Pre-Merger Notification United Kingdom

Pre-Merger Notification United Kingdom Is there a regulatory regime applicable to mergers and similar transactions? The primary legal basis for UK merger control is the Enterprise Act 2002 (the Enterprise Act), which came into force on 20 June 2003 and which repealed the Fair Trading Act 1973. Secondary legislation implementing the provisions in the Enterprise Act is also relevant as are the various guidance documents published by the relevant regulatory agencies, principally the Office of Fair Trading (OFT). Identify Applicable National Regulatory Agency/Agencies The primary regulatory agencies are the OFT and the Competition Commission (CC). The OFT conducts a preliminary analysis of mergers and has a duty to refer mergers to the CC for a more in depth analysis when it believes that there is, or may be, a relevant merger situation, that has resulted or may be expected to result in a substantial lessening of competition (SLC) in the UK. (see below for details on the nature of the SLC test) Sectoral regulators also have a role. Where newspaper and broadcasting mergers are involved, the Office of Communications (OFCOM) has an advisory role with regard to public interest issues Similarly, where a merger in the gas and/or electricity industries is involved, the OFT will request the Office of Gas and Electricity Markets (OFGEM) to advise on those aspects of the transaction which will impact on OFGEM's ability to regulate the gas and/or electricity companies involved. OFGEM may also give its views to the CC. There is also a special regime for mergers in the water and sewage sectors which can, in some circumstances, involve a mandatory reference from the OFT to the CC. Before the Enterprise Act, the Secretary of State (i.e. a government minister) formally took the decision as to whether to refer mergers to the CC. With the exception of cases raising certain public interest issues (such as mergers relating to national security interests and newspaper and broadcasting mergers) the Secretary of State is now excluded from the merger control process. Is there a supranational regulatory agency (e. g. the European Commission) that has, or may have exclusive competence? If so, indicate. The European Commission (Commission) will have exclusive competence to review mergers if the criteria for notification in the EU Merger Regulation (Merger Regulation) are met. Under the Merger Regulation, the OFT can, however, request that a merger notified to the Commission be referred back to the OFT where it threatens to significantly affect competition on a distinct market within the UK; or where it affects competition in a distinct market which is not a substantial part of the EU. The parties to a merger which meets the criteria for notification to the Commission are also able to make premerger requests to the Commission to refer the merger to the OFT where they believe that the merger significantly affects competition on a distinct market within the UK. The Commission does not have to

agree to requests for referral to the OFT, but will often do so where the case does not involve clear EU interests. Are there pre-merger fling requirements; if so, where are they published? Please see below for further information on methods of filing notifications to the OFT. Guidance on filing requirements is published on the OFT's website - www.oft.gov.uk. What kinds of transactions are "caught" by the national rules? (Identify any notable exceptions) The UK rules apply to transactions which involve a "relevant merger situation". A relevant merger situation occurs when the following criteria are fulfilled: two or more enterprises (broadly speaking business activities of any kind) cease to be distinct, i.e. are brought under common ownership or control, or where there are arrangements in progress or in contemplation which will lead to enterprises ceasing to be distinct; and either the merger has not yet taken place or has taken place not more than four months before the reference by the OFT to the CC is made. If the merger took place without having been made public and without the OFT being informed of it the four month period starts from the public announcement or the time the OFT is told; and the transaction meets the turnover or share of supply tests (see below). "Control" for these purposes means a change in the influence over an entity. Control can comprise any of the following: the ability materially to influence policy (known as "material influence") - this is presumed to exist for shareholdings of greater than 25 per cent but, depending on the facts could, according to the OFT, also arise on the acquisition of as little as 15 per cent of the voting rights of another enterprise. This could be the case, for instance, based on distribution of shareholdings, board representation, special veto rights, other contractual arrangements etc; the ability to control policy (known as "de facto" control) - no precise criteria exist for determining when de facto control exists, however the acquisition of 30 per cent of voting rights will often given rise to de facto control; a controlling interest (known as "de jure" or "legal" control) - this generally means a shareholding of more than 50 per cent of the voting rights in a company. Control by stages is also possible and movements from material influence to de facto control or from de facto control to a controlling interest may result in separate relevant merger situations which may fall under the OFT's jurisdiction. In practice this means that most acquisitions, joint ventures and other changes of "control" are caught by the UK merger control rules. Agreements where one party agrees to cease its production and to source all its requirements from another party can potentially also result in a change in control. Mergers, as well as any restrictions that are "directly related and necessary to the implementation or the attainment of the merger" (i.e. ancillary restrictions), are generally excluded from the prohibitions on abuse of a dominant position and anti-competitive agreements in the Competition Act 1998. Additional Comments In the Hoet Hennessy/Glenmorangie decision of 17 December 2004 the OFT decided that a shareholding of more than 25% did not give rise to material influence. The OFT's decision appears to be based on the fact that the company with the minority shareholding was not a UK company and did not have the right to veto commercial decisions. Therefore, where this is demonstrated by the facts and local laws, non UK companies may not always gain material influence when they acquire shareholdings of more than 25%.

Is there a "size of transaction" threshold? There is no size of transaction threshold. Is there a "size or turnover of the parties" test; if so, what is it and how are size and turnover to be calculated? The Enterprise Act provides the following alternative jurisdictional tests based on turnover and share of supply: The turnover test: the UK turnover associated with the enterprise which is being acquired must exceed 70 million. This is established by aggregating the total value of the turnover in the UK of the enterprises which cease to be distinct and deducting: c the turnover in the UK of any enterprise which remains under the same ownership or control (this means that the turnover of the acquiring enterprise should be ignored); or the turnover of the enterprise with the highest turnover in the UK if no enterprise remains under the same ownership or control (for example, the formation of a new joint venture) or; the share of supply test (i.e. not a market share test): the merger must create or enhance a 25 per cent share of supply of purchases of goods or services of any description in the UK (or a substantial part of it). There must be an increase in share of supply. If one party has a 25% share of supply and the other no share, the test will not be satisfied. Turnover is defined as "the amounts derived from the sale of products and the provision of services to customers in the UK, which an undertaking made in the ordinary course of its business activities". The turnover test applies to the turnover that was generated within the UK in the business year preceding the date of completion of the merger or, if the merger has not yet taken place, the date of the reference to the cc. In practice, the figures in the enterprise's latest published accounts should be used, unless there have been significant changes in turnover since the accounts were prepared. It is important to realise that the share of supply test is not a market share test. The OFT and CC have wide discretion in describing the goods or services, and need not look to relevant economic markets. Mergers may, therefore, fulfil the share of supply test where the parties do not have a combined 25 per cent market share on relevant economic markets. If neither the turnover test nor the share of supply test is met the authorities have no jurisdiction to review the transaction. Intervention may, however, still be possible on limited public interest grounds (newspaper, broadcasting and national security sectors). Is geographic scope/national market effect of transaction an issue with respect to filing or approval requirements? If so, specify. The jurisdictional tests mean that either the target must have UK turnover or both parties must have share of supply in the UK (or a substantial part of the UK), without needing necessarily to be incorporated in the UK. These principles apply equally to non-uk companies that sell to (or acquire from) UK customers or suppliers. Similarly if a case under the Merger Regulation is referred back from the European Commission a UK market must be affected. Is the filing voluntary or mandatory? What are the penalties for non- compliance? Filing is voluntary. There are no direct sanctions for not notifying a merger to the OFT. However, where parties do not notify they accept the risk that the OFT may inquire into the transaction and refer the merger

to the CC - potentially up to four months after it has been publicised. Whether or not a notification is made, if the CC believes that a merger will lead to an SLC, it can block the merger (or can require divestments or other remedies). Time in which a filing must be made As filing is voluntary, there are no filing deadlines and no sanctions apply if no notification is made (see above). Form and Content of Initial Filing Until November 2005, it was possible to contact the OFT to seek informal advice or confidential guidance on whether the OFT would be likely to refer a merger to the CC. These procedures were relatively informal and were used when a merger was still at an early, confidential stage in order to get a feel for the OFT s thinking on the likelihood of a referral. The OFT could not, however, contact third parties to test its conclusions and as such the informal advice or confidential guidance given was not binding. The OFT took an interim decision in November 2005 that, unless it is dealing with a pubic body or a private enterprise unable to afford competition law advice, it will no longer give confidential guidance or informal advice. The OFT has indicated that this change is due to the fact that, under the Enterprise Act, it has to carry out an more in-depth review of whether a transaction should be referred to the CC than under the previous legislation. The OFT is, therefore, no longer comfortable that its conclusions under the informal advice or confidential guidance procedure will be in line with its full review when a transaction is actually notified. The OFT has also pointed out that its increased workload makes the giving of informal advice or confidential guidance no longer feasible from a practical point of view. The OFT will consult on this development and could potentially change its mind. However, you should assume that in future the OFT will not confirm, before a transaction becomes public, whether or not its believes a referral to the CC is likely. This change does not have an impact on the formal notification system and it will still be possible to contact the OFT before filing to discuss issues and to smooth the filing process. The OFT will, however, no longer give a view on the likelihood of a referral. A formal filing can be made be means of either a Merger Notice or an Informal Submission. These procedures are outlined below. Merger Notice The statutory Merger Notice procedure can only be used with regard to anticipated mergers which have already been made public. It cannot be used for completed mergers or mergers which are not yet in the public domain. The information which must be included in a Merger Notice is detailed and includes inter alias a full description of the transaction and proposed timetable; information on the main products and services supplied by the merging enterprises; estimates of market shares in UK markets; and information on horizontal overlaps, vertical links, entry barriers, buyer power and customer benefits. In addition, financial information must also be provided such as copies of the latest relevant annual reports and accounts and the UK turnover of the target. It may also be necessary to provide copies of reports prepared for the purpose of assessing or analysing the proposed transaction. The Merger Notice must be complete to be accepted by the OFT. More details on the form and content of the Merger Notice, as well as a copy of the Merger Notice itself, are available on the OFT's website (httpalwww.oft.gov.uk/nrlrdonlyres/d6e8c6ea-6af3-4ada-bo8a- 4C8F25F951A9/O/mergernoticeO3.pdf) Informal submission It is also possible to notify a merger to the OFT by means of an informal submission. Although not specifically required, where an informal submission is made to the OFT, similar information should be

provided as in a Merger Notice. The OFT's procedural guidance document on mergers (http://www.oft.gov.uk/nr/rdonlyres/791b6ba9-e321-49dd-8040-01db2e74f5c6/o/oft526.pdf) sets out the type of information that is useful in such submissions. This can be divided into three categories: general background information (information about the parties, the transaction, timing, etc), jurisdictional information (i.e. information showing that the turnover and/or share of supply tests are met) and information related to the substantive assessment (for example, information relevant to market definition, the nature and extent of competition in the market, barriers to entry, buyer power, customer benefits etc). Whether to use a Merger Notice or informal submission depends on a range of considerations. The former is subject to strict timetables which, if about to be exceeded may prompt a reference to the CC. Are filing fees required? Although there are certain exceptions, any merger which qualifies for a reference to the CC (i.e. there is a relevant merger situation) is, in principle, subject to a fee irrespective of whether a reference to the CC is made. The level of the fee depends on the turnover involved and is payable by the acquirer or the person making the Merger Notice. Certain small and medium sized enterprises are exempt from paying fees. The fees in force in January 2005 are as follows: 5,000 - where the turnover in the UK of the enterprise taken-over/to be taken over does not exceed 20 million; 10,000 - where the turnover in the UK of the enterprise taken-over/to be taken over is between 20 million and 70 million; 15,000 - where the value of turnover in the UK of the enterprise to be taken over is in excess of 70 million. Where a Merger Notice is used, the fee must be paid with the completed notice. Otherwise, including situations where an informal notification is made, the fee must be paid on publication by the OFT of its decision to refer, or not to refer, the merger to the CC. The government is currently conducting a review of the system of fees - primarily due to the fact that fees no longer cover costs. It is not yet clear whether the system will change, however, the government has indicated that if any changes are made, these will probably be introduced in April 2005. Is There An Automatic Waiting Period? If so, specify. There is no automatic waiting period and a merger can in principle be completed while it is being considered by the OFT. However, prior to a decision whether to refer a completed merger to the CC, the OFT can require initial undertakings or impose initial orders to prevent action that might prejudice a merger reference or the ability of the CC to act following its inquiry. Therefore, if a reference to the CC is a real possibility, the OFT should be informed if completion is intended before clearance. If a reference is made to the CC, the Enterprise Act prohibits any party to a completed merger (except with the consent of the CC) from undertaking further integration including the acquisition of further shares. The Enterprise Act also provides the CC with the power to accept undertakings or make an order preventing the parties to a merger from taking action that might prejudice the eventual outcome of the merger reference. Are There Time Limits Within Which The Regulatory Agency Must Act? Can they be shortened by the parties or be extended by the regulatory agency? Where a Merger Notice is submitted, the OFT has twenty working days to consider whether or not to make a reference. This period starts the first day after a complete Merger Notice is received by the OFT and any fee is paid, and may be extended by a maximum often further working days.

There is no statutory timetable for dealing with informal submissions. However, the OFT has indicated in its procedural guidelines that, once the requisite information has been provided, a period of 40 working days will generally be sufficient to take a decision. Where the merger is straightforward, and there are no third party complaints, it is possible that the OFT will take a decision in a shorter period than the time limits indicated above. Pre-notification discussions with the OFT can also speed up the process. However, the OFT will not guarantee that it will take a decision before a set date. Where a merger is referred by the OFT to the CC, the CC is under an obligation to publish its report within 24 weeks from the date of reference. The CC can extend this period by a further eight weeks for special reasons. The CC also has the discretion to extend the 24 week period when one of the parties to the merger has failed to comply with a formal notice requiring the provision of information or documents or the appearance of witnesses. What is the substantive test for clearance? The OFT has an obligation to refer a relevant merger situation to the CC where the OFT has a reasonable belief, objectively justified by relevant facts, that there is a realistic prospect that the merger will lead to a substantial lessening of competition (SLC) in the UK. Even if the OFT believes that there is a realistic prospect of an SLC it may exercise discretion not to refer to the CC: where (i) the merger is insufficiently advanced to warrant reference, (ii) the market(s) in question are not of sufficient importance (which is uncommon), or (iii) the customer benefits of a merger would outweigh its adverse effects. According to the OFT, a merger can be expected to lead to an SLC where the level of rivalry between firms is decreased to such an extent that customers would be harmed (for example, through reduced product choice, increased prices, output reductions or reductions in product quality or innovation). The SLC test covers: horizontal mergers where the parties are active on the same market, vertical mergers where the parties are active at different levels of the supply chain, and conglomerate mergers between firms on different markets where, for example, portfolio power can arise. In addition to situations where the merging parties themselves are the focus of competition concerns, an SLC is also possible where a merger would lead to a substantial lessening of competition between firms - i.e. rival firms would be likely to either increase their prices after the merger (non-coordinated effects) or would be likely to tacitly coordinate their activities on oligopolistic markets (coordinated effects) In order to assess whether a merger leads to an SLC, the OFT begins by defining the relevant product and geographic markets. This is followed by the core analysis of the prospects for competition on the market(s) with and without the merger. This analysis will take into account, amongst other things, possible loss of rivalry as a result of the merger, the position of competitors on the market, the concentration of the market, possible entry by new or existing competitors, buyer power, efficiency gains and the likelihood that a merging party would in any case be likely to exit the market. Following a reference, the CC will conduct a detailed investigation as to whether a relevant merger situation has been created and, if so, whether it has resulted, or may be expected to result, in an SLC within any market(s) in the UK. The CC's analysis of a merger will follow the core elements considered by the OFT, but, since the CC takes the final decision, it carries out a more in-depth consideration of the economic issues. Where the CC concludes that the merger situation has, or is likely to have, an anti-competitive outcome, it will have to determine the appropriateness of taking remedial action and the action to take (itself or by others, such as the government, regulators or public authorities). Note that where the Secretary of State intervenes in public interest cases (i.e. newspaper, broadcasting and national security sectors) a separate public interest test may apply on its own or in addition to the SLC test. Note also in appraising water mergers for their effects on the public interest, a separate test applies which

provides that the authorities should have regard to whether the merger will prejudice the ability of the Water Services Regulation Authority to make comparison between different water enterprises when carrying out its regulatory function. What are the common Post-Filing Procedures: Requests for further information, etc? There are two phases of post-filing investigation in UK merger control. In the first phase, the OFT investigates the merger to establish whether a reference to the CC is necessary. Where the OFT refers the merger to the CC, the CC will consider whether the merger has resulted, or may be expected to result, in an SLC and, if so, how the SLC can be remedied. The OFT will start the first phase investigation by analysing the merging parties' notification. The OFT will, however, often need more, or more comprehensive, information than is provided in the initial merger notification and may make requests to the merging parties for supplementary information to be provided. In all public merger situations, the OFT will invite comments from interested third parties by means of an invitation to comment notice published through the Regulatory News Service and on the OFT's website. In addition to publishing a general request for information, the OFT will often issue targeted requests for information to competitors, major customers or suppliers and will maintain the confidentiality of this information. In a large majority of cases (according to the OFT, 80 per cent) this information gathering process is sufficient and the OFT will issue a decision clearing the merger. In cases that raise more complex or material competition issues (around 20 per cent of all cases), a different process will be followed. This involves the OFT sending an "issues letter" to the merging parties and meeting with the parties to discuss their concerns (the so-called "issues meeting"). The final decision is then communicated to the parties to the merger. In public cases, the text of all decisions (i.e. that a case is not a relevant merger situation, clearance decisions, acceptances of undertakings in lieu of a reference and references to the CC) will be published on the OFT's website, subject to removal of business secrets. The decision will also be announced through the Regulatory News Service and placed on the OFT's website. A second phase investigation by the CC is by its nature more complex than an OFT investigation and will require significant time and resources from the merging parties. The CC will begin by gathering information from the merging parties and third parties, including: the issuing of questionnaires, visits to the merging parties, the hearing of witnesses and the commissioning of market surveys or expert advice. Once the CC has analysed and verified this information, it will issue a statement of issues indicating the main lines of inquiry which will be sent to the main parties and published on the CC's website. Hearings generally follow and parties are notified of the CC's provisional findings. Possible further hearings and the discussion of remedies may follow before the CC publishes its final decision. Interested parties who are aggrieved by a merger decision of the CC may apply to the Competition Appeal Tribunal (CAT) for a judicial review of that decision. Decisions of the OFT can also be appealed to the CAT (see IBA Health Ltd v OFT where a third party competitor successfully challenged the OFT's decision not to refer a merger to the CC). Appeals against decisions of the CAT may be brought on points of law, or in penalty cases as to the amount of any penalty. Any such appeal lies to the Court of Appeal in relation to CAT proceedings in England and Wales; in relation to CAT proceedings in Scotland, to the Court of Session; and in relation to CAT proceedings in Northern Ireland to the Court of Appeal in Northern Ireland. Describe the sanctions for not filing or fling and incorrect/incomplete notification. The Enterprise Act makes it an offence knowingly or recklessly to supply false or misleading information to the OFT, the Secretary of State or the CC in connection with any of their functions under the Act. This applies to both notifying parties and third parties. It is also an offence to give false or misleading information to any third party knowing that they will then supply it to the OFT, the Secretary of State or the CC. The penalties for breaching this provision are a fine, or a maximum of two years imprisonment, or both.

Describe the procedures if the agency wants to challenge the transaction? If the CC decides to block the merger, or to impose remedies, the orders can be enforced by the CC by civil proceedings. This includes proceedings for injunction or interdict or for any other appropriate relief or remedy. See above for the general procedure at the OFT and CC. Describe the penalties applicable to the implementation of a merger before clearance or of a prohibited merger? Since filing is voluntary, there are no direct penalties for implementing a merger before clearance (see above, however, for the risks of not gaining clearance). In the case of mergers prohibited by the CC, the CC's orders can be enforced by civil proceedings. In addition, any person who has sustained loss as a result of the breach of an order may bring an action for damages. Describe, briefly, your assessment of the regulatory agency's current attitudes/activities The Enterprise Act introduced the new SLC test to UK merger control. To a certain extent the SLC test is an explicit confirmation of the previous practice of the OFT and CC. Merging parties should, however, be aware that in line with other competition authorities such as the European Commission, the OFT and the CC are increasing their use of sophisticated economic techniques to analyse the effects on competition of mergers. This is likely to be a trend in coming years and merging parties should be aware that well grounded economic arguments will be needed when dealing with the OFT and/or CC. The Court of Appeal recently examined the nature of the OFT's duty to refer mergers to the CC (see judgment of the Court of Appeal of February 2004 on the OFT's appeal against the CAT decision in IBA Health). The Court's judgment confirms that the OFT acts as a "first screen" and, therefore, has a degree of leeway when deciding whether or not a referral is necessary. The Court found, however, that there need not be a "significant prospect" that an SLC may arise for a duty to refer to the CC to arise (the OFT was of the view that only a "significant prospect" was necessary). According to the Court, the OFT need only "believe" that a merger could lead to an SLC in order to be under an obligation to refer to the CC. This judgment has introduced a degree of uncertainty and nervousness into OFT practice and appears to have made the OFT somewhat wary of taking decisions which may later rebound on it. In borderline cases, merging parties should, therefore, ensure that they provide the OFT with sufficient information aimed at persuading the case team that the merger will not lead to an SLC. At the level of the CC, one of the key changes brought about by the Enterprise Act has been the increase in the level of control which the CC has over the assessment and implementation of remedies aimed at solving competition concerns. In 2004, the CC required remedies in three final decisions under the Enterprise Act (Stena/P&0; Drager Medical and Hillenbrand Industries; and FirstGroup and the Scottish Passenger Rail Franchise). The Drager case is significant in that recommendations to UK health departments were made which had to be explored in detail before being implemented. It appears, therefore, that the CC is taking a particularly pro-active and practical approach to remedies, which is likely to continue in coming years. Note, though, that the CC will block a merger where it finds that there are no remedies which would address the SLC (see the Knauf/Superglass decision of November 2004 where the CC blocked the merger). Merging parties which are involved in CC merger investigations should be aware of the importance which the CC attaches to remedies and should consider possible remedies at an early stage. * * * * * The Lex Mundi member in this jurisdiction is Maclay Murray & Spens. Antitrust, Competition and Trade Practice Group Maclay Murray & Spens (Contacts: Michael Dean-michael.dean@mms.co.uk; Catriona Munrocatriona.munro@mms.co.uk)