Competition law: what gambling companies need to know

This guide was updated in August 2011.

One particularly important aspect of mergers and acquisitions activity is the need to ensure that any possible merger control issues are identified and addressed upfront.

Consolidation amongst online gambling companies has been long-awaited, the proposed merger between PartyGaming and bwin being the most recent high profile example.  The need to address merger control requirements is one of the myriad of issues which merging companies must address, but a failure to do so could have significant adverse consequences. 

Which competition authorities have jurisdiction?

The first step in any merger notification analysis is to identify the territories which might have jurisdiction to review the transaction.  In simple terms, within the European Union a merger will be subject to the exclusive jurisdiction of either the European Commission or national competition authorities, with jurisdiction being determined by the turnover of the parties involved.  There are however procedural mechanisms by which mergers can be transferred from the jurisdiction of the European Commission to national competition authorities, and vice versa.

Joint ventures raise particular issues because the creation of even a small stand-alone joint venture company can trigger an obligation to pre-notify the European Commission if the parent companies are large and have sufficient turnover to meet the jurisdictional thresholds.

If the European Commission does not have jurisdiction over a merger within the EU, then it is necessary to identify the individual territories in which the merging parties have turnover or activities, to identify whether national merger control laws may apply.  In most EU countries the thresholds are related to the turnover of the merging parties but in some instances a different approach is adopted. 

For example, in the UK there are two alternative jurisdictional thresholds; one applies if the target's turnover in the UK exceeds £70 million, and the other applies only if the parties are competitors and their combined share of supply or purchase exceeds 25% in the UK.  In Jersey by contrast, where there is a mandatory notification requirement and companies have been fined for not pre-notifying, the relevant thresholds relate to the parties' share of supply or purchase in Jersey, and notification may be required even if the merging parties are not competitors.

It will also often be necessary to ascertain whether the merger control laws of countries outside the EU will apply and require some form of notification.  In some countries, the merger control laws are drafted so as to aggressively assume jurisdiction over transactions which in practice will have very little impact on, or connection with, the country concerned, potentially with sanctions for a failure to notify.

Impact on timing

The EU's merger control laws, and those in most countries within the EU, require mergers to be pre-notified for clearance before they can be completed, with sanctions (typically in the form of fines or improperly completed transactions being declared void) potentially being applied where these obligations are not met by the merging parties.  Even in countries where there is no requirement to pre-notify, it may be advisable for the merging parties to do so if third party complaints (especially by customers) are likely.

The process of evaluating merger control issues, notifying and awaiting merger control clearance, whether from the European Commission or from individual countries, can - even in comparatively uncontroversial transactions - lead to delays in the corporate timetable of two plus months, or even longer.  In some countries, the process of securing merger clearance can be much shorter, but that cannot be assumed for every jurisdiction.

In the meantime, the relevant merger control laws normally require the merging businesses to be run independently of each other which can create commercial difficulties, especially if the staff or customers of the merging parties react adversely by transferring their allegiances to competing operations.

The documentation

One area of potential sensitivity is that merging parties and their advisers need to be careful when preparing background documentation (eg business plans or Board papers) which considers the potential impact of a proposed transaction on the market.  It is not unknown for the individuals involved to produce documentation which exaggerates the potential impact of the transaction on customers and competitors.  If those statements come to the attention of a competition authority reviewing a merger (and several authorities require the parties to provide copies of such background papers), then that may complicate, or potentially even undermine, the securing of merger clearance from that authority.

Merging parties can also underestimate the amount of hard data and supporting documentation which will be needed to prepare a merger notification and, on occasions, to persuade a competition authority that a transaction is unproblematic.  Corporate timetables permitting, it is also distinctly preferable for the parties to gather the likely evidence needed before approaching a competition authority, rather than reacting under pressure and on short timescales to requests for information after the merger has been formally notified.

Ultimately, identifying merger control issues and obtaining the necessary clearances is one of many issues which will need to be considered on any transaction, and the potentially tough sanctions for failing to follow the proper formalities emphasise the importance of the issue.  To reinforce the point, the provision of external funding, which is often a critical element in facilitating merger activity, will generally be conditional on satisfying relevant merger control laws.

E-compliance training

The need for companies to comply with EU/UK competition law, and the personal risks faced by directors of companies that do not so comply, are increasingly pronounced.  To assist companies with their competition law compliance efforts, Pinsent Masons has developed a range of competition compliance documentation and training modules, including an e-compliance training tool. 

If you would like to learn more, then please contact the head of our Competition Team, Guy Lougher, via [email protected].