Buying a liquidated company’s assets? – Be wary of UK Merger Control

by Bryan Cave
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On the 16 December 2015, the Supreme Court overturned a decision of the Court of Appeal and held that the Competition and Markets Authority (CMA) had the power to subject the acquisition of the former SeaFrance Dover-Calais ferry business by Eurotunnel to merger control, even though Eurotunnel had only acquired the assets of the business out of liquidation. The ability to subject the acquisition to merger control meant that the CMA had the power to oppose the acquisition and impose a 10 year ban on Eurotunnel operating a ferry service using the assets. The decision brings to an end a legal saga and has serious implications for many future acquisitions of liquidated assets in the UK.

The facts
The facts of the case concern the now defunct SeaFrance ferries which crossed between Dover and Calais. The business went into liquidation in November 2011. Within months of this liquidation, Groupe Eurotunnel S.A. (Eurotunnel), purchased many of the former SeaFrance assets. These assets included three ferries, customer records and IT software. Eurotunnel then began running a similar service to the liquidated SeaFrance ferries under the trade name; ‘MyFerryLink’, within seven weeks of their acquisition of the assets. The assets were purchased in conjunction with a co-operative of former SeaFrance employees, many of whom subsequently got jobs under the MyFerryLink brand, operating the ferries as before.

The CMA’s decision
The purchase of the former SeaFrance assets was considered by the CMA to be the purchase of an ‘enterprise’ under the meaning of the Enterprise Act 2002. The CMA believed that although the purchase had followed the liquidation of the former SeaFrance, in reality, it was not the purchase of assets but rather an enterprise or going concern as the business could be turned around in a short time in order to operate on a similar basis to how it had operated before, albeit under a different brand name. This was withstanding the fact that the former employees had been formally dismissed and the berthing slots for the ships given up. The CMA therefore asserted they had jurisdiction to assess the purchase under the UK merger control regime and that the co-operative and Eurotunnel were acting as associated persons under the Enterprise Act when they purchased the assets.

After deciding they had jurisdiction to investigate the purchase, the CMA asserted that the acquisition brought serious competition concerns due to the overlap of the Eurotunnel train based crossing and the acquisition of one of only several sea ferry operators between Dover and Calais. Subsequently, the CMA (actually its predecessor the Competition Commission) ruled in July 2013 that Eurotunnel must either sell the ferry business or stop operating it for a period of ten years.

The CAT’s decision
The CMA’s decision was appealed by Eurotunnel under section 120 of the Enterprise Act to the Competition Appeal Tribunal (CAT). The CAT upheld the CMA claims and considered it correct to consider the co-operative and Eurotunnel as a single entity for the purposes of the acquisition, and that the acquisition should be considered the acquisition of an enterprise within the meaning of the Enterprise Act 2002. However, permission was granted to appeal to the Court of Appeal on jurisdictional grounds concerning the CMA’s ability to assess the competitive effect of the purchase.

The Court of Appeal
The Court of Appeal overturned the CAT and CMA’s analysis in a majority decision on the basis that the CAT had erred in finding that the former SeaFrance employees had transferred to Eurotunnel and the Co-operative. The Court of Appeal instead believed they had been re-hired separately under new contracts following the termination of their SeaFrance contracts and therefore the CMA did not have jurisdiction in assessing the competitive effects of the acquisition. Only four days after this judgment, the CMA announced their intention to seek appeal of the decision to the Supreme Court for final adjudication on their jurisdiction in this matter.

The Supreme Court
The Supreme Court’s judgment represents the conclusion of the case and a reinstatement of the CMA’s jurisdiction to assess the acquisition under UK merger control laws. The Court followed both the CMA’s and CAT’s reasoning and considered the Court of Appeal judgment incorrectly formal. The Court looked at the substance of the acquisition over the form and considered the acquisition, an acquisition of the ‘activities of a business’, thus satisfying the definition of an enterprise under the Enterprise Act 2002, as mentioned above. The Court believed the acquisition was the purchase of a ready-made business and that was economic continuity between the cessation of the SeaFrance business and the advent of MyFerryLink. Crucially, the Court reaffirmed that the law does not specify a time limit after which the reinstatement of the business could not be considered an enterprise, therefore the CMA (and the CAT) had been correct to hold it so. Lastly, it is worth noting the Court gave a warning to appellate courts such as the Court of Appeal (and presumably itself in future hearings) not to lightly overturn the findings of the expert competition tribunals and regulators, when they had evidenced and reasoned their case thoroughly.

Comment
Aside from the strict legal analysis on the wording under the Enterprise Act, the decision by the Supreme Court, the CMA and the CAT was a matter of public policy. The fact of the matter is that continuation of the MyFerryLink business threatened the existence of the low cost competitor DFDS, one of only three operators, together with P&O. If Eurotunnel with its alleged dominant position was able to squeeze a competitor out of the market and avoid merger control by waiting for the SeaFrance business to be formally liquidated rather than buying it while it was still a legal entity, a sizeable lacuna would exist in competition law.

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Bryan Cave
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