The DMCC Bill
On 25 April 2023, the UK government published its long-awaited DMCC Bill, which sets out a raft of new rules and powers to protect consumers online in accordance with its stated objective of “boosting competition in digital markets in the UK, currently seen as dominated by a small number of firms”. The DMCC Bill aims to address concerns that the UK does not have sufficiently robust regulation to appropriately regulate digital markets and ensure fair competition in these. The provisions of the DMCC Bill seek to bolster the ability of the CMA to reign in the power of Big Tech firms with the aim of allowing businesses and consumers “access to dynamic and thriving digital markets that will ultimately support our economy to grow” and “ensure digital markets work for the UK economy, supporting economic growth, investment and innovation”. The DMCC Bill is currently making its way through the UK Parliamentary process and is expected to come into force in the second half of 2024, with further CMA guidance on the application of the new rules expected within a similar timeframe.
A number of material reforms to UK competition and consumer protection laws are contained in the DMCC Bill. These reforms include expanding the CMA’s investigational powers in the context of both competition and consumer protection investigations, granting the CMA the power to intervene in relation to new categories of consumer harm (e.g. to seek to tackle fake reviews) and broadening the territorial scope of competition investigations (so in the future the CMA will be able to investigate anticompetitive agreements likely to have an effect on trade within the UK, even if the agreement is implemented outside of the UK). The DMCC Bill also provides a statutory footing for the CMA’s Digital Markets Unit (the “DMU”), which will have responsibility within the CMA for considering and enforcing matters related to the digital sector. However, for the purpose of this current piece, we focus solely on two of the more significant reforms, being: (i) the introduction of a new pro-competitive regime for digital markets; and (ii) revisions to the existing jurisdictional thresholds in the merger control context.
The new pro-competitive regime for digital markets
Following the lead of equivalent measures introduced in the EU (via the EU Digital Markets Act (“DMA”)) and Germany, the DMCC Bill seeks to establish a new pro-competitive regulatory regime in the UK targeted at reining in the power of Big Tech firms or, more precisely, those that are ultimately designated as having “strategic market status” (“SMS”) in light of their substantial and entrenched market power and a position of strategic significance in at least one “digital activity”. The new regime will empower the DMU to impose tailored Codes of Conduct on firms with SMS status and also permit the making of targeted pro-competitive interventions to address factors (e.g. problematic conduct or market structures) that are the source of a particular firm’s SMS. The introduction of such a regime was deemed necessary by the UK government so as to enable the CMA to address areas of potential concern more quickly and also because the CMA’s existing tools were deemed to be inadequate for dealing with the concerns digital markets typically present.
Per the provisions of the DMCC Bill, an entity engaged in digital activity may be designated as an SMS firm if it meets the following conditions: (i) it has substantial and entrenched market power – assessed on a forward-looking basis, taking into account a period of at least five years to demonstrate that the firm’s market power is “neither small nor transient”; (ii) it occupies a position of strategic significance with respect to the relevant digital activity – assessed based on factors including its size or scale, user numbers and its ability to either extend its market power to other activities or substantially influence how other entities operate; (iii) the relevant digital activity is “linked to the United Kingdom” – that is, the firm has a significant number of UK users, carries on business in the UK in relation to the digital activity or the digital activity is likely to have an immediate, substantial and foreseeable effect on trade in the UK; and (iv) it satisfies the relevant turnover threshold – that is, it has global turnover in excess of £35 billion or UK turnover in excess of £1 billion. However, even if one or more of the above criteria are not satisfied, the DMU will still be able to assign an SMS designation to a firm should it consider it appropriate to do so. The first designations are expected to be made nine months after the DMCC Bill comes into force, so likely in Q1 2025 at the earliest. While designations are capable of being appealed, the applicable judicial review standard provides the DMU with significant discretion when taking such decisions.
As noted above, the DMU will have certain specific powers to regulate the conduct of firms designated as having SMS:
· Firstly, the DMU will have the power to develop tailored ‘Codes of Conduct’ to regulate each SMS firm’s behaviour in relation to the activities for which they have been designated. The Codes of Conduct will be formed following extensive engagement between the CMA and designated firms and should be focused on achieving one or more of the following objectives: fair dealing, open choices and trust and transparency. However, the DMU will have significant discretion when it comes to setting the content and scope of the Codes of Conduct. That said, the DMCC Bill does set out “permitted” categories of requirements that can be included in the Codes of Conduct (including obligations related to preventing self-preferencing, unfair data usage and requiring the use of the firm’s broader services alongside the designated activity). While it is likely that the Codes of Conduct will include many of the same requirements as in the DMA, certain aspects of the UK regime will likely go beyond the DMA interventions in respect of some firms. This divergence could in turn result in some SMS firms having to specifically tailor their conduct for the UK market, having in certain cases already introduced changes to their business practices in the EU to comply with their “gatekeeper” obligations under the DMA. However, the more collaborative approach envisaged under the DMCC Bill may provide an avenue for SMS firms to negotiate Codes of Conduct that are very similar in scope to the obligations imposed under the DMA.
· Secondly, the DMU will have the ability to make “pro-competitive interventions” to address the source of a designated firm’s substantial and entrenched market power in a particular activity. As a result of such an intervention the CMA will be able to impose behavioural commitments (e.g., to facilitate interoperability among platforms or in relation to data sharing), structural measures (including potential ownership separation) and/or recommend action be taken by another regulator (e.g. the FCA) where that regulator is better placed to do so. The DMU will have the power to test potential commitments and measures with the designated SMS firm’s users.
· Thirdly, the DMCC Bill also introduces a specific reporting obligation, with a five-day “waiting period”, for certain transactions undertaken by SMS firms, which would then prevent such transactions from closing until this period expires or the CMA consents. The relevant thresholds associated with this new reporting obligation are as follows: (i) the transaction must result in the SMS firm acquiring at least 15% of the equity or voting rights in a target (and then subsequent transactions that result in the SMS firm crossing 25% or 50% or the equity or voting rights); (ii) the value of consideration must be at least £25 million; and (iii) the target must carry on activities or supply goods or services in the UK. The formation of joint ventures expected to have links to the UK by SMS designated firms are also caught by this reporting obligation. The CMA intends to publish a notice setting out the form and content of the report that SMS firms will need to submit to discharge this obligation, however, it will likely be significantly more limited than a full merger notice and its purpose is only to give the CMA sufficient information to determine if it wants to open a full investigation under its regular merger control regime.
Companies in breach of the new rules could face fines of up to 10% of global turnover, with director disqualifications of up to 15 years also being possible. The CMA will also have the power to impose orders to ensure compliance. That being said, the current messaging is that the CMA will first attempt to resolve any concerns through constructive engagement with the relevant firm before it seeks to utilise its enforcement powers.
While the noise currently emanating from the UK government is relatively promising, in that the stated intention is for the new regime to be more openly applied than the EU’s equivalent DMA and for the DMCC Bill to create a collaborative and ongoing regulatory dialogue between companies and the DMU, the CMA’s recent decision to veto Microsoft’s proposed acquisition of Activision (at least as originally notified) calls into question whether the DMU will put into practice what is currently being conveyed by the UK government (or may it instead seek to apply the new regime against Big Tech in an aggressive and restrictive manner).
Revisions to the existing merger control thresholds
The UK merger control regime currently has two alternative jurisdictional thresholds, the first is met where the target’s UK turnover exceeds £70 million and, the second, where the parties have a combined share of supply in the UK (or a substantial part thereof) of 25% or more and an increment will result from the transaction. The CMA has flexibility to, and a proven track-record of, interpreting the latter of these thresholds broadly so as to establish jurisdiction over transactions of potential interest, including to capture transactions where the target has no existing UK revenue or marketed products (e.g., by establishing jurisdiction based on the number of UK employees engaged in overlapping R&D activities in the UK). The CMA is aided in these efforts by the fact that the share of supply test is not an economic market share test (nor is the CMA required to adopt the same approach as it would for market definitional purposes) and can be satisfied on the basis of “any reasonable description of a set of goods or services” taking into account sales value, sales volume, capacity, number of employees, value of goods acquired or “some other criterion of whatever nature”.
Nevertheless, concerns remained that certain strategic acquisitions by large market incumbents of innovative start-ups with high growth potential but often with no, or only limited, existing revenues were still evading the CMA’s jurisdiction. The resultant issue being that the CMA arguably had a limited ability to review potentially problematic “killer acquisitions” (i.e. resulting in the elimination of the target as a possible source of future competition) and/or “reverse acquisitions” (i.e. resulting in the elimination of the acquirer as a potential competitor post-transaction as it foregoes innovation in competition with the target) undertaken in the digital and pharmaceutical sectors in the UK. The CMA was of course not alone in this regard, with similar concerns being the driving force behind the introduction of transaction-value based thresholds in Germany and Austria (back in 2017) and more recently in the likes of South Korea (2021) and India (2023).
The DMCC Bill seeks to address the above concern via the introduction of a third alternative jurisdictional threshold. This new threshold will be met where: (i) one party has a share of supply in the UK (or a substantial part thereof) of 33% or more and UK turnover of over £350 million; and (ii) another party has a UK nexus (i.e. it is a UK business, carries on at least part of its activities in the UK, or supplies goods and/or services in the UK). Once in force, the new threshold will significantly expand the CMA’s jurisdiction, providing it with the ability to review not just killer/reverse acquisitions but also transactions not involving direct competitors and other non-horizontal mergers where the acquirer is a significant player in the UK. Therefore, the likes of the Big Tech companies should be acutely aware that going forward there will be an increased likelihood of their transactions requiring CMA approval and that this will have a real impact on the timing and resources that have to be devoted to deals.
In addition to introducing a new jurisdictional threshold, the DMCC Bill also revises the existing thresholds by increasing the turnover-based threshold from £70 million to £100 million and introducing an additional limb to the share of supply test that requires at least one of the parties to have UK turnover of more than £10 million (effectively creating a safe harbour for transactions involving parties with limited UK turnover).
For the avoidance of doubt, and notwithstanding extensive consideration being given to introducing a mandatory filing requirement, the voluntary and non-suspensory nature of the general UK merger control regime has been retained by the DMCC Bill.
Conclusion
The reforms introduced by the DMCC Bill will clearly result in a further strengthening of the CMA’s already impressive arsenal and increase the existing large regulatory burden that companies active in certain sectors (technology companies in particular) and their investors may face. This will be particularly true for certain Big Tech companies if, in practice, there ends up being a material divergence between the obligations imposed on firms designated as having SMS under the UK regime and on those identified as “gatekeepers” under the EU’s DMA. However, if a suitable engagement and compliance strategy is put in place, in most instances the reforms introduced by the DMCC Bill should not present an insurmountable obstacle to deal making or current/future business operations and developments in the UK. Of equal importance is cultivating an open and transparent relationship with the CMA. This applies not only when potential transactions/investments are being contemplated but also when engaging with respect to SMS matters and as part of a more general effort to help facilitate the CMA’s understanding of how the relevant markets (particularly those that are nascent and rapidly developing) truly function and are likely to develop over time.
