Supreme Court holds that insolvency insufficient to break the chain and prevent merger control authority from intervening
In December 2015, the Supreme Court confirmed that the Competition and Markets Authority (CMA) has jurisdiction to apply merger control to certain transactions where the target is not a going concern.
Under the Enterprise Act 2002 (the Act), the CMA only has jurisdiction to review a merger situation if two or more “enterprises” cease to be distinct from one another. An “enterprise” is defined as “the activities, or part of the activities, of a business”, where a business “includes a professional practice and includes any other undertaking which is carried on for gain or reward or which is an undertaking in the course of which goods or services are supplied otherwise than free of charge”. However, the Act offers no statutory definition for “activities”.
The distinction between “bare assets” and assets that constitute an enterprise is needed to prevent the merger control regime from restricting organic growth in the market. However, the extent to which a mere “transfer of assets” constitutes an enterprise, so that the CMA has jurisdiction to investigate the transaction, is not entirely clear. Merger control authorities will usually regard permanent transfer of employees as conclusive evidence of the acquisition of an enterprise, but when this is not present it is unclear where an acquisition ceases to be an acquisition of an enterprise.
This question was the basis of the recent Supreme Court decision in Société Coopérative de Production SeaFrance S.A. (SCOP) v. the CMA.
SeaFrance operated a ferry service between Calais and Dover until its liquidation in November 2011. Under a job-saving plan initiated by the French government, the dissolved SeaFrance owners agreed to pay former employees €25,000 each if they were subsequently redeployed on a former SeaFrance vessel. Around 15 per cent of the workforce was also retained to operate the vessels in so-called “hot lay-upC so that the ferries could be redeployed quickly once liquidated. Working together with a workers' co-operative formed by the former SeaFrance employees (a Société Co-Opérative et Participative (the SCOP)), Groupe Eurotunnel SA (GET) acquired the liquidated SeaFrance's logos, its brand, trade name, computer software, customer records, IT hardware, office equipment and three out of the four ferries. SCOP then contracted with GET to operate and run the ferries, and services between Dover and Calais resumed trading under the name MyFerryLink. Many former SeaFrance employees were subsequently employed by SCOP, entering into a contract with GET to operate the ferries.
Had GET acquired an enterprise, rather than merely the assets of a defunct enterprise? The CMA thought so. In September 2014, the CMA prohibited GET from operating any ferry service from Dover using the passenger ships acquired from SeaFrance for at least 10 years.
This led to a series of appeals against the CMA decision, leading to the Court of Appeal concluding that the CMA was “irrationally” wrong in May 2015. In making this finding, the court placed heavy emphasis on the French court’s liquidation order that terminated the link between SeaFrance and its employees.
It is settled decisional practice that the fact that a target business is no longer active does not necessarily prevent it from being considered as an enterprise for merger control purposes.
The Supreme Court confirmed that the reference to “activities” in the definition of an enterprise is simply a descriptive characteristic of an enterprise. Such activities can be characteristic even when they are not actually being performed when the transaction takes place. What is essential is that there is the capacity to carry activities on as part of the same business, whether by the current owner or someone else.
The Supreme Court gave three examples of where a transaction will be considered a relevant merger situation despite not having activities at the time of the transaction:
- the sale of a seasonal business during the off-season (i.e. during a time when the business does not trade);
- the sale of a business in liquidation that is mothballed by the liquidator, in the hope that the business can be sold as a whole; and
- a transaction designed specifically to avoid merger control, for example by a business suspending its activities shortly before selling. This was the case in AAH Holdings Plc and Medicopharma NV (1992), where the Competition Commission ordered that the company divest a significant amount of its business following a transaction designed to deliberately avoid merger control.
Here, the Supreme Court held that it did not necessarily follow that, because SeaFrance had ceased its ferry service at the time of the sale to GET, it had no activities to be acquired.
The question of whether GET acquired an enterprise or merely bare assets turned on whether there iseconomic continuity between the previous business and the assets which are acquired.
The court noted that merger control is specifically concerned with the economic substance of transactions, not just their legal form. When a buyer acquires no more than if it simply went into the market and purchased equipment, hired employees, etc separately, it is irrelevant that the equipment and employees were previously employed by the target enterprise. This is because the buyer gets no more than he would have done had they not have been employed by the target.
Therefore, in order to determine whether the sale of assets is considered to be an enterprise:
- the sale must provide more than might have been acquired by going into the market and buying factors of production; and
- the extra must be attributable to the fact that the assets were previously employed in combination in the “activities” of the target enterprise.
Put bluntly, the key to whether an acquisition is a merger or not depends on whether at the time of the transaction the whole being acquired was bigger than the sum of its parts.
While a hiatus in trading will be relevant to the question of whether an enterprise is acquired, it is not decisive. The CMA’s own guidance notes that the significance of a hiatus will depend on its duration, economic impact and all other relevant circumstances.
The Supreme Court did not agree with the Court of Appeal that the link between SeaFrance and its employees had been terminated, as this did not reflect the economic substance of the arrangement. The CMA was correct in finding that there were “embers of an enterprise” capable of passing into GET’s control, creating a relevant merger situation.
The Supreme Court therefore confirmed that the CMA had jurisdiction to review the Eurotunnel/SeaFrance transaction, and to impose remedies.
In June 2015 GET announced it would lease two of its ferries to rival operator DFDS, with a put option to require DFDS to buy the ships in 2017. Following the Supreme Court decision, GET then announced that its last ship, the freight ferry Nord Pas de Calais, would be put up for sale. The CMA stated that it will now work constructively with the parties to determine the appropriate steps. However, GET, through the leasing and sales of the ferries, has effectively abandoned the transaction.
The Supreme Court's ruling helps clarify further where the line between acquiring a dormant enterprise and acquiring merely the bare assets lies. As in more controversial merger control decisions, the issue turned on what happened to the employees charged with running the acquired assets. While employing those who used to run the assets is often a good strategy for preserving value, in this case the incentives offered (and who they were offered by) were enough to establish the necessary continuity for UK merger control to apply.