What happened?
On 30 April 2018 Nicholls’ (Fuel Oils) Limited (“Nicholls”) completed the acquisition of the oil distribution business of DCC Energy Limited ("DCC") in Northern Ireland. In early June 2018, the CMA opened an investigation into the merger on its own initiative and served an initial enforcement order (“IEO”) on Nicholls imposing a standstill obligation on Nicholls to maintain and operate the two businesses separately and refrain from taking any action which might impair their ability to compete independently in future, just in case the CMA should later find that the parties should be separated.On 16 July 2019, the CMA found that Nicholls had failed to comply with the IEO, without reasonable excuse, by moving ex DCC staff to Nicholls’ premises; using a Nicholls' mini-tanker and employees to make deliveries of oil to ex DCC customers and failing to provide compliance statements to the CMA by the specified deadline.
A total penalty of £146,000 was imposed on Nicholls reflecting the seriousness of the breaches.
Legal Background
Unlike the position in the EU, UK merger control operates as a voluntary regime and therefore merging parties can complete a deal without notifying it for clearance to the CMA without breaking the law. However, merging parties do this in respect of qualifying transactions at their own risk and once aware of a case, the CMA can impose interim measures including what amounts to a "standstill" obligation (the IEO) that merging parties need to comply with during the CMA merger investigation.
Under Section 72(2) of the Enterprise Act 2002 the CMA may, by order, for the purpose of preventing pre-emptive action impose certain restrictions and obligations. 'Pre-emptive action' is defined as action which might prejudice the reference concerned or impede the taking of any action which may be justified by the CMA's decisions on the reference. Section 72 is the legal basis for the IEO.
Under the Enterprise Act, the CMA may impose administrative fines for breach of procedure during Phase 1 and Phase 2 merger investigations.
In particular, under section 94A of the Enterprise Act 2002 the CMA may impose financial penalties where it considers that a person has, without reasonable excuse, failed to comply with an interim measure. It may impose a penalty of such fixed amount as it considers appropriate, but shall not exceed 5% of the merging parties' combined global turnover.
In this regard, the CMA has published guidance on its powers and approach to imposing administrative penalties including for breach of interim measures in merger cases - https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/270245/CMA4_-_Admin_Penalties_Statement_of_Policy.pdf .
Are fines for breach of merger interim measures more likely in the future?
The CMA's decision to impose a fine on Nicholls is the latest example of the UK authority's taking a tougher position on standstill obligations (so- called gun-jumping) in merger cases. This is only the fourth case the CMA has imposed a fine for such practice since 2014. However all cases were dealt with in the last 12 months, clearly indicating the CMA's increased appetitive to exercise its powers more frequently going forward.
Previous breaches of IEOs include: (a) Electro Rent failing to seek the consent of the CMA before terminating its UK premises lease. They were fined £100,000. The CMA imposed another £200,000 penalty on Electro Rent for appointing its CFO as director of Test Equipment Asset Management Ltd (the company acquired) and its subsidiaries, without permission of the CMA.; (b) Ausurus directing the target's customers (CuFe Investments Limited) to make payments into its bank accounts and making payments to the target's suppliers without seeking CMA consent. Ausurus also failed to take adequate steps (e.g. provide to the target clear delegation of authority to take decisions independently) to procure that the CuFe business was carried on separately from Ausurus. Ausurus was fines £300,000; (c) Vanilla Group and JLA New Equityco selling the target's (Washstation) laundry machines without CMA consent. They were fined £120,000.
How to minimise the risk of fines?
Parties to a merger should consider the risks arising as a result of completing a deal without notifying it first to the CMA. The safer option is always to seeka CMA approval, when necessary, prior to completition. However while parties can legitimately start integrating the relevant businesses after completion in the absence of a prior approval, the CMA may still open an investigation into the deal subsequently (up to four months from a deal completing or becoming public knowledge, whichever is later) and impose IEOs requiring the parties to pause the integration process and ensure that the two businesses continue to operate separately during a CMA investigation. This can be very burdensome, particularly to deal with at the same time as the substance of the competition investigation. Failure to comply with an IEO will not only increase the risk of fines but may also have an impact on costs and the duration of the investigation.
The standstill obligation will usually include an obligation on the merging parties not to engage in the following practices: share between them commercially sensitive information, including current and future pricing, customer lists, information on employee remuneration and benefits; exercise control over the other business' assets, day-to-day dealings, management and operations; hold themselves out to the market as one entity (e.g. combining IT systems, email addresses and telephone centres, rebranding assets, negotiating contracts on behalf of the other, entering in joint purchasing agreements).
Having said the above, parties can request in writing from the CMA to be granted a derogation for specific actions which would otherwise be prohibited by the IEO. Such requests will not be accepted for actions that have already occurred and that may be in breach of the IEO. These derogations could be in relation to the exchange of information which is strictly necessary and limited to comply with external obligations, or the provision of essential services (such as back-office support, HR, insurance coverage) by one party to the other; access to specific financial information for the purpose of financial oversight.
Actions taken in the ordinary course of business, such as matters connected to the day-to-day supply of goods/services by each of the parties, are outside the scope of IEOs and do not need a derogation. However, as these actions are assessed by the CMA on a case-by-case basis, merging parties should seek legal advice and consult with the CMA in advance.
Dealing with IEOs and derogation requests can be time consuming and complex. Parties should therefore be prepared to put appropriate internal mechanisms in place, including training and ongoing monitoring support, to ensure compliance and proper reporting.
