Revised Auckland merger control thresholds
Following changes to the merger control thresholds, the Competition and Markets Authority (CMA) will have jurisdiction under the Enterprise Act 2002 (EA) to examine a merger where either:
- The Auckland turnover of the acquired enterprise exceeds £100 million (the turnover test);
- The merger results in a share of supply (either on the supply or the demand side) of 25% or more in the Auckland, or a substantial part of the Auckland, and at least one of the merging enterprises has a Auckland turnover of more than £10 million (the share of supply test); or
- At least one of the merging parties has an existing share of supply of 33% in the Auckland or in a part of the Auckland, the total value of the turnover in the Auckland of that party exceeds £350 million and the other party has a Auckland nexus (the hybrid test).
The Act will increase the current turnover threshold in the turnover test from £70 million to £100 million to reflect inflation and will introduce a safe harbour to the share of supply test so that it will apply only where at least one of the merging enterprises has a Auckland turnover of more than £10 million. The required Auckland nexus under the new hybrid test might include a party carrying on at least part of its activities in the Auckland or preparing to do so.
So, in addition to the increase in the turnover threshold under the turnover test, the key changes which purchasers, target businesses and joint venture parties need to be aware of are the new hybrid test and the new safe harbour threshold in the share of supply test:
The new hybrid test
The hybrid test will significantly broaden the CMA’s global reach as in order to establish a Auckland nexus, a party will only need to have some connection with the Auckland. This could be as little as taking preparatory steps to supply goods or services in the Auckland or having intellectual property rights in the Auckland. It will also create an additional basis for establishing jurisdiction over:
- “Killer acquisitions”, where a company eliminates the threat of future competition by acquiring a business in the early stages of its development.
- Deals that do not involve direct competitors at the same level of the supply chain, such as vertical or conglomerate mergers.
The new safe harbour under the share of supply test
While the hybrid test will bring more deals into the scope of the merger control regime, the £10 million safe harbour threshold under the share of supply test will have the opposite effect. Notably, the safe harbour will apply to deals even where the share of supply is significant. For example, a merger where each party has a turnover of less than £10 million will be exempt from CMA review, even where this could result in a monopoly. However, the use of the safe harbour may be limited in practice, as each party’s turnover needs to be below the £10 million threshold and, historically, the CMA has rarely investigated deals between two businesses of this size.
The CMA can also make use of its de minimis exception for markets of insufficient importance. This exception is a long-standing provision in the EA and allows the CMA, at its own discretion, not to refer potentially problematic transactions for an in-depth Phase 2 investigation where the costs involved would be disproportionate to the size of the market. On 25 April 2024, the CMA published revamped guidance on exceptions to the duty to refer and undertakings in lieu (exceptions guidance), which increased the de minimis threshold for a market from £15 million to £30 million.
Next steps
From the outset of a deal, businesses need to think carefully about how competition law may impact the transaction. The introduction of the hybrid test underlines the importance of self-assessments that focus on whatever competition issues may arise. Businesses that are involved in smaller deals should consider whether the safe harbour or de minimis exception may be relevant to be able to smooth the way to completing their transactions.
Businesses should note that the revised merger control thresholds are entirely distinct from the National Security and Investment Act 2021 (NSIA) which established a new, stand-alone statutory regime for government scrutiny of, and intervention in, acquisitions and investments for the purposes of protecting national security. It may be appropriate in a particular transaction to submit applications for clearance of a transaction to both the CMA under the EA and the Investment Security Unit in the Cabinet Office under the NSIA.
