The case centred around the issue of whether or not Eurotunnel acquired an 'enterprise' as opposed to bare assets when it purchased a number of vessels from SeaFrance which had gone into liquidation. Eurotunnel and SCOP argued that they were simply acquiring assets, and that UK merger control did therefore not apply to the transaction. The Competition Commission, and following a remittal by the Competition Appeal Tribunal (CAT) its successor, the CMA, however concluded that it had jurisdiction to review the transaction under the Enterprise Act 2002 as the assets acquired were sufficient to constitute an 'enterprise'.
The Court of Appeal (by a 2:1 majority) dismissed this interpretation in a way that is highly critical of the CMA's analysis which it described as 'materially flawed'. Although the Court of Appeal's ruling relates to the specific facts of the case, if the ruling stands (the CMA has announced that it will seek permission to appeal to the Supreme Court) it will be difficult to say that an enterprise is being acquired once a business is no longer a going concern and its assets are being acquired (unless the deal is intentionally structured by the parties with the intent of avoiding merger control). The Court did accept that an enterprise would extend to a seasonal business that was in abeyance during the off-season or to a business being sold by a liquidator as a going concern.
The decision highlights the uncertainty as to the precise scope of the CMA's merger control jurisdiction.
- The definition of 'enterprise' under UK merger control
- SCOP's appeal
- The Court of Appeal's judgement
In June 2012 Eurotunnel and SCOP (a French workers cooperative formed by former SeaFrance employees), acquired certain assets (three ferries, the SeaFrance brand, websites and customer records) which formerly belonged to SeaFrance, a company that went into liquidation in January 2012. The OFT (now CMA) considered that the package of assets acquired was sufficient to constitute an enterprise for the purposes of the Enterprise Act 2002 and the deal was examined under UK merger control.
In June 2013 the Competition Commission (now the CMA) published its final report which concluded that the transaction was expected to result in a substantial lessening of competition in the markets for the supply of short sea transport services of passengers and freight customers. The remedy proposed was to prohibit Eurotunnel from operating ferry services at the port of Dover.
Eurotunnel and SCOP challenged the Competition Commission's decision before the CAT on the basis that there was no relevant merger situation and therefore no jurisdiction under UK merger control. The CAT remitted for reconsideration the question of whether the particular arrangements in this case met the statutory definition of a merger but the CMA subsequently decided again that it considered that the arrangements did meet the statutory definition of a merger. This second decision was upheld on appeal before the CAT and SCOP subsequently challenged this second CAT ruling before the Court of Appeal.
2. The definition of 'enterprise' under UK merger control
The UK merger control regime applies to 'relevant merger situations'. A relevant merger situation exists where two or more 'enterprises' cease to be distinct and either the turnover or the share-of-supply test are met. The Enterprise Act 2002 defines an 'enterprise' as the activities, or part of the activities, of a business. This does not mean that the enterprise needs to be a separate legal entity, it simply means that the activities in question could be carried on for gain or reward.
The CMA jurisdictional and procedural merger control guidance provides that, in deciding whether or not the activities of a business, or part of a business, constitute an enterprise, the CMA will have regard to the substance of the arrangement rather than merely its legal form. In some cases, the transfer of assets alone may be sufficient to constitute an enterprise, for example where the facilities transferred enable a particular business activity to be continued.
The fact that a target business may no longer be actively trading does not in itself prevent it from being an enterprise. In such cases, the CMA will take into account a number of factors such as the period of time elapsed since the business was last trading, the extent and cost of the actions required to reactivate the business as a trading entity, the extent to which customers would regard the acquiring business as continuing from the acquired business and whether goodwill or other benefits beyond the physical assets could be said to be attached to the business and part of the sale.
3. SCOP's appeal
On appeal before the Court of Appeal SCOP argued that the CMA had failed to identify the activities that were acquired by Eurotunnel/SCOP. SCOP and Eurotunnel acquired the SeaFrance vessels seven months after the company had gone into liquidation and the SeaFrance employees were made redundant. The fact that a job saving scheme, approved by the French Courts, was put in place which encouraged ex-SeaFrance employees to be redeployed on the vessels purchased from the liquidator did not amount to a transfer of employees which allowed the CMA to conclude that the transaction qualified as an enterprise. The CMA had accepted that the acquisition of intangible assets such as IP rights and goodwill were not sufficient in themselves to decide there was a relevant merger situation, so the argument in relation to the transfer of employees had become the determining factor in leading it to conclude that Eurotunnel/SCOP had acquired an enterprise and that it did therefore have jurisdiction to review the transaction under the Enterprise Act 2002. The CAT could not reasonably have concluded that this was simply a question of fact and that there were no grounds for judicial review.
4. The Court of Appeal's judgment
The Court of Appeal, by a 2:1 majority, allowed the SCOP's appeal. The Court concluded that the CMA's decision was materially flawed in relation to its findings regarding the transfer of employees for the following reasons:
- Although in order for there to be an 'enterprise' it is not necessary for the business to be trading or carrying on any activities at the time of the acquisition, the effect of the order by the French court in this case, was that the activities were to cease and that the employees were to be dismissed as redundant within 15 days. At the point of dismissal the employees' connections with SeaFrance were fully severed;
- The statutory job saving plan that was put in place was directed at assisting the dismissed employees to find re-employment. The scheme was not aimed at preserving any connection between SeaFrance and its former employees;
- The fact that, following Eurotunnel's bid, many of the former SeaFrance employees were re-engaged by SCOP is not a sustainable basis for concluding that these engagements resulted from a transfer of employees (or what was said to be 'in effect' a transfer);
The Court of Appeal also dismissed the fact that the vessels were maintained in hot lay-up as an indication that there was a continuation of SeaFrance's business. The vessels were no longer in service and maintaining them in hot lay-up was simply aimed at keeping them attractive to a prospective buyer;
Whilst accepting that the legislation had to be read purposively, the Court of Appeal took issue with the CMA's view that the jurisdictional provisions of the Enterprise Act, and in particular the definition of an 'enterprise', should be interpreted 'widely'.
Without a valid finding by the CMA that a transfer of employees took place, which was central to its decision that Eurotunnel/SCOP acquired the 'activities' of SeaFrance, the CMA's decision 'collapses' and the CAT's decision under appeal was wrong in failing to find that this was the case.
The CMA has announced that it will seek permission to appeal the Court of Appeal's ruling before the Supreme Court.