- Buyer (of assets) beware;
- In Eurotunnel on an acquisition of vessels after an eight‑month gap following bankruptcy of SeaFrance amounted to a “merger”;
- This is because the vessels were suitable and configured to the Dover to Calais route on which they were redeployed, and were operated by former employees of SeaFrance;
- The merger was likely to result in a substantial lessening of competition and Eurotunnel is now likely to be prohibited from operating any ferry service from Dover (for 10 years) and any ferry service in the Channel (for two years);
- The French competition authority had cleared the merger subject to commitments to deal with the risk of bundling ferry services and Channel Tunnel crossings.
Groupe Eurotunnel S.A. v Competition Commission provides clarity, and perhaps a warning, to those that believe that an acquisition of assets may generally be exempt from UK merger control rules (indeed, from merger control rules generally). Not so: the finding by the Competition Appeal Tribunal (“CAT”), and more recently the provisional findings of the Competition Commission (“CC”) and its successor the Competition and Markets Authority (“CMA”) have provided important guidance on this issue.
The Background: the eight‑month gap
Eurotunnel operates the Channel Tunnel between England and France. In November 2011 SeaFrance, a ferry company operating between Dover and Calais, went into liquidation and ceased operations. Nearly eight‑months later, in July 2012, Eurotunnel purchased three of SeaFrance’s four vessels along with their website and customer records. Eurotunnel then entered into an agreement with Société Coopérative de Production Sea France S.A. (“SCOP”), a cooperative of former SeaFrance employees which was formed in October 2011. In August 2012, eight‑months after SeaFrance’s going into liquidation, Eurotunnel began operating the Dover to Calais route with former SeaFrance crew members, under the MyFerryLink brand.
In October 2012, the Office of Fair Trading referred the transaction to the CC. The CC found that a relevant merger situation existed. As Eurotunnel already operate the Channel Tunnel, the CC found that by also operating the ferry link between England and France, a substantial lessening of competition would occur. The CC found that in order to remedy the situation, Eurotunnel should be prohibited from operating ferry services from Dover under the MyFerryLink brand for 10 years, and for operating any other ferry services for a period of two years.
Eurotunnel appealed the decision. In December last year, the CAT quashed the CC’s findings and remitted the decision back to the CC to determine whether the asset sale amounted to a merger which would fall within the jurisdiction of the CC under the UK merger control rules. The CC found in March this year that the SeaFrance vessels had to be considered an ʺenterpriseʺ and the acquisition had to be scrutinised as a merger under the UK merger control rules. The CMA, the successor to the CC from April this year, has last month provisionally confirmed the CC’s earlier findings. A final decision is expected later this month.
Defining an Enterprise
The CMA has jurisdiction to review a transaction under the Enterprise Act 2002 when two test are satisfied. First, it must be shown that “two or more enterprises have ceased to be distinct” and second, that the turnover threshold or the share of supply threshold have been satisfied. In the Eurotunnel case, the share of supply thresholds was met (the merging parties will supply or acquire at least 25% of particular services in the UK, and the merger leads to an increment in share) but the questions to be answered related to when an “enterprise” was being transferred, and when it ceased to be “distinct” under the first limb of the test.
An enterprise is defined as “the activities, or part of the activities of a business”.
When Eurotunnel and SCOP brought their case to the CAT, they challenged the CC’s findings that an enterprise existed, stressing that the assets had been acquired separately and after an eight‑month period of inactivity following the liquidation of SeaFrance.
The CAT did not define an “enterprise”, but did say that a distinction could be drawn between “bare assets”, which would not constitute an enterprise, and something more than bare assets, which would. Importantly, the CAT said that someone dealing with a transaction should consider what the enterprise does and whether it still exists at the time of the sale. In particular, an enterprise can be characterised by combining assets and using them for output. The CAT suggested that one indication of whether the assets amount to an enterprise would be if the person acquiring them has been placed in a better position than if they had gone out and acquired the assets separately in the market.
Whilst the CAT thought that liquidation would not necessarily prevent assets from amounting to an enterprise, they found that the CC had focused their findings too heavily on the purpose for which the vessels were to be used, namely to operate the same route as SeaFrance had previously done. The CAT thought that it was unlikely that bringing the ships back into operation on the same route, and entering into an agreement with former SeaFrance employees would by themselves be sufficient to show that an enterprise existed.
In March this year, the CC found that despite the eight‑month gap, there was sufficient continuity: by acquiring assets that were suitable and configured to the Dover to Calais route combined with an agreement to operate with former SeaFrance workers, MyFerryLink was able to start with much less risk and expense than if it had acquired separate assets in the market. Therefore, although there had been a break in the operations and the assets had been acquired separately, the CC provisionally found that an enterprise existed.
Having established the jurisdictional issue, the case was then taken up by the CMA who looked into whether or not there had been any material difference in the facts or special reason to alter the report since it was initially published. Despite Eurotunnel and SCOP submitting that there had been better customer growth on the Dover to Calais route than anticipated, the CMA did not find that this was sufficient to change the conclusions reached. Therefore, as matters stand Eurotunnel is likely to be finally prohibited from operating a ferry service from Dover.
The French Connection
By comparison, the French Competition Authority (Autorité de la Concurrence) (“FCA”) cleared the same transaction, subject to commitments. Under French law an acquisition of assets is a merger in circumstances where the assets generate turnover at the moment of their acquisition. The FCA determined that this requirement was met in Eurotunnel and in November 2012 (decision 12‑DCC‑154) found that there was a possible risk of affecting competition by bundling the ferry service with the Channel Tunnel crossing business, and accepted commitments to address this risk: Eurotunnel undertook not to offer discounts to freight customers for using both the Channel Tunnel and MyFerryLink services for five years; and not to discriminate against customers who do not use the MyFerryLink service for shipping.