The EEA Agreement, often described as the ‘Norwegian model’ extends the Single Market to Norway, Liechtenstein and Iceland. This Monckton Brexit Blog post describes the roles and functions of the EFTA Surveillance Authority and the EFTA Court.

To view the blog post written by Michael-James Clifton please click here.

In the light of Brexit, World Trade Organisation (WTO) law has attracted considerable attention. It has been viewed as a possible model governing the future relationship between the UK and the EU (should other options fail), as well as the future trade links between the UK and non-EU states (in the absence of specific trade agreements).

The question that Brexit raises is whether the application of WTO rules to the relations between the UK and the rest of the world would be automatic. Put differently, how does Brexit affect the WTO status of the UK?

The UK is currently a member of the WTO along with the EU. This is because, when the relevant agreements were concluded back in 1994, the UK had competence over parts of these agreements, while the EU had exclusive competence to conclude other parts, including the General Agreement on Tariffs and Trade 1994 (GATT 1994). Over the years, the scope of the exclusive competence of the EU within the WTO framework expanded to cover, amongst others, services (a move signalled by the Lisbon Treaty).

In the light of its co-existence with the EU in the WTO, the rights, commitments and concessions of the UK under WTO rules are currently tied in with those of the EU. Following Brexit, the UK will no longer be covered by the common schedules which the EU submitted for all its Member States. The application, therefore, of WTO law on the UK following Brexit will depend on resetting the terms of the British membership in the Organisation. This would be the case across a wide range of economic activities covered by the WTO agreements. The schedules of concessions and commitments on market access, for instance, as well as the UK’s list of exemptions from the MFN treatment obligation would have to be reset and resubmitted. They would also have to be accepted by the other WTO parties.

In the light of the above, a process of negotiation would ensue between the UK and the WTO parties. Given that the existing arrangements constitute part of a package deal, resetting their terms would not be a straightforward exercise: it would entail a complex process which could take time and the successful outcome of which would depend on the political will of the other WTO parties. This point has been made by the WTO Director-General Roberto Azevêdo on a number of occasions (for instance, in his interview in the Financial Times on 26 May 2016).

The WTO rules have been viewed as a safe fall back option for the trade relations between the UK and the rest of the world following Brexit. The application of these rules, however, would not be automatic. The process of resetting and negotiating the terms of British membership in the WTO would require considerable work.

Amid concerns that the referendum was conducted without the public having full knowledge of the facts, there have been increasing clamours for a second referendum. Last week, Sir Richard Branson reportedly had discussions with Theresa May to request a second poll – see here.

In yesterday’s press, lawyers have requested the Government to carry out a legislative process informed by an “objective understanding as to the benefits, costs and risks of triggering Article 50”.

According to Mrs May “Brexit means Brexit”.

But what does Brexit mean?

The problem with the referendum questions was that, whilst the Remain option was clearly framed in favour of the status quo, the Leave option was left open-ended without any discussion of the various exit models that might apply. Nor has there been any real assessment of how the various options marry with the economic risks inherent in the UK’s departure.

As a matter of common law, a public body is under a duty to take reasonable steps to obtain relevant information to enable it to carry out its public functions so that decisions are taken on the best available evidence at the time. That Tameside duty applies unless it is overridden by statute and is subject to judicial review on rationality. Regardless of whether Article 50 is triggered by prerogative or parliament vote, it would be sensible for the Government to carry out a prior assessment of the impact of Brexit and various options available that might minimise any collateral damage.

Under s.7(1) of the Enterprise Act 2002 (EA02), with its area of competence, the Competition and Markets Authority (CMA) is charged with advising and/or providing information to any Minister(s) in relation to any aspect of the law or any proposed change in the law. It can also make recommendations about the effect of a legislative proposal on competition within a market(s) in the UK for particular goods and services. Similarly, under s7(2) a Minister of the Crown can request the CMA to make proposals or provide information and the CMA has to comply with that request.

The CMA has issued guidelines (the CMA50 guidelines – issued with input from the OECD) about the considerations it will consider as part of impact assessments and its assessment of alternative proposals in order to select the most appropriate regulatory measure in a particular case. Those guidelines are designed to achieve the Government’s principles of better regulation, to ensure that decision-making is transparent, accountable and proportionate. They also ensure that policy makers select the most appropriate solution to achieve their objectives whilst, at the same time, mitigate any adverse effects so far as possible. Although those guidelines apply to specific regulatory interventions that affect businesses within a particular market, they serve as a useful analogy for wider legislative change that has similar disruptive effects.

The UK’s withdrawal from the EU will undoubtedly affect competition in numerous markets for goods and services, including but not limited to financial services, legal services, scientific and academic research and online services that have a cross-border dimension. Oliver Letwin has recognised the need for the Article 50 trigger to be delayed so that the Cabinet Office can prepare a “multi-dimensional” bottom-up review of the options.  Perhaps he should “Phone a Friend” and call on the CMA’s independent expertise for input?

As an area that has been a key EU competence, Brexit can be expected to have a considerable impact on competition policy.  That point applies in spades in the area of State aid, which is entirely based on the EU Treaties and which is centrally enforced by the European Commission.  As a matter of law, as soon as the United Kingdom ceases to be party to the Treaty on the Functioning of the EU, State aid law simply vanishes.

Or does it?

Over the next couple of weeks, David Unterhalter SC and I will blog about State aid post-Brexit.  In this piece, I will cover State aid control in Europe outside the EU – in what Michael Gove, during the referendum campaign, described as the “free trade zone stretching from Iceland to Turkey that all European nations have access to, regardless of whether they are in or out of the euro or EU” – a zone in which he promised the UK would stay. In a second piece, David will explain WTO anti-subsidisation rules.

The obvious unknown element in thinking about the post-Brexit future of the State aid rules in the United Kingdom is the attitude the UK Government will take to those rules.  In general, the United Kingdom has been strongly supportive of the State aid rules: and no UK Government since that of Mrs Thatcher has been in favour of State support to business in the absence of a good case for market failure.  The United Kingdom has an excellent record of compliance with the State aid rules.  Further, the consensus of responses to the Coalition Government’s review of the balance of competence between the EU and UK was that:

3.27 … there was broad agreement in principle on the current balance of competence on State aid, but some expressed concern about its limits, about real or apparent extension of EU competence into areas of domestic policy, and about the way State aid controls are exercised.

On the other hand, during the referendum campaign the Leave campaign argued, in relation to the problems affecting Tata Steel, that out of the EU the United Kingdom would have a free hand to grant subsidies on energy costs to support the steel industry.  It may perhaps be pointed out that some of those making that argument were not generally known for their support for interference with the free market: but it should also be noted that the current leader of the Labour Party (though in favour of remaining in the EU) stated that “There are certainly problems about EU state aid rules, which need reform.”  And the present author is aware that a number of Ministers in the present Government have seen the application of the State aid rules as an obstacle to projects that they wish to promote.  And, finally, the comment at the end of the paragraph quoted above refers to business concerns that the State aid rules can be taken too far, particularly in the area of taxation (with, perhaps, the current tax ruling cases such as Starbucks and Fiat in mind).

So it cannot be certain that the new Prime Minister – who it now seems certain will be Mrs Theresa May – would necessarily want to accept continuation of the State aid rules.  However, although this risks straying into political matters, the present writer considers that the new Prime Minister – given that she will be from a party that generally believes in the free market – is likely to regard accepting control on State aid as a relatively easy “give” in negotiations with the EU.  A further point is support of the “give” is that the State aid rules serve the useful purpose, within the United Kingdom, of controlling the ability of the devolved Governments – and in future, city regions exercising devolved powers – to grant State aid and of preventing ultimately futile “subsidy races” between different parts of the United Kingdom seeking to attract investment.

Moreover, a quick glance at the various arrangements between non-EU European states (from Iceland to Turkey) and the EU shows that State aid control is likely to be a  sine qua non of any agreement that can be described as providing access to the single market.

To start with Iceland.  Iceland, along with Norway and Liechtenstein, is party, as an EFTA State, to the EEA Agreement with the EU.  Article 61 of the EEA Agreement provides that:

61. Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.

2. The following shall be compatible with the functioning of this Agreement:

(a) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned;

(b) aid to make good the damage caused by natural disasters or exceptional occurrences;

(c) aid granted to the economy of certain areas of the Federal Republic of Germany affected by the division of Germany, in so far as such aid is required in order to compensate for the economic disadvantages caused by that division.

3. The following may be considered to be compatible with the functioning of this Agreement:

(a) aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment;

b) aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of an EC Member State or an EFTA State;

(c) aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;

(d) such other categories of aid as may be specified by the EEA Joint Committee in accordance with Part VII.

Resemblances between that provision and Article 107 TFEU – the TFEU provision on State aid – are entirely intentional: the provisions are more or less mirror images of each other.  The only difference that cannot be described as “mutatis mutandis” is the absence, in Article 61(3) EEA of an equivalent to Article 107(3)(d) TFEU, dealing with culture and heritage conservations (which was originally inserted into the EU State aid rules by the Treaty of Maastricht in 1993).  However, even there, the EFTA Surveillance Authority (“ESA”) has stated that it “acknowledges that state aid measures may be approved on cultural grounds on the basis of Article 61(3)(c) of the EEA Agreement”¹ .

Moreover, it is clear from the decisional practice of the ESA and the jurisprudence of the EFTA Court that Article 61 EEA is to be read in precisely the same way as Article 107 TFEU: and the EFTA Court will have regard to the jurisprudence of the CJEU in relation to such questions as what is an “undertaking”²  and as to selectivity in tax measures³.

In fact, the only real difference is that, in the EEA/EFTA States, State aid to the fisheries sector is dealt with in a separate regime (in Article 4 of Protocol 9 to the EEA) which requires the abolition of State aid to the fisheries sector but which is not subject to the enforcement powers of the ESA.

Subject to that fishy caveat, the enforcement powers of the ESA in the EEA State aid system are effectively the same as those of the Commission in the EU system.  The mechanism is, however, a bit more complex.  So, Article 62 EEA requires “constant review” of existing and planned measures in the EEA to ensure compatibility with Article 61, a task which in the EEA/EFTA States is allocated to the ESA.  The ESA then has, under Article 5 of the Surveillance and Court Agreement (“SCA”), the general duty to ensure the compliance of the EEA/EFTA States with their duties under the EEA Agreement, and Article 24 SCA then enumerates compliance with the State aid rules as an aspect of that duty and points to Protocol 3 SCA.  That Protocol effectively incorporates the equivalent provisions to Article 108 TFEU: it provides for the duty to notify new aid (Article 2), and an obligation not to put that aid into effect before clearance by the ESA (Article 3).  Other provisions of Protocol 3 SCA reproduce the main provisions of Council Regulation 659/1999 (the EU procedural regulation) as originally enacted providing, in particular, for recovery orders, suspension injunctions, limitation periods and information-gathering powers.  It is not yet clear whether the amendments to that Regulation (now consolidated into Council Regulation 1589/2015) will be adopted.

If the UK joined EFTA and successfully applied to become party to the EEA, therefore, little would change in the United Kingdom in relation to State aid apart from some re-labelling and the replacement of the Commission and ECJ by the ESA and EFTA Court.  There might even be some advantage in terms of speed, given that the EFTA Court is able at the moment to hear appeals much more quickly than the General Court (and to the relief of monolingual Brits, operates in English – one reason for its relative speed).

However, for various reasons the Government may decide that the EEA is not an option for the United Kingdom.  What is the position in relation to other agreements entered into between the EU and other European countries?

Mr Gove’s speech also referred to Turkey, at the opposite end of Europe to Iceland.  The key point to make about Turkey, in the current context, is that the 2007 Accession Partnership agreement between the EU and Turkey requires Turkey to adopt State aid rules and to set up an internal enforcement mechanism for them.  Indeed, that obligation dates back to the 1995 Customs Union agreement with Turkey.  Turkey’s compliance with those requirements has, to date, been less than entirely satisfactory .  But the obligation is clear.  Similar obligations are included in accession partnership agreements with Macedonia, Albania, Montenegro, Serbia, and Bosnia and Herzegovina.

So it is likely that any preferential trade agreement with the EU would involve the UK’s acceptance of at least an internal mechanism for controlling State aid.  There would, however, be a number of practical and constitutional issues to be resolved in setting up such a mechanism.  It would be possible to have an Act of Parliament binding all devolved administrations and public bodies not to grant State aid, and providing for enforcement by, say the Competition and Markets Authority.  But serious issues would arise where State aid arose as the result of primary UK legislation, particularly in the field of tax: the idea that the CMA could hold that UK tax legislation was invalid to the extent that it granted State aid and that it could order recovery against taxpayers benefiting from a tax break granted by statute would be, to put it mildly, a constitutional innovation.  Moreover, there might well be some resistance to the idea that the CMA should apply ECJ/EFTA Court jurisprudence into which the United Kingdom would have no continuing input: it is one thing for States on their way in to the EU, or EFTA States, to accept such a condition, but quite another for the condition to be accepted by a former EU/EEA Member State on the way out.

Nonetheless, as argued above, the United Kingdom is likely to find that the EU insists on a State aid provision in any agreement going beyond the WTO framework and that this is a relatively easy “give”.   The likelihood of the “give” is reinforced by the point that, as David will explain in his forthcoming piece, even the “WTO option” also contains obligations that bear some resemblance to State aid rules.

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¹ See §87 of its Decision on the financing of the Harpa concert hall in Reykjavik.

² See, e.g., Case E-5/07 Private Barnehagers v ESA (which referred, inter alia, to CJEU case-law on what is a “service” under free movement of services provisions).

³ See e.g. Joined Cases E-17/10 and 6/11 Liechtenstein and VTM Fund Management v ESA, at §§74-75.

4 Turkey 2015 report accompanying the EU Enlargement Strategy Communication, SWD(2015) 216 final, bottom of page 33.

 

Today’s developments mean that Mrs Theresa May is likely to become Prime Minister on Wednesday 13 July.

In her speech delivered this morning (before the news that Mrs Leadsom had withdrawn her candidacy for leadership of the Conservative Party), Mrs May made three points likely to be of particular relevance to readers of this blog.

Two of those points related to competition policy.  Under the heading “Putting people back in control” Mrs May referred to Kraft’s acquisition of Cadbury and expressed concern that “transient shareholders – who are mostly companies investing other people’s money – are not the only people with an interest when firms are sold or close. Workers have a stake, local communities have a stake, and often the whole country has a stake.”  Referring to Pfizer’s bid for AstraZeneca, she then went on to say that “A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.”  Then, under the heading “Getting tough on corporate irresponsibility”, she promised “to use – and reform – competition law so that markets work better for people. If there is evidence that the big utility firms and the retail banks are abusing their roles in highly-consolidated markets, we shouldn’t just complain about it, we shouldn’t say it’s too difficult, we should do something about it.”

Under that last heading, she also said this about tax: “We need to talk about tax. Because we’re Conservatives, and of course we believe in a low-tax economy, in which British businesses are more competitive and families get to keep more of what they earn – but we also understand that tax is the price we pay for living in a civilised society. No individual and no business, however rich, has succeeded all on their own. Their goods are transported by road, their workers are educated in schools, their customers are part of sophisticated networks taking in the private sector, the public sector and charities. It doesn’t matter to me whether you’re Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to your fellow citizens, you have a responsibility to pay your taxes. So as Prime Minister, I will crack down on individual and corporate tax avoidance and evasion.”

Those scanning her speech for further details as to Mrs May’s thinking on Brexit will not have found much: she repeated her commitment to take the United Kingdom out of the EU, but said nothing further as to the type of relationship with the EU she envisages in future.

To view the blog post written by Michael-James Clifton please click here.

International businesses carrying out M&A in Europe have consistently welcomed the “one stop shop” of merger control: the principle that larger deals are reviewed only in Brussels and not by multiple member states. This post (the first in a series on merger control) examines how Brexit may affect that principle, and the practical consequences for merging parties.

The one stop shop

Since 1989, the European Commission has had exclusive jurisdiction over mergers between parties that meet certain turnover thresholds. It examines the impact of those mergers on competition throughout the EU and EEA, and national competition authorities are prevented from applying national rules. This reduces the burden of multiple notifications, especially for international businesses, which could otherwise in principle face up to 31 separate procedures.

The EEA model

As noted elsewhere, it remains unclear what form the UK’s future relationship with Europe may take. If the UK were to adopt the current EEA model (the “Norway option”), the one stop principle would be largely preserved. The European Commission would continue to have exclusive jurisdiction where its turnover thresholds are met (Article 57(2) EEA), working in cooperation with the EFTA Surveillance Authority in cases with a strong EFTA element (see Protocol 24 to the EEA Agreement for details).

A few cases may be treated differently: certain marginal cases may drop out of the Commission’s jurisdiction, as UK turnover will no longer count towards the thresholds. On the other hand, businesses focussed in the UK and other EFTA States would benefit from a separate one stop shop in the form of the EFTA Surveillance Authority (Article 57(2)(b) EEA). However for the vast majority the position would be unchanged.

Outside the EEA

Absent membership of the EEA however, it seems to us very likely that the one stop shop principle would cease to apply to the UK on Brexit, with significant consequences for merging parties.

First, parties will have an additional merger authority to deal with, namely the CMA. This will increase costs and the risk of substantive divergence and may delay transactions. However, the issue is not unusual or insurmountable: companies commonly deal with one or more national authorities outside the EU as well as making an EUMR filing, and the UK will need to be added to the list. The CMA and the European Commission will presumably cooperate closely with one another.

Second, the UK will have the right to invoke public interest considerations in mergers without the constraints of Art. 21(4) of the EUMR. This might apply, for example, to the protection of R&D capability in the UK (cf. Pfizer / AstraZeneca) or the retention of manufacturing capability (cf. Kraft / Cadbury).

Third, the (occasionally) contentious requests for referrals back by the UK will be a thing of the past. The UK will have assured jurisdiction over cases such as Three / O2. We doubt the outcome of that case would have been different had it been considered by the CMA rather than the European Commission. But the change may make a procedural difference, with arguably a greater risk that any given case will be taken into phase 2. And, despite the high levels of alignment of substantive analysis, it might conceivably make a difference to the outcome in some cases.

Finally, parties will seek reassurance that the CMA has the resources and capabilities necessary for what is likely to be a significant change to its caseload. Current rules result in the UK typically considering only relatively smaller deals that are focused on the UK. Brexit without EEA membership would result in a significant increase in the CMA’s case load, along with a greatly increased focus on the UK aspects of large international deals. Andrea Coscelli, the CMA’s Acting Chief Executive, recently (read here) estimated this increase in workload at “at least 40 to 50%”, noting that the CMA would “evidently need to be ready and equipped to deal with such an increase if necessary”.

To view the blog post written by Michael-James Clifton please click here.