Impact of Brexit on Application of Competition Rules in the UK
July 13, 2016
by David Went
On Thursday 23 June, the UK narrowly voted to leave the EU. Formal negotiations to leave the EU, however, will not commence until the UK has invoked Article 50 TFEU. There is no requirement to invoke Article 50 by any particular date and, once invoked, the UK will have two years (which can be extended by unanimous agreement of all other EU Member States) to negotiate its exit agreement with the EU.
Until Brexit occurs, EU competition rules (relating to restrictive agreements, abuse of dominance, merger control, EU State aid, and public procurement) will continue to apply and be enforced without change. After Brexit, EU competition rules will continue to apply to EU commercial activities of UK businesses in the same way as today. The extent to which EU competition rules might continue to apply post-Brexit to commercial activities in the UK will depend on the trade deal negotiated between the UK and the EU and the extent to which the UK continues to have access to the EU’s single market, which has as its guiding principle the free movement of goods, services, capital, and persons.
As explained in more detail below, even absent a trade deal and so a complete “divorce” from the EU (which is an unlikely scenario but instructive to examine), the UK’s domestic competition law regime — to which successive UK governments have been committed — would give rise to much the same substantive laws as compared with EU competition rules in the areas of restrictive agreements, abuse of dominance, and merger control, although case law based on the single market imperative may be less relevant. While more freedom may be sought in the areas of State aid and public procurement with a view to being able to provide targeted support to UK businesses, the need for trade agreements with other countries, World Trade Organization (“WTO”) obligations, and a desire to avoid distortions of competition and inefficiencies, will no doubt place constraints on what the UK government can achieve. Also, there are indications that the UK may not be permitted to cherry-pick which EU rules apply in the UK if it desires continuing access to the EU’s single market.
What would a ‘divorce’ mean for competition law enforcement in the UK?
1. Commercial activities conducted in the EU
Even if there were a complete “divorce” from the EU, EU competition rules would continue to apply to EU commercial activities of UK businesses (at least where the activities satisfy the low threshold for an effect on intra-EU trade).
2. Restrictive agreements and abuse of dominance
If EU competition law did not apply after Brexit to restrictive agreements and abuse of dominance affecting the UK, existing equivalent UK competition rules, modelled on EU rules, would continue to apply but without any requirement on the UK’s competition authorities and courts not to deviate from EU precedent (assuming that the relevant provision in the Competition Act 1998 currently requiring this is repealed). While there might be divergence over time — for example, the UK had traditionally been more lenient towards vertical restraints — the core substantive law is likely to remain the same. The exception to this is the important line of case law whose reasoning is based on the single market imperative (for example, the law relating to parallel imports) and which may become less relevant if the UK were not part of the single market. In addition to this, the main impact would stem from potential parallel investigations (and consequent enforcement action and penalties) where agreements and commercial practices affecting not only the UK but also the EU might be subject to investigations by both the European Commission and the Competition and Markets Authority (CMA) or a sectoral regulator. Post-Brexit and with distinct jurisdictions, the CMA and European Commission would no longer coordinate to decide which authority was best placed to take forward an investigation so as to avoid the risk of parallel investigations.
Questions may also arise as to the extent to which claimants could rely on European Commission infringement decisions and claim for harm suffered in the EU in follow-on damages actions. Brexit might dampen an enthusiasm for such actions (including on the part of third-party funders) at a time when a burgeoning was expected owing to the newly introduced collective proceedings regime in October last year.
3. Mergers and acquisitions
As regards mergers and acquisitions, if the European Commission were not, post-Brexit, competent to review the UK aspects of mergers with an EU dimension, the UK aspects would be subject to separate review under the UK merger control regime by the CMA. In other words, the benefits of the one-stop-shop system in which mergers satisfying certain revenue thresholds within the EU are currently reviewed only by the European Commission (subject to the potential for referrals back to EU Member States, including at present the UK, where there is a serious impact at the national level) would no longer exist. As with commercial agreements and practices, this would lead to parallel merger investigations of cross-border mergers by the European Commission and the CMA. Also, given that UK turnover of merging parties would not count towards the EU revenue thresholds, this may result in less mergers being subject to European Commission approval (but with the possibility of referral requests to the European Commission where a merger was notifiable in at least three EU Member States) and more cross-border mergers being subject to UK review (but without the possibility of referring the UK aspects to the European Commission for one-stop-shop review). There is also the potential for divergence of substantive analysis as has happened on occasion as between the US and the EU (although of course a more lenient approach in the UK might not save a cross-border transaction prohibited or subject to remedies by the European Commission).
4. State Aid
As regards EU State aid, there is currently no equivalent UK legislation that would prohibit the UK government or public bodies from providing support (such as grants, loans, or tax breaks) to businesses in the UK. The UK is nevertheless a signatory to the WTO Agreement on Subsidies and Countervailing Measures that places certain restrictions on financial contributions to businesses by governments and public bodies. Subsidies that depend on export performance or the use of domestic over imported goods are prohibited outright, while subsidies directed at particular companies, industries, or regions can be challenged where the challenging country’s domestic industry suffers adverse effects from subsidised imports. Following an investigation finding that subsidised imports have caused harm, countervailing duties may be imposed by the country whose domestic businesses have been harmed, while there is also a mechanism for seeking to have subsidies withdrawn. Accordingly, even if EU State aid rules did not apply post-Brexit, the UK government and public bodies would not have unfettered discretion to provide financial support to UK businesses, although the WTO system is not as encompassing or prescriptive as the EU regime. Moreover, it is possible that the UK government might consider it prudent from a market economy perspective to introduce some form of national State aid controls aimed at avoiding distortions of competition and inefficient outcomes within the UK.
5. Public Procurement
EU public procurement rules are transposed into UK law and, absent a repeal, will remain in force post-Brexit. While the UK government might endeavour (subject to WTO rules) to introduce changes to enable public bodies to favour UK businesses in certain instances, the benefits of the rules in terms of driving efficiencies and value for money seem well accepted. Moreover, with a view to maintaining trading relationships with the EU and other major economies, the UK may itself become a signatory of the WTO Government Procurement Agreement, which has rules that are in any event similar in substance to the EU procurement regime.
It seems likely that the UK will have negotiated some form of trade agreement with the EU by the time of Brexit and that this may require some level of continuing compliance with EU competition rules even post-Brexit. The extent of application of EU competition rules post-Brexit will clearly depend on the trade agreement negotiated and the level of access the UK will continue to have to the EU’s single market. It seems unlikely that there will be much change in the area of restrictive agreements, abuse of dominance, and merger control except that case law reasoning based on the single market imperative may become less relevant and companies may be subject to parallel investigations if the EU’s jurisdiction does not extend to the UK after Brexit. Given that successive UK governments have recognised the benefits of competition law (including in the area of State aid and public procurement), it is not inconceivable that UK negotiators may be willing to concede continuing application of EU competition rules, but perhaps seeking some derogations in the area of State aid and public procurement, if this assists with other aspects of the Brexit negotiations and depending on the political goals.
David Went specialises in all advisory and litigation aspects of Competition and EU Law.