The OFT's Discretion Not to Refer - Where Do We Stand?

INTRODUCTION

The purpose of this article is to analyse the recent history of the de minimis exception under UK merger control rules, including an analysis of the recent 'Mergers – exceptions to the duty to refer and undertakings in lieu' guidance (the Draft Guidance) that the Office of Fair Trading (OFT) is currently finalising.2 By way of background, this article will also set out the relevant general principles of UK merger control, the statutory context of the de minimis exception, the historical development of the relevant OFT guidance as it has progressed since May 2003 and some key recent OFT decisional practice in this area.

RELEVANT GENERAL PRINCIPLES OF UK MERGER CONTROL

Although the idea has recently been floated that the UK could consider moving to a mandatory merger notification regime (primarily to deal with problematic issues around 'unscrambling the eggs' in completed mergers that give rise to substantial lessening of competition (SLC) concerns),3 the UK's merger control regime is currently voluntary. This means that merging parties are under no obligation to notify the transaction to the OFT, although there is a legal basis for making a 'statutory voluntary notification' to the OFT4 and 'informal submissions' are also accepted.

The OFT has a duty to refer both anticipated and completed mergers to the Competition Commission (CC) if the merger gives rise to a realistic prospect of an SLC. There is a more detailed analysis of the relevant provisions below.

It is in relation to this duty of the OFT to refer mergers that give rise to a realistic prospect of an SLC that the de minimis exception becomes relevant, because in the event that the market in question is, in the words of the Enterprise Act 2002 (the EA), 'not of sufficient importance', the OFT's duty to refer falls away.

The voluntary nature of the UK's merger control regime has a significant impact on the point at which the de minimis exception becomes relevant. As the merging parties can choose whether or not to notify their merger to the OFT, the de minimis exception is not relevant to the question of whether or not to notify. Rather, the de minimis exception is a factor for the OFT to consider when deciding whether or not to refer the merger to the CC.

This in contrast to several Continental European jurisdictions, where the local equivalent to the de minimis exception determines whether the merging parties need to notify the merger to the relevant national competition authority at all. As explained above, this is simply the result of the mandatory nature of merger control in most Continental European legal systems.

The merger control regime in Germany is a good example of such a system. According to para 35(1) of the Gesetz gegen Wettbewerbsbeschränkungen (German Act against Restraints of Competition – 'ARC'), the German merger control regime applies to transactions in which the merging parties have (in the last financial year before the transaction) generated worldwide turnover exceeding €500 million (para 35(1)(1) ARC), and at least one of the parties involved in the transaction (usually the acquirer or the target) has generated turnover in Germany that exceeds €25 million (para 35(1)(2) ARC). A second domestic turnover threshold was added on 25 March 2009, so that now a further party involved in the transaction must generate turnover in Germany exceeding €5 million.5 Therefore, in future it will generally be necessary for the target to generate turnover in Germany in excess of €5 million before a transaction must be notified to the Bundeskartellamt (the German Federal Cartel Office – 'BKartA').

If, however, a transaction prima facie triggers an obligation to file a notification with the BKartA because the relevant turnover thresholds are met, the transaction need not be notified if the German de minimis exception (known as the Bagatellmarktklausel and found in para 35(2)(2) ARC) applies. This de minimis exception will apply if the market under consideration has existed for at least 5 years (in terms of goods or services being sold on a commercial scale) and the turnover generated in that market did not exceed €15 million in the last calendar year.

The Bagatellmarktklausel is intended to exclude the application of the German merger control regime to markets of insufficient economic importance.6 One of the main reasons for this is to ensure that the principle of proportionality is respected.7 The turnover thresholds contained in para 35(1) ARC, which only refer to turnover generated by the parties to the merger, did result (prior to the reform in March 2009) in the BKartA needing to review a large number of benign mergers.8

The second major reason for the Bagatellmarktklausel is to relieve pressure on the BKartA.9 It is intended that the BKartA should both have the capacity to review a large number of straightforward merger filings within the reasonably tight one month deadline from receipt of a complete filing (Phase I – para 40(1) ARC) as well as to have sufficient resources at its disposal to deal with the much more complex Phase II cases.

A third major reason for the Bagatellmarktklausel is to ease the burden on merging parties.

After this brief comparative analysis, the article will focus on the de minimis exception as it has been applied by the OFT in recent times. The statutory context of the de minimis exception is set out below.

STATUTORY CONTEXT OF THE DE MINIMIS EXCEPTION

It is important to put the de minimis exception in its statutory context because a market (or markets) being of insufficient importance is only one of a number of reasons that the OFT may use to decide to make an exception to its duty to refer potentially problematic mergers to the CC. This also explains why the Draft Guidance concerning the de minimis exception (analysed in more detail below) is entitled Mergers – exceptions to the duty to refer and undertakings in lieu.10 In relation to completed mergers there is one other reason not to refer, and in relation to anticipated mergers there are two other reasons not to do so.

The relevant provisions of the EA are s 22 (for completed mergers) and s 33 (for anticipated mergers).

As set out briefly above, the OFT has a duty to refer both completed and anticipated mergers to the CC if the merger gives rise to a realistic prospect of an SLC. The legal bases for this are ss 22(1) and 33(1) of the EA, respectively.

However, a completed merger that gives rise to a realistic prospect of an SLC need not be referred by the OFT if (i) the de minimis exception applies (s 22(2)(a) of the EA) or, (ii) any 'relevant customer benefits' outweigh the SLC and any adverse effects connected to the SLC (s 22(2)(b) of the EA).

Sections 33(2)(a) and 33(2)(c) of the EA provide the same exceptions for anticipated mergers as for completed mergers, and s 33(2)(b) adds another exception which, by its very nature, cannot apply to completed mergers. This is that arrangements for the anticipated merger are not sufficiently advanced to justify a reference to the CC.

HISTORICAL DEVELOPMENT OF OFT GUIDANCE CONCERNING THE DE MINIMIS EXCEPTION

OFT Guidance (2003)

For a number of years after the EA came into force, the de minimis exception languished on the statute books without being applied by the OFT in a single case. This was primarily because of the very restrictive substantive merger assessment guidance document that the OFT published in 2003 (the 2003 Guidance).11 In that document, the OFT noted that the exception was likely to apply 'only very rarely'.12 The 2003 Guidance also set out that a CC reference would cost approximately £400,000 (although not specifically mentioned, the assumption was that the cost referred to was the cost to the public purse rather than to the merging parties). The 2003 Guidance explained that the purpose of the de minimis exception was to avoid references to the CC where such a reference would be disproportionate to the size of the market concerned. As the implication was that the de minimis exception could only be applied to markets of less than £400,000 in size, it is unsurprising that the OFT did not use it.

OFT Guidance (2007)

A very narrow application of the de minimis exception was always going to risk leading to mergers being referred to the CC even when, looking dispassionately at the issues, it might have been felt that the CC's resources could be better used elsewhere. This risk increased significantly after the Court of Appeal's 2004 judgment in IBA Healthcare Ltd v Office of Fair Trading that...