Enterprising look at competition law

Susan Hinchliffe runs the rule over the Enterprise Act 2002 and explains how it will affect aspects of competition law such as mergers and cartels

The Enterprise Act 2002 received Royal Assent last November and is expected to be brought into force during the summer.

It introduces significant changes to the competition law regime in the UK.

There are implications for merger control, as the legislation creates a cartel offence and a regime for market investigation.

Implications for mergers include the following:

- Change in the jurisdictional thresholds.

Previously, the Competition Commission had jurisdiction to review a merger if it led to a combined market share of 25% or more, or if the world-wide value of the assets acquired was at least 70 million.

Under the Act, the 25% market share test will remain, but there will no longer be an assets value test.

Instead, mergers will also be reviewable where the total UK turnover of the target enterprise exceeds 70 million.

- New criteria for assessing mergers.

Previously, the commission's role was to determine whether a merger situation operated, or might be expected to operate, against the 'public interest'.

Mergers will now be assessed on the basis of a 'substantial lessening of competition' test, applied to markets in the UK.

No significant changes are expected to arise.

- Depoliticisation of the merger process.

Under the new regime, there will be less governmental involvement in the merger control process.

The Office of Fair Trading (OFT) will decide on whether to make a reference to the commission (and not merely recommend that the secretary of state makes a reference).

The commission will conclude on the merits of the merger and will decide what remedial action should be taken (rather than merely recommend to the secretary of state).

Ministerial involvement will be limited to those special mergers that are referred to the commission on specific public interest grounds, such as national security.

This decision to refer will be made by the OFT, on the basis of the 'substantial lessening of competition' test.

Under the Act, the OFT may decide not to make a reference if the market concerned is not of sufficient importance to justify a reference; any relevant consumer benefits (such as lower prices, higher quality, greater choice or innovation) arising from the merger, outweigh any concerns relating to the substantial lessening of competition; or the arrangements concerned are not sufficiently far advanced, or are not sufficiently likely to proceed, to justify the making of a reference to the commission.

Cartel offence

These changes are intended to make merger scrutiny more transparent and focus the review on competition issues.

However, the main structure of the regime remains unchanged and the reforms fall short of introducing compulsory notifications and clearance obligations.The legislation's implications for the cartel offence include:

- Arrangements within the scope of the offence.

The offence applies only to individuals who dishonestly agree with others to make hard-core agreements of certain kinds.

These include only horizontal agreements to fix prices, limit supply or production, share markets or customers, and bid-rigging arrangements.

The companies entering into such agreements do not commit an offence, though they are likely to be liable to penalties under the Competition Act 1998 or article 81 of the EC treaty.

- Dishonesty.

Only dishonest individuals are guilty of an offence.

The test for dishonesty is that adopted by the Court of Appeal in R v Ghosh [1982] QB 1053, CA - that is, the jury must decide whether what was done by the individual was dishonest by the ordinary standards of reasonable and honest people and, if so, whether the defendant realised that his actions were dishonest according to those standards.

Dishonesty only arises where the jury is certain of both of these matters, beyond reasonable doubt.

- Penalties.

On indictment, the maximum sentence is five years' imprisonment or an unlimited fine or both.

On summary conviction, the maximum sentence is six months' imprisonment or a fine at the statutory maximum, or both.

- 'No-action' letters from the OFT.

The Act provides for immunity from prosecution in the case of individuals who bring forward evidence of a cartel.

In England, this immunity is given by way of a 'no-action' letter.

The OFT envisages many employees will not require immunity.

For example, these will include managers or directors who were not involved in making the arrangements but become aware of its existence and, on discovering the existence of a cartel, take steps to end it and to report its existence to the OFT.

Those employees who have engaged in cartel activity are at greater risk of prosecution, and therefore should consider an application for immunity.

An individual seeking immunity from prosecution must admit participation in the criminal offence; provide the OFT with all the information, documents and other evidence available to him regarding the existence and activities of the cartel; maintain continuous and complete co-operation throughout the investigation until the conclusion of the criminal proceedings; not have acted as the instigator or played the leading role in the cartel; and refrain from participating further after the time he discloses the cartel, except as directed by the OFT (for example, to act as an insider until the OFT has acquired sufficient evidence to prosecute other guilty individuals and/or bring infringement proceedings under the Competition Act 1998.

Even when all the conditions are satisfied, the OFT will not issue a no-action letter if it already had sufficient information to bring a successful prosecution.

The partial criminalisation of competition law is one of the most radical innovations of the Act.

It is anticipated that once the Act is in force the OFT will act quickly to use these new powers.

Part 4 of the Act sets out the rules relating to market investigations.

These rules are intended to replace the provisions of the Fair Trading Act 1973, dealing with monopoly investigations, and to supplement those provisions of the Competition Act 1998, which provide for the control of monopoly power through the chapter II prohibition on the abuse of dominance.

The provisions of part 4 of the Act retain the basic structure of the monopoly reference procedure of the 1973 Act.

However, there are some significant changes.

In particular, under the Act the primary power to refer a market to the Competition Commission for investigation rests with the OFT.

The secretary of state will retain the reserve power to make a reference only in exceptional circumstances.

Furthermore, the grounds for making a reference have been modified.

The 25% market share threshold prescribed by the 1973 Act for the identification monopoly situations has been replaced by a broad competition-based approach.

The Act now provides that a reference may be made where the OFT has reasonable grounds for suspecting that 'any feature or combination of features for the market in the UK for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK or part of the UK'.

The new powers for market investigations are likely to be used only in limited circumstances.

The OFT has said that they will only be used when the powers under the 1998 Act are not appropriate.

This might arise where there is no evidence of a concerted practice or in relation to the activities of a single firm, where dominance cannot be established.

Susan Hinchliffe is a senior associate at City-based Arnold & Porter.

She is a co-author of Enterprise Act 2002: The New Law of Mergers, Monopolies and Cartels, published this month by Law Society Publishing.

The book deals with legislative reform affecting competition law and practice under the Enterprise Act.

It can be ordered from Marston Book Services, tel: 01235 465 656, at 49.95 plus 3 postage and packing