The Supreme Court (“SC”) has ruled that the merger control provisions of the Enterprise Act 2002 (“EA2002”) are not limited to the acquisition of a business that is a “going concern” and that the test for whether an "enterprise" has been acquired is one of economic continuity.
The SC found that an "enterprise" is acquired where the assets obtained give the acquirer (i) more than might have otherwise been acquired by going into the market and buying factors of production, and (ii) that extra benefit is attributable to the fact that the assets were previously employed in combination in the "activities" of the target business.
The SC added that the period of time between cessation of trading of the target business and acquisition of control of the assets may be a relevant factor in determining whether an "enterprise" has been acquired, but is not necessarily decisive.
Legal Question at issue
The Appeal concerned the interpretation of s22(i) of EA2002 which provides that a pre-condition for exercise by the Competition and Markets Authority (“CMA”) of its merger control powers is the existence of a “relevant merger situation”. Under s23, a “relevant merger situation” has been created where two or more “enterprises cease to be distinct” and an “enterprise” means the “activities, or part of the activities, of a business” (s129).
In July 2012, Société Coopérative de Production SeaFrance SA (“SCOP”) and Groupe Eurotunnel SE (“GET”) acquired substantially all of the assets of SeaFrance SA (“SeaFrance”), a French company providing ferry services between Dover and Calais which had ceased operations in November 2011 and had been formally liquidated in January 2012.
GET and SCOP commenced ferry services between Dover and Calais in August 2012 through GET’s subsidiary, MyFerryLink SAS (“MyFerryLink”). To a large extent, MyFerryLink’s vessels were operated by former SeaFrance employees whose reemployment by the new ferry operator had been incentivised by a French statutory employment plan known as PSE3.
The above acquisition was referred to the Competition Commission (“CC”). The CC found that although SeaFrance’s operations had been on hiatus, the package of assets being acquired constituted “the embers of an enterprise” and thus the acquisition consisted of two or more “enterprises” ceasing to be distinct for the purposes of jurisdiction under EA2002. The CC concluded that the transaction would result in a substantial lessening of competition and imposed restrictions on MyFerryLink operations.
GET and SCOP appealed the CC decision to the Competition Appeal Tribunal (“CAT”) arguing that the transaction was not a “relevant merger situation” under the EA2002 and therefore the CC did not have jurisdiction to review it.
The CAT stressed that the acquisition of an “enterprise” should be distinguished from an acquisition of “bare assets”, with the former placing the acquiring entity in a different position than if it had simply gone out into the market and acquired the assets.
The CAT expressed doubt about whether the transaction in question amounted to more than an acquisition of “bare assets” and remitted the question of jurisdiction back to the CC for further consideration.
In particular, the CC was asked to explain how the reemployment of SeaFrance employees constituted their “transfer”, rather than mere reengagement, from the old operator to MyFerryLink, and how the ongoing maintenance of the vessels contributed to the ability of the purchaser to resume the service.
Following further analysis, the CC (now the CMA) maintained its view that a “relevant merger situation” had arisen. The CMA decision was appealed to and upheld by the CAT. This second CAT ruling was subsequently challenged by SCOP before the Court of Appeal (“CA”).
Court of Appeal Judgment
The CA allowed SCOP’s appeal by a 2:1 majority. The CA considered that GET / SCOP could only have acquired the “enterprise” of SeaFrance if both vessels and crew had been transferred. The CA found that since the crew’s employment had been statutorily terminated the CMA had been irrational in finding that their transfer had taken place.
Additionally, the CA held that in defining “enterprise” in EA2002 as “the activities of a business” Parliament intended for the merger control rules to apply to transfers of a going concern – allowing for temporary hiatus, e.g. a seasonal business.
The CA considered that the continuation of SeaFrance’s activities had been judicially prohibited; therefore, in light of the above definition, no dormant “enterprise” existed and no “relevant merger situation” had been created for the CMA to review. The CMA appealed this decision.
Supreme Court Judgment
The SC, acting unanimously, overturned the CA judgment. The SC held that the CA had erred in finding that the CMA had behaved irrationally, and had wrongly focused its analysis on the termination of SeaFrance’s employees. The SC considered that the test for whether certain “business activities” amount to an “enterprise” is an economic one and the CA should not have discounted the CMA’s wider economic analysis of the transaction.
The SC stressed that the UK merger rules apply to mergers of business activities, rather than the mergers of the entities that carry out those activities. For this reason, the SC considered that the EA2002 rules are not limited to the acquisition of a business as a going concern. If the merger rules were so qualified their scope would be severely limited and, in the SC’s view, such limitation would be against the economic rationale of the legislation.
Therefore, the SC considered that it is possible for an “enterprise” to exist as long as the means of carrying out its business activities persist, even if the original entity which carried them out has been dissolved. Although the period of time between cessation of trading of the target business and acquisition of control of the assets may be a relevant factor in determining whether an "enterprise" has been acquired, it is not necessarily decisive.
The SC echoed the CAT’s “enterprise” and “bare assets” distinction and considered that an “enterprise” is acquired where:
- the assets obtained give the acquirer more than might have otherwise been acquired by going into the market and buying factors of production; and
- that extra benefit is attributable to the fact that the assets were previously employed in combination in the "activities" of the target enterprise.
The SC found that the CMA had applied the above test correctly in its economic analysis of the transaction and was right to find that there was “considerable continuity and momentum” between the activities originally carried on by SeaFrance and those now carried out by MyFerryLink. In particular, the CMA was right to find that:
- GET / SCOP acquired substantially all of the assets of SeaFrance, including vessels which were being maintained by the liquidator to enable ferry services to be resumed faster and at lower cost, and lesser commercial risk, than would otherwise have been possible;
- SCOP’s involvement enabled the service to be resumed with substantially the same personnel, providing operational efficiency advantages and financial incentives under the PSE3 re-employment scheme.
In allowing the appeal, the SC held that the above characterisation of the transaction was logical and there could be no question that the CMA had behaved irrationally in its assessment. The decision has been welcomed by the CMA as “providing clarity on an important point of law” and “assisting in assessing such transactions in the future”.
This is an important case for companies seeking to acquire assets out of administration since it addresses the question of when such acquisitions are reviewable under merger UK control.
In distinguishing between the acquisition of “bare assets” on the one hand and the acquisition of assets amounting to an “enterprise” on the other, the SC focuses on the principle of “economic continuity”. For assets to constitute an “enterprise” (i) they must be more than mere factors of production and (ii) the extra must be attributable to the fact that the assets were previously employed in combination in the “activities” of the target enterprise.
This focus on economic substance rather than form has been welcomed by the CMA.
For business, the implication of the judgment is that each relevant acquisition will need to be assessed on its facts according to the principle of economic continuity. Companies acquiring assets of a competitor should reflect carefully on the economic reality of the situation and have due regard to the possibility that the CMA could have jurisdiction to review the acquisition under its merger control regime.