House of Commons - Explanatory Note
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Chapter 3: Other special cases

Special public interest cases

178.     These clauses provide for an exceptional category of mergers that may be referred for investigation on public interest grounds, even though they do not meet the normal qualifying thresholds (the turnover test or the share of supply test). These are mergers involving certain government contractors (or subcontractors) who may hold or receive confidential information or material relating to defence.

179.      They will not be scrutinised on competition grounds, but against public interest considerations only.

Clause 57: Intervention by Secretary of State in special public interest cases

180.     Subsection (1) provides that the Secretary of State may intervene on special public interest grounds if she has reasonable grounds for suspecting that: a special merger situation has been created or is in contemplation; at least one of the enterprises concerned is carried on in the UK or by or under the control of a body corporate carried on in the UK; and one of the enterprises concerned is a relevant government contractor. Subsection (2) provides that the Secretary of State may issue a special intervention notice if she believes that the case raises public interest considerations as specified in clause 56.

181.     Subsection (3) provides that a special merger situation is one where the usual thresholds of share of supply or turnover have not been met. Subsections (4) and (5) provide that for the purposes or determining whether a relevant merger situation has been created, clauses 21-30 shall apply, subject to certain changes listed in subsection (5). These changes clarify certain references to the OFT shall, for the purposes of the Chapter, be read as the Secretary of State.

182.     Subsection (7) defines a relevant government contractor as a contractor whose contract includes handling confidential information or documents. They are notified of this by the Secretary of State, or on behalf of the Secretary of State in cases where this notification is passed on from a prime to a subcontractor. This subsection also establishes that a contractor is a former contractor if their special contract has been revoked.

183.     Subsection (8) defines defence as having the meaning of section 2 Official Secrets Act 1989, and further defines government contractor as having the meaning given in the 1989 Act and including subcontractors.

Clause 58: Special intervention notices under section 57

184.     This clause provides that a special intervention notice shall contain details of the case concerned, and why it is being considered as against the public interest provisions provided in clause 56. It also provides for the circumstances in which a special intervention notice would finally be determined and the time in which it would be determined.

Clause 59: Initial investigation and report by OFT

185.     This clause establishes the OFT's role in investigating and reporting on these cases. Subsections (1) and (2) establish that if the Secretary of State issues a special intervention notice to OFT, they shall produce a report within a time-limit that the Secretary of State may specify. Subsection (3) provides that, in its report, the OFT will consider if a relevant merger situation is created under clauses 20 and 31, which is also relevant to the criteria specified in clause 60. This means that OFT do not need to consider whether the merger may result in a substantial lessening of competition as this is not relevant to the Secretary of State's decision in a special public interest case. This subsection also provides that the OFT's report will include a summary of representations received that are relevant to the Secretary of State's decision.

186.     Subsection (4) provides that the OFT shall decide whether a special merger situation has been created or is contemplated. This will be a relevant merger situation without the need to meet the qualifying thresholds (share of supply or turnover test). Subsection (5) provides that OFT may, at its discretion, provide other advice that may be relevant to the Secretary of State's decision about whether to refer, and subsection (6) allows the OFT to carry out their investigations for the report as it considers appropriate.

Clause 60: Power of Secretary of State to refer the matter

187.     This clause provides for the Secretary of State to refer the case to the CC if she believes that a special merger situation has been created, or is contemplated; a consideration specified in clause 56 is relevant, and it may operate against the public interest. Subsection (5) provides that the Secretary of State will accept the OFT's decision as to whether a special merger situation has been created; and will only consider the issues raised by the OFT in their report.

Clauses 61 and 62: Questions to be decided on references under section 60 & Cancellation or variation of references under section 60

188.     Clause 61 provides that the CC will consider whether a special merger situation has been created, or is contemplated; whether - on the basis of the considerations set out in the reference - the merger may be expected to operate against the public interest; and make recommendations as to what action, if any, the Secretary of State or others should take to remedy any adverse effects.

189.     Clause 62 provides for the circumstances in which the CC or the Secretary of State may cancel or vary a reference.

Clause 63: Investigations and reports on references under section 60

190.     This clause provides that the CC's report and investigation should contain its conclusions on whether a special merger situation has been created; whether it may be expected to operate against the public interest; and what actions should be taken by the Secretary of State to remedy these adverse effects.

Clause 64: Decision and enforcement action by Secretary of State

191.     This clause provides that the Secretary of State must decide whether the merger may operate against the public interest within 30 days of receiving the report from the CC and may take whatever remedial steps she considers necessary (from Schedule 6, 9-11). The Secretary of State must accept the view of the CC as to whether a special merger situation has been created or is contemplated.

Other

Clause 65: Newspaper mergers

192.     This clause provides that the general merger regime will not apply to mergers covered by the FTA 1973 newspaper merger regime, unless the Secretary of State is prevented from making a reference under that regime.

Clause 66 & Schedules 5 and 8: Water mergers

193.     Clause 66 and Schedules 5 and 8 amend the special regime applying to mergers between water enterprises (whether water only, or water and sewerage undertakings) in England and Wales, as set out in sections 32 to 35 Water Industry Act 1991 (WIA 1991). The clause and Schedule 5 insert replacements for those sections.

194.     The current WIA 1991 provisions provide for the mandatory reference by the Secretary of State of qualifying mergers between two or more water enterprises to the CC. A qualifying merger is one where the value of the relevant water assets being taken over and those of the acquirer each exceed a specified figure (currently £30 million). Once a qualifying merger has been referred, the FTA 1973 'public interest' test is applied in a way that attaches particular weight to the principle that the ability of the Director General of Water Services ('Director') in carrying out his or her functions under the WIA to make comparisons between water enterprises should not be prejudiced. If the CC makes an adverse finding, the Secretary of State is responsible for determining final remedies.

195.     The purpose of the special water merger regime is to preserve the Director's ability to make use of 'comparative' or 'yardstick' regulation (i.e. the ability to compare the performance of different water companies for the purposes of setting robust price and customer service standards), except where there are strong wider public interest reasons for not doing so. In the absence of any significant competition in the water sector, yardstick regulation is regarded as a particularly important regulatory tool.

196.     The main purpose of the changes being brought about by this clause is to bring the special arrangements for assessing mergers in the water sector more closely into line with the general merger regime whilst ensuring that particular weight continues to be attached to the Director's ability to make comparisons between water enterprises.

197.     The changes to effect a closer alignment with the general regime include:

  • a switch from an assets threshold to a turnover threshold for determining whether a merger between water enterprises qualifies for a mandatory reference;

  • transfer of the responsibility for making such references from the Secretary of State to the OFT;

  • the transfer of responsibility for final decisions on what remedies should be applied in the event of an adverse finding from the Secretary of State to the CC; and

  • in the case of a completed water merger, the time that the OFT will have to make a reference will be reduced from 6 months to 4 months from the date of the merger taking place.

198.     New section 32 provides that qualifying water enterprise mergers will continue to be subject to mandatory reference to the CC, but with responsibility for making such references transferred from the Secretary of State to the OFT.

199.     New section 33 provides that a mandatory reference shall only be made if:

  • the relevant turnover of the water enterprise being taken over exceeds a figure set out in the Bill; or

  • if the relevant turnover of one or more of the water enterprises belonging to the acquirer exceeds a figure also to be determined in regulations.

200.     The purpose of this provision is to exclude small water mergers from the OFT's duty to make a reference. It replaces a similar provision based on asset values. The regulation-making powers provided in subsections (4) and (5) include power to make provision for the definition of relevant turnover for these purposes. The turnover will be set independently of the qualifying turnover thresholds set for the general merger regime.

201.     The Government intends to set the initial turnover threshold for the water regime at £10m. There are powers in subsection (6) for the Secretary of State to amend the figure subsequently. A refinement of the present statute will enable the Secretary of State to prescribe a different turnover threshold for the target and for the acquirer for the purposes of deciding whether there is to be a reference. The £10m turnover threshold is expected to have an identical effect to the current assets threshold of £30m in terms of the number of water enterprises that will be affected were they to be involved in a merger.

202.     Schedule 5 replaces section 34 WIA 1991. The new section sets out the task for the CC when a water enterprise merger has been referred to it. Its first job is to determine whether a merger situation qualifying for investigation has been created. If it has, the CC has to decide whether the merger can be expected to prejudice the Director's ability in carrying out his or her functions by virtue of WIA 1991, to make comparisons between different water enterprises. The Director's functions that are likely to be most relevant here and that could be prejudiced by a merger are his or her functions of setting price controls and service level targets and the related general term of reference in WIA 1991 s2 (3)(d) to 'promote economy and efficiency on the part of water enterprises'.

203.     If there is prejudice, then the CC has to decide whether to take action to remedy, mitigate or prevent the prejudice or any adverse effects that might result, and to decide what action should be taken. In deciding what action to take, the CC may have regard to the effect of any action on relevant customer benefits. The definition of a customer benefit is set out in paragraph 7. This matches the definition of customer benefits as defined for the purposes of the general merger regime.

204.     Sub-paragraph 4(1)(a) and (b), however, places two constraints on the circumstances in which the CC is able to have regard to customer benefits in deciding on remedies. These constraints are unique to the water regime. They provide that customer benefits can only be considered where the taking account of those benefits would not prevent a solution to the prejudice concerned, or in circumstances where the benefits are expected to be substantially more important than the prejudice concerned. These constraints are intended to ensure that the water regime continues to operate in a way that attaches particular weight to the preservation of comparator enterprises, whilst not excluding the possibility of customer benefits being taken into account if they are important enough, or if they can be obtained in a way that does not prevent action to address the prejudice.

205.     Paragraphs 1, 2 and 4(3) provide for the general merger provisions in the Bill to apply to qualifying water mergers subject to modifications contained in regulations that may be prescribed by the Secretary of State. It is envisaged that this power will be used, for example, to ensure that the general duty to remedy the effects of completed or anticipated mergers in clause 39 can be adapted for the special purposes of the water regime. It may also be used to adapt the arrangements for the consideration of water mergers under the special regime to circumstances where the merger also raises a public interest case.

206.     The new sections 34(5) and (6) provide that no enforcement action can be taken against a merger of water enterprises if a reference was not made within 4 months of the later of: the merger taking place, or material facts about the transaction coming to the attention of the OFT or being made public. The current section provides for a six-month period. The change brings the special water regime into line with the period in the equivalent provision for the general mergers regime.

207.     The transfer of responsibility for determining and implementing remedies following an adverse finding from the Secretary of State to the CC requires a consequential change to section 17 WIA 1991. This section currently gives the Secretary of State a power, as part of her power to order remedies, to modify the conditions of appointment of a relevant undertaking for the purpose of giving effect to or taking account of the main remedial order. Schedule 8 revises section 17 WIA 1991 to extend the power to modify conditions of appointment to the CC.

208.     Sections 32(2) and 32(3) of the current WIA 1991 set out transitional arrangements relevant when the original Act was brought into force. They are no longer required, and are therefore repealed.

209.     The amendments to sections 32-35 are concerned, as is the original Act, only with the water sector in England and Wales.

Chapter 4: Enforcement

210.     Clauses 67-91 and Schedules 6 and 7 set out the enforcement powers of the OFT, CC and Secretary of State before, during and after a merger reference. As in FTA 1973, enforcement takes two forms: undertakings and orders. Undertakings are given voluntarily by one or more of the parties to a merger. Once accepted by the relevant authority, these become legally binding and enforceable in the courts. Orders are made by the authorities and prohibit the parties specified in the order from doing something or specify that they must take certain action. Before and during a reference, undertakings and orders seek to prevent any action being taken that might prejudice the eventual outcome of the merger inquiry. Following the CC's final report, an undertaking or order may be used to remedy the adverse effects on competition identified by the report. In the case of final orders, what an order can specify is set out in Schedule 7. Under FTA 1973, orders were made by statutory instrument; the OFT and CC will now have the power to make orders on their own authority. There is a different but similar enforcement regime for those cases where the Secretary of State has intervened on public interest grounds. This is set out in Schedule 6.

Powers exercisable before references under section 20 or 31

Clause 67: Initial undertakings: completed mergers

211.     This clause allows the OFT to accept undertakings from parties where it is considering whether to make a merger reference. This is a new power for the OFT. It allows the OFT to act before it has reached a definite conclusion on whether to refer the merger. The OFT can ask parties to undertake not to carry out any action that might prejudice the merger reference or the ability of the CC to act following the outcome of its inquiry. These undertakings are legally-binding.

Clause 68: Initial enforcement orders: completed mergers

212.     This clause permits the OFT to make an order where it is considering whether to make a merger reference. This is a new power for the OFT. The OFT is able to act before it has reached a definite conclusion on whether to refer a completed merger. The OFT can only make initial orders in respect of mergers that have been completed and where it has reason to believe that action is planned that could prejudice any subsequent investigation. This power is modelled on the interim order-making power in section 74 FTA 1973.

Clause 69: Undertakings in lieu of references under section 20 or 31

213.     This clause allows the OFT to seek and accept undertakings from one or more parties to a merger in place of a reference. The purpose of accepting undertakings is to allow the OFT (where it is confident about the problem that needs to be addressed and the appropriate solution) to correct the competition problem the merger presents without recourse to a potentially time-consuming and costly investigation. This provision mirrors the existing power in section 75G FTA 1973 for the Secretary of State to accept undertakings-in-lieu, but with responsibility transferred to the OFT.

Clause 70: Effect of undertakings under section 69

214.     This clause specifies that a reference on the same merger cannot be made if the OFT has accepted undertakings in lieu of a reference.

Clause 71: Order-making power where undertakings under section 69 not fulfilled etc.

215.     This clause allows the OFT to make an order when an undertaking-in-lieu is not being complied with. In such circumstances, the OFT could seek to enforce the original undertaking in the courts or decide to replace it with an order. The content of such an order is limited to the matters set out in Schedule 7 (see below). This provision transfers the Secretary of State's existing powers in section 75K FTA 1973 to the OFT.

Clause 72: Supplementary interim order-making power

216.     This clause is for use when an undertaking-in-lieu is not being fulfilled and the OFT would like to replace it with an order. It allows the OFT to act quickly to put in place an interim order while it prepares the main remedial order, including carrying out any consultation. The interim order can prevent the parties from taking any action that might prejudice the main order. This interim power is also available to the CC when they are considering replacing final undertakings with a final order.

Interim restrictions and powers

Clause 73: Restrictions on certain dealings: completed mergers

217.     This clause applies an automatic prohibition on the parties to a completed merger, once it has been referred, to prevent them undertaking any further integration without the consent of the CC. This is a new provision, which applies only to completed mergers. It has been introduced because in almost all merger cases the authorities seek to prevent such further integration either by securing undertakings or by making an interim order.

Clause 74: Restrictions on certain share dealings: anticipated mergers

218.     This clause applies an automatic prohibition on the parties to an anticipated merger to prevent them from acquiring any further shares in one another without the consent of the CC. This provision brings in the equivalent prohibition in section 75(4A) FTA 1973.

Clause 75: Sections 73 and 74: further interpretation provisions

219.     This clause provides technical clarification on what constitutes a share transaction for the purposes of clause 74 and sets out certain common definitions for both clauses.

Clause 76: Interim undertakings

220.     This clause allows the CC to accept undertakings from one or more parties to a merger that they will not take any action that might prejudice the eventual outcome of the merger reference. This is a new provision. Section 74 FTA 1973 allowed for an interim order (see below) to be made during the course of a reference but made no provision for accepting interim undertakings. In practice, undertakings have been sought and accepted during this period, but on a non-statutory basis. This provision makes such undertakings legally-binding.

Clause 77: Interim orders

221.     This clause allows the CC to make an order to prevent the parties to a merger from taking any action that might prejudice the eventual outcome of the merger reference. This provision is modelled on section 74 FTA 1973. It applies after a merger has been referred. An interim order can be made in respect of both completed and anticipated mergers.

Final powers

Clause 78: Final undertakings

222.     This clause allows the CC to accept final undertakings from the parties to remedy competition problems identified in its final report on a merger. This is based on the provisions on undertakings in section 88 FTA 1973.

Clause 79: Order-making power where final undertakings not fulfilled

223.     This clause allows the CC to replace final undertakings with an order where the parties are not complying with the undertakings. Any order made under this clause is limited to the matters set out in Schedule 7.

Clause 80: Final orders

224.     This clause allows the CC to make an order to remedy any competition problem identified in its final report on a merger investigation. This final order may contain any of the matters set out in Schedule 7.

Schedule 7: Provision that may be contained in certain enforcement orders

225.     This Schedule contains the list of matters that can be included in final orders for the purpose of remedying the adverse effects specified in the CC's report. This list is based on Schedule 8 of FTA 1973. It has been updated to reflect modern drafting conventions. Certain new remedies have also been added. These are remedies that experience has shown it would be useful to be able to call upon. The new remedies are as follows:

  • paragraph 10 - this allows the OFT to approve the buyer of a divested business and also to approve other conduct or matters.

  • paragraph 11 - the ability to require goods or services to be supplied to a particular standard or in a particular manner. This has been added to ensure that final orders can require parties to meet a certain quality of service or to continue to produce a certain range of goods. For example, it would allow an order to tell a bus company to maintain a certain frequency of service.

  • paragraph 14(k) - this allows for the appointment of a trustee to oversee the divestment of a business.

  • paragraph 19 - the ability to specify how certain information should be published. This has been added to ensure that orders can specify that information should be published on the Internet.

  • paragraph 20(c) - this allows the OFT to publish information that it is given.

  • paragraph 21 - this allows for provision to be made in the interests of national security.

Public interest and special public interest cases

Clause 81: Enforcement regime for public interest and special public interest cases

226.     This clause brings into effect the separate but similar enforcement regime for those cases when the Secretary of State has decided to intervene on public interest grounds. This regime is set out in detail in Schedule 6.

Schedule 6: Enforcement regime for public interest and special public interest cases

227.     This Schedule sets out the enforcement regime that applies for cases involving a public interest consideration. The regime mirrors that of the main regime, giving the Secretary of State equivalent powers to the CC and OFT. It includes provisions for the Secretary of State to make pre-emptive orders or accept pre-emptive undertakings (paragraphs 1 and 2); these are the equivalent of initial and interim orders and undertakings. The Secretary of State may accept undertakings in place of making a reference (paragraphs 3, 4, 5). Schedule 6 includes the supplementary interim order-making power set out in clause 72 (paragraph 6) and the same automatic prohibitions (see clauses 73 and 74) on further integration for completed mergers and on further share acquisition for anticipated mergers (paragraphs 7 and 8). Finally, the Schedule includes equivalent powers to accept final undertakings (paragraph 9) or make final orders (paragraph 10 and 11). Orders of the Secretary of State under Schedule 6 are made by way of statutory instrument and subject to the negative resolution procedure in Parliament (clause 116(4)).

Undertakings and orders: general provisions

Clause 82: Enforcement orders: general provisions

228.     This clause makes certain general provisions that apply to all orders.

Clause 83: Delegated power of directions

229.     This clause allows the person making an order to give directions to an individual or to an office-holder in any company or association. Failure to comply with such directions may lead to action before the courts.

Clause 84: Contents of certain enforcement orders

230.     This clause sets out the minimum contents of any final order or order to replace undertakings-in-lieu.

Clause 85: Subject-matter of undertakings

231.     This clause makes clear that final undertakings (which are legally-enforceable) can make provision for matters that cannot be included in final orders. Final undertakings differ from final orders in that the latter are limited to the matters included in Schedule 7.

 
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Prepared: 26 March 2002