Under the Enterprise Act 2002, the Competition and Markets Authority (CMA) only has jurisdiction to review a transaction if a "relevant merger situation" has been created. A key criterion of a "relevant merger situation" is that two or more enterprises must have ceased to be distinct. Acquisitions of bare assets on their own do not give rise to ex ante merger control scrutiny (to ensure that the organic growth of business is not inappropriately hindered).
On 16 December, the UK's Supreme Court provided some useful guidance on
- What might be considered an 'enterprise' (as opposed to a collection of assets), and
- What legal relevance can to be attached to a cessation of trade by the relevant enterprise.
SeaFrance, a wholly-owned subsidiary of Groupe SNCF (SNCF), operated ferries on the Dover-Calais route but went into liquidation in November 2011. Subsequently, the French courts formally ended SeaFrance's activities in January 2012.
Groupe Eurotunnel S.A. (GET) acquired a substantial part of the SeaFrance assets; including three ferries, various IP rights, IT software and hardware, office equipment and customer lists and records. In addition, many of the former SeaFrance employees found subsequent employment working on the ferries that GET had acquired from SeaFrance (even though they had not been transferred as part of the transaction and had in fact been made redundant by the French court). SNCF had also agreed to pay an "indemnity" of 25,000 EUR for each former SeaFrance employee that was subsequently re-deployed on the former SeaFrance vessels.
The case came before the Supreme Court because the relevant UK competition authority (now the Competition and Markets Authority - CMA) investigated the transaction on the basis that it considered a "relevant merger situation" existed and imposed remedies on the parties. The decision and remedies were challenged before the Competition Appeal Tribunal (CAT), then the Court of Appeal and ultimately before the Supreme Court.
The Supreme Court, in reviewing the Court of Appeal's findings (that a relevant merger situation had not arisen) made various relevant pronouncements, notably in relation to what might be considered to be an 'enterprise' (as opposed to 'bare assets') and what the legal relevance was of a cessation of trade.
'Bare assets' or an 'enterprise'
The Supreme Court established two criteria in order to determine whether an acquisition of a collection of assets constitutes an acquisition of an 'enterprise'. Firstly, the company must obtain something more than merely assets that it could otherwise have acquired separately on the open market. Secondly, this extra value must stem from the fact that the collection of assets was previously employed in combination in the activities of the target enterprise. There must, in other words, be some 'economic continuity' between the previous business activities and the collection of acquired assets. The acquisition must be such that "economically the whole is greater than the sum of its parts".
Legal relevance of a cessation of trade
The Supreme Court further confirmed that the applicability of the Enterprise Act 2002 was not limited to acquisitions of an enterprise as a going concern. As such, the fact that SeaFrance had ceased trading prior to the acquisition was not decisive. However, the court noted that the longer the interval between the enterprise's cessation of trade and the acquisition of control over the assets, the higher the likelihood that the acquisition is of bare assets.
There is no requirement that the enterprise must have carried out its activities at a particular time eg at the time of the transaction. However, in order for a collection of assets to qualify as an enterprise, a residual capacity to carry out the business activities must remain. In the words of the CAT, the "members of an enterprise" must remain.
The Supreme Court emphasised that if the UK merger control regime could not apply to cases where the relevant activities have ceased before the time of the concentration, it would severely limit the regime's effectiveness and scope. The following examples of temporary cessation of business not being decisive were noted:
- Seasonal businesses which only operate for parts of the year, and where the concentration occurs when the business is not trading
- Where a business has gone into liquidation and has been temporarily mothballed by the liquidator in the hope that a purchaser can be found for the whole business, and
- Where an entity cease trading before an anticipated merger with the specific intention to evade scrutiny under the UK merger control system.
The Supreme Court allowed the appeal and held that the authority had not acted irrationally in finding that a "relevant merger situation" had arisen as it had sufficient facts before it demonstrating that the cessation was not decisive.
The Supreme Court has provided some much needed clarity to the concept of an 'enterprise' and what impact a cessation of trade has. The case confirms that a business does not need to be transferred as a going concern in order to be an 'enterprise' for the purposes of UK merger control.
The case also highlights that careful analysis needs to be carried out on the asset(s) being acquired and the economic context surrounding the acquisition to determine:
- Whether the acquisition is genuinely a collection of assets, devoid of any link to a previous activity, or
- Whether there is an "economic continuity" between the assets and the previously operated enterprise.
If there is economic continuity between the cessation of one enterprise and the resumption/initiation of another, then the transaction is not beyond the reach of the UK merger control regime.