This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
Brexit will inevitably have implications for businesses in terms of compliance with the anti-trust regime, merger law and state aid rules. The purpose of this article is to provide an overview of possible changes.
At present, 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. Large-scale mergers and joint ventures with cross-border implications currently benefit from a "one-stop-shop" review regime. These things may change.
In practice, the precise shape of those changes will depend on the deal the UK strikes with the EU and the decisions the UK Government takes on how closely to align its competition laws with the EU in the future. At the end we give a few tips on what businesses may want to consider doing in the meantime.
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.
Looking ahead, there are certain elements of the existing UK rules that may come under review. Currently under the Competition Act, an agreement may be considered exempt under Chapter I if it benefits from a European Commission block exemption regulation. The UK Government will need to consider whether to retain these provisions or replace them with new national exemptions and guidelines. This could be an opportunity to introduce more flexible rules, e.g. on vertical agreements that do not have an effect on EU trade.
Flexibility could come at the price of having to face parallel competition regimes. That is because, even post-Brexit, UK companies doing business or selling into the EU will still remain subject to EU competition law if their conduct has an anticompetitive effect in the EU (e.g. a cross-border cartel). This may lead to parallel investigations, which could increase costs for businesses, and the potential for additional fines or other penalties.
This brings us to a further area where change is expected – and that is in the enforcement of the parallel rules. 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. If no such deal is agreed, the CMA will cease to enforce EU rules in the UK and the European Commission would lose its enforcement powers in the UK.
Quantifying the extent to which Brexit will 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. Although European Court decisions may cease to bind UK courts, the general global trend in competition policy is moving towards convergence. With the EU still being the UK's largest and closest trading partner, EU competition law trends would be hard to ignore.
If the UK courts and the CMA cease to be bound by the rulings of the European courts, divergent interpretations of competition law may arise. 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, but there are no equivalent EU provisions.
Private actions for damages
In the immediate future the implications for private actions for damages in the UK are likely to be limited, as 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, the number of private damages claims for breaches of competition law coming before UK courts is expected to increase.
However, leaving the EU could mean that the substantive EU competition law rules would not apply and that will have a knock-on effect on claims based on EU rules coming before the UK courts. In particular, there is a question mark over the future of follow-on actions for damages from breaches of competition law at the EU level that caused damage to UK businesses. The issue is the extent to which a UK business in that position would still be entitled to rely upon that initial finding of infringement when making a damages claim before the UK courts.
The UK has its own well established merger regime which applies to smaller scale mergers and those where the principal activities of the businesses are in the UK. The main impact of Brexit will be on large pan-European mergers where the parties meet certain worldwide and pan-European turnover thresholds and 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 will there be any guarantee that the regulatory authorities will reach a consistent outcome. The CMA is likely to need to ramp up resources to deal with a larger number of filings or businesses would face real delays. Given that the profile of mergers the CMA will review is likely to change, there is a question as to whether the CMA would adjust its jurisdictional thresholds.
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 may be regarded as a real disadvantage for some.
Post-Brexit the UK will fall outside the EU's state aid "level-playing-field" enforcement regime, which controls the granting of subsidies or other advantages likely to distort competition and trade with the UK, given to companies by Member States.
The UK Government will no longer be subject to external controls in granting preferential treatment to specific companies and it could introduce a selective tax regime (e.g. to attract investment into the UK). The Government could also adopt protectionist policies such as the proposed Tata Steel rescue plan, which would likely have fallen foul of EU state aid rules. However, it also seems likely that the UK Government would implement at least a degree of replacement legislation, for example to prevent local councils from propping up local failing firms on the pretext of saving local jobs. At this stage, the degree of intervention for which there would be political appetite is unclear.
The WTO rules on anti-dumping and anti-subsidy would continue to apply, as would the EU trade protection rules. Unless the UK entered into a special trade deal with the EU, a company trading goods in the EU benefiting from a selective government subsidy could face compensatory tariffs following a successful complaint by EU competitors claiming adverse harm to the relevant EU sector. Brexit could 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 to persuading the UK Government to seek a remedy before a WTO panel – generally a cumbersome proceeding.
What should we be doing now to prepare?
- For UK companies doing business cross-border or with a potential effect in the EU, compliance with both EU and UK competition law remains important both now and for the future.
- For cross-border agreements with long-term implications (e.g. joint venture or long-term supply arrangements), restrictive contractual clauses should be carefully reviewed to ensure that these accommodate the possibility of the application of parallel competition laws, which may diverge.
- Once Article 50 is triggered, there could be a period of uncertainty in which the progress and direction of negotiations with the EU and proposals to introduce new UK competition rules and guidelines should be closely monitored.
- Steps will be needed to ensure that deal negotiations, contractual provisions and compliance programmes are kept up to date with new proposals and provisions.