Memorandum by the Competition Commission
OVERVIEW
Certain mergers between large companies raise
competition concerns because they might reduce the competitive
pressure on the merged companies, so allowing unnecessary price
increases, and/or reductions in product range or quality, and/or
reduced innovation. Ministers no longer decide whether such mergers
should take place. This task was in effect delegated to expert
competition authorities (the Office of Fair Trading—"the
OFT" and the Competition Commission—"the CC")
by the Enterprise Act 2002.
Whether or not they raise competition concerns,
certain mergers raise public interest considerations. Media mergers
in particular may raise plurality concerns because they might
concentrate newspaper and other media ownership in too few hands,
to the detriment of the quality of journalism and broadcasting.
The Communications Act 2003 accordingly gives the Secretary of
State for Business, Enterprise and Regulatory Reform the power
to intervene in such mergers. Following his intervention, he receives
advice from the OFT, Ofcom and his departmental officials. If
he decides to make a reference, the CC undertakes a detailed investigation
and makes recommendations to the SoS. He then receives further
advice as appropriate before he finally decides whether the merger
is allowed to go ahead. Parliament did not feel it appropriate
for an unelected body, with a specialist competition remit to
make decisions on broader public interest concerns.
There are slightly different processes for newspaper
and broadcast media mergers.
There are also slightly different processes
for:
— Smaller media mergers (ie those
too small to be caught by general competition law—called
special mergers in the legislation), and
— European relevant merger situations
(those whose competition aspects fall to be dealt with by the
European Commission).
The rest of this note summarises:
— the standard UK merger regime;
— public interest considerations;
— the public interest regime,
including;
— the newspaper public interest provisions,
and
— the broadcast media and cross media
public interest considerations.
— The public interest regime process;
— the special rules applying to
special merger situations;
— the special rules applying to
European relevant merger situations;
— the remedies available in public
interest cases;
— the role and resources of the
CC; and
— the chronology of the current
investigation into BSkyB's 17.9% shareholding in ITV.
THE STANDARD
UK MERGER REGIME
Under the standard UK merger regime, transactions
may be subject to review where a "relevant merger situation
is created". This applies to share acquisitions and asset
acquisitions provided that what is being acquired is an enterprise.
A relevant merger situation is created where "enterprises
cease to be distinct" and either the turnover test or the
share of supply test is satisfied. The concept of "enterprises
ceasing to be distinct" is a relatively broad one. It is
defined as enterprises coming under common ownership or common
control. Three levels of control are identified in the Enterprise
Act:
(i) a controlling interest (legal control);
(ii) de facto control of policy; and
(iii) material influence over policy.
The turnover test will be satisfied if the UK
turnover of the acquired enterprise exceeds £70 million.
The share of supply test will be satisfied if, as a result of
the merger, at least 25% of goods or services of any description
supplied in the UK or in a substantial part of the UK are supplied
by or to the merged entity. In order for the share of supply test
to be satisfied, there must be an overlap in the activities of
the parties.
Under the standard merger regime, the initial
review of mergers is carried out by the OFT. Where the OFT considers
that it is or may be the case that a merger may give rise to a
substantial lessening of competition (an SLC), it is under a duty
to refer that merger to the CC for in-depth investigation. However,
the OFT has the ability in such cases to accept undertakings from
the parties in lieu of a reference to the CC. It may decide to
do this where the competition issue identified is clear and where
a comprehensive solution of the problem can be easily identified.
THE PUBLIC
INTEREST CONSIDERATIONS
The Enterprise Act retained the ability of Ministers
to intervene in mergers where certain specified public interest
considerations are raised. Intervention is only possible in relation
to public interest criteria that are specified in the Enterprise
Act. It is possible for additional public interest criteria to
be added by primary legislation or by affirmative resolution placed
before both Houses of Parliament.
At the time that the Act was introduced, the
only public interest specified was national security. Although
often regarded as synonymous with defence, national security is
defined in the Act as including public security and is broader
than defence. It could for example cover security of supply issues
in relation to energy companies or the maintenance of essential
medical treatment facilities within the UK.
The Communications Act 2003 added further public
interest criteria to the Enterprise Act. These relate to:
— mergers involving broadcast
media, and
— cross media mergers involving
both broadcast media and newspaper enterprises.
The newspaper merger public interest provisions
were introduced to replace the special newspaper merger regime
that applied under the Fair Trading Act 1973 (and which had not
been repealed when the Enterprise Act was introduced). The special
newspaper merger regime was introduced in 1965 in response to
concerns that increasing concentration of newspaper ownership
in too few hands could stifle the expression of opinion and distort
the presentation of news. As a result, newspaper mergers were
subject to a stricter regime than other mergers and where the
relevant jurisdictional tests were satisfied, a transfer of a
newspaper was unlawful and void without the prior consent of the
Secretary of State. With certain limited exceptions, the Secretary
of State could not consent to the transfer without a reference
to the CC. This regime was felt to be too burdensome and it was
decided that introducing a discretion for Ministers to intervene
in newspaper mergers that appeared to raise public interest concerns
was more appropriate.
Under the Enterprise Act, the public interest
considerations that relate to newspaper mergers are the need for:
— accurate presentation of the
news in newspapers;
— free expression of opinion in
newspapers; and,
— to the extent reasonable and
practicable, a sufficient plurality of views in newspapers in
each market for newspapers in the UK or a part of the UK.
These considerations were ones that had been
identified in cases that had been examined under the Fair Trading
Act special newspaper merger regime.
One of the changes brought about by the Communications
Act 2003 was a relaxation in the media ownership rules. In return
for a relaxation in these rules, it was considered appropriate
for Ministers to have an ability to intervene in relation to such
mergers. As a result, the broadcast media and cross media public
interest considerations were also added to the Enterprise Act.
These public considerations are:
— the need for a sufficient plurality
of persons with control of media enterprises serving each audience;
— the need for a wide range of
high quality broadcasting; and
— the need for persons carrying
on media enterprises to have a genuine commitments to the broadcasting
standards objectives set out in the Communications Act 2003.
THE PUBLIC
INTEREST MERGER
REGIME PROCESS
There are three different types of public interest
merger situation identified in the Enterprise Act: public interest
mergers, special public interest mergers and European relevant
merger situations. The procedures and considerations that apply
differ according to which of these types of merger is under review.
A public interest merger is a relevant merger
situation (ie one that satisfies the jurisdictional test described
above) which raises one or more of the specified public interest
considerations. The OFT has a duty to bring to the Secretary of
State's attention any mergers that it consider may raise public
interest issues. Also by their very nature, mergers raising public
interest concerns are likely to attract media coverage. Cases
raising national security concerns tend to be brought to the attention
of the Secretary of State by the Ministry of Defence.
Where the Secretary of State has concerns about
the impact of the merger on public interest grounds that he considers
require further investigation he will issue an intervention notice.
The Secretary of State can issue an intervention notice at any
point until the OFT makes a decision on whether or not to refer
the merger to the CC on competition grounds. In practice, the
Secretary of State has indicated an intention to make a decision
on whether or not to intervene within 10 working days of the later
of: the transaction being notified to the OFT, or the transaction
being brought to his attention. The parties to the merger are
given an opportunity to make written representations to the Secretary
of State on whether he should issue an intervention notice.
If the Secretary of State decides to issue an
intervention notice, the notice must specify the public interest
consideration that the Secretary of State considers may be relevant.
The procedure following the issuance of an intervention notice
differs according to the public interest consideration specified
in the notice.
Where national security is specified, the effect
of the notice is to require the OFT to prepare a report for the
Secretary of State by the date specified in the notice. The issues
to be addressed in the report are whether the transaction in question
is a relevant merger situation, the OFT's competition analysis
and an assessment of whether the merger does give rise to public
interest concerns. In order to prepare its report, the OFT will
carry out a consultation seeking third party views on the public
interest issue.
Where the intervention notice specifies a newspaper
or media public interest consideration, the effect of the notice
is to require both the OFT and Ofcom to prepare reports for the
Secretary of State. The OFT's report will address jurisdictional
issues and the competition assessment. It is Ofcom's role in such
cases to advise the Secretary of State on the public interest
issues raised by the merger and to carry out the consultation
seeking third party views on the impact of the transaction on
the media public interest consideration specified in the notice.
The OFT's report may include a summary of any representations
on the media public interest considerations that it has received,
but it is not under an obligation to seek out those views.
The Secretary of State takes these reports into
account in deciding whether or not to refer the merger to the
CC for further investigation. If he decides that the public interest
consideration specified in the notice is not relevant to the transaction,
the case will revert to a competition only assessment and the
OFT will decide whether or not to refer the merger to the CC on
competition grounds. Otherwise, the Secretary of State will balance
any identified competition detriment against the public interest
considerations in deciding whether to refer the merger, seek undertakings
in lieu of a reference or to clear the merger outright. The Secretary
of State is obliged to accept the OFT's assessment on the jurisdictional
issue and on the impact on competition. If no impact on competition
is identified then the Secretary of State cannot refer the merger
on competition grounds but he may make a reference on public interest
grounds alone. If a competition problem is identified by the OFT,
then the Secretary of State must treat this as being adverse to
the public interest unless he considers that the competition concerns
are outweighed by the national security or newspaper/media public
interest considerations.
Where a merger is referred to the CC on competition
and public interest grounds, the investigation carried out by
the CC is broadly similar to an investigation carried out on competition
grounds alone. There are certain differences in relation to media
mergers: where the reference decision specifies a newspaper public
interest consideration, the Group of members appointed by the
CC to conduct the investigation must include at least one member
of the CC's specialist newspaper panel and if three such members
are appointed to the Group, the Group may consist entirely of
those members. This only applies in relation to newspaper mergers
or cross media mergers where a newspaper public interest consideration
is specified. The other difference to the CC's procedures is that
where the reference specifies a media public interest consideration,
the CC is under a duty to have regard to the need for consultation
in order to obtain a representative cross section of opinion of
those who may be affected by the media merger. In practice, consultation
forms an important part of CC investigations regardless of the
industry involved.
The CC carries out its investigations and prepares
a report for the Secretary of State. In cases referred on both
competition and public interest grounds that report contains the
CC's decisions on whether the transaction qualifies as a relevant
merger situation, and whether taking account of any SLC identified
by it and the public interest consideration(s) specified in the
reference decision, the merger operates, or may be expected to
operate against the public interest. If the CC decides that the
merger does operate against the public interest, the CC must decide
whether remedial action should be taken by the Secretary of State,
or whether the Secretary of State should recommend that others
take remedial action in order to address the adverse effect on
the public interest. The CC's report also contains its decision
as to what remedial action is appropriate in the circumstances.
If the reference was made on the basis of public
interest concerns alone, the CC does not carry out any competition
assessment and its report will address only the jurisdictional
issue and the public interest issue(s).
The CC has 24 weeks (extendable by up to 8 weeks)
to carry out its investigation and send its report to the Secretary
of State. Where the reference decision contained a newspaper or
media public interest consideration, the CC is also required to
provide a copy of its report to Ofcom and Ofcom can provide the
Secretary of State with advice on the newspaper/media public interest
consideration and on any appropriate remedial action. Following
receipt of the CC's report the Secretary of State is required
to publish his decision on whether or not to make an adverse public
interest finding within 30 working days of receipt of the report.
The Secretary of State must accept the CC's conclusions on jurisdiction
and on competition (where applicable). If the Secretary of State
makes an adverse public interest finding, he must consider the
question of remedies and although he must have regard to the CC's
findings on this issue, the final decision on remedies lies with
the Secretary of State. The Secretary of State also has responsibility
for publishing the CC's report (subject to any excisions that
may be required).
SPECIAL MERGER
SITUATIONS
The Enterprise Act recognises that public interest
considerations may be relevant in relation to mergers that fall
below the jurisdictional thresholds that apply in the standard
merger regime. As a result, it is possible for the Secretary of
State to intervene in certain mergers that fall below these thresholds.
In cases raising national security concerns, intervention is possible
if one of the parties is a defence contractor. In newspaper mergers
intervention is possible if one of the parties has a pre-existing
share of supply of newspapers of any description in the UK or
in a substantial part of the UK of at least 25%. This differs
from the standard jurisdictional test in that there is no need
for there to be an overlap between the parties' activities under
the special merger regime. Similarly, in mergers involving broadcast
media enterprises, intervention is possible where one of the parties
has a pre-existing share of supply of broadcasting of any description
in the UK or in a substantial part of the UK of at least 25%.
In order to investigate the public interest
issues in relation to such smaller mergers, the Secretary of State
can issue a special intervention notice. A special intervention
notice can be issued at any time up to four months from the date
of completion of the merger, but as for public interest mergers,
the Secretary of State has indicated that he will aim to decide
whether or not to intervene within 10 working days of the merger
coming to his attention. The effect of the special intervention
notice is similar to the effect of an intervention notice. However,
in such cases, no competition assessment is carried out by the
OFT. If the Secretary of State decides to refer a special merger
situation to the CC for further investigation, the CC will not
carry out a competition analysis and its report will deal only
with the jurisdictional and public interest issues.
EUROPEAN RELEVANT
MERGER SITUATIONS
The Enterprise Act also makes provision for
the Secretary of State to intervene on public interest grounds
in relation to mergers that are subject to the jurisdiction of
the European Commission under the EC Merger Regulation. Again
intervention is only possible in relation to one of the public
interest considerations specified in the Enterprise Act and provided
that the jurisdictional thresholds under the standard merger regime
are satisfied (ie that the merger would be a relevant merger situation
if it were not subject to the European Commission's jurisdiction).
Intervention is such cases starts with the Secretary of State
issuing a European intervention notice. Since the European Commission
had exclusive jurisdiction in relation to the competition assessment
in such cases, the OFT's report will not include assessment of
the impact on competition of the merger. Any reference to the
CC will be on public interest grounds alone and the CC's report
will deal only with the jurisdictional and public interest issues.
REMEDIES IN
PUBLIC INTEREST
CASES
Remedies in public interest cases can take the
form of undertakings given by the parties and accepted by the
Secretary of State. The Secretary of State also has power to impose
an order remedying the issues identified. The Enterprise Act has
specific provisions relating to matters that may be included in
an order made in relation to mergers specifying a national security
public interest consideration or a newspaper public interest consideration.
The measures identified in relation to mergers raising newspaper
public interest considerations are based on remedies that were
used in relation to newspaper mergers under the previous special
newspaper merger regime and illustrate the sorts of remedies that
the CC may consider in its reports on mergers involving newspapers.
They include:
— an ability to alter the constitution
of a body corporate (for example in connection with the appointment
of directors to ensure their independence or the establishment
of an editorial board);
— an ability to require the agreement
of the Secretary of State or another person, before taking specified
action such as appointing or dismissing editors, journalists,
directors or shadow directors;
— attaching conditions to the
operation of a newspaper; and
— prohibiting consultation or
co-operation between subsidiaries.
The Role and Resources of the Competition Commission
Only a relatively small number of mergers are
referred to the CC for investigation (12 so far in 2007, including
BSkyB). The investigations are these days quite substantial affairs,
to which the parties (ie the companies) will devote considerable
resources. The CC itself is therefore well resourced with strong
teams of economists, lawyers and others supporting "Groups"
of decision makers ("Commission Members") who are quite
independent from the Government and drawn from a wide range of
professional, business and other backgrounds. It is free to (and
frequently does) employ industry experts, consultants and others,
depending both on workload and on the need for particular expertise.
As well as investigating mergers, the CC also
investigates markets (such as the groceries market and London
Airports) and acts as an appeal body from certain decisions by
utility regulators. Its total budget is just over £20m pa.
The CC feels that it is well resourced and has the necessary experience
to decide competition questions applying well-established tests.
The CC believes that it has access to the necessary
resources, and appropriate skills, to investigate media mergers,
to report facts, and to give advice to Ministers. But it does
not seem appropriate for a specialist competition authority to
make final decisions where broader public interest concerns are
at stake.
10 December 2007
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