Concluding remarks

United Kingdom legislation has been tentative in its approach to merger activity, recognizing the desirable qualities of some monopoly situations created through merger; it therefore seeks to examine each case on its individual merits. The first UK legislation, the Monopolies and Restrictive Practices (Inquiry and Control) Act, dates from 1948 and set up the Monopolies Commission. The power of the 1948 Act was extended to mergers by the Monopolies and Mergers Act of 1965 under which the newly estab-lished Monopolies and Mergers Commission (MMC) could now report on situations where a merger resulted in a combined market share of 25% or more of a particular good or service, or involved combined assets of over £30m.

The next major Act having implications for merger activity was the Fair Trading Act 1973, under which the Office of Fair Trading (OFT) was formed with a Director-General of Fair Trading (DGFT) as its head.

Over the next quarter of a century, the DGFT advised the Secretary of State for Trade and Industry as to which mergers should be referred to the MMC for investigation. However, the Secretary of State could overrule both the DGFT and the MMC if he or she felt that the merger was in the ‘public interest’, which was nowhere clearly defined. This vague ‘public interest’ test often led to complaints by business of undue and arbitrary government involvement in the decision-making process as regards permitting or prohibiting merger activity.

Problems with UK merger policy

As already noted, by the 1990s the effectiveness of the MMC and the role of the Secretary of State in merger investigations were increasingly being called into question. For example, the MMC was criticized for lacking both resources and a professional attitude. It

had one full-time chairman, three part-time deputy chairmen, 31 part-time commissioners and only 100 full-time staff. Many argued that the MMC was often

‘outgunned’ by lawyers representing firms under investigation and, with its scarce resources, was unable to properly scrutinize many potentially important merger proposals. For example, between 1950 and 1995 the MMC had investigated only 171 merger cases.

The traditional UK approach to mergers was based on the principle that they can be forbidden by the Secretary of State if they operate against the public interest. The vagueness of the term ‘public interest’, together with the differing approaches to mergers of individual Secretaries of State, led to what many saw as inconsistent decision-making in merger policy over time. For example, the Labour govern-ment had recommended in 1978 that the MMC should recognize the benefits as well as the costs of merger activity in their deliberations. However, the following Conservative government issued guidelines in 1984 suggesting that the MMC should concentrate on ‘loss of competition’ as the most important aspect when assessing mergers. By 1992, the Conservative government’s approach to mergers seems to have shifted ground yet again, with the DTI placing greater emphasis on creating ‘national champions’ capable of competing in international markets – thereby sup-porting larger mergers even when some ‘loss of competition’ was inevitable. Yet by 1996, Ian Laing, the new Conservative Secretary of State for Trade and Industry, announced that ‘fostering competition’

rather than the creation of national champions should be the guideline for assessing merger policy. This followed the refusal of the minister to allow either National Power’s £2.8bn bid for Southern Electric or PowerGen’s £1.9bn bid for Midland Electricity to proceed. These ever-shifting approaches to merger activity indicate some degree of strategic confusion in the implementation of merger policy.

In addition to the problems noted above, there were also increasing complications as regards the power of the Secretary of State during merger refer-ences. For example, the Secretary of State had the power to overrule recommendations from both the DGFT and the MMC if he or she was so minded. For example, in 1993 the then Secretary of State at the DTI, Michael Heseltine, rejected the recommendation of the DGFT to refer both GEC’s acquisition of Philips’ infra-red components business and the hostile

The control of mergers and

acquisitions

bid by Airtours for Owners Abroad, to the MMC.

The Secretary of State argued that the mergers might help rationalize the industry and create strong com-petitive companies so that, despite the competition-based concerns of the DGFT, he declined to refer these proposed mergers to the MMC for further scrutiny. Again, in August 1998 Margaret Beckett, the Secretary of State for Trade and Industry, over-ruled the recommendation of the MMC in the case of First Group, a transport company which had made a

£96m acquisition of Glasgow-based SB Holdings.

The MMC believed that First Group should be allowed to acquire SB Holdings only if it agreed to sell a division of its Scottish operations to decrease the company’s market power. However, the Secretary of State allowed the merger to proceed without any such restriction on the grounds that a rival company, Stagecoach, had entered the Glasgow bus market, thus creating sufficient competitive conditions.

These inconsistencies in merger policy continued even after the replacement of the MMC by the Competition Commission (CC) under the provisions of the 1998 Competition Act. Again there was criti-cism of inadequate resources in the CC, which had a relatively small staff of 78 persons and a grant income of only £5.9m, the concern being that it might become a ‘toothless tiger’, used only for appeals against merger decisions rather than itself being a key decision taker. A series of consultation documents were pub-lished between 1999 and 2001 culminating in the Enterprise Act of 2002, which received the Royal Assent on November 2002 and was brought into force, in stages, from the spring of 2003 onwards.

Current merger legislation: Enterprise Act 2002

The Enterprise Act 2002 overhauled UK competition law and, amongst other things, restated the UK merger control framework by introducing significant amendments to previous legislation in this area. The main aspects of current merger legislation now include the following.

1 Relevant merger situation. Under the Act, a ‘rele-vant merger situation’ to which the new proce-dures potentially apply is one in which three criteria are met:

■ First, that the two or more enterprises involved in the merger cease to be distinct as a result of the merger.

■ Second, that the merger must not have taken place, or have taken place not more than four months before the reference is made to the OFT.

■ Third, either that the enterprise being taken over has a UK turnover exceeding £70m (the

‘turnover test’) or that the merged enterprises together supply, or acquire, at least 25% of all those particular goods or services supplied in the UK or a substantial part of the UK (the ‘share of supply’ test). It is implicit in this criterion that at least one enterprise must trade within the UK.

2 Competition authorities evaluation test. Under the Act, for a ‘relevant merger situation’, the test which the OFT will apply when evaluating whether a merger should be referred to the CC is whether the merger or proposed merger has resulted, or may be expected to result, in a sub-stantial ‘lessening of competition’ within the rele-vant market or markets in the UK. ‘Lessening of competition’ would generally mean a situation where product choice would be reduced, prices raised, or product quality or innovation reduced as the result of merger activity. However, the OFT might decide not to make a reference to the CC if it believes that customer benefits (e.g. higher choice, lower prices, higher quality or innovation) resulting from the merger outweigh the substantial lessening of competition noted above. Similarly, the CC when considering a merger in more depth will also weigh the ‘lessening of competition’ effect against the ‘public benefits effect’ before making its final decision.

3 Competition authorities. Under the Act, the OFT was established as an independent statutory body and the post of DGFT was abolished.

■ As a result of its new statutory power the OFT can require the provision of information and documents, enter premises under warrant, and seize material. It has explicit duties to keep markets under review and to promote competi-tion. It publishes an annual report on its activi-ties and performance which is laid before Parliament. It also has the functions of advising the Secretary of State on mergers which might fall under the scope of the ‘public interest’.

■ The CC, which was already an independent statutory body, continues its in-depth investi-gation of any merger cases referred to it by the OFT or less frequently by the Secretary of State.

The CC determines the outcome of such cases and reports its decision to the Secretary of State.

■ The Secretary of State for Trade and Industry has retained power to make decisions for mergers involving newspaper transfers and in certain public interest cases such as those that deal with national security. Apart from these specified types of merger situations, the main decisions relating to mergers are now dealt with by the OFT and CC without resort to the Secretary of State.

■ There is also a new appeals mechanism giving a right to those parties involved in the merger to apply to the Competition Appeal Tribunal (CAT) for a statutory judicial review of a deci-sion of the OFT, CC or the Secretary of State.

There is also a further right of appeal (on a point of law only) to the Court of Appeal.

Putting merger policy into practice

To understand the main procedures for merger inves-tigation, a brief account will be given here of the process. When the OFT is made aware of the ‘relevant merger situation’, it may choose to undertake a ‘first stage’ investigation. It might seek to assess the poten-tial effect of the merger on market structure. For example, if it is a horizontal-type merger then market shares, concentration ratios or the Herfindahl
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Hirschman Index (see below, page 92) might be used as initial indicators of potential competition concerns.

This market structure assessment could be followed by an examination of whether the entry of new firms into the market is easy or difficult and whether any

‘lessening of competition’ is likely to occur. The OFT will then make its own decision on the case without reference to the Secretary of State. The OFT will give one of three possible decisions:

■ First, the merger is given an unconditional clearance.

■ Second, the merger is given a clearance only if the parties agree to modify their uncompetitive behaviour or decrease their market power.

■ Third, the merger may turn out to be serious enough to refer it directly to the CC for a ‘second-stage’ investigation. At this point the Secretary of State can intervene in the proceedings, but under the new regime this intervention can be done only in very specific circumstances involving mergers with media, national security or other narrowly specified implications.

If the OFT refers the merger to the CC, the Com-mission will consider the evidence of the OFT but will also make its own in-depth report on the merger. After consideration of the evidence and basing its views on both the ‘lessening of competition’ and ‘customer ben-efits criteria’, the CC will recommend that one of three possible actions be taken: (i) an unconditional clear-ance, or (ii) a clearance subject to conditions proposed by the CC, or (iii) an outright prohibition. If the CC recommends conditional clearance then the companies involved may be asked to divest some of their assets or to ensure in some specified way that competition is maintained (e.g. giving licences to their competitors).

Again, the Secretary of State may intervene only in very limited circumstances as in the media, national security or other specified issues (e.g. if one of the parties to the merger is a government contractor). If the decision of the CC is to prohibit the merger, the parties can appeal to the CAT.

In essence, the Enterprise Act has depersonalized competition authority by abolishing the post of DGFT. It has also improved the overall predictability of the mergers investigation procedure by de-politiciz-ing the process of merger control. It has done this by severely curtailing the involvement of the Secretary of State and by giving expert independent bodies (the OFT and CC) more power. Basically, the OFT and CC have been transformed from essentially advisory bodies to the Secretary of State to independent bodies with their own decision-making powers. The Act has also clarified merger control policy by introducing the

‘lessening of competition’ test in place of the old

‘public interest’ test and by allowing potential bene-fits (including public benebene-fits) to be considered. In addition, the Act made the mergers regime more transparent by obliging both the OFT and the CC to consult fully with companies involved in mergers and provide the parties involved with their provisional findings. Finally, the new mergers regime seeks to introduce a fairness criterion in that companies now have the right of appeal to the CAT.

Self-regulatory controls

As well as the legal controls noted above, there are also self-regulatory controls on UK merger activity which are imposed by the Stock Exchange and the Panel on Takeovers and Mergers, both of which are responsible to the Council for the Securities Industry. The London Stock Exchange imposes self-regulatory controls on all companies which are listed on the Stock Exchange or

on the Alternative Investment Market (AIM). These rules were developed mainly in order to keep all share-holders adequately informed of certain important changes in share ownership. For example, the quota-tions department of the Stock Exchange must be given certain information about listed companies which acquire more than 5% of the assets of another company or which divest more than 5% of their own assets. If the figure is between 5% and 15%, only the Stock Exchange and the press need be notified; but if the figure rises to 15% or more, the Department of Trade and Industry, the shareholders and the press should be notified. The Council for the Securities Industry also issues a ‘City Code on Takeovers and Mergers’. This is administered by the Panel on Takeovers and Mergers and relates to both listed and unlisted companies but not to private companies. One function of the Code is to make sure that each share-holder is treated equally during takeover bids. For example, an offer given to some shareholders early in a bid, and which they have accepted, must also be left open to all other shareholders. Another function of the Code is to set out ‘rules’ for the conduct of companies during a takeover, covering items such as ‘insider dealing’ and other complicated aspects of such bids. If companies fail to follow these rules, the Council can refuse them the facilities of the securities market.

Insider dealing

On a wider issue, the whole question of ‘insider dealing’ came to the fore during this period. This type of dealing occurs when company shares are bought by those who have special privileged information about the future of the company, e.g. the possibility of an imminent takeover. By buying shares before a takeover announcement, for example, they can make huge gains as share prices rise when the excitement of the takeover begins. Basically, the UK has some of the most advanced insider-dealing regulations in the world.

The latest UK legislation regulating insider dealing came into force in 1994 and extended the scope of the main Companies Securities (Insider Dealing) Act of 1985. The new provisions were contained in the 1993 Criminal Justice Act and followed a requirement to implement an EU Directive on the subject. Under the new law it is a criminal offence for an individual who has inside information to deal in price affected securi-ties (such as shares, debt securisecuri-ties, gilts and deriva-tives whose price movements could be sensitive to certain information), or to encourage another person

to deal. It is also a criminal offence for such an indi-vidual to disclose the information to another person, other than as part of his or her professional work.

The dealing in question must be either on a regulated market (basically all EU primary and secondary markets) or off-market but involving professional intermediaries who deal in securities.

The new legislation expands the scope of the 1985 Act by widening the definition of who can be con-sidered an ‘insider’ and by extending, for the first time, the definition of the securities covered to deriv-ative products. The definition of dealing has been widened to include subscribing for shares (as well as the buying and selling of shares), thus making the legislation applicable to underwriting transactions.

Also the territorial scope of the legislation was extended to most EU markets rather than only UK markets and the burden of proof was shifted from the prosecution to the defence. Whether the legislation achieves its main aim of making convictions for insider dealing easier remains to be seen, especially since insider dealing is a criminal offence, so that the amount of proof needed for conviction is substantial, leading to few being convicted. For example, in 1995 the Stock Exchange investigated 1,500 unusual share trading operations but only 43 were referred to the prosecuting authority. A city ‘think tank’ report in 1996 recommended that to increase the number of convictions, insider dealing should be made a civil offence. This would mean that a lower burden of proof would then be required for conviction and those harmed by insider dealing would be able to recover damages.