Two recent high-profile cases involving BSkyB/News Corporation and Ryanair/Aer Lingus have highlighted the importance of the merger control rules. These cases have also demonstrated the extensive scope and potential flexibility of the UK merger control regime and why anyone considering the acquisition of even a minority stake in a business may need to consider competition issues.
Before reviewing these cases, it is useful to re-cap on the basic law. UK merger law is comprised of both an EU and a national (UK) element.
The EC Merger Regulation (ECMR) is enforced by the European Commission and applies to a merger that has a ‘Community dimension’. That is the case where one of two sets of turnover tests are satisfied. The more frequently applied test is fulfilled where:
- the combined aggregate worldwide turnover of all the merging entities is more than €5,000m; and
- the aggregate Community-wide turnover of each of at least two of the merging entities is more than €250m; unless
- each of the merging entities achieves more than two-thirds of its aggregate Community-wide turnover within one and the same member state.
The second test, which examines the turnover of the merging parties across three or more EU member states, is more rarely encountered in practice.
The ECMR creates a compulsory notification system. Where a merger with a Community dimension is not pre-notified, the Commission can impose fines of up to 10% of the merging parties’ turnover.
The Commission has exclusive jurisdiction over mergers with a Community dimension. Applying national law to a merger with a Community dimension can infringe EU law. However, a member state may seek permission from the Commission to investigate the issues relating to the prudential management of its national financial institutions, national security, or the plurality of its national media that are linked to a merger with an EU dimension. The BSkyB/News Corp case was one that raised media plurality questions.
Where EU merger law is not triggered, domestic merger control law could potentially apply. The UK law is set out in the Enterprise Act (EA) 2002. EA 2002 aims to prohibit mergers that would cause a substantial lessening of competition (SLC) in any affected market. The law is enforced by two regulatory bodies, the Office of Fair Trading (OFT) and the Competition Commission (CC).
Under EA 2002, the parties to an acquisition may notify certain mergers to the OFT. This step is entirely voluntary and there are no penalties for non-notification (although this is often strategically advisable). A merger is notifiable to the OFT where it either:
- creates or strengthens a share of supply of more than 25% for a particular type of goods or services in the UK or a substantial part of it (the share of supply test); and/or
- involves the acquisition of a target company that has a UK turnover of more than £70m (the turnover test).
Following receipt of a notification, the OFT may decide to clear a proposed merger (possibly with commitments from the parties) or to refer it to the CC for an in-depth investigation. Following any referral, the CC itself may decide to clear the transaction (again, subject to possible undertakings) or to prohibit it.
The OFT also has the power to refer to the CC any completed merger (which is notifiable but has not been notified) that risks a possible SLC. Such referrals may result in a CC order for the merging entities to ‘unscramble’ the deal or to sell off parts of the merged entity where necessary to avoid an SLC. The OFT must generally make any referral within four months from the deal’s completion or from the point at which the material details concerning it become public. However, there are exceptions to this general rule and one of those was at issue in the Ryanair/Aer Lingus case.
Although the two cases reviewed in this article are high profile, they also highlight several important features of UK and EU merger control law that are applicable to many less prominent deals.
BSKYB/NEWS CORP MERGER: THE VEXED QUESTION OF MEDIA PLURALITY
News Corp, which is owned by Rupert Murdoch, is currently engaged in a bid to obtain complete ownership of the British-based pay-TV operator, BSkyB. News Corp already owns 39.1% of the target. The regulatory examination of this process has been a protracted affair, involving regulators at both the EU and UK level.
In the first instance, as the merger had a Community dimension, the Commission had exclusive jurisdiction to examine the competition aspects of the deal. However, the subject matter of the merger and the parties’ identities raised questions over the future diversity of media ownership in the UK. Article 21 of the ECMR recognises that member states may, with the Commission’s consent, also review mergers for issues relating to media plurality.
On 4 November 2010, the UK government sought (and was later granted) permission from the Commission to investigate the media ownership issues connected to the deal. On 21 December 2010, the Commission issued its competition clearance decision, concluding that the proposed acquisition would not significantly impede competition in the internal market. News Corp, however, faced a nervous wait on the UK’s determination on media plurality before the takeover could be advanced.
The purpose and legal frameworks for competition and media plurality assessments are very different. The competition rules focus broadly on whether consumers would be faced with higher prices or reduced innovation as a result of a transaction. A media plurality assessment reflects the crucial role media plays in a democracy, and looks at wider concerns about whether the number, range and variety of persons with control of media enterprises will be sufficient.
The UK has a set procedure for examining media plurality matters. In the first instance, the OFT and Ofcom advise the reviewing Secretary of State on the best way to proceed. If the Secretary of State decides that problems can be addressed through accepting undertakings, there will be a public consultation on the proposed measures.
In this case, the reviewing Secretary of State was Jeremy Hunt (of the Department for Culture, Olympics, Media and Sport). The OFT advised Hunt that the proposed acquisition would amount to a merger, as News Corp would acquire a controlling interest in BSkyB, and that he had the power to refer the merger to the CC.
Ofcom also advised that a reference could be necessary due to concerns over a high concentration of ownership of UK news providers. Although Ofcom’s role was not to advise on whether those concerns were established, its investigations reached the fairly low threshold needed to satisfy a reasonable belief that the acquisition would be against the public interest. However, during Ofcom’s investigation it received representations on possible remedies to this issue, including the need for undertakings that would in particular secure editorial independence for Sky News.
News Corp was critical of the methodology applied by Ofcom in reaching its conclusions. However, as matters stood, it risked the merger being subject to an in-depth CC investigation. As that could take up to eight months and would have no guaranteed outcome, it was a process to be avoided. News Corp signalled its willingness to negotiate undertakings with the government to obtain a clearance without a CC reference.
On 3 March 2011, Hunt announced that he had, in consultation with the OFT and Ofcom, agreed with News Corp several undertakings to address Ofcom’s concerns. These undertakings included the following:
- BSkyB would divest its controlling interest in Sky News to an independent third party;
- Sky News would be spun off and listed;
- Sky News would be granted an independent chairperson;
- News Corp would continue to provide operating funds for Sky News to enable it to continue to function; and
- Sky News would be permitted to continue to use the ‘Sky’ name for seven years.
This is not (quite) the end of the story. The proposed undertakings will now be the subject of a public consultation. Many parties have expressed their intention to raise concerns that the undertakings do not go far enough to protect plurality. Following that consultation period, Hunt will decide whether or not to confirm that the undertakings are sufficient to allow the deal to go ahead. If clearance is granted, News Corp will need to agree a purchase price with the other shareholders in BSkyB for their respective holdings in the pay-TV operator, a requirement that is likely to heap more controversy on the deal.
Hunt has received plaudits for his dealings with this case. On the one hand he demonstrated a willingness to accommodate BSkyB’s concerns (avoiding a long-winded CC inquiry). However, in a deft piece of political footwork, he has managed to sidestep political views over the nature of the undertakings by referring this to the OFT and Ofcom for their opinion, publishing their advice even when not strictly required to do so.
This case highlights that the parties to any media merger risk encountering a ‘double jeopardy’ in the regulatory review process. Different sets of criteria will be applied to the examinations under the competition and media plurality headings. It is also possible, as here, that the two review procedures will be undertaken by different regulators, at different levels (EU and member state). Media and regulatory plurality will, it seems, frequently go hand in hand.
OFT DEFENDS ITS DECISION TO INVESTIGATE RYANAIR
Aer Lingus is a long-standing acquisition target for Ryanair. Ryanair first acquired a stake in Aer Lingus in 2006, gradually increasing its interest to 29.82% by the end of 2007. In 2006 Ryanair also made a public bid for all other issued shares in the company.
As the public bid amounted to a merger with a Community dimension, Ryanair was required to seek Commission clearance for it under the ECMR. The Commission prohibited the takeover on 27 June 2010 as it considered this would significantly impede competition on certain UK-Ireland routes.
Aer Lingus wanted the Commission to go further. It requested an order for Ryanair to divest all of its shares. The Commission refused. Ryanair only held a minority shareholding, which did not enable it to exercise either de jure or de facto control over Aer Lingus. The ECMR does not give the Commission jurisdiction over shareholding situations short of decisive control.
On appeals by Ryanair and Aer Lingus, the EU General Court (GC) upheld both of the Commission’s decisions on 6 July 2010. The Aer Lingus appeal decision confirmed the Commission’s inability to investigate a situation under the ECMR where there was no change of control.
This position was in contrast with UK merger law. EA 2002 allows the OFT to investigate situations where one party acquires a ‘material influence’ over the behaviour and policy of the target. A material influence usually begins at a holding of 25% of share capital (which enables a shareholder to block special resolutions).
The GC judgment left the OFT in an interesting position. With regard to the minority interest, the Commission was out of the picture – it had no jurisdiction. The OFT now considered itself ‘back in play’ and on 29 October 2010, began an investigation into Ryanair’s minority stake to determine whether this could substantially lessen competition.
Ryanair fought back. It argued that any investigation by the OFT of its acquisition of the minority stake would be time barred. In the case of completed mergers, EA 2002 requires the OFT to refer these to the CC within four months of the merger’s completion, or from the time material facts about the merger were made public. In this case, the reference would clearly be made outside the general limit as it would relate to share acquisitions completed in 2007.
In response, the OFT cited a provision of EA 2002 that lengthens the four-month limit for references that could not have been made earlier because of anything done under or in accordance with the ECMR. The OFT claims that the appeals against the Commission by Ryanair and Aer Lingus constituted actions in accordance with the ECMR, and therefore the four-month period does not forestall its action. The OFT considers that any investigation undertaken before the conclusion of the appeals would have carried the risk of inconsistent outcomes from the UK and European authorities. That would have been contrary to its duty of sincere co-operation with the EU, set out at Article 4 of the EU Treaty.
Ryanair has appealed the OFT’s decision to the Competition Appeal Tribunal (CAT). Castigating the OFT decision as ‘baseless’, Ryanair argues, first, that the investigation has been brought out of time and, secondly, that its existing stake does not give a material influence on Aer Lingus’ behaviour.
At the time of writing, the appeal is scheduled for hearing before the CAT. The outcome will raise interesting questions in relation to time limits for an OFT investigation, as well as the treatment of mergers that have both a domestic (UK) and EU dimension.
The case shows the long arm of national UK merger law. EA 2002 enables the OFT to investigate purchases of interests that stop short of decisive control. In a sense, this gives it a more extensive jurisdiction than the Commission. Furthermore, the OFT will not always be constrained to refer an unnotified merger to the CC within the four-month time limit. In this case, Ryanair could ultimately be forced to sell shares that it purchased almost five years before the OFT’s first involvement.