CMA investigation highlights the importance of merger control analysis

Background

A&L Goodbody has unrivalled local experience in advising on complex transactions that necessitate engagement with the Competition and Markets Authority (CMA). Should you require any further information please contact a member of the Belfast Corporate or Competition teams.

Over the last two years we have observed an increase in companies having to give consideration as to whether they need to engage with the CMA in respect of a proposed transaction. This is in part due to Northern Irish success stories growing to the point where they meet merger control thresholds and a result of the CMA taking a more expansive view of its jurisdiction. The recent ION/Broadway investigation is a timely reminder of the importance in giving these issues the due consideration they warrant.

The UK stands out internationally in that it operates a voluntary merger control regime; when two entities merge, there is no requirement to seek prior clearance from the Competition and Markets Authority (CMA) and it is left up to the parties to decide whether the CMA should be notified. Similarly, it is a matter for the parties involved to determine whether to notify the CMA before or after the completion of the merger. Nevertheless, the CMA still holds broad powers to impose interim measures on merging businesses while it carries out an investigation, including the ability to order the freezing and unwinding of completed mergers until clearance is granted or it is referred to a full "Phase 2" inquiry.

This merger control regime does afford merging enterprises a degree of flexibility where the timing of the notification is concerned; this may be particularly relevant if circumstances require a merger to complete quickly. However, the CMA's recent imposition of a £325,000 fine on ION Trading Technologies Group (ION) following its merger with Broadway Technology Holdings LLC (Broadway) in February 2020 demonstrates the importance of both timely notification and compliance with the CMA's initial enforcement order (IEO).

How does voluntary merger control notification operate?

The merger control regime in the UK is governed by the Enterprise Act 2002 and applies to "relevant merger situations". When the parties determine that they may fall into this category, they are expected to provide the CMA with a draft of the submission and engage in pre-notification discussions with the CMA; this step was originally considered merely best practice but is now expected by the CMA and parties who do not engage risk having their notification rejected as incomplete.

Overall, this dialogue between the CMA and the parties can be mutually beneficial in that the parties can better explain the details of the merger and also take onboard informal advice from the CMA. Once this is complete, the parties may submit a formal Merger Notice for the CMA to consider. The CMA also carry out intelligence to identify potential non-notified mergers and investigate accordingly; in such cases, an enquiry letter will be sent to the parties in which they will be asked to provide information that the CMA can use to ascertain whether any of the jurisdictional thresholds are met and if it qualifies as a relevant merger situation which requires a Merger Notice.

Initial Enforcement Orders

When a merger is being investigated and the CMA has reasonable grounds to suspect that two entities plan to cease or have already ceased to be distinct, it can take interim measures to either prevent the parties commencing the process of integrating their businesses or order that no further integration take place pending their enquiries. This is most often done by way of an IEO which can require that the parties not engage in and if necessary, unwind any "pre-emptive action"; this is a broad concept which may include, among other things, the integration of IT systems, the failure to retain key employees or selling equipment.

The imposition of an IEO on two parties that have already completed a merger can be very burdensome, particularly if the CMA order pre-emptive action to be reversed, although depending on the parties' circumstances, derogations may be granted to allow certain specific actions to be carried out that would otherwise be prohibited by the IEO.

The merger of ION and Broadway

ION is a software provider incorporated in the Republic of Ireland which offers trading and workflow automation products to financial institutions across the globe, including in the UK. Broadway is a Delaware corporation and software provider which supplies capital markets solutions to sell-side financial institutions. The two enterprises were considered by their customers to be close competitors, offering products with similar functionality and both had a significant market share within the UK.

The merger of the two parties completed on 6 February 2020 and it was announced a week later. In due course, the CMA's mergers intelligence function identified the transaction as meriting an investigation and issued an IEO on 2 April 2020. The IEO prohibited any action that could have led to ION's integration with Broadway, to the transfer of ownership or control in either entity or that would have impaired their ability to compete with each other.

In August 2021, the CMA issued a penalty of £325,000 to ION for failure to comply with the IEO without reasonable excuse. After an in-depth investigation, the CMA uncovered that both ION and Broadway continued their close collaboration after the IEO was issued; emails found during discovery showed that Broadway had gone as far as presenting itself as an integral part of the ION group in order to gain a competitive advantage in a procurement process. Neither entity sought the CMA's consent to do so; ION was found to have been ineffective in the dissemination of details of the IEO throughout their group, allowing further pre-emptive actions to occur. Lastly, the CMA noted that further breaches of IEO occurred in that ION failed to adequately furnish the CMA with the requisite compliance monitoring information; it was noted that what was provided contained 'material inaccuracies'.

The Enterprise Act 2002 affords the CMA the ability to impose a penalty of up to 5% of a party's annual group turnover. In the case of ION, its two group entities had a collective turnover of nearly £1.9bn in 2019, making the ultimate fine of £325,000 a mere 0.03% of the total. While this is indisputably a 'drop in the ocean' for a multinational corporation of ION's magnitude, compliance with the CMA's investigation will have cost it a significant sum in legal fees during the investigation, not to mention the reputational damage.

For more information please contact a member of the Belfast Corporate or Competition teams.

Date published: 29 September 2021