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Merger between Suppliers of Toddler Electronic Learning Toys and Child Laptops/Tablets Comes under In-depth UK Competition Law Review

On 30 August 2016, the Competition and Markets Authority, which is the UK competition authority, announced that it has opened an in-depth review into toy company VTech Holdings Limited’s acquisition of rival toy supplier LeapFrog Enterprises Inc. The report of the in-depth review is expected by 13 February 2017.

On its website, VTech is described as the creator of the e-Electronic Learning Products (ELP) category. The website further describes VTech as a global leader of age-appropriate learning products. LeapFrog states on its website that it creates educational solutions for children.

Hong Kong businesses operating in the EU may be interested to know more about the UK proceedings in this case so far, as its ramifications may affect them in the future. VTech Holdings Limited acquired LeapFrog Enterprises on 4 April 2016. There is no duty to pre-notify mergers to the Competition and Markets Authority under UK Law. However, even if a merger between two companies has been completed, an initial enforcement order from the Competition and Markets Authority can be issued and the authority can investigate how the merger can affect competition in the UK.

It is important for traders to bear in mind that the issue of an enforcement order will occur when (a) the Competition and Markets Authority has reasonable grounds for suspecting that the merger will result in two or more enterprises ceasing to be distinct if the merger is carried to effect; (b) the Competition and Markets Authority is considering whether a relevant merger situation has been created and the creation of that situation has resulted or may be expected to result in a substantial lessening of competition in any market or markets in the UK; and (c) the Competition and Markets Authority wishes to ensure that no action is taken pending its investigation.

Under the initial enforcement orders of 27 April 2016 and 12 May 2016, subject to VTech obtaining the prior written consent from the Competition and Markets Authority, VTech was prohibited from taking a number of actions. The prohibition included  any actions which might lead to the integration of the Leapfrog business with the VTech business or actions which might transfer the ownership or control of the VTech business or the Leapfrog business or any of their subsidiaries. Actions relating to impairing the ability of the Leapfrog business or the VTech business to compete independently in any of the markets affected by the transactions were also restricted. In the current case, a number of limited derogations to these prohibitions were granted.

Following the initial enforcement order, the initial period notice was issued to the parties on 24 June 2016. The initial period then commenced on the first working day after the notice, in this case on 27 June 2016. During the initial period it is determined if a reference to a phase 2 in-depth investigation is necessary. The initial period has a 40 working day deadline. Consequently, the Competition and Markets Authority had until 18 August to announce whether it would refer the merger for a phase 2 investigation. 

On that day, 18 August 2016, the Competition and Markets Authority found that a phase 2 investigation was indeed necessary. VTech subsequently had until 25 August to offer suitable “undertakings in lieu of reference” to address the Competition and Markets Authority’s competition concerns. Such undertakings are modifications to the transaction in order to remedy any identified competition concerns and would therefore deflect the opening of the phase 2 in-depth investigation.

Hong Kong traders may like to know the grounds on which this decision was made. The Competition and Markets Authority listed a number of reasons. First, it stated that the companies are two of the three largest suppliers of toddler electronic learning toys and child laptops/tablets in the UK. Furthermore, it found that in the UK, toy companies compete closely in supplying toddler electronic learning toys and child laptops and tablets to UK retailers. The Competition and Markets Authority added that only a few other competitors exist. Finally, regarding child electronic reading systems, in which the audio narration accompanies a corresponding book, the Competition and Markets Authority found that, in the absence of the merger, VTech and Leapfrog would have been close competitors in this segment. LeapFrog is currently the only company offering these systems.

The Competition and Markets Authority therefore concluded that the merger could lead to a substantial lessening of competition in the UK market for these products, which could cause increased prices and a reduction in quality or choice for consumers.

Kate Collyer, deputy chief economic adviser and decision maker in the case, had stated at the time that VTech and LeapFrog are two of the largest and best known brands supplying electronic toys and learning products for children in the UK and that retailers see them as close rivals and rely on competition between the companies to keep prices down.

Collyer continued that the Competition and Markets Authority is concerned that the merger could lead to prices rising, the quality of products going downhill or the range on offer being reduced. Given this, the merger warrants an in-depth investigation – unless VTech is able to offer suitable undertakings to address the Competition and Markets Authority’s concerns, she concluded.

The opening of the in-depth investigation could have been avoided by suitable undertakings offered by V-Tech. However, VTech did not propose any undertakings and therefore the Competition and Markets Authority has now referenced the merger to an in-depth investigation, a so-called phase two investigation.

The Competition and Markets Authority will conduct a more detailed analysis to determine: (i) whether there is a relevant merger falling within the UK merger control regime; (ii) whether the relevant merger situation has resulted, or may be expected to result, in a substantial lessening of competition, and (iii) whether it should take action to remedy any substantial lessening of competition identified. This decision is taken by an Inquiry Group of three people, which was appointed by the Competition and Markets Authority on 30 August 2016. The deadline for the decision is 13 February 2017.

Content provided by Picture: HKTDC Research
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