The Competition Commission's hard-hitting approach in two recent merger inquiries is a reminder to purchasers of the cost of not making transactions conditional on receiving prior approval from the competition authorities.
Overview
In the UK, there is no obligation to pre-notify mergers to the Office of Fair Trading (OFT). However, there is always a risk that the OFT will learn of a merger, either from monitoring the trade press or via a third party complaint, and choose to investigate it. In the case of a completed merger, the biggest concern is that it may be prohibited by the Competition Commission (CC) and an order be made for the target or other parts of the purchaser's business to be divested.
More recently, the CC has taken an even tougher stance with parties who have completed mergers without seeking OFT clearance in terms of:- (a) the conditions imposed on them during the merger review process; and (b) remedies.
What conditions may the competition authorities impose during the review phase?
Where the OFT is deciding whether to refer a completed merger to the CC, the OFT is increasingly requiring the purchaser to agree to ‘hold separate’ the target business until after the OFT has decided whether to make a reference to the CC.
This stance is increasingly being repeated at the CC when completed mergers are referred to it for further investigation. In addition to requiring purchasers to accept far-reaching ‘hold separate’ undertakings (which often go beyond those imposed by the OFT), the CC has other powers which it is increasingly exercising to ensure that its ability to impose remedies at the end of the review process is not jeopardised (see CC Powers box below).
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CC Powers Monitoring Trustees If the CC considers that a purchaser is being difficult, or where there has been material integration of the merged businesses prior to the CC reference, then the CC may appoint a Monitoring Trustee (MT). The MT's role is to assess what integration has occurred, oversee the performance of the HSM and to reach a view on whether the acquired business can function independently during the CC's investigation. The parties are responsible for the remuneration of the MT. Hold Separate Managers If there are any doubts as to a purchaser's ability or willingness to implement the ‘hold separate’ undertakings, then the CC may appoint an independent Hold Separate Manager (HSM), for example a firm of accountants, to run the acquired business until the CC's investigation has been completed (see further below). |
Case Study 1: Stericycle
In a recent case, Stericycle International Limited (Stericycle) completed the acquisition of its competitor, Sterile Technologies Group Limited (STG), without first having received clearance from the OFT. The transaction was subsequently referred to the CC,
and, in order to preserve as much as possible the integrity of the two businesses pending the outcome of the merger reference, the CC adopted the ‘hold separate’ undertakings that had been accepted by the OFT.
The ‘Hold Separate’ Order
The CC was concerned that both before and after the OFT issued its ‘hold separate’ undertakings, Stericycle had been actively integrating the STG business. Following a failure by the parties to agree undertakings with the CC, it imposed a ‘hold separate’ order in order to prevent further ‘pre-emptive action’ (see Terms of the Order box below).
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Pending the outcome of the inquiry, the CC ordered, amongst other things, that:
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The CC also directed the parties to appoint a MT to ensure compliance with the ‘hold separate’ order and to determine the extent of integration of the businesses. This was because it had serious concerns over the way in which the parties had implemented the undertakings imposed by the OFT and to ensure that separation of the businesses was preserved should divestment remedies need to be imposed.
Following the MT's report, the CC issued further directions for the appointment of a HSM to achieve separation of the already integrated Stericycle and STG businesses. The HSM assumed the role of CEO of STG, whilst the CEO of Stericycle/STG remained in place as the CEO of Stericycle.
The Appeal
Following these directions, Stericycle and STG appealed to the Competition Appeal Tribunal (CAT) and asked it to review whether the CC was entitled to appoint a HSM, and whether in this case, the appointment was reasonable.
The CAT observed that the CC had a statutory right (under the Enterprise Act 2002) to appoint a person to conduct or supervise the conduct of any activities and that this would include the appointment of a HSM. It stated that such an appointment was possible in order to prevent ‘pre-emptive action’, defined as ‘any action which might prejudice or impede any subsequent action by the CC’. The CAT therefore concluded that the CC had acted both reasonably and proportionately in appointing a HSM, in order to safeguard the effectiveness of any divestiture that it may ultimately order.
Moreover, the CAT found that the CC's action was in line with the CC's Guidance on Interim Measures which indicates that the appointment of a HSM is more likely when certain factors are present. These factors included: past breaches of interim measures, substantial integration of the merged businesses, the likelihood of further or continued integration, the absence of pre-merger senior management of the merged businesses and the risk that current senior management will run the merged business in the interests of the acquirer. The majority of these factors were present in this case in that:-
- Stericycle and STG had interpreted the OFT's interim measures (the ‘hold separate’ undertakings) as having no effect, such that material integration of the two businesses had occurred before the merger was referred to the CC;
- The process of integrating the two businesses seemed likely to continue; and
- In practice, the businesses were also subject to the same management under the CEO of the Stericycle UK subsidiary (the CC's key concern).
According to the CAT, these were ‘classic circumstances’ in which the appointment of a HSM was likely to be legitimate. This suggests that the threshold for the appointment of a HSM is relatively low.
This case demonstrates that the CC is not shy of exercising its powers in this regard and that the CC may require the separation of already-integrated businesses during its investigation.
What remedies can the CC impose?
Where the CC concludes that a completed merger has resulted in a ‘substantial lessening of competition’ (SLC), it has the power to take appropriate action, including ordering the divestment of certain businesses of the parties.
Case Study 2: Dean Foods
In another recent case, Noble Foods Limited acquired the majority of shares in Deans Food Group Limited (Deans) and Stonegate Farmers Limited (Stonegate). The completed transaction was then notified to the OFT who later referred it to the CC, having rejected the parties' offer of behavioural undertakings in lieu of a reference.
As the CC has concluded that the merger is likely to give rise to an SLC, it is currently seeking comments as to possible remedies to address its competition concerns. Interestingly, in this case, the CC has stated that if the remedy is to be divestment of the current target business (as opposed to the purchaser's business) then additional assets or contracts may need to be added on. If this option is chosen, this would effectively put Deans in a worse position than if the merger had not taken place. If this indeed happens, this will serve as a stark warning to parties that the CC has no qualms in penalising those who choose to press ahead without first seeking merger clearance.
Comment
The Stericycle case highlights that where a merger comes under the scrutiny of the OFT or the CC, these bodies have a broad discretion to use their powers to prevent pre-emptive action by the merging parties, including the appointment of a HSM, depending on the progress of the case.
In addition, in Stericycle the CAT criticised the OFT for failing to have issued a ‘hold separate’ order when the completed acquisition came to its attention (and thus for having allowed integration of the businesses to continue). This may mean that in the future the OFT is more likely to require ‘hold separate’ undertakings (or impose equivalent orders) and that such undertakings/orders will have a broader and greater impact, and will be applied more rigorously pending a decision on whether to refer to the CC.
Managing the risk
The practical impact of the OFT's and CC's actions in both these cases is that purchasers must carefully evaluate the benefits of completing a merger before receiving OFT clearance, against the risk of later disruption and additional costs to the business, in the event of a reference being made to the CC and a MT and/or a HSM being appointed. Extra care should be taken where a merger is at risk of being referred (and the signs are that the OFT is referring more mergers to the CC).
It may also be prudent, where possible, for parties to approach proactively the OFT (or CC in the case of referred mergers) with suggestions of ways to ensure that their businesses remain separate pending the outcome of the merger review process and, if necessary, to negotiate effectively with these bodies. Being co-operative in this way should help prevent the OFT/CC imposing more stringent measures which may be hard to challenge successfully later on.
Merging parties may proceed to integrate their businesses unless the OFT seeks ‘hold separate’ undertakings from them, or until the OFT/CC orders them not to do so. However, there is a risk that any integration that has already occurred may need to be unravelled, especially where it is likely that the merger may be referred to the CC. The question of risk is one for the merging parties to assess: Is integration a risk worth taking before it is clear whether or not the merger will be referred? Or is it more prudent (and perhaps more cost effective) to wait and see?
If the benefits of integration outweigh the disadvantages, then the merging parties would in any event be well-advised to appoint a separate person to manage the acquired business. This would help address the key concern, identified in Stericycle, of having a single ‘directing mind’ managing both the acquiring and acquired businesses and may mean that the parties are less likely to have to bear the cost of paying for a MT and/or HSM later on.
The CC's current approach in Dean Foods is a stark warning that purchasers may actually be worse off if they complete a merger before receiving clearance. If you would like to know more about us or how we could help you, please call one of the following contacts in our EU & Competition Group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
