Mergers and acquisitions refer to two or more companies joining forces to fulfill an objective. Mergers mean two companies joining together, usually through an exchange of shares, and acquisition means buying assets or shares of another company.
There can be multiple reasons for such transactions, like spreading risks, adapting to changing industry trends, or any strategic reasons, but they must abide by different mergers and acquisitions laws in the UK.
Important laws of mergers and acquisitions you need to know in the UK
1. The City Code on Takeovers and Mergers
The City Code on Takeovers and Mergers supervises and regulates turnovers and mergers in the UK.
It ensures that all shareholders are treated fairly, aren’t denied any opportunity to decide on the takeover, and shareholders of the same class must be provided equivalent treatment by the offeror. All companies that are listed on the London Stock Exchange are bound to stay compliant with the Takeover Code.
This code outlines the process and timetable for takeovers but isn’t concerned about the commercial or financial advantages and disadvantages of it. Also, it doesn’t interfere with the responsibilities of the government and other bodies in the takeover process like the competition policy.
2. The Competition Act 1998 and the Enterprise Act 2002
Both the Competition Act 1998 and the Enterprise Act 2002 are merger control regulations that ensure fair competition in the UK market. The Enterprise Act investigates mergers that may affect national security, financial stability, or public health emergencies.
The Competition Act reviews transactions that may affect market competition in the UK and harm consumer benefits.
3. The NSI (National Security and Investment) Act
The UK introduced the NSI Act on January 4, 2022 for screening of different investments on national security grounds. Acquisitions of companies in 17 specified sectors, like synthetic biology and artificial intelligence, are affected by this new law. It is also applicable to non-UK companies if they carry out activities in the UK or are supplying goods and services to it.
The government can call or scrutinize any company acquisitions that are completed on or after 12 November 2020. However, there are multiple criteria on which this scrutiny of acquisitions happens.
For example, the acquisition of company shares or voting rights in a qualifying entity must pass any of the following thresholds:
- From 25%, or less to more than 25%
- From 50% or less to more than 50%
- From less than 75% to 75% or more
4. Transfer of Undertakings (Protection of Employment) regulations (TUPE)
Every employee must sign an employment contract with their employer that states the rights and responsibilities of both sides. This contract plays an essential role during company mergers and acquisitions.
TUPE is applicable to all UK businesses and protects the rights of employees in the UK. If a business has its head office anywhere outside of the UK, but the business transferring ownership is in it, then TUPE is applicable. It protects two kinds of transfers: business transfers and service provision changes.
Under this law, employees’ jobs usually transfer over to the new company (exceptions are there), employment terms and conditions transfer, and continuity of employment is maintained.
5. Listing Rules
Any company having a premium listing on the FCA’s official list must comply with the Listing Rules. This rule is applicable to a takeover where the offeror is a premium listed company and not just the target company.
Transactions are classified with respect to four class test outcomes where each of them gives a percentage ratio as
- The gross asset is subjected to the transaction by the gross assets of the premium listed company.
- The profit attributed to the assets subject to the transaction by the profits of the premium listed company.
- The consideration for the transaction by market capitalisation of the premium listed company
- For an acquisition, the gross capital of the company being acquired by the gross capital of the premium listed company
Connected transactions happening in the past 12 months must be aggregated together for this purpose.
Class 2 transaction: It refers to the Sale or acquisition of a company or assets with a percentage ratio of 5% or more on any of the above class tests but less than 25% on each of them. The premium listed company is required to announce the key transaction terms immediately once agreed.
Class 1 transaction: It refers to the sale or acquisition of a company or assets with a percentage ratio of 25% or above on any of the mentioned class tests. The seam announcement requirement is applicable as a class 2 transaction. Additionally, premium listed companies may only complete the acquisition with shareholders’ approval and produce a clear circular about the details of the transaction, which is reviewed and approved by FCA.
6. Prospectus Regulation
UK’s Prospectus Regulation regulates public offers of securities and admissions to trading on regulated markets. Under the regime, securities are admitted to trading when they are listed on a regulated market like a stock exchange and can be bought or sold.
You must follow all its rules if your organizational securities are offered for sale to the general public.
Merger Control Legislation
Enterprise Act 2002
The Enterprise Act 2002 makes reforms to the UK’s law for the control of mergers. It set out rules for the scrutiny of mergers, raising matters of public interest, market competition, and customer benefit concerns.
The merger investigation process happens in two phases.
Phase 1: At first, an initial review of the merger is conducted to determine whether it raises any competition-related concerns. If no such issues are detected, the merger is cleared; otherwise, it moves to phase 2.
Phase 2: CMA conducts an in-depth investigation of the merger and has the authority to block it, approve it with conditions, or pass it unconditionally.
This act has a significant impact on mergers and acquisitions in the UK. It prevents monopolies and anti-competitive practices and ensures that consumer benefits are equivalently maintained with fair prices and equal opportunities.
It also protects the public interest, ensuring that mergers do not negatively impact national security, financial stability, media diversity, or public health.
Competition Act 1998
Competition Act 1998 aims to prevent anti-competitive practices in the UK market. In mergers and acquisitions transactions, the CMA reviews all the agreements between undertakings, decisions by associations of undertakings or concerted practices which may affect the trade within the UK and have their object or effect the restriction or distortion of competition, and prohibits them.
For investigation, the CMA has the power to ask any person to produce a specific document or specific information which relates to the merger investigation. If CMA finds an agreement has been infringed, the party needs to pay a penalty. The penalty is fixed based on the seriousness of the infringement.
However, CMA cannot investigate a transaction if it is completed for more than 4 months, unless the completion has not been made public.
Merger Notification Requirements
The merger notification process is handled by the Competition and Markets Authority (CMA). There are no mandatory notification requirements in the UK. However, you can get certain benefits by notifying about the merger to CMA where it qualifies to be reviewed by the governing body.
Companies don’t face any prohibition on completing mergers and acquisitions without clearance from CMA.
Mandatory Notification Thresholds
The CMA has the power to review any merger and acquisition in the UK where both of these thresholds are met:
- Two or more enterprises ceased to be distinct within the past four months or will cease to be distinct shortly and
- The turnover or share of supply thresholds is met, which is either a £70 million turnover made by the target entity or the merger will create a 25% of the combined share of supply in the UK or a substantial part of it.
Additionally, the Secretary of State can also ask the CMA to investigate mergers related to public interest implications.
Now, when you know whether your merger meets the mandatory notification thresholds, you can decide on notifying the CMA. You may or may not inform the CMA about the transaction even if the merger meets the above threshold, but if it raises competition concerns, you must choose to notify the CMA beforehand to avoid risks.
Voluntary Notification Procedures
To notify the CMA, you first need to complete the Merger Case Team Allocation Request Form. They will then discuss what information is to be added to the merger Notice Form with you.
You can then notify the CMA in either of these ways:
- Using a Merger Notice Template or
- Providing a submission in a written format along with an annotated version of the Merger Notice Template noting where in the submission the questions are addressed
There are mainly two benefits of getting approval from CMA before taking your merger ahead. One is you are legally confident about the transaction, and it saves you time and resources in future.
But, if you decide not to notify the CMA, there can be some risks. Even after your transaction is completed, CMA has the power to investigate the merger. It has multiple other powers that can be used to:
- Prevent the merged company from taking any action if CMA thinks that it might pre-empt its eventual decision
- Order that the pre-empt action that has taken place is reversed
- Appoint a trustee to ensure that pre-emptive actions aren’t taken place or their impacts are mitigated at the businesses’ expense.
- Force the disposal of a business if the merger is prohibited
What are the key merger control laws in the UK?
The key merger control laws in the UK are mentioned in the Enterprise Act 2002, which came into action on 20 June 2003. The Competition and Markets Authority (CMA) is responsible for keeping up the competition within and outside the UK for consumer benefits.
Though the entire administrative procedure of merger control is handled by CMA, in some cases that raises defined public interest issues, the secretaries of state for business and trade or culture, media, and sports may be involved in the decision-making process.
Another law to be introduced in the upcoming years is the Digital Markets, Competition and Consumers Bill (DMCC Bill). This act was introduced to parliament on 25th April 2023, received Royal Assent on 24 May 2024, and is expected to be in action in Autumn 2024. It will introduce a new mandatory transaction reporting requirement for digital firms with strategic market status.
What role does the Competition Act 1998 play in merger control?
The Competition Act 1998 provides the legal framework for regulating mergers in the UK and ensuring no anti-competitive practices are performed. Under this act, the CMA has the power to assess and control mergers that might affect the UK market competition.
If they discover any anti-competitive behavior in the merger, CMA can take legal action and impose penalties.
What is the process for reviewing mergers in the UK?
The process for reviewing mergers in the UK is a 2 phase process.
Phase 1: It is an investigation to determine whether a qualifying merger is likely to create a significant reduction of competition in one or more markets within the UK or any part of it.
Phase 2: In this phase, the CMA conducts a thorough analysis to determine if your merger qualifies as a relevant merger and whether it has resulted, or is likely to result, in a substantial reduction of competition. This investigation typically takes up to 24 weeks, with a possible extension of up to 8 weeks. If the CMA determines that remedies are necessary to address a substantial lessening of competition, it has up to 12 weeks to implement these remedies.
After a phase 2 investigation, several outcomes are possible for your merger:
- It is cleared.
- It is cleared subject to conditions.
- It is prohibited.
Conclusion
The ongoing reforms in the merger and acquisition laws in the UK ensure the market remains competitive, offers a predictable, fair and efficient business environment, and maintains consumer benefits. You must notify about any M&A transaction to CMA before completion such that you stay risk-free and invest in a company that doesn’t put you in a bad position in future.