On 18 May 2017 Vanilla Group Ltd, a company within the JLA Group, acquired Washstation Limited. Forms were filed at Companies House notifying it of the change of control that same day, but there was no public announcement and no press release appeared on either company’s website. No material facts about the merger reached the public domain.
However, one year on the companies are subject to a hold separate order (albeit with some derogations) and are facing an in-depth Phase 2 merger investigation by the UK’s Competition and Market’s Authority (CMA) into the merger after it emerged that together the companies had a 90 – 100% market share in managed laundry services to higher education customers.
Are companies required to notify mergers to the CMA?
The merger control regime in the UK is voluntary. Unlike the European Union Merger Regulation, there is no obligation under the Enterprise Act 2002 for companies to notify mergers to the CMA if the merger meets the jurisdictional thresholds. Instead, an acquiring company can take the risk that the CMA will choose not to investigate. For mergers considered unlikely to raise competition concerns this may save several months’ delays and thousands in legal fees, so many chose not to notify.
Risks of choosing not to notify
Under section 24 of the Enterprise Act 2002 the CMA may refer a completed merger for a Phase 2 investigation until the later of either four months after the date the merger completed or four months after material facts about the merger are made public. This gives the CMA four months to become aware of and carry out an initial investigation of a completed merger. The buyer will therefore carry the risk of a CMA investigation (and any possible remedies or prohibition) until the four month period has expired.
For the material facts of a merger to be made public, they must be publicised so as to be generally known or readily ascertainable. This would normally be done by publishing and prominently displaying a press release about the transaction on a company’s website and publicising key facts in the national or any relevant trade press.
The material facts are only those necessary for the CMA to determine whether it has jurisdiction. These would typically include the identity of the parties and the status of the transaction (i.e. whether it remains anticipated or has completed) and will clearly vary on a case by case basis. Neither Vanilla Group nor Washstation publicised material facts about the merger and, therefore, when the CMA received a complaint by one of their competitors some five months after completion, it was still able to open a merger inquiry and in April 2018 refer the merger to a Phase 2 investigation.
The statutory deadline of the CMA’s in-depth six month Phase 2 review of the merger is not until 14 October 2018 and JLA is required to hold Washstation as a separate business and prevent any further integration. Already a difficult and time-consuming task, this is made harder by the delay between completion and investigation due to the fact that some integration has already taken place. Washstation no longer has separate employees, its own IT system, back-office functions, a business plan or even customers on its own terms. This is likely to increase the cost and effort required to both run Washstation as a separate business and to carry out any potential remedies required at the end of the Phase 2 review.
What are the key lessons?
This will serve as a reminder to companies that, if a merger falls within the jurisdiction of the CMA, it is important to have a strategy that addresses the possibility of an investigation. While there is no requirement to notify the CMA, in order to minimise the duration of any risk, companies should consider whether to notify any potentially problematic mergers in advance of completion, or, at least publicise the material facts of a completed merger.
Companies not wishing to make a full notification to the CMA, but at the same time not wanting to run the risk of a subsequent intervention by the CMA can submit a short briefing note to the CMA’s Mergers Intelligence Unit explaining why they do not propose to submit a formal merger notice. While the CMA will not give the parties certainty that there will be no investigation, the CMA will make it clear whether or not it intends to start a merger investigation based on the information provided by the parties. If the CMA does not intend to investigate at that stage, then absent further information coming to light (maybe from customers or competitors), the parties can take comfort that there will not be a merger investigation.