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OFT consults on revised guidance in merger cases

OFFICE OF FAIR TRADING News Release (84/07) issued by The Government News Network on 18 June 2007

The Office of Fair Trading has today issued for consultation revised guidance on the so-called 'markets of insufficient importance' or 'de minimis' exception in merger cases. The revised guidance is intended to provide the same high level of consumer protection in UK merger control while reducing the system's cost to business and the taxpayer.

Under the Enterprise Act 2002, the OFT has a duty to refer certain mergers to the Competition Commission (see note 1). The exception allows the OFT to decide not to refer where the markets involved are not of sufficient importance to justify a reference.

Existing guidance suggests that the OFT may consider a merger in a market worth as little as £400,000 per year to be of sufficient importance to justify a reference to the Competition Commission. The revised guidance raises the market size threshold to £10 million.

Since real consumer harm can arise in cases below that threshold, it is subject to certain caveats. Specifically, the OFT is less likely to make use of the exception where:

* market concentration is very high and entry prospects are low, making substantial consumer harm likely,

* there is evidence of coordination -- such as price-fixing -- between competitors in one or more of the markets in question,

* a reference would have important precedent value for business, or

* a substantial proportion of the likely detriment is suffered by vulnerable consumers.

The OFT decided to review its guidance in this area because it was concerned that an unduly narrow interpretation of the exception might result in mergers being referred to the Competition Commission where the risk of consumer harm was low and any adverse effect there might be would be small-scale. In such case the costs involved potentially outweigh any benefit of intervention. This concern has been heightened by the impact of the Court of Appeal's judgment in IBA Health which is widely regarded as having made references more likely in marginal cases (see note 2).

The existing guidance emphasises that the exception will be used only very rarely and suggests a very low threshold for market value. This may have contributed to a situation in which, to date, the exception has not been determinative of the outcome of any case.

Download the consultation paper, including a proposed revision of the guidance (pdf [ ]).

John Fingleton, Chief Executive of the OFT, said:

'The changes we proposed are carefully designed to remove unnecessary regulatory burdens on business with no lessening of consumer and business protection from anticompetitive mergers. These changes will benefit the taxpayer, businesses directly, and consumers indirectly. We welcome views from consumers and business and their representatives on these changes and how we can ensure that they have the greatest positive impact.'

Comments from any interested parties on the issues raised by this paper are welcome. The deadline for comments is 10 August 2007 and responses should be submitted in writing by email, letter or fax to:
Markets of Insufficient Importance - Consultation

Mergers Group
Office of Fair Trading
Fleetbank House
2-6 Salisbury Square
London
EC4Y 8JX

Fax: 020 7211 8916/11
Email: Alison.Knight@oft.gsi.gov.uk and Duncan.Porter@oft.gsi.gov.uk

Next steps

We will publish our formal response to the consultation exercise, together with a summary of response after August 2007.

Data use statement for responses

Please note that we may choose to refer to comments received in response to this consultation in future publications. In deciding whether to do so, we will have regard to the need for excluding from publication, as far as that is practicable, any information relating to the private affairs of an individual or any commercial information relating to a business which, if published, would or might, in our opinion, significantly harm the individual's interest, or, as the case may be, the legitimate business interest of that business (confidential information). If you consider that your response contains such information, that information should be marked 'confidential information' and an explanation given as to why you consider it is confidential. All information received is subject to Part 9 of the Enterprise Act 2002.

If you are replying by email, these provisions override any standard confidentiality disclaimer that is generated by your organisation's IT system.

NOTES

1. The Reference Test - The OFT has a duty to make a reference to the CC if the OFT believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation; and the creation of that situation may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

2. In its February 2004 judgment in IBA Health v OFT [2004] EWCA Civ 142, the Court of Appeal criticised the OFT Guidance in force at that time, which described the threshold test for reference as whether there was a 'significant prospect that a merger may be expected to lessen competition substantially', as setting too high a threshold for reference. As a result, OFT guidance was revised, and it now states that the threshold for reference will be met if there is a 'realistic prospect that the merger will lessen competition substantially'. The effect of the judgment, and the change in OFT guidance, is widely regarded as having lowered the threshold for references and, consequently, having made reference in marginal cases more likely.

3. Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25% share of supply in the UK (or a substantial part thereof) is created or enhanced.

4. Download 'Mergers: substantive assessment guidance' (pdf [ ]). This explains how the OFT approaches the substantive assessment of mergers under the Enterprise Act 2002 (in particular the substantial lessening of competition test) and the grounds on which the OFT refers mergers to the Competition Commission.

5. Download 'Interim arrangements for informal advice and pre-notification contacts' (pdf [ ]). This sets out OFT interim practice since April 2006 on the provision of informal advice for proposed mergers.

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