The threshold is met where:

• One party to the transaction has an existing share of supply of at least 33% of any goods or services in the UK and a UK turnover of £350 million or more; and
• The other party has a UK nexus.

The nexus test is extremely broad and does not include specific turnover, market share or asset value criteria.

The new hybrid threshold has significant implications for businesses and investors.

• The scope of the 33% threshold is very broad and could cover various goods and services as there is no requirement for the parties to overlap in any relevant market. The CMA has broad authority to define the market and apply any combination of criteria it considers appropriate.² This means that narrow market definitions resulting in high market shares could be adopted, which can have a big impact on business transactions.
• In addition, the 33% threshold does not require an increment; i.e., the transaction does not need to create or increase the share of supply to 33% or more. This means that the hybrid threshold can capture vertical and conglomerate transactions, as well as acquisitions of newly formed entities with little or no operations in the UK.
• In the absence of a market overlap or increment requirement, businesses with UK turnover of £350 million or more should carefully consider their share of supply in the relevant market(s) and assess risk prior to entering into any M&A transactions involving a target with a UK nexus.
• The UK nexus test has a very low threshold. It is met if, pre-transaction:
  • the relevant party’s (usually the target’s) activity is carried out by a body of persons formed or recognised by UK law;
  • at least part of its activities (including any preparatory steps, such as obtaining regulatory clearances or intellectual property rights) are carried out in the UK; or
  • it supplies (directly or indirectly) goods or services to a person in the UK.

This low threshold means that businesses that do not have a UK presence may also be caught within the hybrid threshold as long as there is a link to the UK.

Practical implications for businesses

• Although the new hybrid threshold mainly targets killer acquisitions, any party fulfilling the UK turnover and share of supply threshold when carrying out M&A transactions may fall within the scope as long as the other party involved in the transaction has a UK nexus, even if none of the other merger control criteria are met.
• A wide range of transactions (including non-horizontal and conglomerate transactions) may fall within scope of the new hybrid threshold due to the absence of a market overlap or increment requirement and the low threshold of the UK nexus test. This is likely to result in an increase in briefing notes and/or merger notifications submitted to the CMA, in turn increasing compliance costs and regulatory risks for organisations that satisfy the high turnover and market share requirements.
• Such investors should be mindful of their market position and factor into their transaction budgets the costs associated with producing and submitting briefing notes and/or merger notifications to the CMA. This will allow investors to ensure that the M&A transactions they enter into are commercially viable for their business.
  
  It should be noted that there are no filing fees associated with submitting briefing notes to the CMA. However, the fees associated with merger notifications can range from £40,000 to £160,000 depending on the value of the UK turnover of the enterprises being acquired.³
• Investors should also consider that where deals are completed without notifying the CMA (since the UK operates a voluntary merger control regime), the CMA may issue “hold separate” orders requiring both the acquirer and target businesses to operate separately until the CMA finishes its investigation. Investors should consider how this may potentially affect their future business plans and put in place appropriate systems or safeguards in case such an order is imposed during the transaction process.
• The hybrid threshold under the merger control regime is separate from the mandatory merger notification requirement for big tech and digital firms with “strategic market status” (SMS) under the digital markets competition regime, which requires firms with a “position of strategic significance”⁴ to notify the CMA of any transactions that meet specific criteria relating to an increase in the percentage of shares or voting rights, the activities of the target, and the value of the transaction.⁵ Firms subject to both regimes may have to factor in the costs and consequences of having to notify the CMA under the mandatory digital markets competition regime, alongside the hybrid threshold, when entering into M&A transactions.
• Apart from SMS designated firms, large businesses, such as private equity investors, with multiple portfolio investments in the UK may also fall within the 33% threshold as the criteria are applied on a group-wide level. As a result, we envisage more large acquirers (including PE investors) submitting briefing notes and/or merger notifications to the CMA to potentially gain some comfort.
  
  The CMA has indicated in its interim measures in merger investigations guidance that, where hold separate orders are imposed on private equity investors with multiple portfolio investments, they may consider limiting certain aspects of the order to portfolio organisations whose activities overlap with the target business, rather than applying the order across the entire portfolio. This may provide such businesses with some relief, allowing them to pursue integration where possible.
• The DMCCA empowers the CMA to impose a fixed fine of up to 1% of worldwide annual turnover on businesses and investors, and/or a daily penalty of up to 5% of worldwide daily turnover. Additionally, the CMA can now impose fines for any breaches of undertakings, orders or commitments of up to 5% of worldwide annual turnover, and/or up to 5% of daily worldwide turnover for each day that the party fails to comply.

Looking forward

When carrying out mergers, acquisitions or joint ventures, businesses will need to carefully consider whether they may be in scope of the new hybrid threshold. This threshold can easily be triggered due to the absence of a market overlap or increment requirement, as well as the low threshold of the UK nexus test. The wide range of transactions that may be in scope requires large businesses and investors to act proactively and plan ahead, as transactions involving certain organisations are likely to fall within its scope. This includes businesses and investors that have more than £350 million in UK turnover and a share of supply of 33% or more. The number of briefing notes and/or merger notifications submitted to the CMA may increase on this basis. In any event, businesses could find themselves subject to more than one aspect of the DMCCA.

For organisations looking to streamline the lengthy process of notifying transactions and undergoing investigations, the new hybrid threshold may increase the number of briefing notes submitted to the CMA. Briefing notes allow parties to a transaction to submit an informal paper to the CMA explaining why they do not intend to make a formal merger notification. There are no filing fees associated with the submission of briefing notes. The CMA usually confirms within two to four weeks of receiving the briefing note whether it will open an investigation into the merger or if it has no further questions at this stage. If the CMA confirms that it is likely to initiate a formal investigation, the parties will typically be expected to submit a merger notification to the CMA within ten working days. Hence, the notification is often prepared in parallel to the briefing note submission. This offers some comfort to businesses and investors, allowing them to factor regulatory aspects into their transaction timelines.

This new regime means that large businesses and investors may incur increased transaction costs in achieving competition compliance and ensuring some level of certainty as to whether the transaction will be investigated in the UK. Therefore, parties should continue to be vigilant in assessing UK merger control risks before entering into M&A transactions. Businesses must ensure transaction documents include carefully drafted conditions that take account of UK merger control and regulatory risks. It is also advisable to establish certain criteria when evaluating business acquisitions and consider methods that may be more cost-effective and efficient, given the complexity of the transaction, budget or legal expertise.

UK merger control, in theory, remains a voluntary regime. This means that there is no requirement to notify the CMA or suspend closing pending investigation and clearance, unless otherwise ordered by the CMA. However, the increased scope of UK merger control rules through the hybrid test creates greater risks for acquirers, which must be factored into their transaction timelines. Businesses and investors will need to assess the impact of the changes on their transactions and adopt measures and strategies to ensure merger control risks in the UK are suitably addressed and managed.

1. See our alerts on the digital markets regime, the competition law and merger control regime and the consumer protection regime for an in-depth review of the regimes.
2. Section 23(5) Enterprise Act 2002
3. For further information on the merger notification fees, see the CMA’s Merger Fees Payment Information Guidance.
4. As per section 6 of the DMCCA, firms will have a position of strategic significance if they meet one or more of the following conditions: 
   
   • the firm has achieved a position of significant size or scale in respect of the digital activity;
   • a significant number of other undertakings use the digital activity as carried out by the firm in carrying on their business;
   • the firm’s position in respect of the digital activity would allow it to extend its market power to a range of other activities; or
   • the firm’s position in respect of the digital activity allows it to determine or substantially influence the ways in which other undertakings conduct themselves, in respect of the digital activity or otherwise. 
5. As per section 57 and section 58 of the DMCCA, SMS designated firms are required to submit a report to the CMA if they meet all of the following criteria:
   
   • the act of concentration results in an increase in the percentage of shares or voting rights held by the SMS company: (a) from below 15% to 15% or more; or (b) from 25% or less to more than 25%; or (c) from 50% or less to more than 50%;
   • the target/joint venture carries on or expects or intends to carry on activities in the UK or supplies or expects or intends to supply goods and services (directly or indirectly) to a person in the UK; and
   • the total consideration of the deal is at least £25 million.

See our alert on the digital markets regime for a detailed discussion on the new regime.

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