DMCC & DMU: In Detail
What changes will the DMU reforms bring?
Once the DMU is a statutory body, it will introduce and enforce a new regulatory framework for digital markets.
This article will specifically explore the following key reforms:
SMS;
PCIs; and
The New Merger Regime.
SMS
What is it?
The Digital Market Taskforce defines Strategic Market Status (SMS) as “a firm that has substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position’.
The DMU will have the power to designate SMS to firms with ‘substantial and entrenched’ market power in a digital activity. Once a firm is designated with SMS, it becomes subject to specialised regulations and Codes of Conduct that the DMU has put in place. This will give the DMU significant powers over the company, allowing it to influence core business decisions.
As of right now, the legislation only applies to firms with global turnover exceeding £25 billion or UK turnover exceeding £1 billion.
What are the intended consequences of SMS?
By targeting firms with significant market power, the SMS may likely encourage fair competition. By controlling certain activities of large tech giants, the DMU will likely reduce monopolistic behaviour. This will help give startups the space to grow without being overshadowed by dominant players.
How could SMS potentially impact startups?
Many UK startups are adopting digital strategies in traditional sectors such as banking, insurance, pharmaceuticals, law, human resources, etc. Startups are using digital methods to innovate and disrupt these industries, which could make startups potential targets of the DMU.
Secondly, many startups get acquired by larger companies who want their innovative technology to improve their own operations. However, if startups are labelled with SMS due to digitisation, it could make it harder for them to find buyers.
PCIs (pro competitive interventions)
Another key power of the DMU will be PCIs.
The DMU will have the right to take action if a company has too much control over a specific digital market.
The DMU can initiate a PCI investigation if it has reasonable grounds to believe that certain factors related to a digital activity are negatively impacting competition in the UK.
After the investigation, the DMU can issue orders to promote fair competition, which can include making the company change its behaviour or even splitting up parts of the business to create more competition.
The New Merger Regime
The New Merger Regime requires certain companies with SMS to report specific types of mergers to the Competition and Markets Authority (CMA). This reporting is mandatory and must be done before the merger is finalised.
The transactions that must be reported include cases where the shares or voting rights of an entity in the SMS group increase to certain thresholds (e.g., from less than 15% to 15% or more), and the consideration for the merger is at least £25 million.
Currently, if a potential merger has an over 50% chance of harming competition, the CMA can get involved. The DMU wants to lower this standard for firms with SMS by using a "realistic prospect" test. This change could give the CMA more power to block acquisitions they believe could harm competition, even if the likelihood is less than 50%.
This could have some potential impact on the startup world.
Many successful startups are acquired by larger companies. Acquisitions are important because they allow venture firms and investors to raise funds for future investments in new companies. If new M&A rules prevent larger companies from acquiring startups, it could disrupt the ecosystem and have unintended consequences for the UK's thriving startup community.
Author: Natalie Achou -
Author: Natalie Achou -
In partnership with
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Coadec, 'An Investor Perspective' (The Digital Markets Unit: On the Side of Startups? , September) <2021> accessed 25 July 2023
Nayantara Ravichandran, 'What does the new regime mean for investments in UK tech companies?' (DMU Insights #6: , 1st June) <https://techinsights.linklaters.com/post/102ifto/dmu-insights-6-what-does-the-new-regime-mean-for-investments-in-uk-tech-compani> accessed 25 July 2023
Verity egerton-doyle, 'Tech Insights' (The (not so) new frontier: long-awaited digital, competition and consumer law reforms finally reach the UK Parliament, 26th April) <https://lpslivecms.linklaters.com/en/insights/blogs/linkingcompetition/2023/april/the-not-so-new-frontier_long-awaited-digital-competition-and-consumer-law-reforms> accessed 25 July 2023
