Ryanair’s latest misfire in the UK Court of Appeal was another landmark in the ongoing legal battle for the Anglo-Irish skies 

Ryanair’s third failure in the UK Court of Appeal in the last three years was a further downer in its long-running dogfight over Aer Lingus. Since Ryanair began acquiring its 29.82% minority stake in the former Irish state carrier in 2006, immediately after the IPO, Ryanair has launched three unsuccessful takeover bids for its main Irish rival, as well as multiple related appeals in the UK and EU courts.

Two separate appeal processes remain pending at present: in Luxembourg, Ryanair has appealed the EC’s prohibition of its third takeover bid (Case T-260/13), its appeal against the 2007 prohibition having failed (Case T-342/07). And on the UK domestic front, Ryanair continues in its efforts to overturn the report of the Competition Commission requiring it to sell its shareholding down to 5%. The judgment reported here is the ruling handed down on 12 February 2015 by the Court of Appeal in Case C3/2014/1376, Ryanair v Competition and Markets Authority and Aer Lingus [2015] EWCA Civ 83.

Plane-spotters with a long memory will recall that the Office of Fair Trading (OFT) began its review of the minority holding in Aer Lingus only after resolution of the EU appeal against the first EUMR prohibition. Ryanair challenged the timeliness of this review unsuccessfully in the Competition Appeal Tribunal ([2011] CAT 23) and then unsuccessfully in the Court of Appeal ([2011] EWCA Civ 1579).

When the OFT then referred the merger situation to the Competition Commission (CC), Ryanair launched its third bid for Aer Lingus and at once put it to the CC that it had to stop work, in deference to EU jurisdiction. But the CC decided that its investigation was not pre-empted, and so Ryanair once again landed on the steps of the CAT arguing that the UK investigation should be blocked – only this time trying to prevent the CC investigating, having failed in the first round of litigation to stop the OFT from doing so. This second round of UK litigation foundered again in the Competition Appeal Tribunal ([2012] CAT 29) and Court of Appeal ([2012] EWCA Civ 1632). 

Which brings us to the present, third, round of UK litigation, in which Ryanair seeks to overturn the findings of the CC in its final report of August 2013 (see “Tyranny of the Minority” CLI 15 October 2013). The Competition and Markets Authority (CMA), the successor to the CC, was supported by Aer Lingus. The CAT rejected Ryanair’s application at first instance on 7 March 2014 ([2014] CAT 3). Three of the six grounds argued unsuccessfully in the CAT were renewed in the Court of Appeal. In an emphatic judgment, the Court of Appeal rejected all three grounds, also refusing permission to appeal to the Supreme Court. Ryanair has said it will seek permission directly from that court (as it did, to no avail, in both of the earlier rounds of litigation).

Ryanair’s grounds of appeal

Ryanair grounds were threefold:

  • First, it was procedurally unfair for the CC to have refused to disclose to Ryanair (or its external lawyers) the allegations and evidence relied upon by the CC in concluding that Ryanair might affect Aer Lingus’s ability to combine with another airline. The CC attached weight to the evidence of other airlines but their identities and the underlying evidence were withheld from Ryanair, despite its requests for disclosure. Ryanair therefore claimed it was denied a fair opportunity to respond.
  • Second, the divestiture remedy was disproportionate and was imposed by the CC on the basis of a misdirection in law as to the degree of risk of a substantial lessening of competition (SLC) occurring that must be found before a given remedy can be imposed.
  •  Lastly, the decision to require divestiture of all but 5% of the minority stake involved a breach of the duty of sincere cooperation under article 4(3) of the European Union treaty (TEU) because of a material risk of conflict between the order and a future decision of the European Commission (following presumed success in the pending appeal against the 2013 EUMR prohibition) that Ryanair should be permitted to acquire Aer Lingus.

The Court of Appeal unanimously rejected these arguments in the following manner:

Procedural unfairness – the missing airlines. Ryanair maintained that it was denied a fair hearing by the CC because it (or at least its lawyers) were not given the identities of the airlines which the CC found would have been likely to have entered into some form of combination with Aer Lingus, had it not been for the impediment created by Ryanair’s minority stake in the company. Ryanair had been given summaries of the Aer Lingus submissions and had the opportunity to respond to key provisions of the report. This included references to Aer Lingus’s strategy documents relating to potential partners (but not the names) and intermediate discussions with third-party airlines on possible combinations in the 2010-2013 period. The strategy documents indicated that Aer Lingus wished to pursue a strategy for expansion through an acquisition, merger or some other kind of joint venture.

The evidence indicated that third parties considered Aer Lingus to be a credible M&A partner (contrary to Ryanair’s contention that no third party would in any event wish to engage with Aer Lingus) but it was no part of the CC’s findings that a specific third-party deal would have taken place. The Court of Appeal considered, as had the CAT, that Ryanair had been given sufficient gist of the matters considered by the CC and accordingly that there had been no breach of the requirement of fairness.

But why were the names key airlines missing in action? The CC was required to consider whether (1) disclosure would be contrary to the public interest (s244(2) Enterprise Act 2002 – EA); (2) whether it might significantly harm the legitimate business interests of Aer Lingus (s244(3)(a)); and (3) the extent to which disclosure was necessary for the CMA’s legitimate purpose (s244(4)). After balancing these considerations, and conducting a consultation exercise, the CC decided that the identities of the mystery suitors should remain clouded.

The Court of Appeal affirmed the CC approach, ruling that the disclosure of the names to Ryanair’s lawyers in a confidentiality ring would not have assisted Ryanair because the information could not have been disclosed to Ryanair itself. In the court’s view, no further disclosure was necessary in order for Ryanair to address the evidence. Similarly, it had no difficulty in being able to respond to the reasons why it was said that the presence of Ryanair as a significant minority shareholder was likely to deter potential merger partners. The CC report contained analysis of how Ryanair could, if it chose, use its shareholding to frustrate a merger, joint venture or other combination. The precise identity of the potential combination partners was found to be “immaterial to this analysis”.

Legitimate aim – how low is safe? The second ground of Ryanair’s appeal challenged the CC’s determination that a divestiture of all but 5% of the minority stake was the only remedy effective to remove or prevent an SLC. Having found that a relevant merger situation had been created, the CC was required to decide whether it had resulted or might be expected to result in an SLC. It was common ground that the actual or prospective existence of an SLC is a matter to be determined on the balance of probabilities (see BSkyB v CC [2010] EWCA Civ 2) and the CC directed itself accordingly. Ryanair floated the argument that once the probability of an SLC has been found, all the CMA needed to do was implement a remedy to reduce the chances of that SLC occurring to below 51%. The court disagreed, saying that the “argument confuses the standard of proof necessary to establish the risk of an SLC ….. with what the CMA is required to do in remedial terms in that situation”. Once the SLC is found, it is no longer the CMA’s role to weigh up probabilities, but rather to ensure that no SLC either continues or occurs.

In other words, the duty imposed on the CMA is to take action to remedy or prevent the SLC, not merely to lessen the chances of it occurring. Accordingly the CC had been right to reject undertakings offered by Ryanair that addressed some but not all of the possible mechanisms of harm. It followed that the divestiture order satisfied the legitimate aim of the Act and was neither ultra vires nor disproportionate.

Duty of sincere co-operation – a wellnavigated route. Ryanair circled old legal ground here, invoking article 4(3) TEU, the duty of sincere co-operation. This provision had been central in the first two rounds of UK litigation, the focus being on the extent to which Ryanair’s shareholding in Aer Lingus was simultaneously subject to EU and UK law, and the extent to which the UK was for that reason impeded in applying its rules. (One learned judge remarked in that context that it should not be read as a “duty of sincere procrastination”). In the most recent appeal, Ryanair took a different tack and argued that the treaty duty precluded forced divestment of the minority stake because such enforcement might render more difficult a later full takeover of Aer Lingus. Ryanair contended that the facilitation of mergers cleared under the EUMR was an EU objective. This argument was summarily dismissed by the court. (Indeed, at the hearing, after counsel for Ryanair had conducted oral argument on this ground, the court directed counsel for the respondents that they did not need to take up the court’s time in any counter-argument.)

Ryanair has said it will petition the Supreme Court for permission to appeal. At the time of writing, it had yet to do so.

Holding pattern 

Just as the Court of Appeal was ruling, Ryanair asked the CMA to reconsider the CC’s report, in the light of an approach by IAG to Aer Lingus with a proposed takeover offer. Ryanair argued that IAG’s willingness to engage with Aer Lingus undermines the CC’s conclusion that Ryanair’s presence in the share register acts as a deterrent to M&A partners. The CMA has opened a consultation with a view to verifying whether there has indeed been a material change in circumstances (cf s41(3) EA) that ought to affect enforcement of the report’s findings. The CMA might draw quite the opposite conclusion, namely that IAG’s approach validates the report’s finding that Aer Lingus is an attractive partner, and that Ryanair’s anticipated exit was the facilitating factor in inciting IAG’s approach. Time will tell.

Time will also tell whether the incoming European competition commissioner Margrethe Vestager decides to take further the 2014 consultation regarding minority shareholdings under the EUMR (see “Irish Air Traffic Control” CLI 16 April 2013). The European Commission’s lack of power to require Ryanair to divest its stake, following prohibition of its first takeover bid, was the precursor to the involvement of the UK authorities. That lack of power was confirmed by the General Court in the interpretation it put on article 8(4) EUMR in Case T-411/07, when it determined that the power to unwind an implemented (but subsequently prohibited) concentration did not extend to unwinding partial steps towards that concentration that did not, viewed separately, confer control. That is a failing in the regulation that the Commission could cure at the next reform opportunity, even if it does not form the view that the EUMR should be extended to the review of minority shareholdings generally. The European Commission’s consultation paper indeed invited views on reform of article 8(4) (see Commission staff working document Towards more effective EU merger control SWD (2013) 239 Final, 25 June 13, pp 22-23, Part IV).

Conclusion

Despite crashing and burning again in the Court of Appeal, Ryanair remains strapped onboard the Aer Lingus share register, pending next steps in the CMA divestiture process. After a turbulent eight-year ride, the eject lever may not yet be pulled without a fight and some additional legal surcharges.