A new day for UK merger control - a practical take on the new Digital Markets, Competition and Consumer Act 2024

Authors: Tobias Caspary, Valeri Bozhikov, Paschalis Lois

The Digital, Markets, Competition and Consumer Act 2024 (the "DMCC")'s sections on digital markets and competition will come into force on 1 January 2025, introducing significant changes to the UK's merger control regime. With its overarching aim to enhance competition, the DMCC offers reforms that are designed to streamline enforcement, increase scrutiny of transactions involving strategic players, whilst also attempting to ensure that the UK remains a robust but attractive market for investments.

This note explores some key merger control takeaways from the DMCC.

A. Revised jurisdictional thresholds, a de minimis exemption, and a new 'killer acquisitions test'

The UK is a voluntary, non-suspensory merger control regime, meaning that transacting parties do not require an approval prior to completing their transaction. However, in certain circumstances the Competition and Markets Authority ("CMA") could use its powers to call in a transaction for review when: (i) the target entity's turnover in the UK was more than £70 million in the last completed financial year (the "Turnover Test"); or (ii) if both parties to a transaction supply or acquire the same goods or services in the UK, and after the transaction they are expected to supply or acquire at least 25% of those goods and services in the UK (the "Share of Supply Test").

The DMCC introduces significant changes to the status quo:

• Turnover Test. The DMCC increases the Turnover Test from £70 million to £100 million.
• A new de minimis exemption. The DMCC amends the Share of Supply Test by adding a new de minimis exemption. Where neither party to the transaction generated at least £10 million of turnover in the UK in their last financial year, their transaction would escape CMA's jurisdiction.
• A new hybrid threshold will fight "killer acquisitions". Pursuant to the DMCC, the CMA will be able to review transactions where: (i) one party holds a 33% share of supply in the UK for any goods or services, and has a UK turnover of at least £350 million; and (ii) the other party has some nexus to the UK. It is the CMA's optimistic expectation that this new test will capture only a further 2 to 5 cases a year.

A key difference with the existing Share of Supply Test is that under this new hybrid test the CMA will be able to review transactions where there is no horizontal overlap whatsoever.

In practice, the expansive nature of this new test will likely be a cause for concern. First, the CMA has a wide discretion in determining whether the party with £350 million in turnover also triggers the 33% share of supply test - the share of supply test has very loose limits, and the CMA is oftentimes willing to stretch this notion. Second, the UK nexus test is unclear - for instance, does a party need to have a presence in the UK, a UK subsidiary, IP rights in the UK, or any sales in the UK? According to the ICN Recommended Practices for Merger Notifications and Review Procedures a "material" nexus is required (ICN: "[t]he most common means of providing a material nexus is by requiring significant local sales or local asset levels").

Given the CMA's expectation of only few additional cases being caught under the new threshold, as a minimum the CMA should interpret the local nexus notion in line with ICN's principles and, in any event, restrictively.

B. Hybrid regime for entities holding 'strategic market status'

The DMCC will introduce mandatory reporting obligation for entities that have been assigned a 'strategic market status' ("SMS") in digital markets. Such entities will need to inform the CMA of any transactions that meet certain jurisdictional thresholds, prior to closing.

SMS

The CMA may designate entities as holding a SMS if they meet certain jurisdictional and substantive conditions:

• Jurisdictional conditions: the entity must: (i) conduct digital activity[1]; (ii) with a link to the UK (e.g., the provider has significant number of users in the UK or carries on business in the UK); and (iii) generate turnover of £25 billion globally or £1 billion in the UK.
• Substantive conditions: the entity must (i) possess a substantial and entrenched market power in the UK; and (ii) hold a position of strategic significance in respect of the digital activity in question. The first consideration will require the CMA to undertake a prospective analysis of at least 5 years, to consider whether, inter alia., the position of the entity in question is subject to challenge. As regards the second consideration the CMA effectively assesses how important the entity's services are with respect to consumers and competitors[2].

Reportable events

Entities holding SMS will need to report to the CMA when they acquire a qualifying status with respect to an entity which carries activities in the UK (e.g., sells goods or services), and the value for consideration[3] paid by the SMS acquirer is at least £25 million.

A qualifying status arises whenever a SMS acquirer: (i) acquires at least 15% in the shares or voting rights of the target (including newly set up joint ventures with third parties); or (ii) exceeds 25% or 50%, with respect to the target's shares or voting rights.

Although a report is not a formal notification process, the DMCC requires that the CMA must deem a report 'sufficient' before allowing the parties to close their transaction. This is concerning, as it has the potential for the CMA to expand the scope of reporting requirements into a de facto suspensory pre-notification process. As such, such reporting, coupled with the CMA's new hybrid test, could in practice give the CMA broad powers to investigate all transactions involving a SMS acquirer, under a de facto mandatory suspensory regime.

C. Fast track Phase 2 and ability to voluntarily extend Phase 2

The DMCC introduces two important changes for cases that could require an in-depth review by the CMA.

For background, the CMA's merger investigations generally follow two steps: (i) CMA initiates an initial investigation (Phase 1) after which it has up to 40 working days to decide whether to approve the transaction or refer the transaction for in-depth review (Phase 2) (subject to certain exceptions where, for example, parties offer remedies); (ii) under a Phase 2 procedure the CMA generally has between 32-50 weeks to either approve or block the transaction. As such, a complex investigation could last well over a year. To speed up the process, parties to a transaction could apply to the CMA, under an informal process, to bypass the Phase 1 process. However, by doing so, the parties would need to concede that the transaction could have some detriment to competition in the UK.

The changes are now twofold. First, the DMCC formalizes the 'fast-track' process into law. Parties can now apply for a fast-track review without having to "admit" that the transaction could lead to a competitive harm. While the CMA still retains a large discretion on whether to accept or reject this 'fast-track' application, the process, when used successfully, could allow parties to front-load discussions on remedies and potentially resolve issues at a faster pace.

Second, the DMCC allows parties to mutually agree extensions to Phase 2 proceedings with the CMA, thus avoiding being 'timed out' of the process before resolving any issues that the CMA may be considering. Additionally, this will allow parties to align multi-jurisdictional proceedings where necessary.

D. Bolstering the CMA's investigative and enforcement powers

The DMCC further bolsters the CMA's investigatory and enforcement powers with respect to transactions in four important ways:

• Extra-territorial reach of requests for information. Following recent disputes on the extra-territorial reach of the CMA's information requests, the DMCC now formally codifies the CMA's ability to request the production of documents or information to persons outside the UK.
• Higher and novel penalties for businesses for failure to provide information/misleading information to statutory requests for information, and breaching of commitments. As of today, the CMA may only issue businesses a fixed fine of £30,000 and/or a daily fine of up to £15,000 for failing to respond to a statutory request for information. The DMCC now empowers the CMA to issue businesses a fixed fine up to 1% of the worldwide turnover of the business, and/or a daily penalty of up to 5% of worldwide daily turnover of the business. Additionally, the DMCC now empowers the CMA to issue civil fines for any breaches of undertakings, orders or commitments (up to 5% of the worldwide turnover of the business, and/or a daily penalty of up to 5% of worldwide daily turnover of the business).
• Extra-territorial cooperation. The DMCC streamlines the CMA's ability to cooperate with overseas regulators in the context of multi-jurisdictional transactions. For example, the CMA can cooperate with overseas regulators if there is a qualifying cooperation agreement or if otherwise approved by the Secretary of State. Such cooperation can be broad, including in certain circumstances allowing the CMA to serve requests for information to parties within the UK solely to assist a foreign regulator's investigation.

As recently as 29 October 2024, the UK and the European Union concluded negotiations on a new agreement that will enable increased cooperation between the CMA, the European Commission, and EU Member States' national competition authorities.

CONCLUSION

Whilst the expectation was that the DMCC would predominantly deal with the digital sector and various means to tackle "big tech" players, it achieves much more. The DMCC provides more clarity on the types of transactions that could attract CMA's attention, whilst also offering a more flexible approach for complex deals.

That said, some changes introduced by the DMCC are concerning. Notably, the DMCC creates a new 'acquirer focused' threshold giving the CMA the ability to, inter alia., review transactions where the target has no overlaps with the acquirer. The only limitation to the CMA's jurisdictions seems an ambiguous reference to a local nexus requirement. It is hoped that the CMA will interpret such notion restrictively, to align with ICN principles that require a "material" nexus. Further, the new rules introduce a de facto mandatory and suspensory pre-notification regime for certain acquirers operating in the digital sector.

All these reforms come at a time when the CMA is in the spotlight. On the one hand, the CMA appears to be showing more flexibility when it comes to remedy discussions in merger control reviews, which aligns neatly with the most recent announcement by CMA's Chief Executive that the remedies process will be subject to a review in 2025. On the other, the CMA appears to have attracted UK Prime Minister's attention who pledged in an October 2024 keynote speech to "rip out the bureaucracy that blocks investment" and to "…march through the institutions and make sure that every regulator in this country - especially our economic and competition regulators - take growth as seriously as this room does."

It remains to be seen whether the CMA will use its newly enshrined powers pragmatically, or try to extend its reach based on jurisdictional tests that afford it a large discretion.

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