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Potential Impact on M&A as Chances of “no-deal” Brexit Increase

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The UK Competition and Markets Authority (CMA) has issued a draft guidance paper (Draft Guidance) concerning the application of UK competition law in the event that the UK withdraws from the EU in a "no-deal" Brexit scenario. Contained in the Draft Guidance are specific guidelines on the impact of a no-deal Brexit on companies currently contemplating or pursuing M&A transactions. The Draft Guidance underlines the potentially serious implications for merging parties who expect to notify their transactions to the European Commission under the EU Merger Regulation (EUMR) over the coming weeks and months. While the UK's withdrawal from the EU has long been expected to raise some issues around the potential for overlapping merger control reviews to be triggered in the EU and UK, the increasing possibility of the UK slipping into a no-deal Brexit scenario within less than two months has made some of these issues much more acute for companies engaged in M&A activity. At this stage, regardless of any potential political developments over the coming weeks, it has become imperative for merging parties to anticipate the potential impact of a no-deal Brexit in their approach to drafting deal agreements, and in their broader transaction planning efforts.

Background and Current Position on EU/UK Merger Control

Following the conclusion on 25 November, 2018 of the EU/UK Withdrawal Agreement (Withdrawal Agreement), it appeared that individuals and companies affected by potential changes to the law might have some legal certainty come 29 March, 2019 - the intended date for the UK's withdrawal from the EU (Exit Day). The intervening months, however, have demonstrated that it is far from certain that the Withdrawal Agreement will be ratified by the UK Parliament - whether in its current form or some modified version. While political manoeuvring is certain to intensify over the coming weeks, the prospect of the UK departing the EU without a formal agreement (and corresponding transition period during which EU law would continue to apply) seems more likely than previously thought.

Under the terms of the Withdrawal Agreement, there would have been a transition period until December 2020 during which EU law (including the EUMR) would continue to apply in the UK, meaning no material change to companies engaged in the merger control process. If, however, the UK leaves the EU on Exit Day without the Withdrawal Agreement (or an agreement very similar in substance) in place, there are some specific and immediate implications for companies contemplating transactions which have a UK nexus. Currently, any transaction involving parties with substantial revenues in the EU (including the UK), tends to be caught under the terms of the EUMR, meaning that a single merger notification is submitted to the European Commission, rather than multiple filings being submitted to national competition authorities in the various EU Member States. The European Commission has exclusive jurisdiction to take decisions on transactions notified under the EUMR, and those decisions have automatical effect in all EU Member States. If the UK leaves the EU on a no-deal basis, this exclusive jurisdiction will cease to apply in the UK, meaning that the CMA becomes competent to review transactions which otherwise would have been handled exclusively by the European Commission.

Potential for Parallel Reviews

One obvious effect of a no-deal Brexit will be that merging parties may be required to notify their transactions to both the European Commission and the CMA if their transaction meets the filing thresholds in both jurisdictions. Although the UK's merger regime is voluntary, the system sets down two alternative thresholds under which the CMA may establish jurisdiction over a transaction - one based on the target entity's UK revenues (GBP 70 million), and one based on the merged entity's "share of supply" (in basic terms, where parties are active in related markets and where their combined market share will reach 25% or more as a result of the transaction). In circumstances where a transaction meets one or both of the UK thresholds, parties will often opt to enter into a consultation with the CMA as to whether the authority views the transaction as one that should be formally notified. Post-Exit Day, without a withdrawal agreement in place, merging parties may find themselves notifying the Commission of their transaction under the EUMR, and the CMA under the UK merger regime, with no formal mechanism or bilateral agreement between the authorities for cooperation or coordination on the substance of the case.

How Should Companies React?

When it comes to transactions which involve a significant UK aspect (even where the merging parties themselves are not UK-based companies), the parties will need to take Brexit-related developments into account for transaction planning purposes. In concrete terms, not only will the merging parties need to be prepared to accommodate parallel EU and UK merger reviews in their transaction timelines, but they will also need to provide sufficiently for the possibility of parallel EU/UK merger reviews in the conditions precedent in their deal agreements. The risk of potential issues arising from parallel reviews by the EU and UK will be particularly acute around the time of Exit Day: the CMA has effectively confirmed in its Draft Guidance that it fully intends to enforce UK competition law as of Exit Day in respect of mergers which otherwise would be subject only to review by the European Commission under the EUMR. The CMA states in the Draft Guidance that it will consider any transaction in relation to which the European Commission has not issued a decision by Exit Day as potentially subject to UK merger review. In this sense, the CMA is essentially giving notice that unless a transaction notified under the EUMR has received a formal clearance decision from the European Commission before Exit Day, then that transaction will be considered "fair game" for the CMA. Moreover, the CMA has the power to investigate mergers that have been closed, for up to four months after closing. In the Draft Guidance, the CMA reiterates that it will regard even transactions which have been notified to the Commission, and which have been cleared by the Commission post-Exit Day, as still potentially subject to subsequent investigation by the CMA.

All of this strengthens still further the imperative for merging parties to build into their deal agreements sufficient comfort that they will not be caught in a situation where their transaction ends up being the subject of a retrospective investigation by the CMA, with the potential consequences that flow from that (including, in theory, unwinding of completed mergers). In practice, it will be only those transactions which involve a significant UK aspect - the acquisition of a competing target company with substantial UK operations and market share, for example – which are likely to require the submission of a merger filing to the CMA. It will still be necessary, however, to provide in many deal agreements for the possibility of consultation with the CMA in order to establish whether a UK filing might be necessary alongside an EU filing. Sellers in particular will be keen to avoid situations where, post-signing, it becomes apparent that the CMA expects a UK merger notification for a transaction where the deal agreement only contains a condition precedent related to an EU merger notification. Buyers likewise will be keen to reach a clear position as to whether their acquisition might trigger a UK merger filing on top of an EU filing, with all the timing implications that such a development might have. Certainty as to whether parallel filings may be triggered will only be available following upfront consultation with the CMA, meaning that merging parties will need to allow for such consultation - and the possible subsequent need for a merger notification to the CMA - in the conditions precedent in their deal agreements.

Moving Goalposts

In the event that Exit Day is delayed and occurs on a date later than March 29, the immediacy of the issue subsides, but the issue will still need to be dealt with whenever Exit Day eventually occurs. Ultimately, even if the Withdrawal Agreement, or a similar form of agreement, is implemented by the EU and UK, there will inevitably be a time (perhaps at the end of an agreed transition period) when the CMA becomes competent to review transactions which would otherwise have been subject to the European Commission's exclusive jurisdiction under the EUMR. Calibration of deal agreements for Brexit-related eventualities therefore remains advisable in the immediate term.

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