House of Commons - Explanatory Note
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Clause 86: Procedural requirements for certain undertakings and orders

232.     This clause gives effect to Schedule 9, which sets out the procedural requirements to be followed in making or revoking an order and in accepting or releasing an undertaking.

Schedule 9: Procedural requirements for certain enforcement undertakings and orders

233.     This Schedule sets out the consultation process for making, varying or revoking an order or undertaking. Paragraphs 1-5 set out the process to be followed in making an order or accepting undertakings. Paragraphs 6-8 set out the process for revoking an order or releasing a party from an undertaking.

234.     In both cases, the authorities will set out clearly what they are proposing to do and the reasons for it. The authorities will have to give notice of their intention to make or vary an order to the parties directly affected by it. There will be a thirty-day consultation period for orders and a fifteen-day period for undertakings, although the authorities can apply an accelerated procedure in merger cases in special circumstances (paragraph 9).

235.     These procedural requirements apply to all orders and undertakings except initial and interim orders and undertakings. Initial and interim orders do not have to comply with these procedural requirements because they may need to be introduced at short notice.

Clause 87: Register of undertakings and orders

236.     This clause creates a register to be maintained by the OFT of all orders and undertakings made or accepted by the OFT, CC or Secretary of State and of which it is aware. This register will be available to the public.

Enforcement functions of OFT

Clause 88: Duty of OFT to monitor undertakings and orders

237.     This clause gives the OFT the lead role in monitoring undertakings and orders. The OFT will keep all undertakings and orders under review. Where it decides that an order or undertaking should be amended or revoked, it will advise the CC or Secretary of State accordingly. Where an order or undertaking is not being complied with, the OFT will be able to take the company to court. This is based on the monitoring role the DGFT currently has under section 88 FTA 1973.

Clause 89: Further role of OFT in relation to undertakings and orders

238.     This clause allows the CC to ask the OFT to negotiate undertakings with the parties to a merger. The CC retains the final say on whether undertakings should be accepted. The CC may also choose to negotiate directly with the parties.


Clause 90: Rights to enforce undertakings and orders

239.     This clause ensures that orders and undertakings can be enforced through the courts. Any person who sustains loss or damage as a result of the contravention of an order or undertaking may bring action before the courts. The OFT may bring civil proceedings to enforce compliance with orders or undertakings. The CC and Secretary of State may also bring civil proceedings in respect of orders or undertakings for which they are responsible.

Clause 91: Rights to enforce statutory restrictions

240.     This clause ensures that compliance with the automatic prohibitions on further integration (clause 73) and on further share acquisition (clause 74) can be enforced through the courts.

Chapter 5: Supplementary

Merger notices

241.     This set of clauses updates the merger notice procedure provided for in sections 75A-75H of FTA 1973.

Clause 92: Merger notices

242.     This clause describes the circumstances in which a notice may be given. The clause sets out that the notice should be in the form prescribed by the OFT, and that no reference will be made if the period for considering a merger notice has expired.

Clauses 93 and 94: Period for considering merger notices & Section 93: supplementary

243.     These clauses provide for the time-periods in which a reference can be made under a notice. On receipt of a merger notice, the OFT has 20 working days, with a possibility of extending that to 30 workings days, to decide whether to refer. This reduces the FTA 1973 merger notice timetable by 5 days.

244.     If an intervention notice has been served, the time-period can be extended to a maximum of 40 working days.

245.     There are also circumstances in which a merger notice timetable can be extended further:

  • if the parties have failed to provide information that OFT asked for. In this case, the extension will be the period it took for the parties to provide the information;

  • if the OFT is seeking undertakings. In this case the extension will be for the period it takes until undertakings are given; or up to 10 days after the OFT has received a notice saying that undertakings will not be given;

  • if the European Commission is considering whether to deal with the case;

  • if the Secretary of State decides to extend her consideration of a public interest case in relation to the creation of a new public interest gateway.

Clause 95: Certain functions of OFT and Secretary of State in relation to merger notices

246.     This clause sets out the responsibilities of the OFT in relation to merger notices. This includes: taking appropriate steps to ensure that all affected parties are made aware of the case and what the OFT should include in their notice to parties requesting information. It also provides for the circumstances in which the OFT may reject a notice. These include: if the OFT suspects that false or misleading information has been given; if they suspect that the merger will not take place; if information is not given as requested; and if the arrangements would result in a concentration with a Community dimension under the ECMR.

Clause 96: Exceptions to protection given by merger notices

247.     This clause provides for the circumstances in which a case continues to be referable, notwithstanding the fact that the period for considering a merger notice served in that case has expired. Such circumstances include rejection of the notice by the OFT or withdrawal of it by the parties, non-disclosure of material information, and any merger involving any relevant party.

Clauses 97 and 98: Merger notices: regulations & Power to modify sections 93 to 97

248.     Clauses 97 and 98 provide the Secretary of State with the power to make and modify provisions relating to the merger notice procedures.

General duties in relation to references

Clause 99: Duty of expedition in relation to references

249.     This clause ensures that the relevant authority (either the OFT or the Secretary of State) will make its decision on reference as early as it is sensible to do so.

Clause 100: Certain duties of relevant authorities to consult

250.     Subsections (1) and (2) set out that the OFT, CC or Secretary of State will, where practicable, consult those persons who control any of the merging enterprises who are likely to be adversely affected by certain proposed decisions before those decisions are taken. Subsection (6) provides that this duty applies in particular to reference decisions by the OFT and the Secretary of State and the CC's final conclusions on whether there is a substantial lessening of competition or an adverse public interest effect and on remedies. Subsection (3) provides that, where practicable, those likely to be affected should be given the reasons for a proposed decision.

251.     Subsection (4) ensures that the general duty to consult does not override other considerations, such as the timetable for taking decisions and the need to keep certain matters confidential.

Information and publicity requirements

Clause 101: General information duties of OFT and Commission

252.     This clause sets out the general duties of the OFT in relation to merger cases.

253.     Subsections (1) and (2) ensure that the OFT will act, if practicable, to bring cases that it is investigating to the attention of those that might be affected by the transaction. This duty does not apply to merger notice cases, which carry their own publicity requirements (see note on clause 95).

254.     Subsections (3) and (4) provide that the OFT will give relevant information to the CC.

255.     Subsections (5) and (6) ensure that the OFT and the CC will give information and assistance to the Secretary of State to enable her to carry out her functions in relation to cases that may raise public interest considerations.

Clause 102: Advice and information about references under section 20 and 31

256.     This clause requires the OFT and the CC to publish advice and information about certain of their key tasks in the merger scrutiny process. The OFT will be required to explain how it will apply its duty to make references. The CC will have to explain how it will consider references. This information and advice will include explanations of how the OFT and CC will apply the substantive tests in the new regime, including, in particular, the application of the substantial lessening of competition test, and the circumstances and manner in which relevant customer benefits will be taken into account when the OFT considers references and when the CC is considering possible remedies. The OFT and the CC will be required to consult each other (and others they consider appropriate) in preparing their respective advice and information. It is intended that the information and advice will increase clarity for business about how the new regime works.

Clause 103: Further publicity requirements

257.     This clause provides that the OFT, CC and the Secretary of State will publish certain decisions, some accompanied by their reasons for those decisions.

258.     Where the Secretary of State decides to take enforcement action in a case raising public interest considerations, she will lay details of that decision (including reasons for it) before Parliament, as well as a copy of the relevant report of the CC.

Clause 104: Defamation

259.     This clause protects the Secretary of State, OFT and the CC against actions for defamation as a result of their exercise of functions under the merger provisions of the Bill.

Investigation powers

Clauses 105-113: Investigation powers

260.     Clauses 105-113 set out the CC's powers to require persons to give evidence and to provide specified documents and information needed for the purposes of a merger (or markets investigation) inquiry. There are many similarities with the investigatory powers that it currently has under section 85 FTA 1973. However, the CC's current power to initiate contempt proceedings against persons who fail to comply with notices requiring the production of documents and information and the attendance of witnesses is replaced with a power for the CC itself to impose monetary penalties for non-compliance subject to a full right of appeal to the CAT.

261.     Clause 105 gives the CC a power to serve notices requiring any person to attend to give evidence to the CC or to provide it with specified documents or information by specified dates. Any notice has to set out the possible consequence of a failure to comply with the notice.

262.     Clause 106 sets out the enforcement powers that the CC will have. It gives the CC a power to impose monetary penalties where it considers that a person has, without reasonable excuse, failed to comply with a notice. This power replaces the current contempt sanction in section 85(7)-(8) FTA 1973. The existing provision gives the CC the power to apply to a court for a finding that a defaulter has failed without a reasonable excuse to comply with a notice. If the court does make such a finding, it can punish the defaulter as though he or she had been guilty of contempt of court.

263.     The clause retains a similar criminal offence to that in section 85(6) FTA 1973 for circumstances where a person intentionally alters, suppresses or destroys documents that he or she has been required to produce.

264.     Subsection (9) provides that the CC should have regard to a statement of policy (see clause 112) in deciding how to make use of the available powers.

265.     Clauses 107-112 set out how the power to impose a monetary penalty will operate. The CC will have discretion about whether to impose a fixed penalty or a daily rate penalty, or both. A daily rate penalty, once set, will accumulate for a period until: the requested information is provided, or the date of publication of the CC's report on the reference, or an earlier date at the CC's discretion.

266.     The Secretary of State will determine by order the maximum fixed and daily rate penalties that the CC will be able to impose up to the maximum of £30,000 and £15,000 respectively set out in clause 107(6). It is currently envisaged that the Secretary of State will set the initial maximum fines at £10,000 for the fixed penalty, and £2,000 for the daily rate penalty. In each case, the actual level of penalty shall be an amount that the CC considers appropriate in all the circumstances of the case. Receipts from the exercise of the power will be paid into the Consolidated Fund.

267.     Parties will have a full right of appeal to the CAT against decisions to impose monetary penalties. A party may appeal where it is aggrieved by the imposition of the penalty, the amount of the penalty, or the date by which the penalty is required to be paid. The requirement to pay a penalty is suspended until the case is determined. The CAT may cancel or reduce (not increase) the penalty or amend the date or dates by which penalties have to be paid.

268.     Clause 112 requires the CC to consult on and then to publish a statement of policy in relation to the enforcement of notices under clause 105. It will include the considerations that will be relevant to determining the nature and amount of any monetary penalty. These considerations will be for the CC to identify, but it is envisaged that they could include:

  • the nature and gravity of the omission;

  • the size and financial resources of the defaulter;

  • the size of penalty that will encourage the party to co-operate;

  • the scale of costs and other disbenefits that will be incurred by the CC if an inquiry has to be extended to take account of information provided late.

269.     Clause 113 retains the existing section 93B FTA 1973 offence for the circumstances where a person supplies false or misleading information to the CC, the OFT or the Secretary of State. The penalty for this offence is imprisonment or a fine or both.


Clause 114: Review of decisions under Part 3

270.     This clause allows decisions taken by the OFT, CC or Secretary of State in connection with a merger reference or possible merger reference to be reviewed by the CAT. The grounds of review are those that would be applied by a court on an application for judicial review. Case law suggests such grounds could include: (i) that an error of law was made; (ii) that there was a material procedural error, such as the failure of an inquiry panel to comply with the Chairman's procedural rules; (iii) that a material error as to the facts has been made; and (iv) that there was some other material illegality (such as unreasonableness or lack of proportionality). Judicial review evolves over time and the approach in subsection (6) has been taken to ensure the grounds of review continue to mirror any such developments.

Clause 115: Fees

271.     This clause provides that the Secretary of State may, by order, require fees to be paid to her, or the OFT for the exercise of their merger regulation functions. It provides that the order may specify that fees are payable in public interest cases, special public interest cases and mergers of water and newspaper enterprises, as well as cases referred on competition grounds under clauses 20 and 31. This clause replaces section 152 Companies Act 1989.

Clause 117: Offences by bodies corporate

272.     This clause provides for the circumstances in which individual officers of companies and partners of Scottish partnerships may be held responsible for the conduct of their companies or Scottish partnerships in committing offences under the provisions mentioned above.

Clause 118: Service of documents

273.     This clause sets out how any document served on any person (individual, body corporate, partnership or limited liability partnership) under the merger provisions may be served.

Clause 119: Associated persons

274.     This clause explains, for the purpose of deciding whether enterprises have come under common control or ownership, which persons will be considered to be "associated persons" under this model and therefore to be treated as one person. This includes relatives, trustees and business partners. The term "relative" is also defined in this clause for further clarification. This clause reflects and updates section 77 FTA 1973.

Clause 120: Supply of services and market for services etc.

275.     This clause expands upon what is meant by "supply of services", and is based on section 137 FTA 1973. It provides that supply of services does not include the provision of employment services, but includes access to computer software or data, and the sharing of telecommunications apparatus (within the meaning of the Broadcasting Act 1990). It also provides that the Secretary of State may by order specify that permitting the use of land may in certain circumstances be a supply of services.



276.     Clauses 123-174, 166-167 and Schedules 8 and 12 make provision for a system of market investigations to replace the existing FTA 1973 monopoly inquiries regime. The purpose of these investigations is to inquire into markets where it appears that competition has been prevented, restricted or distorted by the structure of a market (or any aspect of its structure), the conduct of firms (i.e. persons supplying or acquiring goods or services in the course of business) operating within it, or the conduct of such firms' customers, but there has been no obvious breach of the prohibitions on anti-competitive agreements or arrangements or abuse of a dominant position under CA 1998 or Articles 81 or 82 of the EC Treaty. An example of the sort of circumstances in which these provisions might be used would be a situation where a few large firms supplied almost the whole of the market and, without there being any agreement between them (i.e. a non-collusive oligopoly), they all tended to follow parallel courses of conduct (e.g. in relation to pricing), while new competitors faced significant barriers to entry into the market, and there was little or no evidence of vigorous competition between the existing players.

277.     As under the FTA 1973 monopolies provisions, market investigation references will be able to be made to the CC by the OFT, certain sectoral regulators, and (under a reserve power) Ministers. The CC will carry out an in-depth investigation of competition in the market or markets concerned. Where the CC identifies competition problems, their findings will be used as the basis for remedial action. The main differences between the market investigations regime and the FTA 1973 monopoly inquiries regime are as follows:

  • the tests applied both by OFT and others when making a reference and by the CC when analysing markets referred to it will be focused on identifying adverse effects on the process of competition that arise from the structure of particular markets, the conduct of firms operating within them, or the conduct of such firms' customers or suppliers (under FTA 1973 the CC's key recommendations are based on the application of a broad 'public interest' test);

  • where the CC identifies competition problems as a result of its investigations, it will be under a duty (except in cases where a public interest intervention notice issued by the Secretary of State is in force: see below) to take such steps as it considers reasonable and practicable to remedy them. Under FTA 1973, any remedial action is at the discretion of the Secretary of State. The CC will have powers to accept remedial undertakings and make remedial orders similar to those that the Secretary of State has under FTA 1973;

  • in considering the implications of its duty to remedy in any given case, the CC will be able to take account of 'customer benefits' in the form of lower prices, greater quality or choice, or increased innovation that result from the structure or conduct from which adverse effects on competition have been found to arise. This group of benefits represents the sub-set of 'public interest' matters most often associated with competitive markets;

  • in certain regulated sectors (e.g. gas, electricity, water), the CC will be able (as the Secretary of State is under the monopolies regime) to exercise its powers to remedy by means of a change to the terms under which companies are licensed to operate in the market (in the case of water, this will include conditions of appointment; in the case of rail, this will include passenger franchise agreements and access agreements). When considering remedies in this form, the CC is to take account of the statutory duties of the relevant sectoral regulator rather than just the standard set of customer benefits;

  • the scope for consideration of any wider 'public interest' issues will be restricted to cases in respect of which the Secretary of State issues an intervention notice;

  • intervention notices will only be issued in circumstances where the Secretary of State has concerns about the impact that a market investigation may have on national security or other public interest considerations specified by statutory instrument subject to the affirmative resolution procedure. There will also be a requirement to make the scope of such public interest considerations clear at an early stage in the investigation process;

  • the OFT or other referring body will no longer set a deadline for the CC to conclude its investigation. Instead, the CC will be responsible for setting its own administrative timetable in consultation with parties to the investigation, subject to a two-year statutory long-stop provision;

  • the CC's proceedings will be governed by published procedural rules. It will have a power to impose financial penalties for failure, without reasonable excuse, to produce specified information.

278.     Other differences and similarities between the monopolies and market investigations regimes are pointed out in relation to particular clauses below.

279.     References to the OFT in the explanatory notes on this Part should be construed as including relevant sectoral regulators, unless explicitly stated otherwise (see further the notes on clause 128 and Part 2 of Schedule 8).

Chapter 1: Market investigation references

280.     Chapter 1 (clauses 123-130) sets out the substantive framework for decision-making in market investigation cases (except for those cases where the public interest intervention regime is engaged, which are covered by clauses 131-145). In particular, they set out the statutory criteria to be applied by the OFT or other referring body when making references and by the CC when investigating markets; prescribe what the CC must cover in its report; and set out the CC's duty to remedy the competition problems that it identifies.

Making of references

Clause 123: Power of OFT to make references

281.     This clause describes the criteria on which the OFT and certain sectoral regulators may make a market investigation reference. In order to make a reference, the OFT must have reasonable grounds for suspecting that one or more 'features' of a market are preventing, restricting or distorting competition in the supply or acquisition of specified goods or services.

282.     Subsection (2) provides that, for the purposes of Part 4, the following are to be considered features of a market: its structure (or any aspect of its structure); the conduct of firms operating within it; and the conduct of such firms' customers.

283.     The distinction between 'structure' and 'conduct' in a market is commonly made in economic analysis, and is intended to provide the framework for a wide-ranging inquiry into how firms compete in a market and the economic context in which they operate.

284.     Some of the main elements that it is anticipated might be included in an analysis of market structure are outlined below:

  • Market definition: the starting point for an analysis of the structure of a market is market definition: the process of deciding what goods or services are included in the product market (e.g. ice creams bought from convenience outlets on the spur of the moment rather than from a supermarket) and what the geographic extent of this market is (e.g. is it local, regional, UK-wide, European, or global).

  • Measures of market shares and concentration: these can provide a rough indication of the competitive strength of firms operating in a market, although they will seldom in themselves provide an unambiguous indication of market power and the state of competition in that market (e.g. the fact that three firms each have 30 per cent of a market now does not mean that the market is uncompetitive: it may be that their respective shares a year ago were quite different, or that, although their shares remain broadly stable over time, there is a great deal of customer 'churn' between them).

  • Barriers to entry and expansion in a market: these are factors that place actual or potential entrants into a market at a competitive disadvantage compared with established firms, or make it difficult for new entrants or existing smaller players to grow and thus act as an effective competitive constraint on larger incumbents. High barriers to entry and/or expansion are often a cause of competition problems in a market because they remove a competitive constraint, thus allowing the incumbents to raise prices above the competitive level, secure in the knowledge that new entrants cannot enter the market, undercut them, and win market share. Barriers to entry and expansion arise from a wide variety of causes; for example:

-     laws and regulations (e.g. where only a certain number of licences is issued to operate in a market);

-     sunk costs (investment costs of entering the market that cannot be recovered if the entrant subsequently exits the market) and economies of scale (which make it inefficient to operate in a particular market below a certain scale) will tend to increase the risks and difficulty of entry;

-     information constraints (e.g. where it is difficult or impossible for new entrants to gain the information that they need to compete, or where it is difficult and costly for consumers to gain sufficient knowledge to switch to a new product);

-     the strategic behaviour of incumbents (who may, for example, have positioned themselves so as to be able to take retaliatory action to eliminate any competitive threat posed by an entrant);

-     the likelihood or rate of market growth (a growing market is more likely to be attractive to new entrants than a declining one).

  • The degree of vertical integration and vertical links: the extent to which firms in a market are also active in upstream and downstream markets, or are linked with other firms on upstream and downstream markets, may influence their competitive behaviour (as well as having an impact on the ease of entry into the market).

  • The cost or difficulty of switching from one supplier to another: such costs can act as a disincentive to vigorous competition either between incumbents or on the part of new entrants.

  • Buyer power: the strength of customers' bargaining position relative to that of suppliers can have a significant impact on competition in a market and on the ease of entry into it.

  • Information asymmetries: the participants in a market will rarely all have the same information. The asymmetry of information between different participants buying or selling a product can have a significant impact on the nature and extent of competition in the market for that product. For example, in some markets consumers are poorly informed about the product in comparison with sellers (e.g. used cars); in others, sellers are poorly informed about consumers, and this may affect how they price their products (e.g. car insurance). Information asymmetries can feed in to other aspects of market structure (in particular, they may constitute a barrier to entry or a barrier to expansion, for example if information asymmetries make consumers unwilling to switch supplier). They can also play a part in the analysis of conduct where individual firms exploit or create informational asymmetries, for example through branding or through price discrimination (charging different prices to different customers).

285.     The term 'conduct' includes any acts and omissions, whether intentional or unintentional, of the persons referred to in subsection (2)(b) and (c). By the decisions they take, the way in which they make decisions, and how they respond to their rivals and potential entrants, firms operating within a market can prevent, restrict or distort not only competition within that market, but also competition in the markets in which their immediate suppliers (upstream) and customers (downstream) operate, and in complementary markets (i.e. the conduct of firms in a market for one of a pair of complementary markets, such as printers and printer cartridges, may prevent, restrict or distort competition in the market for the other product). The conduct of consumers, as well as that of businesses, can also constitute a feature of a market, and is included within subsection (2)(c).

286.     In some cases, it will be open to debate whether a given feature of a market is structural or an aspect of conduct (for example, information asymmetries and barriers to entry arising from the behaviour of incumbents could equally well belong in either category). However in indicating the range of features of a market which the competition authorities may take into account, the separate references to structure and conduct in clause 123 do not require either the OFT under clause 123 or the CC under clause 126 to identify particular features of markets that are the subject of a reference as falling entirely within the terms of one of subsections (a), (b) or (c) to the exclusion of the others.

287.     In considering whether it has reasonable grounds to suspect that features of a market are preventing, restricting or distorting competition, the OFT will have to evaluate the evidence available to it in each case. In some cases, the OFT's grounds for suspecting that the reference criteria are satisfied will include an assessment of indirect evidence, such as the prevailing levels of prices charged for goods or services in a market, or the prevailing levels of profitability or productivity of firms operating in that market (particularly when observed over time, or when compared to another market, in the UK or elsewhere, for similar or related products).

288.     The OFT will be obliged to consult before making a reference decision, and to give reasons justifying its decision both before and after it is made (see further clauses 161 and 164).

289.     The power to make market investigation references is a discretionary one. The OFT is not obliged to make a reference where it has reasonable grounds for suspecting that the reference criteria are satisfied (unlike in the merger regime, where the provisions of Part 3 place it under a duty to refer in certain circumstances). Since potential market investigation cases will often raise many complex issues, the clause sets no limits to the matters that may be taken into account in deciding whether or not to make a reference, once the OFT has reasonable grounds to suspect that the reference criteria are satisfied. For example, there could be circumstances in which the reference criteria were satisfied, but the competition problems in the market concerned were of a kind that it was more appropriate for the OFT to address using its powers under CA 1998. Or the OFT might take the view that the competition problems in a market that it had the power to refer were likely only to be temporary, or were too trivial for it to be likely that the costs and burdens of a CC investigation would be justified by any likely outcome of such an investigation.

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Prepared: 26 March 2002