Where the Competition Market Authority (CMA) opens an investigation into a completed transaction, it will generally impose an initial enforcement order (IEO).(1) In addition, the CMA can impose IEOs in the context of planned transactions, but anticipates that it will do so relatively rarely in practice.(2)
In the context of a completed transaction, an IEO aims to ensure that the acquired business:
- continues to compete with the acquiring business; and
- is maintained as a going concern during the course of the CMA's investigation.(3)
As such, an IEO prevents pre-emptive action being taken, which might prejudice the outcome of the CMA's investigation and/or impede appropriate remedial action at a later date. In addition, an IEO can require any pre-emptive action that has already taken place to be unwound.(4)
While there is no exhaustive list of the types of conduct that would constitute pre-emptive action, the CMA's recently published guidance provides that, depending on the nature of the transaction, pre-emptive action could include:
- closing or selling sites;
- selling or failing to maintain equipment;
- degrading service levels;
- failing to retain key employees;
- integrating IT systems;
- failing to compete at arm's length for tenders;
- integrating customer-facing functions;
- weakening the independence of brands;
- discontinuing competing products; and
- exchanging confidential commercially sensitive information.(5)
As a general rule, the CMA will use its standard template when imposing an IEO in relation to completed acquisitions.(6)
Where an IEO is imposed, the parties are able to request the CMA's consent to specific derogations from the IEO (eg, enable specific actions or activities to be undertaken) with consents published by the CMA on its website (together with the IEO).
An IEO will remain in force (subject to variation, revocation or release by the CMA) until the conclusion of the CMA's Phase 1 investigation. Where a transaction is referred for a Phase 2 investigation, the IEO will be replaced with an interim order; this will remain in force (subject to variation, revocation or release by the CMA) until the conclusion of the Phase 2 investigation.
The CMA may require the appointment (at the parties' cost) of a monitoring trustee and/or a so-called 'hold separate manager' to ensure compliance with, and the appropriate implementation of, an IEO or interim order.(7)
Significantly, if an addressee fails to comply with an IEO or an interim order without reasonable excuse, the CMA may impose a penalty of up to 5% of the group worldwide turnover of the persons concerned.(8) Thus far, the CMA has imposed financial penalties ranging from £100,000 to £200,000 in respect of failures to comply with interim orders without reasonable excuse, with these penalties being substantially lower than the statutory maximum.(9)
However, the CMA's recently updated guidance indicates that larger penalties may be considered appropriate in future cases:
[t]o date the penalties imposed have been significantly less than the 5% cap. However, given the importance of [IEOs and IOs] to the functioning of the regime, the CMA will not hesitate to make full use of its fining powers. The CMA will therefore impose proportionately larger penalties in future cases should this prove necessary in the interests of deterrence. [emphasis added].(10)
(1) See CMA108 Interim measures in merger investigations, 28 June 2019, paragraph 2.26. This article is part of a series that examines minority shareholding acquisitions and the UK merger control regime. For previous articles in the series, please see: "Competition and Markets Authority's ability to investigate completed transactions".
(9) See, for example, Case ME/6676-17 Notices of penalty pursuant to section 94A of the Enterprise Act 2002 – addressed to Electro Rent Corporation, dated 11 June 2018 and 12 February 2019 and most recently Case ME/6267-18 Notice of penalty pursuant to Section 94A of the Enterprise Act 2002 – addressed to Nicholls (Fuel) Oils Limited of DCC Energy Ltd in Northern Ireland, dated 28 June 2019, where the CMA imposed a total penalty of £146,000 for failing to comply with the IEO imposed with respect to the acquisition of the oil distribution business of DCC Energy Limited in Northern Ireland.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.