UK: CAT Shows Its Claws

While the reform of UK merger control law introduced by the Enterprise Act 2002 ("the Act") (see BLG Briefing Note – The permanent revolution – further changes to the UK’s anti-trust laws) modernised the institutional basis of UK merger control and some of the tests to be applied in considering mergers, it also maintained much of the substance of the previous system of merger control, including a two stage process of decision making involving the Office of Fair Trading ("OFT") and Competition Commission ("CC").

The biggest immediate change introduced by the Act was the removal of political interference in the merger control process. The corollary, however, is that decisions of the specialist authorities namely, the OFT and CC, are now fully subject to judicial review. It was felt by many commentators at the time that this change would prove to be the more far-reaching and the facts of the iSOFT case seem to confirm this view.

The case was brought by IBA, a competitor of Torex and iSOFT for the supply of IT systems to healthcare providers and, in particular, the National Health Service ("NHS"). The argument centred around the extent of the OFT’s responsibility to refer to the CC for detailed consideration, cases in which the competition effects of a merger are unclear.

Section 33(1) of the Act obliges the OFT to refer mergers to the CC if it "believes that it is or may be the case that [a merger] will result in a substantial lessening of competition". After conducting an investigation lasting just over three months, the OFT decided not to refer this merger to the CC. The OFT reached its decision by accepting the parties’ argument that in the context of the reform of the NHS IT purchasing requirements and processes introduced by the NHS multi-billion pound National Programme for IT, preexisting market share was not a basis on which to assess the impact of the merger. The parties’ contention was that this programme would lead to the entry of many major IT service providers into the market so that all IT contracts in the NHS could be considered to be "up for grabs", on an equal basis, between all qualified market participants.

IBA appealed against the decision not to refer on the basis that it was "self evident that ‘it is or may be the case’ that the proposed merger may be expected to result in a substantial lessening of competition" on the markets concerned and that the OFT should therefore have referred the matter to the CC. It pointed, in particular, to the fact that on the two specific markets affected by the merger, software and services relating to Electronic Patient Records and Laboratory Information Management Systems, Torex and iSOFT had historic combined market shares of 46% and 56% respectively and that both had a large installed customer base.

The CAT found in favour of this argument. In the CAT’s view, the OFT had itself to be satisfied that there was no substantial lessening of competition and also that "there was no significant prospect of the CC reaching an alternative view on the basis of a fuller investigation".

In the light of this test, the CAT was clear that the OFT’s decision was not one it could reasonably have come to. Accordingly, it had to be quashed.

As a result of the CAT’s decision, the merger has been referred back to the OFT and, at the date of writing (5 December) the OFT has stated that it is going to reexamine the case. Of course, it is open to the parties (who were due to finalise the merger this month) to appeal against the decision of the CAT.

While the CAT’s decision undoubtedly has major repercussions for Torex and iSOFT, the forceful and unequivocal nature of the CAT’s findings will have a major impact on the future conduct of parties to UK mergers.

The introduction of the Act has already led to the OFT requiring much more detailed background information about notified mergers. The criticisms made in the CAT’s judgment of the OFT’s methods will only increase the amount of information that will have to be presented by merging entities. The larger point, however, is that "only exceptionally [should] the OFT… attempt to resolve the matter" where there is a real issue as to whether or not a deal leads to a substantial lessening of competition. Inevitably, unless this judgment is overturned, more mergers will be referred to the CC for detailed investigation.

The increased likelihood of referral needs to be taken into account during the planning of mergers as does the need to provide more extensive market analysis in difficult cases. Suddenly, the landscape of UK merger control has changed and the scale of this change should not be underestimated.