The OFT clarifies the circumstances in which the grant of a lease may amount to a merger for the purposes of the UK Enterprise Act 2002

On 7 November 2012 the Office of Fair Trading (“OFT”) published its decision on the application of UK merger control to an anticipated lease of premises at Guys & St Thomas’ NHS Foundation Trust (“the Trust”) to HCA, a private healthcare provider.

The case provides guidance on the circumstances in which the transfer of a business asset (in this case a lease) will be subject to merger control review by the UK competition authorities and is a reminder of the potential application of these rules merger control to transactions involving NHS Trusts.  (Readers will note that the OFT is currently also considering the merger of two foundation trusts – Poole and the Royal Bournemouth & Christchurch).

The Facts

The Guy’s & St Thomas case involved the grant of a 25 year lease by the Trust to HCA.  Under the lease, HCA was permitted to operate and manage a private patient unit (PPU) providing inpatient and day care, medical and surgical cancer patient services on four floors within the Trust’s Cancer Treatment Centre (CTC).  The terms of the lease required the Trust not to set up a competing PPU.

In addition, a ten year lease of space in the Borough Wing of Guy’s was granted to HCA to provide private outpatient radiotherapy planning and treatment services.

The Law

The Enterprise Act 2002 enables the OFT to review transactions whereby two or more "enterprises" (at least one of which is carried on in the UK or by or under the control of a company incorporated in the UK) cease to be distinct and either:

  • as a result of the transaction a share of 25% or more in the supply or purchase of goods or services in the UK or a substantial part of the UK is created or enhanced; or
  • the value of the total UK turnover of the enterprise being acquired exceeds £70 million.

For the purposes of the Guy’s & St Thomas’ case, the critical question for the OFT was whether the grant of the lease amounted to an “enterprise”.

Definition of an “enterprise”

The term “enterprise” is defined in section 129 of the Enterprise Act 2002 as the activities, or part of the activities, of a business.   The activities in question must be carried on for gain or reward, but there is no requirement that the transferred activities generate a profit or dividend for shareholders: indeed, the transferred activities may be loss making or conducted on a not-for-profit basis.

According to the OFT’s jurisdictional and procedural guidelines an “enterprise” may comprise any number of components, most commonly including the employees and the assets and records needed to carry on the business, together with the benefit of existing contracts and/or goodwill.  In some cases, the transfer of physical assets alone may be sufficient to constitute an enterprise: for example, where the facilities or site transferred enables a particular business activity to be continued.  However, none of these factors, individually, is likely to be conclusive. The OFT will assess all of the above factors, and any other relevant circumstances in the round.

The key distinguishing features for the OFT

In considering whether the grant of the lease by the Trust to HCA involved the transfer of an existing business, the OFT identified the following factors as key to its assessment:

  • In relation to the lease of floors in the CTC, this effectively granted HCA empty space with a right to operate and manage the PPU.
  • The facility being leased was new and would be leased for the purposes of providing services that were not currently provided to private patients by the Trust. It was not intended that any part of the Trust’s existing private patient business would transfer to HCA.  
  • In relation to the lease of space in the Borough wing, although the Trust had in the past carried out a small amount of radiotherapy planning and treatment services for private patients, it was not intended that this business would transfer and the lease expressly allowed the Trust to continue to carry out its existing private cancer services up to a financial cap that was significantly above the value of the existing work.  Therefore the agreement allowed for all existing private patient cancer services provided by the Trust to continue.
  • No other assets, equipment, stock, existing contracts or existing goodwill would transfer.  
  • No staff were to be transferred and consultants practising at the Trust would have to apply for privileges to practice at the new HCA facilities.

The OFT therefore concluded that the lease itself was not expected to provide the basis for a finding that an enterprise had been transferred.   However, it noted that, if any Trust services were to transfer in the future, the OFT would need to reconsider the application of the Enterprise Act.

Comment

This case is a reminder for those organisations considering the grant of a lease and/or the disposal of certain business assets of the potential application of merger control law.

The key to the decision in the Guy’s case was that the lease transferred a “greenfield” space in which to operate a business, but did not transfer any other assets which (together with the lease) were capable of amounting to a business.  In the case of the lease of space in the CTC, the Trust had no existing PPU business which was capable of transferring to HCA.  In relation to the Borough wing, the arrangements were structured to expressly carve out the Trust’s existing private patient radiotherapy planning and treatment services and the Trust gave no commitment that it would not compete with HCA.

Had the arrangements involved the transfer of other assets (such as equipment or goodwill) or of employees or consultants, or if they had contained any commitment on the part of the Trust to cease an existing activity there would have been a greater likelihood of the arrangements being caught by the rules.

In addition, the case highlights the potential application of UK merger control to transactions involving not for profit organisations (including NHS Trusts).   The OFT has previously reviewed mergers in the charities and higher education sectors.  In relation to NHS foundation trusts specifically, section 79 of the Health and Social Care Act 2012, gave the OFT responsibility for reviewing mergers between NHS Foundation Trusts and the OFT is currently reviewing its first merger of this type (that between Poole and the Royal Bournemouth & Christchurch).