Supreme Court defines limits of merger control

16/12/15

On 16 December 2015 the Supreme Court handed down judgment in Société Coopérative de Production SeaFrance SA v Competition and Markets Authority [2015] UKSC 75.

In the first appeal to reach it on the mergers provisions of the Enterprise Act 2002, the Supreme Court has provided important guidance as to the jurisdiction of the Competition and Markets Authority (“CMA”).

The appeal concerned the acquisition by Group Eurotunnel SA (“GET”), acting together with the Société Coopérative de Production SeaFrance SA (“SCOP&rdqurdquo;), of the assets of SeaFrance SA, which had formerly operated a ferry service between Dover and Calais but, at the time of the acquisition, was in liquidation.

In June 2013 the Competition Commission concluded that a “relevant merger situation” had occurred for the purposes of Part 3 of the Enterprise Act 2002, which could be expected substantially to lessen competition in the market for ferry services across the Channel. As a result, it prohibited GET from operating any service from Dover using the passenger ships acquired from SeaFrance for a period of ten years.  That decision was challenged by GET and SCOP before the Competition Appeal Tribunal, which remitted the matter back to the Competition Commission (whose functions were later taken over by the CMA) for further consideration of whether there was indeed an acquisition of an “enterprise” as opposed to the acquisition of bare assets.  The CMA maintained its conclusion that there was a “relevant merger situation” within the meaning of the 2002 Act. Although SeaFrance had entered liquidation, its services had ceased, and most of its employees been made redundant, there was continuity between the old SeaFrance business and what GET had acquired – in particular the vessels used in the crossings, the former business’ trademarks and significant numbers of the former crew.

GET and SCOP challenged the CMA’s decision on the basis, inter alia, that it was irrational. This challenge was rejected by the CAT, but upheld following an appeal by SCOP to the Court of Appeal (by majority).  The Court of Appeal held that the former SeaFrance crew had not “transferred” to the new entity because they had been made redundant prior to being reemployed by GET/ SCOP.  GET/ SCOP had not, therefore, taken over the “activities of [SeaFrance’s] business.”

The CMA appealed to the Supreme Court, challenging not only the Court of Appeal’s findings on the irrationality point, but also the legal test applied by the Court of Appeal for the existence of a relevant merger situation. GET was not a party to the Court of Appeal proceedings and, by this point, SCOP had entered liquidation. As a consequence, an Advocate to the Court was appointed. GET was later granted permission to intervene.

The leading judgment of the Supreme Court was given by Lord Sumption, with whom Lords Neuberger, Clarke, Reed and Hodge agreed. On the question of the legal test, Lord Sumption considered that the purpose of merger control was to regulate in advance the impact of concentrations on the competitive structure of markets. In that context, it was not necessary for “activities” to be carried on at the date of the acquisition. A hiatus in those activities is therefore relevant, but not decisive. Where there is such a hiatus, it is necessary to consider whether (i) what is acquired is something more than could have been acquired by going into the market and buying factors of production, and (ii) the “extra” is attributable to the fact that the assets were previously employed in combination in the activities of the target enterprise. Lord Sumption held that the question ultimately turns on “economic continuity” between the old operation and the new.

Applying that principle to the irrationality part of the challenge, Lord Sumption considered that the CMA’s decision had not been irrational and therefore allowed the appeal. In particular, the majority of the Court of Appeal had sought to reduce the question of economic continuity to the single question whether the employment relationship between SeaFrance and its crew had been terminated.  This “led them to take an unduly formal approach to the issue before them, and to discount the depth of economic analysis which underlay the [CMA’s] original conclusion”.

The judgment can be found here