Dealpoint is a regular briefing on issues relevant to corporate transactions, notably M & A and reconstructions. Each edition of Dealpoint will focus in detail on one area of law and practice which may be of interest to principals and practitioners in the corporate transactions area.

In this edition of Dealpoint, we consider recent changes UK Merger Policy.

Further changes to UK Merger Policy

The Office of Fair Trading (“OFT”) has recently adopted a Notice on its interim practice on the provision of advice and guidance in UK merger cases.

The new Notice re-introduces the Informal Advice procedure in a different form and in more limited circumstances. These interim arrangements will be in place until the OFT publishes new guidance on the long term provision of Informal Advice and Confidential Guidance, which the OFT is aiming to produce towards the end of 2006, and by March 2007 at the latest.

Prior to November 2005, the Confidential Guidance and Informal Advice procedures allowed parties contemplating a merger to obtain a non-binding opinion from the OFT on a confidential basis as to the likelihood of a reference to the Competition Commission. The Confidential Guidance procedure was more detailed and lengthy than the Informal Advice procedure, but the opinion given was thought to carry greater weight. The Informal Advice process, meanwhile, involved the submission of a short paper followed by a meeting (a “fireside chat”) at which the OFT expressed its preliminary views. The OFT withdrew both these procedures last November.

Under the OFT’s new interim Notice, companies will be able to seek Informal Advice, but not Confidential Guidance (the OFT presently sees Confidential Guidance as an unjustifiable call on its limited resources). Revival of Informal Advice is to be welcomed as it potentially allows parties to obtain some form of steer from the OFT prior to a merger being made public.

The main features of the revised Informal Advice procedure are:

• Informal Advice will be a pre-merger procedure for confident Informal Advicel transactions only.

• Informal Advice will only be available where the OFT is satisfied that there is a good faith intention to proceed as evidenced by a likely ability to do so.

• Informal Advice will only be given where there is a genuine issue - ie the merger could be genuinely problematic and there could be a case for reference to the Competition Commission.

• The OFT will be flexible as to how it gives Informal Advice - as well as “likely to refer” or “not likely to refer” type responses, it could instead say, for example, “the OFT advises that third party evidence is likely to be decisive as to whether or not it refers the merger”.

• As before, the fact of seeking Informal Advice and any Informal Advice given must remain confidential and any views expressed by the OFT will be non-binding.

• The application for Informal Advice should be an executive summary of no more than five pages in length. The OFT will try to indicate within 5 days whether or not it will accept or reject the application. Where Informal Advice is only given at the end of a meeting, the OFT will endeavour to schedule that meeting within 10 - 15 working days of receipt of the original application.

UK Merger Rules - A Reminder

A merger may be referred to the Competition Commission for a detailed investigation if it:

• Creates or strengthens a share of supply of more than 25% in the UK or a substantial part of it (the share of supply test ), and/or

• Involves the acquisition of a target business which has a UK turnover of more than £70 million (the turnover test).

The merger process has been de-politicised under the Enterprise Act. The final decision relating to mergers is now taken by the OFT and the Competition Commission. The rules for merger control decision-making work in the following way:

• The general rule is that the OFT will be responsible for first stage investigation and for referring a merger to the Competition Commission for detailed investigation. The Secretary of State for Trade and Industry will only be involved where a case raises defined public interest issues (currently, national security);

• The OFT will have a duty to refer a relevant merger to the Competition Commission which has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the UK for goods or services.

The Competition Commission is normally asked to complete its investigation into a merger within 24 weeks, with a possible extension by a further 8 weeks. The announcement of a reference automatically prohibits a purchaser acquiring any further shares in the target (if it is a company). The OFT can also make an order, or require undertakings from the parties, preventing them from doing anything which might prejudice the Competition Commission’s investigations. In particular, the purchaser is likely to be prevented from taking any steps to consolidate the target or acquired business with its own business.

If the Competition Commission considers that a merger is likely to have serious anti-competitive effects and therefore submits an adverse report, it must indicate what steps must be taken to alleviate those effects. The steps normally required include divestiture (if the merger has already been completed) or a prohibition on completing a merger or the giving of undertakings (such as agreeing to a price cap or other restraints on prices).

If the merger has been completed and divestment is ordered, the purchaser must identify a new purchaser for the relevant business or assets within a specific period of time. Importantly, the purchaser would have to accept whatever price was on offer (this is known as a “fire sale”) and, in addition, would probably have to obtain the OFT’s prior approval of the new purchaser.

More mergers are being referred to the Competition Commission for a detailed investigation than before, following a recent judgment limiting the OFT's discretion. It should be noted that it is not just large mergers that are being referred to the Competition Commission - recently a merger was referred where the purchase price was only £3 million as the merged entity would have a large market share in a very small market.

So, if you are contemplating a merger which could lead to the new merged entity having a market share approaching 25% in any relevant market (and questions of market definition themselves are complex), you need expert competition law advice!

May 2006