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CMA warns against government power to block mergers

The Competition & Markets Authority (CMA) has warned that allowing government ministers to protect certain industries from foreign takeovers would damage the UK's reputation and ability to attract investment.25 Oct 2016

The CMA was responding to an inquiry launched on 1 August by the Business, Innovation and Skills Committee, now renamed the Business, Energy and Industrial Strategy Committee, into how interventionist the government should be in preventing foreign takeovers of UK companies.

Industrial strategy and competition policy are linked, the CMA said. "They can have common objectives, including encouraging economic growth and increasing consumer welfare. Appropriately designed industrial strategy can complement competition policy in a number of ways," it said.

However, "when intervening to address externalities, distortions to competition can easily be overlooked as policy makers concentrate on potential benefits and direct costs, particularly as it will commonly take some time for the consequences of restrictions to competition to manifest," the CMA said.

"It is also important that government does not introduce measures which directly or indirectly encourage anticompetitive conduct or collusion, or which create conditions in which anticompetitive conduct can thrive."

The CMA would not comment on government plans to review the legal framework for future foreign investment in Britain’s critical infrastructure, it said, but stressed the need for clarity.

"It is desirable that any public interest consideration is defined in a way that ensures it can, so far as possible, be objectively assessed, and is not of unintended or uncertain breadth," it said. 

Otherwise, "there is a risk of either creating a wide exemption, operating as a catch-all, or piecemeal changes creating a fragmented system". Either would create uncertainty for businesses, the CMA said.

It is also important to "avoid encouraging a belief that decisions on mergers could be influenced by political/lobbying considerations and remove the transparency, certainty of analysis and independence associated with the current decision making processes", it said.

A poorly thought through process could affect the UK’s reputation as an open, competitive place to do business and its ability to attract investment from overseas through mergers and acquisitions, the CMA said. It could also encourage other states to introduce similar controls "to the possible detriment of UK businesses seeking to do business there", it said.

Competition law expert Robert Eriksson, of Pinsent Masons, the law firm behind Out-Law.com said: "I think the industry will welcome this submission by the CMA. The Brexit referendum has already created uncertainty and if the government suggests it should be capable of intervening to stop foreign firms acquiring UK businesses, that risks creating further uncertainty."

"Political intervention in transactions outside the normal legal scope of merger control rules, for example by widening the scope for so-called public interest considerations, risks having a chilling effect on M&A activity. As the CMA rightly points out in its submission, it is important that any merger control regime operates on the basis of clear, consistently applied rules that provide legal certainty and thereby inspires business confidence," Eriksson said.

"As the former CMA chief executive Alex Chisholm, who is now permanent secretary for the Department for Business, Energy and Industrial Strategy, once said, one issue that arises when attempting to control foreign acquisitions is the lack of clarity about what a 'foreign' acquirer and a 'national' target is in an increasingly globalised economy, with companies operating across multiple jurisdictions and with employees of different nationalities," said Eriksson.

"For example, Nestlé, which most know as a Swiss company, is only 5% Swiss according to a study by The Economist, which used an index based on the origin of revenue, employees, shareholders and chief executive nationality," he said. "It is often too simplistic to use location of headquarters as the determination of a company’s nationality. Such a definition would also presumably allow for the corporate nationality to easily change by moving headquarters."

The UK has been recognised as a world class merger control regime, the CMA said. This, "while ensuring UK interests, has contributed to the development and remains in line with many of our international major trading partners on merger control policy", it said, citing the US, Australia and Canada as examples.

"These are all jurisdictions that the new government has suggested will be the UK’s future trading partners post-Brexit," said Eriksson.

"While the CMA seems to have carefully referred here to national interests, perhaps to echo government sentiment, it also clearly warns against wholesale and protectionist changes to an already efficient merger control regime that is aligned with international best practice," he said.