A new regulatory regime for Big Tech: the special merger regime for Strategic Market Status (Part 3)

We discussed the new “strategic market status” (SMS) regime proposed in the UK Competition and Markets Authority’s advice to the UK Government on regulating digital markets in Part 1 of our series of Tech Insights on the key themes arising from the DMT advice, and the more general reforms to address the consumer harm the CMA says can arise in digital markets Part 2. We now consider one of the key pillars of the DMT advice – the CMA’s proposals for a distinct merger regime for firms with SMS.

Building on CMA signals re digital mergers

Officials at the CMA signalled in summer 2020 that it was considering a special regime for digital mergers and have since commented on the possibility of introducing a mandatory regime for firms with SMS to notify any acquisition they make to the CMA.

Those proposals now look set to come to fruition, having made it into the DMT advice. Whether and when the proposals make it into law, as ever, depends on the Government’s appetite and bandwidth to take this forward, but it is fair to say that they are firmly on the horizon.

Concerns re underenforcement 

Regulators including the CMA have voiced concerns about perceived historical under-enforcement of merger control in digital markets, regularly citing the decisions in Facebook/Instagram, Google/DoubleClick and Facebook/Whatsapp as examples of incorrect clearances that have resulted in consolidation of market power and ultimately costs to consumers. The oft-quoted statistic is that:

 “over the last 10 years the 5 largest firms have made over 400 acquisitions globally. None has been blocked and very few have had conditions attached to approval, in the UK or elsewhere, or even been scrutinised by competition authorities.”

The CMA argues that, while it has reviewed over 20 mergers in digital markets in the last two years and analysed a broad range of ‘theories of harm’, there are limits to its ability to “enforce effectively in digital markets”, in particular in relation to (i) the current jurisdictional tests; (ii) the standard of proof applied in the CMA’s substantive assessment and (iii) the difficulties caused by the non-suspensory nature of the regime.

What changes for SMS firms?

The CMA has made two key recommendations on merger control to Government in the DMT Advice, which have broad implications for firms with SMS that make acquisitions:

1. Mandatory reporting and notification requirements

The SMS merger control regime would require SMS firms tell the CMA about every acquisition they propose to make and to file a formal notification before closing certain acquisitions that meet the proposed jurisdictional tests.

The mandatory reporting requirement will mean the CMA considers whether each acquisition should be reviewed in more depth, and eliminates the possibility (albeit small, given the CMA’s sophisticated mergers intelligence function) that an acquisition could fly ‘under the radar’ of the voluntary CMA regime.

The mandatory (and suspensory) notification requirement would mark a step-change from the current voluntary merger control regime and the CMA has proposed the use of bright-line jurisdictional thresholds to ensure that the new regime is properly targeted and provides legal certainty as to SMS firms’ obligations.

As jurisdictional thresholds, the CMA has proposed transaction values as a reasonable proxy for the materiality of the transaction, in combination with some form of local UK nexus test.

Similar thresholds have also been introduced in Germany and Austria with the same aim of catching acquisitions of nascent competitors.

2. A lower and more cautious standard of proof

The CMA’s substantive test for assessing mergers – the ‘substantial lessening of competition’ or SLC test – would remain the same but a lower and more cautious standard of proof would apply.

Currently, the standard of proof for a Phase 2 investigation is ‘on the balance of probabilities’. Under the new SMS regime, the CMA has proposed applying the Phase 1 standard of whether there is a ‘realistic prospect’ that a merger gives rise to an SLC at Phase 2. The CMA’s Phase 1 test has been interpreted very widely and (per the Court of Appeal) allows the CMA to intervene where the likelihood of a SLC is, at the low end, no higher than “more than fanciful”.

Lowering the standard of proof will require the CMA to intervene in more mergers and will be particularly relevant to cases where the CMA explores more forward-looking (and difficult to prove) theories of harm around the loss of dynamic or potential competition.

This will mean that the CMA can prohibit a transaction where there is real uncertainty about whether it gives to a SLC, including in relation to so-called killer, reverse-killer or zombie acquisitions.

What does it mean for SMS firms?

The CMA is already one of the world’s most interventionist regulators.  Given the light-touch nature of judicial review in the UK, lowering the standard of proof is likely to make it even easier for the CMA to block global tech deals compared with other agencies.

While the CMA acknowledges that the DMT advice proposals will add additional complexity to the merger control regime and could give rise to a risk of over-enforcement, it nonetheless believes that the changes to the regime are necessary to proactively address the risks of sizeable and durable consumer harm that it has believes would arise if the bar were not lowered.

Coming up next

In the next instalment of our series on the CMA’s DMT advice, we’ll consider the proposed remedies powers or ‘pro-competitive interventions’ under the new SMS regime.