticipated mergers

125.     This clause is the equivalent to clause 33. It sets out the questions that the CC has to decide when an anticipated merger (a merger that is in progress or contemplation) has been referred. The questions are identical, but with future tense used where appropriate to reflect the fact that the merger has not yet been completed.

Clause 35: Cancellation and variation of references under section 20 or 31

126.     The clause allows the OFT to vary a merger reference once it has been made, although this does not carry with it a power to alter the period within which the CC is required to report. It is based on section 71 FTA 1973. The circumstances where this flexibility might be required include situations where the parties have been identified incorrectly, or the grounds for the original reference were wrong.

127.     The clause introduces a provision giving the CC a new power to change the type of reference made, where the facts justify it. The power might be used, for example, where a merger is referred as an anticipated merger under clause 30, but is subsequently completed.

Clause 36: Investigations and reports on references under section 20 or 31

128.     This clause gives the CC an obligation to publish a report on each of its merger references within the statutory time-limit (see below). The clause is closely modelled on section 72 FTA 1973 but with differences reflecting the determinative role of the CC both in relation to decisions on the competition test and decisions on what remedies to apply. The clause includes a requirement for the CC to give reasons for its decision and information allowing for a proper understanding of the decisions.

Clause 37: Time-limits for investigations and reports

129.     Section 70 FTA 1973 currently requires the Secretary of State to set a timetable within which the CC has to report. That timetable cannot exceed 6 months. The period set is extendable for one further period of up to 3 months where the Secretary of State is satisfied that there are special reasons why the report cannot be made within the initial period.

130.     Clause 37 replaces section 70 FTA 1973. It requires the CC to publish its report on a reference within a statutory maximum period of 24 weeks from the date of reference. A shorter period applies if that is needed to comply with Article 9(6) of the ECMR in circumstances where a merger has been referred back for consideration by the UK domestic competition authorities.

131.     The clause permits the CC to extend the 24-week period for the report for one further period of no more than 8 weeks where it is satisfied that there are special reasons for a delay. The clause does not further define 'special reasons', but it is anticipated that they would include matters such as the illness or incapacity of members of a reporting group that has seriously impeded its work, and an unexpected event such as a merger of competitors.

132.     An important difference between the current FTA 1973 timetable and the proposed new timetable is that the CC's report will have to contain not only its decisions on the substantive question of whether there is expected to be a substantial lessening of competition, but also its decisions on remedies. At present, the CC makes the substantive finding against a public interest test, but only makes recommendations to the Secretary of State about the remedies that might be appropriate. The Secretary of State has an unlimited period within which to take final decisions on remedies.

133.     Subsection (4) gives the CC a discretion that it does not have in the current regime to extend the period within which it has to report where one of the parties to a merger (but not third parties) has failed to comply with a formal notice (see clause 105) requiring the provision of information or documents, or the appearance of witnesses. Any such extension continues until the information is provided, or the CC decides to cancel the extension.

Clause 38: Section 37: supplementary

134.     This clause gives the Secretary of State a power by order to shorten the maximum statutory timetable of 24 weeks, and the maximum 8 week period for any extension. They can be lengthened again if necessary, but in no circumstances can the periods be extended beyond 24 weeks and 8 weeks respectively. The clause also gives the Secretary of State a power to make regulations covering detailed procedural matters connected with the provision of information and documents, such as the time at which information is to be treated as having been provided.

Clause 39: Duty to remedy effects of completed or anticipated mergers

135.     There are close links between this clause and clauses 34 and 35. The latter require the CC to decide whether a merger has or may be expected to result in a substantial lessening of competition, and to identify any action that should be taken to address it. Clause 39 requires the CC to take the action that it considers to be reasonable and practicable to remedy, mitigate or prevent the competition problems that it has identified. The steps have to be consistent with the course of action included in the report on the reference, unless there has been a material change of circumstances, or the CC has a special reason for taking different steps.

136.     The CC has a choice of preventing, remedying or mitigating the substantial lessening of competition or the adverse effects arising from that loss of competition. However, it has to have particular regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition itself.

137.     Subsection (5) gives the CC a discretion, in deciding on what action to take to address the competition problems, to have regard to the effect of any such action on any relevant customer benefits (as defined in clause 28). The purpose of this subsection is to give the CC scope, if it considers that customer benefits are of sufficient importance, to impose a lesser competition remedy or no remedy at all if the only steps that the CC could take to remedy the competition problem are steps that would mean that the customer benefits could not be realised.

Chapter 2: Public interest cases

138.     Clauses 40-56 set out the regime for the investigation of mergers that raise matters of public interest beyond competition and customer benefits. In future, such matters may only be investigated and taken into account if the Secretary of State intervenes in a case.

Power to make references

Clause 40: Intervention by Secretary of State in certain public interest cases

139.     This clause allows the Secretary of State to intervene in the consideration of a case by serving an intervention notice where she believes it raises a public interest consideration that needs to be taken into account.

140.     Subsection (2) allows the Secretary of State to serve an intervention notice in a case that she thinks might raise one or more public interest considerations, and subsection (4) provides that only one intervention notice may be served in any case. Subsection (3) limits the considerations that she may raise in this way to those specified in clause 56 or those that the Secretary of State thinks should be so specified. Subsection (7) has the effect that, in the latter case, the Secretary of State must ask Parliament to decide on whether the consideration should be specified in legislation ('finalised') as early as practicable.

141.     Subsection (1) sets out the conditions to be met before an intervention notice can be served. A key condition is that the notice cannot be served if a reference decision has already been taken by OFT.

Clause 41: Intervention notices under section 40

142.     This clause sets out that the intervention notice must include certain details, including which case it relates to, and which public interest considerations may be relevant. The clause also provides that an intervention notice will come into force as soon as it is given, and that it will cease to be in force once the role of the Secretary of State in relation to that case is complete (either because she has acted or is prevented from acting by the legislation).

Clause 42: Investigation and report by OFT

143.     This clause sets out the duties of the OFT to report to the Secretary of State in a case where an intervention notice has been served.

144.     Subsection (2) provides that the OFT will report to the Secretary of State within a deadline set by the Secretary of State.

145.     Subsections (3)-(7) ensure that the Secretary of State will receive information on at least two areas:

• the OFT's advice on the competition issues (including customer benefits, the importance of the market and the scope for undertakings-in-lieu if relevant), as well as its view on whether a relevant merger situation has or would be created; and

• the OFT's summary of the representations that it has received in relation to the public interest considerations mentioned in the intervention notice.

Clause 43: Power of Secretary of State to refer matter to Commission

146.     This clause allows the Secretary of State to make the decision on whether a merger raising public interest considerations should be referred to the CC.

147.     Subsection (1) ensures that the Secretary of State only has the power to refer a case if there is an intervention order in force relating to that case and the OFT has produced a report on that case for the Secretary of State.

148.     Subsections (2)-(7) provide that the Secretary of State may make a reference if she believes that there could be a 'relevant merger situation' that might be adverse to the public interest. In deciding whether to make a reference, she will be bound to accept the views of OFT on any competition-related issues, but may also have regard to the public interest considerations cited in the intervention notice.

149.     Thus subsection (6) ensures that the Secretary of State will view a competition problem identified by the OFT as being adverse to the public interest unless she considers this to be outweighed in the overall assessment.

Clause 44: References under section 43: supplementary

150.     This clause further qualifies the Secretary of State's power to refer under clause 43. As with the OFT's duties to refer under clauses 20 and 31, no reference is permitted if the merger involves a newspaper transfer, or was the subject of either accepted undertakings in lieu of a reference or a merger notice if the deadline for reference has passed. In addition, this clause prevents the Secretary of State from clearing a merger where the OFT identified competition clauses if the public interest consideration(s) that she wishes to base that decision on had not been approved by Parliament. The Secretary of State may delay taking the reference decision for up to 24 weeks from the date of the intervention order so that she might be able to take a newly-approved consideration into account.

Reports on references

Clause 45: Questions to be decided on references under section 43

151.     This clause sets out the matters that the CC must decide in the case of a reference by the Secretary of State.

152.     Subsections (1) and (4) provide that, as in all cases, the CC must first decide whether a 'relevant merger situation' has been created, or is in the process of being created. If so, subsections (2), (3), (5) and (6) provide for it to reach a view on whether it considers the merger would be adverse overall to the public interest and, if relevant to the reference, would result in a substantial lessening of competition. Subsections (7)-(10) ensure that the CC will consider how any of those problems might be remedied, mitigated or prevented.

Clause 46: Cases where references or certain questions need not be decided

153.     This clause provides that, in certain circumstances, the CC need not decide certain questions in relation to a case that raises public interest considerations.

154.     Subsection (1) provides for the CC to cancel a reference in relation to an anticipated merger where it believes that the arrangements for that merger transaction have been abandoned. Subsections (2) and (3) allow the Secretary of State to frame references in a way that requires the CC to limit the questions that it has to consider in deciding whether a relevant merger situation has been or will be created.

Clause 47: Variation of references under section 43

155.     This clause ensures that a qualifying merger situation referred as an anticipated merger may be handled by the CC as a completed merger, and vice versa. The clause also provides for the Secretary of State to vary a reference, but any variation must not alter the time available to the CC to make its report or the specified public interest consideration.

Clause 48: Investigations and reports on references under section 43

156.     This clause provides that the CC will prepare a report for the Secretary of State on any reference made to it under clause 43.

157.     Subsection (1) provides that the CC will have the same deadline for producing a report for the Secretary of State on a case raising a public interest concern as it would have to produce and publish its report on a competition-only case (i.e. within 24 weeks).

158.     Subsections (2) and (3) provide for the CC to give a general report on the subject of the merger and to report on whether there was either a completed or anticipated merger. If so, the CC would report on whether the transaction could be expected to operate against the public interest, and (where the reference has been made on competition and public interest grounds) whether the transaction could be expected to result in a substantial lessening of competition. If either or both of these findings were adverse, the report should also contain advice on how to remedy, prevent or mitigate identified adverse effects. The CC will have to give reasons for its conclusions.

Clause 49: Time-limits for investigations and reports by Commission

159.     This clause (subsection (1)) provides for an upper time-limit of 24 weeks for the CC to send its report to the Secretary of State in a case raising public interest concerns. FTA 1973 currently sets a time-limit of six months. Subsection (2) ensures that, where the merger has been referred back to the UK from the European Commission, the CC will report within a shorter time-limit if necessary.

160.     Subsections (3)-(8) provide for extensions to the 24-week timetable. The CC may extend the timetable once by up to 8 weeks where it has special reasons to do so. FTA 1973 currently allows an extension of up to 3 months. The CC will also be able to extend the timetable where a party to the merger fails to deliver required information - the extension in those cases would be for the period between the deadline for receipt of the information and the actual receipt of that information, or until the CC cancelled the extension.

Clause 50: Section 49: supplementary

161.     This clause limits the ability of the CC to extend its timetable in a case that has been referred back to the UK, where that would conflict with the timetable set by the ECMR. It also provides that the extensions provided for special circumstances and delays in obtaining information can be cumulative, and allows the Secretary of State to alter the standard timetable and extension time-periods (but provides that the periods must not be set above 24 weeks and 8 weeks respectively).

Clause 51: Restrictions on action where public interest considerations not finalised

162.     This clause provides that the CC will only continue to consider a public interest consideration cited in a relevant intervention notice where it has previously been approved by Parliament (either in the Bill, or subsequently), or is so approved within 24 weeks of the serving of the intervention notice in the case.

163.     In a case raising a new public interest consideration, the CC will not report to the Secretary of State, unless either Parliament has decided on the creation of a new public interest consideration, or a period of 24 weeks has passed since the serving of the intervention notice has passed, or the case is subject to the ECMR timetable. In any case, the CC will disregard any public interest consideration that is not finalised at the time it gives its report to the Secretary of State.

Decisions of the Secretary of State

Clause 52: Decision of Secretary of State in public interest cases

164.     This clause sets out how the Secretary of State will proceed on receipt of a report from the CC in a case raising any public interest consideration(s).

165.     Subsection (3) provides for the circumstances in which the Secretary of State can make an adverse public interest finding. Subsection (4) provides that the Secretary of State may decide not to make any finding on the adverse public interest test if she thinks that no public interest consideration is relevant to the case. Subsection (5) ensures that the Secretary of State must make her decision within 30 days from receipt of the CC's report.

166.     Subsection (6) ensures that the Secretary of State will take account only of any public interest considerations that were specified in the reference and were not disregarded by the CC for its report. Subsection (7) provides that the Secretary of State cannot diverge from the relevant competition authority's conclusion on competition.

Clause 53: Enforcement action by Secretary of State

167.     This clause provides that the Secretary of State may accept undertakings from or impose orders on the parties to address any of the adverse effects she has identified where she has made an adverse public interest finding. Subsection (2) provides that she may only take steps provided for in paragraphs 9 and 11 of Schedule 6. Subsections (3) and (4) provide that, in making her decisions on enforcement, the Secretary of State shall have regard to the views of the CC presented in its report and may take account of any customer benefits where there has been a substantial lessening of competition.

Other

Clause 54: Competition cases where intervention on public interest grounds ceases

168.     This clause provides for a case to revert to the competition authorities for a decision where an intervention notice ceases to have effect, either because of the Secretary of State deciding that the public interest consideration should not be taken into account, or, in a case where parliamentary approval of the consideration is required, that approval is not given within the 24-week period mentioned above.

169.     Subsections (1) and (2) provide for the Secretary of State to hand a case back to the OFT for a decision on reference where she decides the public interest consideration(s) cited in the intervention notice are irrelevant to the case.

170.     Subsections (3)-(5) provide for the CC to revert to a competition-only investigation where the relevant intervention notice has ceased to be in force. The CC is to have the same timetable for producing and publishing its report as it had been granted for producing a report for the Secretary of State, plus an additional 20 working days.

171.     Subsection (6) provides for the CC to proceed as though it had conducted a competition-only investigation where the Secretary of State decides that no public interest consideration is relevant to the case.

Clause 55: Duties of OFT and Commission to inform Secretary of State

172.     This clause ensures that the OFT and the Commission pass relevant information to the Secretary of State.

173.     Subsection (1) provides that the OFT will inform the Secretary of State if it believes that any case it is considering raises any issue already specified in legislation that the Secretary of State would not consider immaterial.

174.     Subsection (2) provides that the OFT and the CC must pass on to the Secretary of State any representations that it receives about the need for the Secretary of State to specify a new public interest consideration.

Clause 56: Specified considerations

175.     This clause sets out the considerations that may need to be looked at alongside competition matters in merger cases. It also provides a mechanism for varying the specified considerations.

176.     Subsection (1) provides that 'national security' is the only consideration specified.

177.     Subsections (3) and (4) provide that the public interest considerations specified may be added to, removed or amended and that the revised considerations may be used in any case, regardless of the progress of the order amending the considerations.