We cover below the prospective risks (and, where relevant, opportunities) presented by Brexit in the connected fields of Competition Law (Antitrust), Public Procurement and State Aid.
Each of these areas derive primarily from EU law (in the latter case, directly from the Treaty on the Functioning of the EU itself).
Competition Law (Antitrust)
Antitrust protects the process of competition within markets for goods and services. Merger control laws allow regulators to review and, if appropriate, prohibit proposed take-overs which would leave insufficient remaining competition within affected markets.
UK Competition Law is principally laid down by the Competition Act 1998 and the Enterprise Act 2002. The main sources of EU Competition Law are Article 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”) and the EU Merger Regulation. While a member of the European Union, the UK applied both UK and EU Competition Law.
Substantively, UK and EU antitrust rules are similar, the main difference being that national competition law focuses on domestic situations, whereas EU competition law is limited in application to situations with a cross-border impact. Each sets of laws prohibits anti-competitive agreements and abuse of dominant market positions.
Following the end of the transition period, only UK competition law will be enforced by UK courts and regulators. Only domestic competition law provisions will apply to both pre and post Brexit UK conduct. EU competition rules will however still apply to agreements / transactions of UK businesses that also have an effect within the European territory.
Even in these scenarios, the EU Commission’s power of investigations will be reduced, as on-site investigations will not be allowed. Starting from 1 January 2021, it is likely that we will see an increase of parallel investigations by UK and EU authorities. In the event of a “no-deal Brexit”, the only businesses affected will be the ones subject to ongoing investigations or the ones conducting merger transactions. Organisations subject to antitrust controls should take legal advice on compliance with parallel investigations.
Significant Impact post Brexit
A key element of EU Merger Control is the “one stop shop” principle. National competition regulators are not permitted to review a merger which has an “EU dimension”
With regards to the UK, the EU currently has exclusive jurisdiction to review those mergers which meet the jurisdictional tests of the EU Merger Regulation. If a proposed deal exceeds those thresholds, the jurisdiction of the CMA is generally excluded (unless the CMA applies for a referral back of the merger, for example, on the basis that it could impact UK national security).
This situation will change after the transition period comes to an end. The CMA will be able to review mergers which fall within the EU Commission’s remit. This opens the possibility for businesses of having to seek merger control clearance from both the UK and the EU regulators. It also introduces the prospect of acquisitions being cleared by one regulator but blocked by another.
Businesses which are carrying out a merger or acquisition at the end of the transition period may be unsure to which regulator (if not both) they should file a notification. Guidance issued by the CMA and EU Commission confirms that in general the CMA will not have jurisdiction over any merger which has been filed with the Commission prior to the end of the transition period.
Another point of note relates to the calculation of turnover of the merging businesses when determining whether a particular merger will cross the jurisdictional thresholds of the EU Merger Regulation. Is turnover generated within the UK relevant to the calculation? The short answer is that if a deal has been filed with the EU Commission before the end of the transition period, the “one stop shop” principle will continue to apply, avoiding the need to seek clearance with the CMA as well.
Potential Significant Impact post Brexit
There is currently a high degree of similarity between UK and EU antitrust rules. That is not expected to change in the short term after the transition period comes to an end.
Chapter I of the Competition Act 1998 and Article 101 of the TFEU prohibit anti-competitive agreements between businesses such as price-fixing, market sharing and bid-rigging. Chapter II of the Competition Act 1998 and Article 102 TFEU outlaw abusive conduct by businesses in a dominant position (for example, a monopoly supplier charging customers excessive prices because they have no alternative providers).
Section 60 of the Competition Act 1998 provide that the Chapter I and Chapter II prohibitions of the Competition Act 1998 be interpreted so far as possible consistently with the approach under Articles 101 and 102 TFEU respectively. This creates increased certainty for business, as they can tailor agreements and policies which are more likely to work at a national level and also within the EU.
Section 60 will be replaced at the end of the transition period by a new Section 60A, which releases UK Courts from the requirement to interpret domestic competition law consistently with EU Competition Law. They remain at liberty to have regard to EU rulings should they wish. However, they will no longer be able to refer questions to the EU Court of Justice in Luxembourg. This creates the possibility of divergence between UK and EU Competition Law over time.
As a regulator, the CMA anticipates that it will tackle more complex and higher profile competition investigations as a result of the UK’s full withdrawal from the European Union. Currently, the CMA is a member of the European Competition Network, a network of competition law regulators from different member states, which liaise and coordinate cross border competition law cases.
Co-operation with other European regulators will be more limited after the end of the transition period. For example, the UK will not have the same ability to share and receive information between regulators, particularly where that includes personal data. There may be a growth in “parallel investigations” where a business is subject to investigations from the EU and UK simultaneously, whereas previously the EU may have delegated enforcement of both sets of laws to the CMA.
Following the UK’s departure from the EU, we see the CMA having a freer hand to choosing and applying UK competition law to those cases with a UK nexus which are of interest to it. The regulator will be liberated from the responsibility of enforcing EU competition law, with the possible consequence that it may spend more time analysing competition in local, domestic markets within the UK. This could mean a greater number of businesses fall under its scrutiny than was previously the case. The CMA is clearly showing an interest in Google and Facebook and potential anti-competitive conduct by those entities, for example, in relation to the way they commercially exploit user data.
Block exemptions are another important feature of EU Competition Law and provide a degree of certainty for businesses that their commercial agreements – structured to comply with the conditions of the block exemption – will not infringe competition law. These will remain in place in the short term but that may change over time, which would bring unwelcome uncertainty.
Our advice to clients that it is more important than ever to have in place an effective compliance program. This should cover issues such as:
- ensuring that the company avoids any suggestion of collusive behaviour (for example, price fixing with competitors);
- what to do in the event of an investigation by a competition regulator. “Dawn raids” can be stressful and unpleasant. Swift and appropriate steps must be taken to protect the company’s position and defend its interests, avoid heavy fines and ensure the business can focus on productive commercial activities. Businesses should ensure they are able to take on parallel investigations;
- avoiding anti-competitive provisions in leasing agreements. For example, agreements to rent units in shopping centres or malls frequently grant the tenant some form of immunity from competition. It may be for instance that a retailer would provide that no other similar types of retailer could establish there. Such a provision could fall foul of competition law if it is unreasonable in scope or duration;
- ensuring supply agreements are compliant. Agreements with suppliers of raw materials for example, could risk being declared ineffective if they contain exclusivity clauses that are too long or any other term that prevents or restricts competition;
- avoiding any abuse of dominance, for example, in local markets or in relation to “essential facilities” such as ports, air and cargo terminals and other transport hubs; and
- commencing or defending competition law claims in the Courts.
Lower Impact post Brexit
Whilst there are challenges, increased competition policy enforcement at home could also present an opportunity for businesses. It may be easier to draw the CMA’s attention to anti-competitive conduct which is preventing it from expanding its operations. It could be for example that a business is locked out of areas where it would like to establish operations by exclusivity clauses in leases, national dominant businesses or long-term supply arrangements.
Over the longer term, the UK may move to shape its competition law in a way which business considers more helpful. For example, many businesses consider the EU rules around distribution to be too restrictive in a number of areas (although there are others who consider the same rules not to go far enough to restrain anti-competitive conduct). The repeal of S 60 of CA provides scope for the rules to be refreshed in a number of important areas.
Aside from providing advice on specific situations, we also provide training on competition law to our clients. This assists in ensuring that their personnel are aware of the business’ legal obligations and avoid any behaviour that could constitute an infringement.
The EU’s rules on state aid are highly controversial and have been a sticking point throughout the negotiation of the agreement on the future relationship between the UK and EU. Inability between the two parties to reach an agreement on these areas threatens to prevent a deal being reached on future partnership with the EU.
In general, the TFEU prohibits Member States from granting subsidies or other financial advantages from government bodies to private businesses where this would risk distorting competition and is likely to affect trade between member states.
Article 107 of TFEU defines as State aid “an advantage in any form conferred on a selective basis to undertakings by national public authorities”. Examples include direct subsidies to business, sales of public assets at an undervalue or purchases by the public sector of assets at an overvalue.
Under certain circumstances, subsidy support may be authorised following a notification of the aid scheme to the EU Commission. If the Commission considers the aid to be compatible with the TFEU, it may clear the scheme or clear it with conditions.
Prior to the occurrence of Brexit, the EU rules on state aid prevented the UK from bailing out struggling industries such as steel and to shield such sectors from the challenge of competition from cheaper, imported alternatives. The COVID crisis has highlighted the relevance of state intervention in the market. Governments have sought to intervene, for example, to support the continuation of jobs in the private sector and to stave of the collapse of businesses hard hit by the pandemic, notably those in the hospitality sectors.
The Government has laid before Parliament the The State Aid (Revocations and Amendments) (EU Exit) Regulations 2020, which will enter into force on 1 January 2021 and lay the foundations for the post-Brexit state aid enforcement regime in the UK.
Significant Impact post Brexit
The most significant change relates to the body in charge of enforcement. Whereas that is currently the EU Commission, going forward, it is the CMA which will police the UK’s state aid rules.
Potential Significant Impact post Brexit
Of potential significance is the form the law will take and the potential for relaxation of the current stringent legal standards. At the time of writing, the extent to which the EU State aid rules will apply to Britain is very much an open question. It is also a sensitive one. The UK has insisted Britain takes back control over its subsidy regime. The EU is anxious to ensure that the UK adheres to the same subsidy standards in order to avoid UK firms having an unfair advantage in the EU single market.
As part of the Protocol to the EU-UK Withdrawal Agreement, Northern Ireland will continue to be subject to EU State aid rules. This is necessary in order to keep open the land border with the Republic of Ireland (which forms part of the European single market). The UK has angered the EU by seeking to retain the right within the UK Internal Market Bill to override the EU subsidy rules in Northern Ireland. The EU considers this to run counter to the UK’s previous undertakings contained within the Withdrawal Agreement. The move has triggered legal proceedings against the UK.
After Brexit, UK will become a full member of the World Trade Organisation (WTO) in its own right (currently it is represented by the EU in trade negotiations). The WTO agreement lays down specific provisions on subsidies, containing mechanisms allowing states to protect their domestic industries where they face unfair competition from overseas goods that have benefited from certain subsidies from their home governments. The WTO’s rules on subsidies are effectively the bare minimum standard with which the UK would need to comply in order to trade with other WTO members on a liberal basis.
The WTO agreement does two things: it disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. It says a country can use the WTO’s dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Alternatively, the country may launch its own investigation and ultimately charge extra duty (known as “countervailing duty”) on subsidised imports that are found to be hurting domestic producers.
In many respects, the WTO regime is far more benign than the EU’s own system. For example, its scope is narrower and would exclude many types of support covered by the EU’s definition of aid.
Lower Impact post Brexit
Following Brexit, the UK will no longer be bound by Article 107. That may give the Government a freer hand to intervene in the market and to pursue strategic objectives such as supporting start-ups or businesses that are of national importance. Prior to the COVID crisis domestic steel production should be supported, because of the central importance of this metal in the manufacturing of defence equipment and infrastructure.
If the EU concludes a deal on the future relationship with the UK, that is likely to require the UK to commit to observing the same essential features of the EU State aid rules. It is unlikely that it will countenance competition from businesses which have the unfair advantage of taxpayer funded financial support. In its trade deal with Canada, the EU has required specific provisions on state subsidies. For example, there is a non-binding consultation mechanism, whereby parties must endeavour to minimise adverse effects of the subsidy on the complaining party’s interests.
The EU rules on public procurement regulate the way in which government bodies purchase works, services and supplies. They mandate that public contracts above a certain value threshold must be subject to a transparent, open and fair tender process which is open to all interested businesses across the Union. In particular, they provide that above threshold contract opportunities must be advertised in the Official Journal of the European Union and prohibit discrimination against businesses from other parts of the EU.
The most important procurement thresholds are currently £4,733,252 for works contracts and £189,303 for contracts for the supply of services or goods. Contracts below this threshold must still be subject to a lighter touch form of tender where they could foreseeably attract cross-border interest from other parts of the EU.
Public buying across the European Union accounts for around 19% of the continent’s GDP. Following Brexit, the UK will no longer be required to implement the EU’s rules which are currently reflected (principally) in the Public Contracts Regulations 2015 and the Utilities Contracts Regulations 2016.
The Government has laid before Parliament the Public Procurement (Amendment Etc.) (EU Exit) Regulations 2020. These Regulations make a number of alterations to the existing procurement rules with a view to adapting the legal system to the realities of life outside the EU (for example, by removing references to EU institutions from the statute books).
Significant Impact post Brexit
The public procurement rules ensure that private sector suppliers are more likely to become aware of opportunities and provide guarantees of fair treatment and transparency which ensure their considerable investment in the process is not undermined by nepotism, corruption, protectionism, favouritism or incompetence. Where things go wrong, they can and do go to court to have contract awards overturned or to seek damages for compensation.
Procurement is ultimately about competition. It opens the way for rival firms to compete against each other for opportunities, thereby bringing down the cost of public contracting overall and driving up the quality of works, services and supplies. These benefits, which are difficult to quantify in monetary terms, make it likely that the public procurement rules will not simply be abandoned following the UK’s departure from the EU.
Procurement is also, however, about international trade, politics, reciprocity and occasionally protectionism. Access to government contract opportunities is one of the most important part of any negotiation of a free trade agreement. The EU and UK are both keen to ensure that their domestic firms do not lose access to bid for government opportunities. Neither though is likely to open up its domestic markets to the other than the other is willing to grant access to its own markets.
The UK has signed up to the General Procurement Agreement (GPA), a plurilateral arrangement set up by the World Trade Organisation, of which the EU is also a member.
The fundamental aim of the GPA is to secure mutual opening of government procurement markets among its parties. As a result of several rounds of negotiations, the GPA parties have opened procurement activities worth an estimated US$ 1.7 trillion annually to international competition (i.e. to suppliers from GPA parties offering goods, services or construction services).
Like the EU procurement rules, the GPA establishes rules that require open, fair and transparent conditions of competition in government procurement (although these are less prescriptive than the EU’s own rules). The UK’s accession to the GPA is good news for businesses in the UK, on the one hand and the EU on the other. UK businesses will retain some access to government contract opportunities in the EU and vice versa.
The GPA, however, is a more principles-based legal instrument than the EU Directives. Notably, it does not cover contracts awarded by “utilities” (including former state monopolies in the rail, energy, postal and airport sectors). EU procurement law requires many of these bodies to open up purchase opportunities to competition. The GPA also omits defence contracts from its scope. Opportunities in these lucrative areas could therefore be lost absent any agreement to the contrary in the UK-EU agreement on future partnership.
It is likely that following the end of the transition period, UK contractors will lose some of these protections for certain types of contracts bid by EU public bodies. This includes for example, the right to bid for defence contracts and certain contracts tendered by former state monopolies in the EU. Where UK bidders are admitted to bid for these opportunities, they may find it more difficult to enforce their right to a fair tender if things go wrong.
The level of access to the UK market which is granted to non-UK firms in the post-Brexit procurement system will, to a significant extent, depend upon whether the two sides successfully negotiate an agreement on the terms of their future partnership (and assuming they can, the terms of that agreement). Each side is likely to be keen to maintain access to the other’s public contracting markets and, in our view, it is more likely than not that this will be reflected in any ultimate trade deal with the EU (the EU has included procurement liberalisation provisions in its trade agreements with Canada and South Korea).
The GPA will not require the UK to put out to competition procurements which are below threshold. As mentioned above, the TFEU requires these opportunities to be subject to some form of competition where they are of potential cross-border interest. It is possible that the number of competitive tenders overall will fall therefore as Government may decide in some instances to award smaller contracts directly rather than through a competitive process.
Potential Significant Impact post Brexit
For private sector suppliers, the procurement rules are both a blessing and a curse. The procedural safeguards undoubtedly mean bidders are forced to spend more money on tendering than they would like, filling out more paperwork and disclosing significant amounts of information.
Many see a potential departure from EU public procurement law as an opportunity. They complain that public procurement rules are too cumbersome and see Brexit as an opportunity to streamline or even abolish them completely, thereby making substantial savings. One EU Commission study estimated that procurement costs accounted for around 0.7% of contracts let through the process. In the UK, that could equate to £240 billion per year.
Equally, the UK government is likely to see Brexit as an opportunity to make the rules more flexible and less onerous to follow. It will no longer be bound by the EU’s rules on public procurement, which are laid down in seven key Directives. It will be free to adopt a lighter model. It may also seek to reduce the scope of the procurement rules so that fewer purchasers are covered.
We will be interested to see, for example, whether the rules on utilities procurement are preserved in the medium to long-term in the UK; “utilities” include many operators of infrastructure such as ports and airports which are run commercially. Some commentators consider that there is no rational basis for regulating the purchasing activities of these enterprises, thereby increasing their operating costs and subjecting them to red tape. As mentioned above, the GPA makes no mention of utilities procurement, meaning UK companies may be shut off from certain infrastructure contracts in the EU in the absence of express agreement between the EU and UK.