By John Fingleton, CEO at Fingleton Associates, and formerly CEO of the Office of Fair Trading, Chair of the Irish Competition Authority and Chair of the International Competition Network.
The UK government is currently consulting on the most sweeping changes to UK merger law since the introduction of the Enterprise Act 2002 (EA02). Under that legislation, the Competition and Markets Authority (CMA) can block a merger or takeover on the grounds that it will lead to a substantial lessening of competition.
In addition, the EA02 gives limited power to government ministers to block mergers and takeovers on the grounds of national security and financial stability (a power exercised by the Secretary of State for BEIS), and on the grounds of media quality, plurality and standards (where the Secretary of State for DCMS is the decision maker).
The government proposes to extend its ability to intervene in mergers and takeovers to protect national security. The proposals also apply more broadly to certain investments, loans and the purchase of shares, as well as other measures that may result in increased influence or control over a business. Although presented as benign technical changes to pursue an important public policy goal, the proposals amount to a wolf in sheep’s clothing.
First, they would create an entirely new merger review regime which by-passes existing institutions, structures and the transparent processes that accompany them. Second, they greatly expand the number and types of transactions over which the government has the right to intervene. Third, while much of the language is around national security and the threat from foreign actors, they apply to any takeover, not just those involving foreign companies, and the concept of national security is not adequately defined. Fourth, while focussed on certain sectors of the economy, they would enable the government to intervene in any sector.
The government envisages examining 200 cases per year under the new regime. This would be a vast increase, considering it has used existing powers to intervene on national security grounds fewer than ten times since 2003. Although the consultation does not point to a single historic case where national security was impaired but where the government was unable to intervene, the consultation envisages that under the new regime 50 or so cases a year will need to be remedied or blocked to protect national security. By contrast, the CMA currently only remedies approximately 20 cases a year on competition grounds.
In addition to greatly expanding the size and scope of the government’s interventions in the market, the changes are likely to have two further harmful effects.
First, they would introduce a much more restrictive approach towards foreign investment into the UK. This new approach was first set out in Prime Minister’s Birmingham speech of July 2016, and its application seen almost immediately when the government extracted commitments from Softbank in relation to its acquisition of Arm.
Second, the changes provide a mechanism by which the government can use the threat of a national security intervention to extract commitments related solely to continued economic activity in the UK, and not to national security. This is not a theoretical concern; the government has shown an increased appetite for doing so recently. In March 2018, the government extracted substantial commitments from Melrose in respect of its purchase of GKN. This takeover did not involve a foreign business and any impact on national security was at best limited. National security powers can and will be used to intervene for politically motivated reasons.
One of the main reasons the current merger regime is decided almost solely on competition grounds by an independent agency is to enable Ministers to avoid the siren cries of vested interests. In politics, the short-term interests of stakeholders who can see a direct negative effect, or an opportunity to extract rent, can often trump the longer-term interests of economic efficiency.
The costs of the economy of these changes will be myriad and substantial.
- The direct costs to the taxpayer may exceed those of the CMA’s current merger activity.
- There will be direct costs to the companies whose investments are called in and challenged, and indirect costs in terms of delay and uncertainty.
- There are additional costs for all firms contemplating investments and takeovers in terms of the unpredictability of the outcome. In situations where timing is of the essence, for example, this may in practice serve to exclude many foreign bidders.
- Tighter scrutiny of foreign direct investment (FDI) is likely to reduce the value of UK assets.
- There may be a harm to competition. FDI often increases competition because a foreign owner may have deeper pockets, better technology, or an expansion strategy that causes it to increase competition in domestic markets. In addition, if foreign buyers are excluded, it may result in more mergers that are domestically concentrating.
- Many of the core sectors where intervention is most likely are also those where UK research and innovation are most intense, raising the risk of reduced business incentives because of uncertainty over potential investment.
- The new regime will result in substantial additional rent-seeking activity in most merger situations, with private vested interests opportunistically seeking to benefit from any new merger or investment.
- It will weaken the government’s moral authority to challenge protectionist barriers to investment by UK firms in other countries, which may be more costly post-Brexit.
- It sends a negative signal about the openness of the UK economy post-Brexit.
Ultimately, these proposals seem likely to undermine government policy in relation to productivity growth, innovation policy, and trade post-Brexit. A pathway will open. However seldom the current government intends to use it, this pathway will end up a well-trodden route for lobbyists and other special interests to protect themselves from competition, to the cost of consumers and productivity growth across the country as a whole. These costs illustrate the good reasons why the current policy limits government intervention in the “public interest”.
The remainder of this paper provides a brief chronological account of the UK policy and legislative development over the past 15 years before going on to look at the application of the public interest test in practice. The paper then looks at developments since July 2016, the date that policy started to change.