A version of this article will appear in Entertainment Law Review (EntLR Vol 22 Issue 8)

News Corporation’s attempt to acquire the 60% of BSkyB it did not already own became one of the hottest of political hot potatoes.

The removal of Vince Cable from the review process following a Telegraph-led sting in December 2010, revelations into phone hacking at the News of the World, apparent failings in corporate governance which led to allegations of inadequate supervision and even of a cover-up when the issue was first investigated in 2006, added more and more twists to the seemingly endless rollercoaster ride that the review process had become (the timeline at the end of this article gives a detailed overview – click here to read it).  

Throughout the media frenzy, many commentators and politicians fundamentally misunderstood the legal basis on which the deal fell to be reviewed. Whilst this is perhaps unsurprising (particularly given the complexity of overlaying UK public interest considerations onto the European merger regime), of greater concern was Parliament’s unprecedented intervention.

Ultimately, News Corporation’s bid was withdrawn following the decision to hold an emergency debate and vote on a motion tabled by Ed Miliband that it was in the public interest for the bid to be withdrawn. Such a motion was not only unbinding, it was also predicated on factors which were entirely irrelevant to the considerations facing the Secretary of State, Jeremy Hunt, in his quasi-judicial capacity.

Regulatory framework

In the period leading up to the withdrawal of the bid, much was made of whether News Corporation was a “fit and proper person” to take control of BSkyB. However, this was not, and could not be, the primary purpose of the Competition Commission’s review and nor could it ultimately determine the Secretary of State’s final decision.

In essence, the regulatory review of the proposed transaction boiled down into two separate processes:

  1. The transaction met the test for exclusive review by the European Commission under the EU Merger Regulation. Sole responsibility for assessing compatibility of the merger on competition grounds rested with the European Commission; and  
  2. Despite the European Commission’s exclusive competence for review on competition grounds, Member States are able to intervene (through a “European Intervention Notice”) where mergers touch on certain national public interest considerations. The UK Government issued such a Notice in November 2010, giving it the final say on whether the merger could proceed in the face of concerns about the plurality of ownership of media enterprises in the UK.

Whether News Corporation (or indeed BSkyB) were “fit and proper persons” to hold a UK broadcasting licence was an entirely separate matter, relevant only to Ofcom through its power to review changes of control of holders of broadcasting licences and ultimately to revoke existing licences where it has concerns about the nature of the licence holder.

European Intervention Notice

Section 67 of the Enterprise Act 2002 allows the Secretary of State to intervene in mergers which otherwise fall under the exclusive jurisdiction of the EU Merger Regulation where the Secretary of State believes the merger raises public interest considerations1.  

Process

The European Intervention Notice was issued on 4 November 2010 stating that the relevant consideration was “sufficiency of plurality of persons with control of media enterprises”. Hence the specified (and only) relevant public interest consideration was that contained at section 58(2C)(a) of the Act, ie “the need, in relation to every different audience in the United Kingdom or in a particular area or locality of the United Kingdom, for there to be a sufficient plurality of persons with control of media enterprises serving that audience”.

Given that the intervention notice dealt with a media public interest consideration, the Secretary of State asked Ofcom for advice and recommendations as to whether the public interest consideration mentioned in the intervention notice was relevant to consideration of the transaction and whether as a result of that public interest consideration, the transaction might be expected to operate against the public interest. That report was delivered to the Secretary of State on 31 December 2010.

Having received the report, Jeremy Hunt (who by that time had assumed responsibility following the removal of Vince Cable from the review process) announced his intention to refer the transaction to the Competition Commission, unless undertakings in lieu of a reference could be agreed which would “prevent or otherwise mitigate the potential threats to media plurality” identified in Ofcom’s report.

What followed was a protracted negotiation culminating in the announcement on 30 June 2011 that, following advice received from both the OFT (brought in to assist in negotiating undertakings) and Ofcom, the Secretary of State was minded to accept the commitments offered by News Corporation:

  • Sky News would be spun off as an independent public limited company with shares distributed amongst existing BSkyB shareholders in line with their existing shareholdings (and News Corporation would therefore retain a 39.1% stake in the new entity). For a period of 10 years, News Corporation would need permission from the Secretary of State before increasing its shareholding  
  • The new company would have a board made up of a majority of independent directors, including an independent chair and a corporate governance and editorial committee made up of independent directors with no other News Corporation interests. All decisions on editorial matters at Sky News Board meetings could only be made if an independent director with senior editorial and/or journalistic expertise was present  
  • The new company would have a 10 year carriage agreement and a seven year renewable brand licensing arrangement to ensure its financial viability. BSkyB would also be required to continue to cross-promote Sky News on its channels.  

The Secretary of State then announced a short further consultation period scheduled to expire at midday on 8 July, during which time, of course, the revelations surrounding the News of the World redrew the regulatory battleground, ultimately leading to News Corporation’s decision to withdraw these commitments. This prompted referral of the matter to the Competition Commission on 11 July.  

Substance: plurality of persons with control of media enterprises

The relevant public interest consideration as set out in the European Intervention Notice is concerned primarily with ensuring that media enterprises are not too concentrated in the hands of too few people.

Lost in the increasing political furore, has been an assessment of the legal position. Under section 58A(5) of the Enterprise Act, for the purposes of section 58 (including consideration of the plurality issues contained at section 58(2C)(a)) two media enterprises which fall to be treated as under “common ownership or common control for the purposes of section 26” are treated as being under the control of only one person2.

Turning to section 26, a person may be treated as having control of another enterprise where that person has the ability materially to influence the policy of another. Whilst the European Commission concluded that News Corporation did not already have decisive influence over BSkyB (for which, see below), there can be little doubt that with a shareholding of just under 40% and four main board directors, News Corporation already had material influence over BSkyB3.

Consequently, for the purposes of UK competition law, and crucially for the purposes of the analysis of the relevant public interest consideration under section 58, BSkyB was already under the control of News Corporation by virtue of section 58A(5). As such, the question of whether the merger had any impact on media plurality was arguably moot (notwithstanding section 58A(4)) and no doubt this is what gave News Corporation considerable comfort as regards their substantive case.

Ofcom’s regulatory powers

The revelations in the press about the nature and extent of phone hacking and other potentially criminal activities at the News of the World led to an avalanche of third party comments. This resulted in a number of commentators becoming increasingly fixated on Ofcom’s powers under section 238 of the Communications Act 2003 to revoke broadcasting licences where licence holders are not “fit and proper persons”.

However, it is critically important to note that this power could have had no bearing on the Government’s role in the BSkyB takeover. It was not, and could not be, the basis for prohibiting the transaction (as described above, the only relevant public interest consideration was that set out in the European Intervention Notice, ie plurality of ownership of media enterprises)4.  

Rather, Ofcom’s ability to revoke licences under the Communications Act 2003 is an ongoing function as part of its role as the UK communications regulator, and would need to be applied without regard to transactional activity. This, then, raises the question of whether Ofcom would be able to revoke BSkyB’s licence, which breaks into two issues; namely who controls the BSkyB licence, and whether Ofcom could substantiate the revocation of that licence.

Control of the BSkyB licence

The relevant BSkyB broadcasting licence is held by BSkyB and not News International, News Corporation or any other News Corporation entity. However, Ofcom can look through the direct licence holder to another entity (News Corporation, in this instance) where that entity holds more than 50% of the voting rights or where control can be inferred despite a person holding an interest of less than 50%.

News Corporation has an existing 39.14% interest in BSkyB (with voting rights restricted to 37.19% because of a 2005 voting agreement), and four out of 14 BSkyB directors have a connection with News Corporation (including non-executive chairman James Murdoch).  

On the one hand, such a sizeable voting interest in a public company together with significant board influence might ordinarily be assumed to confer control. However, the European Commission had already concluded that News Corporation did not have “decisive influence” (a notion similar to the concept of ‘control’) over BSkyB presently, not least because an analysis of attendance rates at shareholder meetings over the past four years, revealed that News Corporation did not have more than 50% of the votes present and voting. Board decisions are taken by simple majority and the four directors affiliated with News Corporation recuse themselves from discussions and voting on matters involving relationships with any News Corporation group companies.

Looked at in the round, it would have been difficult for Ofcom to conclude that News Corporation currently has control for Broadcasting Act purposes over BSkyB.  

Process

Theoretically, Ofcom has the power to revoke Broadcasting Act licences under section 238 of the Communications Act 2003. Taking the above to its natural conclusion, particularly in light of the European Commission’s decision that News Corporation does not currently control BSkyB, Ofcom’s power to look at the fit and proper person test (in the context of section 3(3)(a) of the Broadcasting Act 1990) would have arisen only at the point of completion of the merger. In other words, the merger would have resulted in a change of control for the purposes of the BSkyB licence.

Nonetheless, revocation of BSkyB’s licence was, in my view, never more than a theoretical possibility. Even in light of the revelations concerning activities at the News of the World, they can at worst be attributed to activities within a sister entity within a wider corporate structure. Furthermore, before Ofcom may revoke a licence under section 238 of the Communications Act, it must serve a notice and give a period of time for steps to be taken to address any concerns.

Given that concerns, if any, would have arisen as a result of past corporate governance failures, it is inconceivable that these could not (or would not already) have been adequately addressed within News Corporation as a result of its own internal investigation into the phone hacking inquiry, quite apart from the public and criminal inquiries which are ongoing.

Unwelcome Parliamentary intervention

Ultimately, the entire regulatory process was undermined by the decision to debate and vote on a motion in the House of Commons which effectively amounted to passing sentence before trial, circumventing the separate and independent process before the Competition Commission.  

This raises a number of interesting legal and policy points. First, it would have placed the Secretary of State in an impossible position when he was finally called upon to reach a decision 30 days after receiving the Competition Commission’s final report. Up to that point, the Secretary of State had been at pains to confirm that he would act only upon the advice received from the expert and independent regulators. The Competition Commission had been given up to eight months to conduct a thorough and independent investigation into the public interest consideration ab initio. As a second phase regulator, it is expected to arrive at a definitive decision (in this case advice to the Secretary of State) as to whether the transaction gives rise to concerns as a result of the particular public interest consideration set out in the European Intervention Notice. This is quite different from the question which had to be answered by the OFT and Ofcom – as first phase authorities, their test is lower and can be satisfied if “it is or may be the case” that the public interest consideration is relevant and may be expected to operate against the public interest.

It was therefore entirely conceivable that whilst Ofcom considered that commitments were necessary to address its public interest concerns sufficiently to remove the need for an in-depth investigation by the Competition Commission, the Competition Commission may have concluded that no such public interest concern arose once it had completed its detailed and second phase review. In those circumstances, the Secretary of State could have been placed in the invidious position of receiving advice from the independent regulator that the stated public interest consideration was not relevant to the transaction, whilst Parliament had previously voted that the merger was against the public interest.

What the future holds

It is of course entirely possible that once the dust has settled and politicians and regulators alike are able to sit back and review the reality of the legal and regulatory position, there will be pressure to reform the media plurality considerations.

During the debate in the House of Commons on 20 July, the Prime Minister raised three questions on media plurality and power:  

  1. Whether politicians should be removed from the decision making process on media mergers altogether;
  2. Whether the plurality test should be an ongoing one, rather than being considered only at the point of a merger or takeover; and  
  3. Whether limits should be imposed (recognising that these are hard to measure in the modern internet age).  

It is illuminating that these questions focus on the shortfalls of the present system highlighted above, but which have largely been overlooked in the hysteria that has surrounded this particular transaction. It is of course Parliament’s prerogative to look at amending and altering regulations and the law. It was, however, a worrying development that politics, driven on in no small part by a large portion of the press with a vested interest in the outcome, could interfere so dramatically and so definitively to subvert the proper administrative and quasi-judicial process laid down in the Enterprise Act.