Regulatory Outlook | Competition | July 2021

Current issues

Mandatory notification regime for mergers in certain sectors

On 29 April 2021, the National Security and Investment Act 2021 received Royal Assent and is expected to come into force towards the end of 2021. The Act will create a stand-alone notification regime, distinct from the competition merger control regime, enabling the government to review and block or modify transactions on national security grounds.

The Act establishes a mandatory notification regime for transactions involving the direct or indirect acquisition of more than 25%, more than 50%, or 75% or more of the voting rights in qualifying entities active in one of 17 high-risk sectors (including defence, transport and energy). It will be unlawful to complete a notifiable transaction in any of these sectors without prior approval from the Secretary of State. Failure to notify will render the transaction void, and civil and criminal penalties may be imposed. This means that transactions which may fall within the mandatory regime will have to be structured so that completion cannot take place until clearance has been obtained. There will be an initial 30 working day review period after a notification has been accepted, with the government then able to initiate a further 30-75 working day review.

Alongside the mandatory notification regime, there will be also be a voluntary notification regime for transactions which do not concern one of these 17 sensitive sectors but which may give rise to national security concerns. Although voluntary, the Secretary of State will have powers to "call in" transactions, including minority investments and asset acquisitions, for review for up to five years. Companies will need to consider whether the risk of the transaction being called-in merits a voluntary notification. Notably, unlike other international foreign investment control regimes, the Act does not differentiate between foreign and UK investors, with the latter still being subject to the regime (even if transactions involving UK investors are less likely to be called in).

The shift to a mandatory up-front notification regime is a significant change. The UK’s existing framework for national security review gives the government a reactive ability to review a tightly limited class of national security deals. These existing powers catch only a handful of deals each year. Moving from this to a new system under which companies have to notify and obtain approval upfront is major gear shift to which investors and companies need to adapt quickly, even if the government has stated it anticipates that only a small number of deals are likely to require remedies.

In particular, merging parties will need to consider whether their transaction could be caught and how it may affect the transaction timetable. Merging parties required to notify under the mandatory regime will be unable to complete a transaction without approval from the Secretary of State.

UK Digital Markets Unit

In the UK, addressing competition concerns identified in digital markets remains a focus for the UK's competition regulator (the Competition and Markets Authority, or CMA) following several years of analysis of the working of competition in digital markets, culminating with the publication of the CMA's market study in 2020.

On 7 April 2021, a new regulator, the Digital Markets Unit (DMU), was established in shadow form within the CMA to oversee a new pro-competitive regulatory regime for digital markets. While the DMU's powers will require legislation, it is expected to impose rules on the most powerful digital firms: those with "strategic market status". The government has committed to consulting on these proposals – for instance, on how status is designated and to whom the rules will apply – in summer 2021. In the meantime, the DMU is carrying out preparatory work, gathering evidence and engaging stakeholders.

While the DMU is yet to receive its powers, the CMA has already been active in following up on the concerns identified in its market study, launching a number of investigations into the practices of some of the biggest global online platforms. It also, on 15 June 2021, launched a further market study into mobile ecosystems.

Given the potential impact of the new regulation, which will likely be informed by the CMA's ongoing investigatory work, businesses active in digital markets should stay up to date with the CMA's activities and look for opportunities to engage in the upcoming DMU consultation and the CMA's ongoing work, to help shape outcomes in this important area.

EU Digital Markets Act

On 15 December 2020, the EU published a draft of its Digital Markets Act (DMA). This new legislation is aimed at boosting competition in EU digital markets, with new rules aimed at online "gatekeepers"; that is, players that determine how other companies interact with online users.

Similar to the proposals for the UK, the DMA will combine ex-ante regulation with traditional case-by-case ex-post enforcement. The new rules will impose a set of obligations on gatekeepers – such as requirements about interoperability and promoting access to data – alongside a set of prohibited behaviours, including self-preferencing.

This is a significant new piece of legislation for players in digital markets and while the final rules are not expected until 2023 at the earliest, the rules are, and will remain, a key topic of discussion over the next year and beyond as the legislation passes through the EU legislative process. While the drive to regulate big tech has broadly met with support among EU Member States, there are concerns that the DMA may be drafted too broadly (catching challenger players in addition to those with significant market power), and may also not go far enough to address concerns.

Businesses active in digital markets should keep up to date with the developments in order to be prepared for any new rules and consider whether to engage in any consultations.

Reform of the Vertical Agreements Block Exemption Regulation

The Vertical Agreements Block Exemption Regulation (VABER) provides a general exemption for most vertical agreements entered into by businesses with market shares of 30% or less. If a vertical agreement falls within the terms of the VABER it is automatically exempt from the Chapter I prohibition/Article 101 of the Treaty on the Functioning of the European Union (TFEU), that is, prohibitions on anti-competitive agreements.

The VABER is set to expire on 21 May 2022 and the European Commission is undertaking a review of the regulation. Consultations to date have resulted in a number of issues being raised, including that the rules:

• are no longer fit for modern markets (in particular e-commerce markets); for example, there are difficulties in applying rules to companies that do not fit into traditional supply and distribution concepts, as well as to new online sales restrictions; and
• do not reflect the more nuanced approach that case law has taken to e-commerce restrictions.

Potential reforms that the European Commission is considering include addressing increasing pressures on physical stores due to the growth in online sales since the last VABER was introduced - for example by removing a prohibition on dual pricing (allowing differential pricing for online and offline sales channels).

The European Commission is reviewing consultation responses on the potential reforms and will publish a draft of the revised rules for comment in the course of this year.

In the UK, the VABER forms part of retained EU law and the CMA has announced its own review of the regulation to examine whether "it serves the interests of UK businesses and consumers". While there may be some divergence in the final rules adopted at EU and UK level, the CMA has stated it will draw on relevant evidence from the Commission's review. On 18 June 2021, the CMA launched a consultation into its proposed recommendations, with responses sought by 22 July 2021.

At both UK and EU level, there is opportunity to engage in discussions to shape regulations that have a significant impact on day-to-day distribution arrangements.

Dates for the diary

26 July 2021: Deadline to submit view on issues raised in statement of scope for CMA's Mobile Ecosystems Market Study

Summer 2021: Consultation on powers for the new DMU

Autumn 2021 (estimated): CMA’s final recommendation to Secretary of State on VABER reform

Autumn/ winter 2021: National Security and Investment Act set to come into force

2021 European Commission to publish draft revised VABER for comment