The UK Supreme Court has decided that Groupe Eurotunnel's purchase of various assets of SeaFrance was subject to the UK merger control regime, despite SeaFrance having gone into liquidation more than six months prior to the purchase. This was the final stage of a long-running dispute about whether or not a business in liquidation can still be an 'enterprise' for merger control purposes.
The decision could have significant consequences for insolvency practitioners, and in particular for businesses looking to buy assets from a liquidator, who will need to factor in the risk of merger control, which can add significant time and cost to a deal or perhaps even block it altogether.
SeaFrance, which operated cross-Channel ferries, went into administration in April 2010 and was subsequently put into liquidation by a French court order in January 2012. Most of its employees were dismissed. The Societe Cooperative de Production SeaFrance SA (SCOP) was formed as a workers cooperative to secure employment for those former employees.
In July 2012, Groupe Eurotunnel (which operates the Channel Tunnel) acquired all of SeaFrance's assets, including three vessels and various IP rights, on the basis that SCOP would provide crews and shore staff (with a generous incentive payment from SeaFrance's parent company SNCF for each former SeaFrance employee taken on). The ferry services began operating in August 2012, crewed almost entirely by former SeaFrance workers.
Under the Enterprise Act 2002, one of the conditions governing whether the UK competition authorities have jurisdiction over a deal is that two or more 'enterprises' must cease to be distinct (the other tests that must be met are the target having a UK turnover of at least £70 million or the deal giving the buyer at least a 25% share of any market). An 'enterprise' is defined as "the activities, or part of the activities, of a business". The present case concerned whether Eurotunnel had acquired the SeaFrance 'enterprise', or merely a collection of assets that used to belong to SeaFrance.
When the deal was first investigated, the Competition Commission decided that despite SeaFrance having ceased to trade more than seven months previously, the activities of its business had been continued by Eurotunnel. This was due to, among other factors, the ease and speed with which the vessels were put back into operation and the fact that the staff largely consisted of former SeaFrance employees, in line with the agreed incentive scheme. The Commission then decided that the acquisition could be expected to result in a substantial lessening of competition between the Channel Tunnel and cross-Channel ferry services, and so restricted the operations of Eurotunnel's ferry service (including a ten-year ban on using the SeaFrance vessels as ferry services from Dover).
Following a tortuous procedure involving two Competition Appeal Tribunal (CAT) hearings and a remittal to the Competition and Markets Authority (CMA _ which had by then replaced the Commission), the case found its way to the Court of Appeal. A majority there reversed the CMA and the CAT decisions, deciding that Eurotunnel had not acquired an 'enterprise' but had instead acquired assets in order to construct a new business. The merger control regime would only apply if there was a transfer of a business "as a going concern". SeaFrance ceasing operations and dismissing its employees meant the activities of the company had finally and irreversibly been brought to an end, and the maintenance of the vessels to enable a more beneficial sale was irrelevant to that outcome.
On 16 December 2015, the Supreme Court unanimously overturned the Court of Appeal decision, holding that UK merger control is not limited to deals involving the acquisition of a business as a going concern. It stated that a hiatus in the activities of the business will be relevant but not decisive, with its importance varying from case to case. An enterprise will therefore continue to exist, and merger control will be capable of applying to it, as long as there is still the capacity to perform activities as part of the same business.
The Court set out the following test:
- whether the purchaser, in acquiring the assets, is obtaining more than he might have acquired by going to the market and buying equipment, recruiting new staff etc.; and
- whether this 'extra' is attributable to the fact that the assets were previously employed in combination in the activities of another enterprise.
The Court noted that these criteria are less likely to be satisfied the more time that has passed since the other enterprise ceased trading. The question is ultimately likely to turn on the concept of 'economic continuity', and whether the whole of the acquisition is greater than the sum of its parts.
In this case, the acquired vessels were specifically designed for the relevant route and had been maintained in a condition that allowed the service to resume more quickly and at lower cost (and risk) than if ships had been acquired elsewhere. Furthermore, although SeaFrance's employees had been made redundant, the incentive payments created a link between the ships and the personnel, and Eurotunnel's arrangement with SCOP allowed the service to be resumed with substantially the same staff (again providing significant efficiency advantages).
The Court therefore agreed with the CMA that there had been "considerable continuity and momentum" between the activities carried out by SeaFrance before its liquidation in January 2012 and those carried on by Eurotunnel after July 2012, and that what the CAT had called the "embers of an enterprise" remained even after the liquidation.
The Eurotunnel decision confirms that buying assets from a liquidator will in some circumstances require UK merger clearance. The case also tells us that the status of employees _ i.e. will they transfer to the new buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)? _ may be a significant (though not necessarily definitive) indicator that an 'enterprise' is being purchased.
Businesses and insolvency professionals will need to consider the economic reality of a deal, rather than just its form, in order to assess the risk of the CMA reviewing or even blocking the acquisition. Eurotunnel abandoned its plans to run freight-only ferry services immediately following the judgment, having already offloaded its two passenger ferries earlier last year, demonstrating the potential seriousness of an adverse CMA decision.
Please get in touch with your usual Brodies contact or a member of our competition team if you would like to discuss this case or the merger control process in general,and in particular if you think a proposed deal may require merger clearance.