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Jack_Kennedy_phOn 14 and 15 October, the Supreme Court heard an appeal from the Competition and Markets Authority in relation to the CMA’s jurisdiction to review the acquisition of certain assets of a liquidated company by another. Was this, in fact, a relevant merger situation in which two enterprises cease to be distinct, thereby falling within the CMA’s jurisdiction? Or was there no enterprise to be acquired at the date of the acquisition, but merely a collection of assets? Further, was the decision that the CMA reached irrational, as decided in the Court of Appeal?

Background

In June 2010, the popular operator of cross-channel ferries, SeaFrance, was placed into administration and later, in November 2011, liquidation. This was despite efforts of both the French Government and a co-operative of SeaFrance workers (SCOP) to keep the company alive.

Although SeaFrance ceased trading, a number of steps were taken as regards its workforce and assets:

  1. SeaFrance’s vessels were put in “hot lay-up”, meaning that they were maintained by a number of employees in a condition whereby they could be ready to resume service quickly.
  1. Under the French Labour Code, SNCF, the owner of SeaFrance, had to offer a “job saving plan” to help protect employees who had been made redundant. Such a plan (known as PSE3) was adopted in January 2012 and amounted to what was called an “indemnity”. In essence, as Arden LJ later described in the Court of Appeal judgment, it acted as an incentive to any putative new company to employ ex-SeaFrance employees by promising to pay that company €25,000 per employee if it so employed them in a “similar operation”.

That incentive appeared to have worked: in June 2012, Group Eurotunnel SA (GET) bought three vessels that used to be operated by SeaFrance, along with customer lists, software and domain names. GET then entered into a contract with SCOP by which SCOP agreed to provide services and crew members for their new joint venture, a cross ferry service known as MyFerryLink.

It was at this stage that the CMA (or the Competition Commission as it was then known) became involved. It was the first of many stages in the proceedings. It is helpful to take each in turn.

Stage 1: The Competition Commission’s initial report

In June 2013, the Competition Commission reported that the circumstances surrounding GET’s acquiring of various assets constituted a “relevant merger situation” under s.35(1) Enterprise Act 2002 thereby falling within its jurisdiction. It further concluded that the merger itself would likely result in a substantial lessening of competition in the cross-channel ferry market. As a result, the Commission concluded that GET should be prevented from operating its service for 10 years.

Stage 2: GET and SCOP’s challenge (“CAT 1”)

GET and SCOP challenged the decision of the Competition Commission at the Competition Appeal Tribunal (CAT). As we shall see, central to this case is the question of whether an “enterprise” was, indeed, acquired and therefore s.35(1) of the Enterprise Act 2002 was engaged (and, as a result, the Commission had jurisdiction).

s.23(2)(a) Enterprise Act 2002 states that a relevant merger situation has been created if “two or more enterprises have ceased to be distinct enterprises at a time…” It further defines an “enterprise” as “the activities, or part of activities, of a business” (s.129(1) Enterprise Act 2002). Thereafter, there is little guidance both in the statute, and, somewhat surprisingly, case law. CAT1 sought to offer some guidance of its own relying, in part, on a report of the Monopolies and Mergers Commission in the matter of AAH Holdings plc and Medicopharma NV.

It suggested that the Commission might consider the following when deciding whether an enterprise had, in fact, been acquired:

  1. How much time had passed between the SeaFrance ceasing to carry on business and the transfer to the merged enterprise? The CAT stressed that continuous trading was not essential and could be, as Arden LJ later put it in the Court of Appeal, “paused”;
  2. Identify the assets that GET obtained over and above the bare assets;
  3. Ask whether these acquisitions placed GET in a different position from that in which it would have been if it had purchased them in the open market; and
  4. If GET used those assets in the same way in which they were previously used by SeaFrance, that did not, in and of itself, mean that the business was the same.

Stage 3: Remittal to the CMA and CAT 2

On 27 June 2014, the CMA revisited the question of whether an enterprise had been acquired and, therefore, its jurisdiction was engaged. It did so in light of CAT 1’s guidance, but nevertheless held to its initial decision. GET and SCOP appealed this latest report of the CMA, but in CAT 2, the CAT found no grounds for allowing such an appeal. However, it granted GET and SCOP permission to appeal to the Court of Appeal.

Stage 4: the Court of Appeal

Importantly, GET and SCOP’s appeal did not extend to whether the guidance in CAT 1 as to how to analyse the question of what constituted an “enterprise” was correct. Instead, it focused on the rationality of the CMA’s final decision.

The Majority

Sir Colin Rimer and Tomlinson LJ in the majority allowed the appeal and concluded that the CMA’s decision was flawed. They both were of the view that it was “counter-intuitive” to suggest that SeaFrance was conducting any activities at the time of the acquisition. Indeed, as Tomlinson LJ observed, the period of inactivity was seven and a half months. To talk of any “embers of an enterprise” existing, as others had, was equally flawed. Although the vessels remained in “hot lay-up” that was not, in the majority’s view, indicative of the continuation of the business, but rather a prudent decision to make the vessels more appealing to a future purchaser. Equally, addressing the question of the workforce and the suggestion that the PSE3 represented momentum and continuity between SeaFrance and the GET/SCOP operation, the majority were not convinced.  Tomlinson LJ pointed out that the employees were made redundant without any guarantee of reengagement. This was not, as Colin Rimer made clear, a transfer (actual, or effective) of employees.

The Minority

Arden LJ delivered a comprehensive dissenting judgment dismissing the appeal, in which she agreed with both the CMA’s approach to its decision-making, and the decision itself. She stated that “the CMA could rationally take the view that, even though SeaFrance had been placed in liquidation, and even though its employees have been declared redundant, GET/SCOP acquired its business. The CMA made some errors in the way it described the events but the conclusion which it reached was inevitable” (at paragraph 10).

Stage 5: The Supreme Court

On 14 and 15 October 2015, the Supreme Court heard an appeal from the CMA. The panel was comprised of Lord Neuberger, Lord Clarke, Lord Sumption, Lord Reed and Lord Hodge. The basis of the appeal was that the Court of Appeal erred in its finding that the CMA did not have jurisdiction. Equally, the CMA appealed against the decision that its own findings were irrational.

In its submissions, the CMA argued that the Court of Appeal had engaged in too formalistic an analysis of the meaning of “enterprise”. Citing Sir Colin Rimer’s references to TUPE and “selling the business as a going concern”, the CMA argued that the importation of such notions in the analysis was not something that Parliament required of the CMA. Rather, the CMA was required to consider matters “in the round” when reaching its conclusions.

In response, GET/SCOP accepted that whether the activities of a business continued up to the point of acquisition by another company was a question of fact and degree and that the business need not have to be actively trading up to the point of acquisition. However, they submitted that the proper question was one of whether the economic substance of the business was still there – was there, as they put it, economic continuity? Agreeing with the substance of the majority’s view in the Court of Appeal, the argument was advanced that an enterprise was not acquired, but merely a collection of assets.

The Judgment of the Supreme Court and its effect.

It is difficult to know quite how far-reaching the decision of the Supreme Court will be. Of course, it will no doubt offer some guidance to those interested in merger control as to what constitutes an enterprise for the purposes of the relevant legislation. However, such are the intricacies of the case and its procedural history, that one might imagine the judgment could be rather limited in its scope. However, as with any judicial review case, it is always interesting to see how well the Court manages to maintain, or be at pains to appear to maintain, the appeal/review distinction. It seems it was, at times, a difficult task for the majority in the Court of Appeal to maintain the distinction, and it will be interesting to see how successfully the Court manages to keep its appropriate distance from substituting, or appearing to substitute, its own decision for that of the body tasked by Parliament to make such decisions.