CMA imposes fine for breaches of 'hold separate' order

On 10 January 2019, the Competition and Markets Authority (CMA) announced that it had fined European Metal Recycling Ltd (EMR) and its parent company, Ausurus Group Ltd, £300,000 for allegedly breaching an initial enforcement order (IEO) issued in relation to the CMA's Phase 2 investigation into EMR's completed acquisition of rival scrap metal player, Metal & Waste Recycling Ltd (MWR). In particular, EMR and Ausurus were sanctioned for actions that amounted to inappropriate and unauthorised integration of the target business whilst the CMA's investigation remained on going.

This fining decision (taken on 20 December 2018) highlights the CMA's determination to make strict compliance with the procedural merger rules an enforcement priority. It also illustrates the risks merging parties face where they proceed to close a transaction without first notifying and receiving CMA clearance.

Background

This fine marks only the second time a penalty has been imposed by the CMA for failure to abide by the terms of an IEO under section 72 of the Enterprise Act 2002 (EA 2002) – often called a 'hold separate' order requiring merging parties to 'standstill' and avoid further integration until the CMA's review is complete. However, this development follows very soon after the first such fine (a £100,000 fine imposed on Electro Rent in June 2018 – see A sign of things to come? CMA imposes first fine for breach of a 'hold separate' interim order) and only a year after the CMA fined Hungryhouse for a procedural breach committed during the CMA's review of the HungryHouse/Just Eat merger – underscoring a discernible trend of the CMA actively pursuing merging parties for procedural violations.

Procedural breaches of the merger control rules, in particular violations of 'standstill' obligations (whether under EU or national laws) are very much in the news at the moment with the European Commission and other authorities (in Europe and beyond) having recently initiated investigations and/or imposed significant fines in a number of high-profile cases. These recent UK cases are, however, particularly interesting as they arise in the context of a voluntary merger regime (i.e. where there is no legal obligation to notify a transaction) and where parties can (and often do) close their deals without the CMA's prior approval.

IEOs

IEOs are an important feature of the UK's voluntary merger control regime, one in which qualifying mergers (i.e. ones meeting the jurisdictional thresholds) can be completed without notification to the CMA. Such mergers nevertheless remain at risk of being 'called in' by the CMA for review.

Where the CMA exercises such power to examine an already completed transaction, it will routinely impose an IEO to prevent the parties from further integration of their businesses or doing anything which might otherwise prejudice the CMA's investigation or obstruct the imposition of appropriate remedies (which may ultimately be required to address identified concerns). In short, IEOs are a vital tool for ensuring the CMA "has the full range of remedy options open to it if required by the findings of the investigation" (Electro Rent Penalty Notice, para 63).

Where the merging parties wish to do something which is restricted under the terms of the IEO, they must seek a derogation from the CMA in advance. Parties must also submit regular compliance statements to the CMA confirming compliance with the IEO and inform the CMA of any 'material developments' relating to their businesses. This is in addition to the general obligation actively to keep the CMA informed of such material developments.

The CMA has the power (under section 94 EA 2002) to fine parties up to 5% of their combined global turnover in the event an IEO is breached "without reasonable excuse".

Ausurus Group/MWR merger

On 25 August 2017, EMR completed the acquisition of the entire issued share capital of CuFe Investments Ltd (CuFe and the ultimate parent of MWR). Both EMR and MWR were active in scrap metal recycling (the two largest players in the UK prior to the merger) but did not notify the transaction to the CMA.

Having become aware of the transaction through its own market intelligence function, the CMA 'called in' the transaction and (on 11 September 2017) imposed an IEO on the parties. The IEO required the parties to, amongst other things, maintain and operate the businesses separately, to refrain from taking any action that might impinge on the parties' ability to compete as independent entities on the market and to notify the CMA immediately of any breach or suspected breach of the IEO. To this end, the parties provided regular compliance statements confirming that they were operating in compliance with the IEO.

On 24 January 2018, the CMA determined that the transaction gave rise to a realistic prospect of a substantial lessening of competition and that it would refer the matter for a more in-depth Phase 2 investigation unless acceptable undertakings in lieu of reference were provided. When the parties declined to offer such undertakings, the CMA referred the completed acquisition for a Phase 2 review on 7 February 2018. A Monitoring Trustee was appointed on 27 February 2018.

The parties ultimately provided acceptable undertakings in November 2018 – with the CMA publishing a notice on 5 November 2018 confirming its acceptance (and at which point the IEO ceased to be in force). However, a few weeks before the investigation was closed, the CMA informed EMR and Ausurus that it was considering imposing penalties under the IEO owing to potential non-compliance between the date the IEO was imposed (11 September 2017) and March 2018. The issues of concern were flagged to the CMA's attention by the Monitoring Trustee in reports it provided shortly after its appointment (in March 2018).

Following correspondence between the parties and the CMA, the CMA determined that EMR and Ausurus had, in fact, violated the terms of the IEO on the basis that they had (without prior consent from the CMA and going beyond activity covered by an approved derogation):

  • directed customers of MWR to make payment into Ausurus' bank account and themselves made payments to MWR metal scrap suppliers – such actions amounting to unauthorised integration (and failure to maintain separation) of the merging businesses and potentially impairing the ability of MWR to compete independently (namely by blurring the separate brand and sales identity); and
  • failed to give MWR's managing director a clear delegation of authority to take decisions without consulting or first obtaining permission from Ausurus/EMR – amounting to a failure to take adequate steps to ensure MWR was able to conduct business independently and as a separate going concern.

Under section 94A(1) EA 2002, the CMA may impose penalties where failure to comply with an IEO is "without reasonable excuse" – with the person who has committed the breach bearing the evidential burden of demonstrating that there exists an objectively reasonable justification.

The CMA determined that EMR and Ausurus were not able to establish any such excuse and, therefore, that a penalty was appropriate taking into account general and specific deterrence considerations as well as the seriousness of the breaches in question. The level of the fine, in turn, reflected the seriousness of the breaches and included 'aggravating factors' such as the alleged involvement of senior management in material acts and omissions and that EMR/Ausurus potentially obtained a competitive advantage (and derived potential benefit) from the violations of the IEO.

The CMA, however, considered that the breaches were not so serious as to warrant a fine at the upper end of the statutory 5% maximum. In this respect (and in mitigation), the actual negative effects (though potentially significant) were likely only to be limited. Furthermore, the parties were responsive and cooperative when alerted to the breaches by the CMA (acting swiftly to remedy the situation). The CMA also took into account the level of fine imposed in the Electro Rent case (£100,000) which was imposed (in June 2018) after the breaches in question had taken place in this case. See Penalty Notice (dated 20 December 2018).

Comments

These recent UK cases underscore the importance of parties subject to IEOs working closely with specialist advisors to ensure they appreciate fully the stringent obligations and, as such, to avoid inadvertently falling foul of the requirements under an IEO – especially when integration is already at an advanced or near completed stage.

The fact that these recent cases were ‘called in’ and the parties subject to fines for IEO non-compliance also highlights the complications and subsequent risk of closing transactions without first notifying and receiving CMA clearance. Indeed, despite the voluntary nature of the UK regime (again, which does not require parties to notify or suspend closing), there will always be material risk in proceeding without notification and/or unconditionally – in particular where the merging parties are competitors on UK markets and/or where the transaction generates significant vertical foreclosure concerns.


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