Acquisition of Seafrance Assets--Court of Appeal Says No Jurisdiction

Acquisition of SeaFrance assets--Court of Appeal says no jurisdiction

22/05/2015

Competition analysis: The Court of Appeal has upheld a challenge to the Competition and Markets Authority's (CMA) jurisdiction over Eurotunnel's acquisition of three ferries and related assets formerly owned by SeaFrance. Matt Evans, partner at Jones Day, examines the issues raised in the case and its impact on UK merger rules.

Original news Société Coopérative de Production SeaFrance SA v Competition and Markets Authority and another [2015] EWCA Civ 487, [2015] All ER (D) 146 (May) The CMA had found there to have been a relevant merger situation under the Enterprise Act 2002, s 22(1) (EnA 2002) arising from the appellant's acquisition of cross-channel ferries from SeaFrance's liquidator and its employment of the majority of former SeaFrance employees, as a consequence of a statutory indemnity payment to the appellant for employing those redundant workers. The decision was upheld by the Competition Appeas Tribunal (CAT). The Court of Appeal, Civil Division, allowed the appeal as the CMA's finding that upon such mass re-employment there had been in reality a transfer, or a transfer 'in effect' by SeaFrance, had been irrationally wrong and one that could not properly have been made. For more information on this case, see SCOP v CMA and DFDS (Court of Appeal).

How did the case end up before the Court of Appeal? This dispute dates back to October 2012, when the Office of Fair Trading (OFT) decided to refer Eurotunnel's (GET) acquisition, together with a workers cooperative formed by former SeaFrance employees (SCOP), of certain assets of SeaFrance for an in-depth merger review by the Competition Commission. In June 2013, the Competition Commission, in its report in Eurotunnel/SeaFrance, concluded that the assets acquired met the statutory definition of an 'enterprise' for the purposes of EnA 2002 and that it had jurisdiction to review the deal under the UK merger control regime. It also concluded that the merger would be likely to result in a substantial lessening of competition in the markets for the supply of transport services to passengers and freight customers on the short sea crossing between England and France, and that the most effective remedy was to prohibit GET from operating ferry services at the port of Dover for ten years. GET would have six months prior to this prohibition coming into effect to dispose of the two vessels to a suitable purchaser if it so wished. Both GET and SCOP appealed the decision to the CAT. The CAT ruled on 4 December 2013 in Eurotunnel and Société Coopérative de Production SeaFrance v Competition Commission (1) (CAT 1) that there were doubts as to whether GET/SCOP had acquired an 'enterprise' for the purposes of EnA 2002, thereby casting doubt as to whether the deal involved two enterprises ceasing to be distinct--which is part of the jurisdictional test in UK merger control. The CAT remitted to the Competition Commission the question of whether it in fact had jurisdiction in this case. On 27 June 2014, the CMA, which had taken over the functions of the OFT and Competition Commission, issued its final decision on the jurisdictional question in Eurotunnel/SeaFrance (remittal investigation), concluding that the acquired assets did constitute an enterprise and confirming that it had jurisdiction to review the merger. GET and SCOP lodged further appeals with the CAT against this decision, in particular as regards whether the acquired assets constituted an 'enterprise'. The CAT concluded on 9 January 2015 in Eurotunnel and Société Coopérative de Production SeaFrance v CMA (2) (CAT 2) that there were no grounds for setting aside the CMA's decision. SCOP was granted permission by the Court of Appeal to appeal that ruling on an expedited basis.

Why did the Court of Appeal conclude that the assets acquired did not amount to an 'enterprise'? By a two-to-one majority, the Court of Appeal upheld SCOP's appeal in SCOP v CMA and DFDS (Court of Appeal).

The Court of Appeal considered the definition in EnA 2002 of 'enterprise'--'the activities or parts of the activities of a business'. The Court of Appeal referred to the CAT's guidance in the CAT 1 judgment which provided that:

o the mere acquisition of 'bare assets' will not constitute the acquisition of 'activities', but o if the acquirer can be said to have acquired 'something more' than bare assets that can be said to have placed it in a different position than if it had simply gone out into the market and acquired the assets, then o a further question arises as to whether such difference 'is capable of constituting what would otherwise be bare assets into something that may properly be described as the activities of a business' The first factor to take into account was that SeaFrance's 'activities' had ceased since November 2011 and had no prospect of resuming after 9 January 2012, when the French court formally ordered the end of any continuation of them. However, the Court of Appeal agreed with the CMA that for the 'enterprise' or 'activities' of a business to come under the control of an acquirer, it is not necessary for the business actually to be trading or carrying on any 'activities' at the moment of acquisition. The crux of the matter rested on whether there had been a transfer to GET/SCOP of the former SeaFrance employees alongside the vessels and certain other assets. In the words of one of the judges: 'If GET/SCOP can fairly be regarded as having acquired from SeaFrance's liquidator both the vessels and the crew that had manned them, I can see a possible basis for a conclusion that SeaFrance's "activities" as short sea ferry operators were brought under their ownership or control.' In other words, the acquisition of the workforce would be that 'something more' that would take this deal over the line from a bare asset acquisition to the acquisition of an enterprise. The question of whether employees had also been transferred along with the assets arose because French liquidation court proceedings concerning SeaFrance had led to the implementation of a job-saving plan, the 'PSE3'. Its aim was to facilitate the return to work of those employees which had been dismissed following the cessation of SeaFrance's operations. The liquidator had arranged for the vessels to be maintained in a 'hot lay-up' for which he had kept on certain SeaFrance employees, in order to maintain the value of the assets ahead of any sale. The CMA had concluded that the workforce had transferred from SeaFrance to GET/SCOP as part of the latter's acquisition of the SeaFrance assets. It found that the PSE3 created a link--'continuity and momentum'--between the vessels and employees between the time of SeaFrance's operation of the ferries and the commencement of the operation of the same ferries by GET/SCOP. In addition, the vessels were acquired in a condition that enabled them to be put into service quickly after their acquisition. According to the Court of Appeal, however, the effect of the French court judgment of 9 January 2012 was that the 'activities' in which the workforce had formerly been engaged had ceased and the employees would be made redundant. The Court of Appeal held that the PSE3 was simply a statutory job-saving plan and in no manner was directed at preserving any connection between the employees and SeaFrance, let alone its activities (which had ceased). What happened was not a transfer, but instead a true re-employment of employees whose services were available for hire in the market. It followed, in the eyes of two of the three judges at the Court of Appeal, that the CMA's decision was materially flawed. The absence of a transfer of the employees from SeaFrance fatally undermined the conclusion that GET/SCOP had acquired an enterprise.

What is the status of the guidance provided in the CAT 1 judgment given that this was not appealed? The guidance provided in the CAT 1 judgment, and detailed above, is still relevant in determining whether the acquisition of assets constitute an enterprise for the purpose of EnA2002, notwithstanding the Court of Appeal expressing reservations about it. The appeal before the Court of Appeal was not an appeal against the decision in CAT 1, and SCOP did not challenge the correctness of the guidance given in it.

What are the next stages in this case and is the CMA likely to seek to appeal to the Supreme Court? The Court of Appeal's judgment quashes the CAT 2 judgment dismissing SCOP/GET's appeal against the CMA's remittal decision. The CAT could now quash the whole or part of the CMA's decision. Before the CAT reviews SCOP/GET's appeal, the CMA will appeal the Court of Appeal's judgment before the Supreme Court. The CMA announced on 19 May 2015 that it will seek leave to appeal the ruling. The CMA has also announced that it will ask the Court of Appeal to suspend the prohibition on GET operating ferry services out of Dover from July this year.

What will be the impact of the Court of Appeal's judgment on when asset acquisitions are caught by UK merger rules? In practice, the impact of the ruling on asset acquisitions is likely to be limited. The facts of the case were very specific-- the long period of inactivity between the cessation of activities and the acquisition of the assets was very unusual and the elements of French legislation on employment and liquidation were also out of the ordinary under UK merger control matters. In addition, as already mentioned, the CAT's guidance in the CAT 1 judgment was not challenged by SCOP and therefore remains good law. It is worth noting that both the CAT and the Court of Appeal found that although the legislation should be interpreted 'purposively', it should not be interpreted 'widely'. This may serve to make the CMA more cautious when seeking to assert jurisdiction over both asset acquisitions and more generally in using its margin of discretion to apply the share of supply test. Interviewed by Susan Ghaiwal. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.