This article first appeared in the Law Society Gazette.
Irish and other EU businesses continue to grapple with the many challenges resulting from Brexit. Indeed, the UK’s break from the EU is likely to have significant implications for EU companies doing business in the UK including buying UK-based companies and/or competing for contracts from UK public bodies/utilities.
Notwithstanding the withdrawal of the UK from the EU on 31 January 2020, the true impact of Brexit did not begin to become apparent until after the end of the transition period eleven months later. Thankfully, after an often-tortuous series of discussions, the EU and the UK eventually agreed a Trade and Cooperation Agreement (TCA) on 24 December 2020. This meant the potentially dire economic consequences of a ‘no-deal’ Brexit were avoided. State aid or public subsidy control, one of the major bones of contention between the two negotiating teams, is the subject of lengthy treatment in the TCA. While by no means as controversial a subject in the EU-UK talks, public procurement is also addressed in detail by the TCA. In contrast, the TCA contains scant provision regarding both merger control and competition rules. (The TCA’s arrangements regarding all four areas are contained in its Part Two dealing with Trade, Transport, Fisheries and Other Arrangements). Irish (and other EU businesses) need to acquaint themselves with how any changes in each of these four areas might affect their respective dealings in the UK.
A key priority of the EU during the negotiations was to ensure that EU-based businesses would not face competition from UK companies in receipt of State subsidies that do not conform to EU rules on State aid. By contrast, the UK wanted a clean break from the application of EU law insisting that it would not be bound by either evolving EU State aid rules or by the Court of Justice of the EU’s (CJEU) interpretation of same. After lengthy engagement, partly played out in the media, a compromise was reached whereby the basics of EU State aid law will apply in the UK (with special provision for Northern Ireland) albeit outside the CJEU’s remit. In addition, the UK will create its own independent subsidy control regime. (The relevant TCA provisions are contained in Part Two, Title XI: Level playing field for open and fair competition and sustainable development, Chapter three.)
While the UK is required to establish its own subsidy control regime, the TCA does stipulate some of its key features. The UK has abandoned the term “State aid” and, instead, targets the grant of a “subsidy”. That said, the definition of “subsidy” is similar to the EU’s definition of State aid contained in Article 107(1) of the Treaty on the Functioning of the EU in that the former seeks to prevent financial assistance from the UK’s resources, capable of conferring an economic advantage that might affect trade between the EU and the UK. To determine whether a particular subsidy will undermine EU-UK trade, the TCA identifies six “principles”. These conditions are broadly similar to the evaluation criteria currently used by the European Commission such as the avoidance of over-compensation, proportionality and overall positive economic effect, in assessing potential aid measures.
Like the EU State aid regime, the TCA provides for specific rules for certain industries/sectors such as financial services and air transport. Similarly, the TCA makes special provision for certain policy objectives such as rescue/re-structuring support and export subsidies. The TCA also requires the UK ultimately to introduce a de minimis exemption of up to, approximately, EUR 390,000 to a single undertaking over three years. However, the TCA does not give specifically address industries such as road/rail passenger transport and airports and activities like research, development and innovation that each benefit from special treatment under EU State aid rules.
Under EU rules, State aid cannot be granted unless it falls within one of the block exemptions or is, otherwise, approved by the European Commission. The TCA does not replicate either possibility. Theoretically, the UK may, therefore, adopt a regime that does not require prior approval for a subsidy to be granted. Enforcement in both regimes may also diverge. EU State aid has a well-established practice whereby aggrieved third parties may complain to the Commission regarding support granted to their respective competitors. In addition, the Commission’s decisions may be and are often challenged before the CJEU. While the UK has free rein to adopt whichever enforcement mechanisms it prefers, the TCA suggests that judicial review will be the primary route that aggrieved third parties may use to challenge the grant of subsidies to their business rivals.
The UK has some thinking to do before its subsidy control regime is fully up and running. Downing Street will want to avoid disadvantaging UK businesses by making it more difficult for them to receive State support than their EU-based competitors. Moreover, the identity of the independent body to administer the new UK subsidy regime and its functions have not yet been decided. At one extreme, this body may simply have an advisory role including issuing ex post observations on a relevant subsidy. At the other extreme, it may have an enforcement role, particularly in issuing compliance advice before subsidies are granted and/or dealing with complaints from the business rivals of beneficiaries as a possible alternative to judicial review.
Finally, under Article 10 of the Northern Ireland Protocol to the so-called Withdrawal Agreement, the entirety of EU State aid laws/guidelines will apply to the UK in respect any measure that affects relevant trade between Northern Ireland and the State/the rest of the EU. This means that pan-UK subsidies may fall under EU State aid rules where, for instance, they benefit a Belfast-based firm doing business in Dublin.
The TCA’s provisions on the award of contracts by both public bodies and utilities are contained in its Part Two, Title VI: Public procurement. Indeed, the TCA goes beyond the commitments of both the EU and the UK in the World Trade Organisation’s Government Procurement Agreement (GPA).
The GPA applies in most of the world’s major market economies such as the EU, US, Japan, South Korea, Switzerland, Canada and, since 1 January 2021, the UK. The GPA requires its signatories to guarantee fair and transparent public procurement processes while obliging them to treat suppliers based in other signatories in the same manner as its domestic businesses for any relevant award procedure.
The TCA extends the commitments of both the EU and the UK beyond the GPA. Suppliers in both jurisdictions have the right to compete for ‘above threshold’ contracts in gas/energy distribution and in the provision of hospitality, real property, education or telecommunications services. In addition, relevant contracts to be awarded by private entities acting as utilities must also be open to competition throughout the EU/UK.
The TCA also goes further than the GPA in seeking to ensure that award processes are, to the extent practicable, run electronically. Moreover, where a candidate needs to demonstrate prior knowledge, such experience does not need to have garnered in territory where the contracting entity is based, be it the EU or the UK. The TCA also requires both jurisdictions to maintain effective domestic dispute resolution mechanisms. Any of the protections granted by the TCA and the GPA may not be relevant, should an EU entity incorporate a subsidiary in the UK or, indeed, partner with a UK-based company before participating in any relevant award process.
The TCA’s provisions, contained in Part Two, Title XI, Chapter two, on both merger control and competition law are succinct. Each of the EU and the UK commits under Article 2 of Chapter two to maintain their own individual rules governing transactions which may have significant anti-competitive effects. This means that the EU Merger Regulation (EUMR), with its one-stop shop rule, no longer applies in the UK. Accordingly, from 2021 onwards, transactions may need to be notified under both the EUMR and UK merger control rules.
The latter regime is a rare beast in that it does not provide for mandatory notifications. In other words, parties are free to complete their transactions without clearance from the UK Competition and Markets Authority (CMA). That said, the CMA has a statutory duty to monitor merger activity allied to the power to review unnotified transactions within four months of completion. This means that the UK is creeping toward a de facto compulsory notification regime with fewer and fewer merging parties willing to take the chance that their potentially controversial transactions will go un-noticed by the CMA. Indeed, UK merger control’s ‘25% share of supply’ screening test allows the CMA wide discretion to ‘call in’ transactions that may give rise to competition concern. In addition, while an EUMR notification does not require the payment of an administrative fee, a fee of up to GBP 160,000 may be payable to the CMA depending on the extent of the UK turnover of the target business.
As UK turnover is no longer counted as EU turnover for the purposes of the EUMR’s alternative jurisdictional tests, allied to the fact that many multi-national companies have significant business activities in the UK, the number of mandatory notifications to the Commission under the EUMR is likely to fall. In such a scenario, merging parties will need to consider whether their relevant transaction requires a notification under national merger control rules of the relevant European Economic Area countries including to our Competition and Consumer Protection Commission (CCPC) and/or to the respective national competition authorities (NCAs) in other EU Member States. The impact of Brexit is thus likely to trigger an increase in the number of parallel notifications.
Although the TCA deals with competition law in a laconic fashion, the EU and the UK are both required to maintain effective laws to prohibit both anti-competitive arrangements and abuses of a dominant position. For the time being, the status quo remains – what is likely to be unlawful under EU competition rules is also likely to be unlawful under UK competition rules. Moreover, the UK courts and the CMA are required to interpret UK competition law in line with EU competition precedent up to 31 December 2020. However, the UK authorities are not required to follow EU competition case-law after that date. Thus, divergences are likely to emerge over time, complicating the compliance efforts of businesses operating in both the EU and the UK. Indeed, like merger control, the potential for parallel Commission and CMA investigations of the same conduct is real provided it effects trade both between EU Member States and, also, in the UK. By extension, the activities of a company or companies could be investigated by both the CCPC for a potential breach of Irish competition rules and by the CMA for a possible infringement of UK competition rules. However, the TCA does require the Commission, the NCAs and the CMA to co-ordinate on related activities where appropriate and, to the extent permitted by law, exchange information.
What has changed for Irish and other EU businesses?
In addition to dealing with increased ‘red tape’ for imports from or exports to Great Britain, EU businesses need to be aware of other impacts of Brexit that are likely to increase their costs and/or additional management time. Whether an Irish company is buying a UK-based business rival or one of its competitors is in receipt of UK Government support, whether this company is competing for a UK public or utilities contract or just doing business in the UK, it will need to be aware of the potential additional legal complexities caused by the departure of our near neighbour from the EU and its single market.