This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
One question that businesses are starting to ask is how much of a change Brexit would make in terms of compliance with the anti-trust regime, merger law and state aid.
The UK has national competition law that runs parallel to EU competition legislation and currently its principal competition law regulator, the Competition and Markets Authority ("CMA") is empowered to enforce EU competition law alongside UK competition law.
In practice, the degree of change depends on the deal the UK strikes with the EU post-Brexit. Various options are being discussed including:
- Joining the EEA: The UK might apply to join the European Economic Area (which includes the 28 members of the EU plus Iceland, Lichtenstein and Norway). In that case the EU's competition laws would still apply, but the UK could no longer participate in competition law legislative process. The EEA has its own regulator (the EFTA surveillance authority) and Court (EFTA Court).
- Bilateral trade deal: Alternatively, like Switzerland, the UK could negotiate trade deals with the EU including one which covered co-operation over competition law the details of which would depend very much on what was negotiated at the time in the context of other political and economic trade-offs.
Any new deal with the EU on competition co-operation could take time to negotiate – which begs the question of what the impact would be in the absence of a deal or until one is agreed.
When it comes to restrictive agreements and abusive conduct, the impact may not initially appear significant. The UK already has its own national rules governing restrictive practices (Chapter I of the Competition Act) and abuse of a dominant position (Chapter II of the Competition Act) which are closely based on EU competition law. Brexit is unlikely to have any immediate impact on those substantive rules.
There are some elements of the existing UK rules that may come under review. Currently under the Competition Act, for instance an agreement may be considered exempt under Chapter I if it benefits from Commission block exemption regulation. The UK Government may consider whether to retain this or replace these provisions by national exemptions and guidelines. This could also be an opportunity to consider the introduction of more flexible rules e.g. on vertical agreements that do not have an effect on EU trade. Flexibility may come at the price of having to face parallel competition regimes where there is potential impact on EU trade or it's simply unclear.
A UK company doing business or selling into the EU would still remain subject to EU competition law post-Brexit if its conduct (e.g. a cross-border cartel) has an anticompetitive effect in the EU. This may lead to parallel investigations, the associated added costs to the business and the potential for additional fines or other penalties.
This brings us to an area where change can be expected - and that is in the enforcement of the parallel rules. The CMA would cease to enforce EU rules in the UK and the European Commission would lose its enforcement powers in the UK. The CMA would cease to be part of the European Competition Network ("ECN") which currently co-ordinates investigations into cross-border investigations – unless a new co-operation deal is introduced.
Private actions for damages would probably not be significantly affected because the UK has already taken a lead in this area, and in certain respects, national law goes further than the new EU Damages Directive (particularly in relation to collective redress and disclosure). At present, it is predicted that an increasing number of private damages for breaches of competition law and will come before the UK courts. However, Brexit would mean that the substantive EU competition law rules would not apply and that would have a knock-on effect on these claims coming before the UK courts.
Quantifying the extent to which Brexit would lead to divergence in the substantive competition rules and interpretation is difficult. There is likely to be something of a 'push me pull you' effect. European Court judgments might not be binding any longer but the general global trend in competition policy is moving towards convergence. With the EU still being the UK's largest and closest trading partner European competition law trends would be hard to ignore.
The UK courts and the CMA would no longer be bound by the rulings of the European Courts which could lead to divergent interpretation. That is not to say there are no differences between UK and EU competition law now. For instance, the UK competition law already has a criminal cartel offence under which an individual involved in a cartel can be jailed for up to five years and/or fined.
The UK has its own well established merger regime which would apply to smaller scale mergers and those where the principal activities is in the UK. The main impact of Brexit would be on large pan-European mergers where the parties meet certain worldwide and pan-European turnover thresholds where the EU rules provide for a 'one-stop-shop' procedure for merger clearance.
For those large international mergers, a UK business could find itself having to make a filing both to the CMA and the European Commission, with the added cost and time involved. Nor would there be any guarantee that the regulatory authorities will reach a consistent outcome. The CMA would have to ramp up resources to deal with a larger number of filings or businesses would face real delays.
The ability to avail oneself of the 'one-stop-shop' is generally viewed by businesses as a positive feature of the EU competition regime, so this change could be a real disadvantage for some.
Post-Brexit the UK would fall outside the EU's state aid 'level-playing-field' enforcement regime which controls the granting of subsides or other advantages by Member States which are likely to distort competition and trade within the EU.
The UK Government would no longer be subject to controls in granting preferential treatment to specific companies or introduce a selective tax regime (e.g. to attract investment in the UK). The World Trade Organisation ("WTO") rules on antidumping and anti-subsidy however would apply - as would the EU trade protection rules. Unless the UK entered into a special trade deal with the EU, a company benefitting from a government subsidy in the UK may find itself facing compensatory tariffs when selling into the EU following a successful complaint by competitors demonstrating harm to the relevant EU sector.
Brexit would also mean that a business disadvantaged by a subsidy granted to a competitor in the EU would have no remedy before the Courts or the European Commission. It would have to resort persuading the UK Government to seek a remedy before a WTO panel – generally a cumbersome proceeding.
What to consider if there is a vote for Brexit?
If there is a vote for Brexit, the UK's withdrawal will take some time but contingency planning for the business will be crucial. This will include reviewing both existing and planned transactions and business practices to take into account the possibility of review both at the UK and EU level.