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OFT publishes revised guidance in merger cases affecting small markets

156/07    15 November 2007

Following public consultation, the OFT has today published revised guidance on the so-called 'markets of insufficient importance' - also known as 'de minimis' - exception in merger cases.

Download the new guidance (pdf 122 kb).

Every respondent to the consultation welcomed the OFT's initiative, and the consultation exercise itself has significantly improved the clarity of the final text. Overall, the revised guidance strikes a careful balance by protecting UK consumers from the risk of harm posed by anti-competitive mergers without imposing disproportionate costs on taxpayers and business.

Under the two-stage merger control system of the Enterprise Act, the OFT has a duty to refer certain mergers to the Competition Commission (CC) for an in-depth investigation. The statutory exception allows the OFT to decide whether or not the markets involved are of sufficient importance to justify such a reference. The previous guidance issued in 2003 suggested that mergers affecting markets worth as little as £400,000 could be referred, and has had no practical effect. The revised guidance has raised the threshold to £10 million.

At the same time, the new guidance does not permit unacceptable consumer harm or undermine deterrence, the importance of which has recently been highlighted by the OFT - see consultation area. Under the new guidance the OFT retains its discretion to refer some cases below the new threshold where the impact of the merger is likely to be particularly significant. This may include cases such as mergers to monopoly in markets without prospects for new entry, or mergers that increase the risk of cartel behaviour where there is evidence of collusion already.

John Fingleton, OFT Chief Executive, said:

'This measure is part of our proactive strategy of reducing disproportionate costs of the UK merger regime, especially in relation to small-scale issues. Our approach reconciles our goals of making smaller markets work well for consumers and avoiding undue burdens on taxpayers and business. Overall, we want the merger regime to encourage efficient merger activity while discouraging the acquisition of market power even in smaller markets that, in aggregate, contribute a great deal to UK productivity and consumer welfare.'

NOTES

1. Mergers: substantive assessment guidance (pdf 233 kb). 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 CC.

2. 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. 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. Last year, the OFT estimated that consumers saved around £52million as a result of the OFT's mergers work. This figure is based on a three-year moving average and includes all UILs and published CC decisions for 2006-7.

4. This guidance replaces the relevant section of the OFT's Mergers - Substantive Assessment Guidance (OFT 516, May 2003). A proposed revision of the relevant text was published in June 2007 and stakeholders were invited to comment in relation to the draft. The published guidance includes a summary of responses to the consultation, together with the consideration the OFT has given to the principal issues arising from those responses and further changes made to the guidance as a result.

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