Caveat Emptor in UK merger control: Record fine highlights the non-filing risks for buyers

Introduction

The UK Competition and Markets Authority (CMA) has imposed its largest ever fine for a single infringement relating to non compliance with an initial enforcement order (IEO). This is the latest CMA enforcement action under UK merger control powers that serves to remind buyers of the pitfalls of completing a transaction without first obtaining UK merger clearance.

Background to the fine

The deal

In February 2020 ION Trading Technologies Group (ION), headquartered in Ireland, took a controlling stake in Broadway Technology Holdings LLC (Broadway), headquartered in the US. Both parties supplied sell side front office software for electronic trading of fixed income securities and foreign exchange. ION did not notify the deal for UK merger clearance.

The CMA merger review

The CMA's mergers intelligence unit subsequently became aware of the transaction and called it in for a formal merger review. As is standard in completed transactions, on 2 April 2020 the CMA imposed an IEO on the parties preventing further integration of the businesses pending the outcome of the CMA's merger investigation and requiring the merged businesses to operate as though they remained independent competitors. On 17 April 2020 the CMA directed ION to appoint a monitoring trustee to ensure compliance with the terms of the IEO. On 20 April 2020 the CMA formally commenced its phase 1 merger review.

In July 2020 the CMA concluded its phase 1 review by finding that the merger had given rise to a realistic prospect of a substantial lessening of competition in relation to the supply of sell side front office systems for fixed income electronic trading, worldwide. To address the CMA's concerns and to avoid an in depth phase 2 review, ION offered to divest Broadway's fixed income business including the underlying software and brand to a third party. The CMA accepted that undertaking in November 2020 and closed its investigation.

CMA investigates procedural infringements

That did not end things. The CMA investigated not just the merits of the completed merger but whether ION had breached the terms of the IEO to which it and Broadway were subject. The CMA has found that ION failed to carry out the Broadway business separately from it and took action that might impair the ability of the Broadway business and the ION business to compete independently. In particular, the CMA found that ION failed to prevent Broadway from submitting a bid for the provision of services in a way which presented Broadway as part of the ION Group and proposed the use of both Broadway and ION products as part of a combined offering. This bid was submitted in the first 24 hours after the IEO came into force and the CMA found that steps were not taken for over a month after the bid was submitted to amend the bid, to make clear that it was Broadway alone that would provide the services in question,. The CMA has fined ION GBP300 thousand for this action, which it held breached several provisions of the IEO. Separately, the CMA has imposed a fine of GBP25 thousand on ION for providing inaccurate and incomplete information during the course of the CMA's IEO compliance/monitoring process.

Key take aways for merging businesses

CMA nuisance value should be not be underestimated

ION's total fine represents approximately just 0.03% of total group turnover. The CMA has power to impose a fine of up to 5% of group annual turnover for breaches of IEOs. In relative terms, therefore, the fine is small. The nuisance value to ION of its dealings with the CMA, however, together with professional fees and management time that this will have entailed, will be much greater.

Voluntary nature of UK merger control

UK merger control laws, unlike most jurisdictions, permit buyers to complete acquisitions of third-party businesses without notifying them first for merger clearance and awaiting that clearance. The UK is often referred to as having a "voluntary" merger control regime. Buyers, however, should think very carefully before taking advantage of the UK's voluntary regime. The CMA has a dedicated mergers intelligence unit whose sole job is to look for deals that have not been notified to it and to contact buyers asking about those deals. The CMA has four months after completion of a deal has been made public or, if earlier, brought to its attention in which to assert jurisdiction. In practice, it does not hesitate to open post completion investigations and it will do so, regardless of how small the target is and how limited the target's nexus is to the UK.

CMA has extensive powers to interfere with completed deals

The CMA has extensive powers to make life difficult for buyers should it decide to investigate a completed deal. From the outset, it imposes an IEO, using standard text which the parties must then negotiate on a point by point basis to obtain “derogations” from the various standard restrictions, even to permit integration that has already taken place. The purpose of an IEO is to preserve the value of the target business and ensure to the greatest extent possible that it operates independently of the buyer group.

As was the case for ION, the CMA may impose a third-party monitoring trustee at the buyer's expense to oversee compliance with the IEO. During the course of its phase 1 investigation, the CMA has the power to unwind integration that has already taken place. For example, it used this power in Tobii/Smartbox when it ordered the re-establishment of a third-party distribution agreement for Smartbox pending the outcome of its merger review. Ultimately, the CMA can seek the unwinding of completed deals by way of a forced divestiture of the merged business. It used this power in Tobii/Smartbox and has done so in other deals.

ION/Broadway serves as the latest reminder to parties whose deals trigger UK merger control thresholds that although the regime may be “voluntary” a careful assessment should be undertaken before taking the risk of not notifying the CMA.