On Wednesday 16 December 2015 the Supreme Court unanimously allowed the CMA's appeal against the Court of Appeal's ruling which had quashed its merger decision in the Eurotunnel case on the basis that there had not been an acquisition of an enterprise, but merely of the bare assets of a defunct enterprise, so that the jurisdictional test to allow the CMA to review the case had not been met.
The Supreme Court's ruling provides helpful clarification on the concept of an "enterprise" for the purpose of the UK merger control regime, more particularly on the circumstances under which the transfer of assets alone may be sufficient to constitute an enterprise. The Supreme Court concludes that the relevant test is one of economic continuity. Where assets are acquired these will constitute an enterprise if they give the acquirer more than he might have acquired by going into the market and buying factors of production, and where that "extra" is attributable to the fact that the assets were previously employed in combination in the "activities" of the target enterprise. In this case, although Eurotunnel and SCOP did not acquire the ferry business as a going concern, they did acquire much of the benefits of doing so, as the commercial operability and coherence of the assets was actively maintained.
The Supreme Court strongly disagreed with the Court of Appeal's conclusion that the CMA's evaluation of the transaction as a relevant merger situation was irrational and unjustified and held that the Court of Appeal's approach had been unduly formal and had discounted the economic analysis underlying the CMA's original conclusion. The CMA had carried out a broader economic analysis taking into account a whole range of factors and concluded that there was economic continuity. Although the CMA is not entitled to any special level of deference, the Supreme Court confirms that its economic analysis should have been respected.
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 Competition Appeal Tribunal (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 case centred round 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 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 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. The Court of Appeal's judgment
On appeal before the Court of Appeal, SCOP argued that the CMA had failed to identify the activities that were acquired by Eurotunnel/SCOP and the Court of Appeal, by a 2:1 majority, allowed the SCOP's appeal. The Court concluded that what had been acquired was not the "enterprise" formerly carried out by SeaFrance, but only the means to construct a similar but new enterprise. Therefore no relevant merger situation had been created and the CMA had no jurisdiction to review the transaction and impose remedies. The Court of Appeal held that it had been irrational for the CMA to reach any other conclusion. Click here to read our e-bulletin on the Court of Appeal's judgment.
In July 2015 the Supreme Court granted permission for the CMA to appeal the Court of Appeal's judgment.
4. The Supreme Court's ruling
The Supreme Court disagreed with the majority of the Court of Appeal and allowed the CMA's appeal.
The Court of Appeal's main argument centred around the issue of transfer of employees from SearFrance to Eurotunel. It considered that the CMA had erred in principle because the facts it had found did not logically lead to the conclusion that employees were transferred from SeaFrance to the business operated by Eurotunnel and SCOP. The Court of Appeal relied on the order of the French Court in 2012 directing the dismissal of the employees which terminated their link with SeaFrance. This meant that their future re-employment by Eurotunnel could not amount to a transfer.
The Supreme Court criticised the approach by the Court of Appeal as wrongly reducing a question of economic continuity to the question of whether the French Court had, as a matter of law, terminated the relationship between SeaFrance and its employees. This did not reflect the economic substance of the arrangements. The relevant question was not whether the dismissals severed the connection between the employees and SeaFrance, but whether it severed their connection with a business that could be acquired and operated by someone else. The Court of Appeal had taken an unduly formal approach to the issue before it and discounted the economic analysis underlying the CMA's original conclusion. The Supreme Court accepted the findings of the CMA as "unimpeachable" that there remained the "embers" of an enterprise. In relation to the employees there remained a link in the form of a "dowry" which would be paid to an acquirer to encourage their re-employment. The Supreme Court stressed that, although the CMA had no wider powers to determine its own jurisdiction than any other administrative decision maker, an appellate court must exercise caution in overturning the economic judgments of an expert tribunal such as the CMA and the CAT. This is a particularly important consideration in merger cases, where even with expedited hearings successive appeals are a source of additional uncertainty and delay which is liable to unsettle markets and damage the prospects of the businesses involved.
The Supreme Court's ruling confirms that the CMA did have jurisdiction to review the Eurotunnel/SeaFrance merger and to impose remedies. The CMA has welcomed the ruling and will now consult the relevant parties and seek to work constructively with Eurotunnel and DFDS (which recently acquired leases for two of the ferries from Eurotunnel) in order to determine the appropriate next steps.
Although inevitably specific to the facts in question, the Supreme Court's ruling provides helpful guidance on how to assess whether the acquisition of assets amounts to the acquisition of an enterprise and is therefore subject to UK merger control. The Court also sends a clear message to appellate courts to exercise caution when overturning the economic judgments of an expert tribunal, particularly in the context of merger cases.