UK merger control - how (not) to respond to a request for information and other lessons

02 August 2018

The UK's Competition and Markets Authority (the "CMA") has recently imposed financial penalties for procedural breaches under the UK merger control regime, including:

  • failure to comply with a statutory request for information under section 109 of the Enterprise Act 2002 (a "s.109 Notice");[1] and
  • failure to comply with an interim order imposed by the CMA.[2]

The CMA is also expected to make increasing use of s.109 Notices, particularly when seeking internal documents from the parties to a merger (the "merging parties").[3]

This update considers what parties should have in mind when (i) responding to s.109 Notices served by the CMA; and (ii) addressing interim orders imposed by the CMA, given the risks arising from non-compliance under the UK merger control regime.



Failure to comply with a s.109 Notice - Hungryhouse

s.109 Notices - Requiring information to be provided

Under a s.109 Notice, the CMA is able to require a person to provide information during a merger investigation, including requiring the production of certain documents in a person's custody and control.[4]

Where a person fails to comply with a s.109 Notice without reasonable excuse, the CMA may impose a fixed and/or a daily penalty, subject to certain statutory maxima specified by the Secretary of State.[5]

The CMA may also "stop the clock" where the s.109 Notice has not been complied with by the stated deadline, and can reject the merging parties' merger notice in the event of non-compliance. Both of these outcomes may clearly be expected to impact upon the transaction timetable.

In addition, it is a criminal offence to either (i) intentionally alter, suppress, or destroy any information that the CMA has requested;[6] or (ii) knowingly or recklessly supply false or misleading information to the CMA (or to a third party knowing they will supply this to the CMA).[7]

Documents requested in Just Eat / Hungryhouse

Having referred Just Eat plc's anticipated acquisition of Hungryhouse Holdings Limited ("Hungryhouse") for an in-depth Phase 2 investigation, the CMA sent a draft s.109 Notice to Hungryhouse.

The draft was intended to enable Hungryhouse to raise questions regarding the requests, and to set out any concerns it had regarding the documents requested. Although Hungryhouse indicated that it could be challenging to respond to certain questions within the CMA's intended timeframe, it confirmed that it would seek to do so.

The CMA finalised its draft, and issued the first s.109 Notice. Hungryhouse responded to this by providing a limited number of documents and emails in relation to questions regarding (i) the appropriate counterfactual; and (ii) Hungryhouse's strategy to move customers onto its platform.

Having received Hungryhouse's response, the CMA sent an informal request for information, seeking certain clarifications. In responding to this, Hungryhouse provided documents that appeared responsive to the first s.109 Notice.

As a result, the CMA issued second and third s.109 Notices, in response to which Hungryhouse provided documents that again appeared responsive to the first s.109 Notice.

The CMA subsequently issued a fourth s.109 Notice, in response to which Hungryhouse provided 1,497 documents. As this evidence was provided at a late stage, the CMA extended its investigatory timetable by four weeks.

CMA's decision to impose a fine

The CMA held that Hungryhouse had no reasonable excuse for failing to provide documents that were responsive to the first s.109 Notice in response to that notice, and imposed a fine of £20,000.

In setting a fine, the CMA noted that Hungryhouse's failure to comply with the first s.109 Notice had a significant adverse impact on the investigation (as well as its timetable), and that a factor contributing to this non-compliance was senior individuals' failure to make suitable resources available to Hungryhouse.

Moreover, the CMA considered that a penalty was "critical to achieve deterrence".[8]

Key points to consider when responding to a s.109 Notice

The decision highlights key points to consider when receiving and responding to a s.109 Notice, including:

  • the addressee of a s.109 Notice must ensure that it takes necessary steps to respond in full to the CMA's requests;
  • in responding to the s.109 Notice, the addressee should ensure it makes sufficient resources available - if the addressee does not have sufficient resources in-house, the CMA considers that it is open to the addressee to engage their external advisers, and/or third party providers;
  • the CMA will expect the addressee to prioritise the assessment and production of responsive emails from senior management;
  • if the addressee has concerns regarding the scope of the s.109 Notice, or how it can respond to this, or the deadline for a response, these concerns should be raised with the CMA, so as to enable possible alternative approaches to be considered;
  • when searching for documents, including emails, it would be prudent for the addressee to discuss and seek to agree search methodologies with the CMA in advance;
  • the addressee should understand whether its search methodologies are comprehensive, or risk omitting documents - if the addressee considers that performing more comprehensive searches would be overly burdensome, this concern should be raised with the CMA;
  • the addressee should expect to review the outputs of its searches - this need for a review cannot justify the application of narrow, or unreliable, search terms; and
  • when reviewing the outputs of searches, the addressee should consider whether any key documents have been omitted - if key documents have been omitted, these should be included in the response, and careful consideration given to revising and re-running the searches undertaken.

Given that the CMA is expected to make increasing use of s.109 Notices, and in view of the risks associated with non-compliance, it would be prudent for parties to consider any such requests carefully, and to engage proactively with the CMA at an early stage to seek to address any queries and/or concerns, and agree methodologies and approaches insofar as possible.

Failure to comply with an interim order - Electro Rent

Preventing pre-emptive action

The CMA can impose interim orders[9] in the context of a merger investigation, so as to prevent any pre-emptive action being taken by the merging parties that might either (i) prejudice the outcome of the CMA's investigation; and/or (ii) impede appropriate remedial action being taken by the CMA.

While the CMA is able to impose interim orders in respect of anticipated transactions[10], the vast majority of interim orders are imposed where transactions (i) have been completed without being cleared by the CMA (as is permitted under the UK merger control regime); and (ii) are subsequently investigated by the CMA.

In essence, an interim order requires that no integration takes place between the merging parties without the express consent of the CMA. An interim order will remain in force until the CMA either clears the transaction, or varies, releases, or revokes the order.

If the addressee fails to comply with an interim order without reasonable excuse, the CMA may impose a fixed penalty of up to 5% of the group worldwide turnover of the person(s) concerned.[11] For a completed transaction, this group worldwide turnover will necessarily include the turnovers of the merging parties.[12]

Interim order imposed in Electro Rent / Microlease

On 31 January 2017, without first notifying the CMA, Electro Rent Corporation ("Electro Rent") acquired Microlease, Inc. and Test Equipment Asset Management Limited ("Microlease").

The following day, having learnt of the acquisition, the CMA imposed an interim order requiring, amongst other things, that the businesses of Electro Rent and Microlease were maintained and operated separately.

This requirement remained in force when the CMA referred the acquisition for an in-depth phase two investigation, and the CMA directed the appointment of a Monitoring Trustee ("MT") to ensure compliance with the interim order.

Failures to obtain the CMA's consent

During the phase two investigation, the CMA provisionally found that the acquisition gave rise to competition concerns, and published possible remedies to address these concerns. Importantly, these possible remedies included the divestment of Electro Rent’s premises in the UK (the "UK premises").

Following these provisional findings, Electro Rent served notice to terminate the lease of the UK premises, without obtaining the CMA's consent.

Upon becoming aware of this, the CMA contacted:

  • the MT, who confirmed that they had discussed with Electro Rent its intention to serve the notice to terminate, but explained that they believed that the CMA would be informed of this, either by Electro Rent directly, or via Electro Rent's advisers; and
  • Electro Rent, who explained its commercial rationale for serving the notice to terminate, and confirmed that it had informed the MT of its intention.

At the CMA's prompting, Electro Rent sought to remedy the situation by negotiating and agreeing heads of terms for a new lease for the UK premises, albeit at a higher rent.

While Electro Rent did not seek the CMA's consent to agree these heads of teams, the CMA subsequently consented to Electro Rent entering into a new lease for the UK premises.

Breach of the interim order without reasonable excuse

The CMA held that Electro Rent had no reasonable excuse for failing to comply with the interim order, given that an addressee of an order:

  • has a statutory duty to comply with that order; and
  • is responsible for seeking the CMA's consent to depart from the terms of that order.

Moreover, the CMA noted that while the role of the MT was to monitor compliance with the interim order, the MT had no delegated authority (express or implied) from the CMA to consent to any action.

The CMA also observed that Electro Rent had informed the MT of its intention to serve the notice, and Electro Rent therefore should have been aware that this may raise concerns for CMA, particularly given that Electro Rent understood the need to seek the CMA's consent under the interim order, and had done so on previous occasions during the investigation.

However, the CMA recognised that the MT had failed to report on Electro Rent's compliance with the interim order, and took this into account when setting the level of the fine imposed on Electro Rent.

Factors considered by the CMA in setting the fine

In setting the fine, the CMA considered that Electro Rent’s failure to comply was significant, and had a potentially adverse effect on the investigation, given that Electro Rent had been aware that the UK premises were part of a possible divestment package.

The CMA also considered that Electro Rent had sufficient administrative and financial resources available to ensure compliance with the interim order, having previously engaged external legal advisers who made earlier requests for consents.

Therefore, despite Electro Rent's attempt to remedy the situation, the CMA considered that its failure to comply was a "flagrant breach",[13] as Electro Rent was aware of its obligations under the interim order.

However, the CMA took into account various mitigating factors. For example, while the adverse effects could have been significant, in practice the effects were likely to be limited, and Electro Rent did not gain any advantage from the breach. Further, in view of the remedial action taken by Electro Rent, the fine was not required to encourage swift compliance (suggesting that a daily penalty could have been considered appropriate in different circumstances).

The CMA also addressed the inaction of the MT, stating that their failure to notify the CMA of Electro Rent's intention to terminate the lease was:

"a significant factor which the CMA has considered in determining the level of penalty. The CMA is of the view that had the MT not been involved in this way, the penalty would have been very significantly higher"[14]

As such, in setting the fine at £100,000, the CMA sought to reflect the seriousness of the breach, and to provide a deterrent to Electro Rent specifically, as well as to other businesses more generally.

Key points to consider in the context of an interim order imposed by the CMA

While the breach and the level of the fine are being appealed,[15] the CMA's decision emphasises:

  • the obligation upon the addressee of an interim order to ensure compliance with the same, including the need for the addressee to seek and obtain appropriate consent from the CMA before undertaking certain actions; and
  • the CMA's willingness to pursue and impose fines for non-compliance (including potentially daily penalties in certain circumstances), so as to discourage parties from seeking to circumvent interim orders in the context of merger investigations.

Against this background, merging parties would be well advised to exercise care and caution in relation to interim orders imposed by the CMA, rather than to "act first and seek permission later".

Footnotes:

[1] See, "Penalty notice under section 110 of the Enterprise Act 2002 - Addressed to Hungryhouse Holdings Limited" ("Hungryhouse")
[2] See, "Notice of a penalty pursuant to section 94A of the Enterprise Act 2002 - addressed to Electro Rent Corporation" ("Electro Rent")
[3] The CMA's draft consultation guidance on requesting internal documents during merger investigations provides that the CMA intends to use s.109 Notices "as standard in future investigations when internal documents are requested from the [merging parties]" (emphasis added), see the CMA's draft "Guidance on requests for internal documents in merger investigations", paragraph 15
[4] See, in particular, section 109(2) of the Enterprise Act 2002.
[5] The current maxima specified by the Competition and Markets Authority (Penalties) Order 2014 are (i) £30,000 (fixed amount); (ii) £15,000 (daily rate); (iii) £30,000 and £15,000 (fixed amount and daily rate together).
[6] See, section 110(5) of the Enterprise Act 2002.
[7] See, section 117 of the Enterprise Act 2002.
[8] See, Hungryhouse, paragraph 93.
[9] In the form of an initial enforcement order under section 72 of the Enterprise Act 2002, or an interim order (in the context of a Phase 2 investigation) under section 81 of the Enterprise Act 2002, or an interim order (in relation to public interest and special public interest cases) under paragraph 2 of Schedule 7 of the Enterprise Act 2002. For completeness, the CMA is also able to accept interim undertakings (in the context of a Phase 2 investigation), pursuant to which financial penalties may be imposed for non-compliance.
[10] I.e. transactions that are yet to be completed.
[11] Being a natural or legal person.
[12] The CMA is also able to commence civil proceedings to ensure compliance with the order.
[13] See, Electro Rent, paragraph 61.
[14] See, Electro Rent, paragraph 70.
[15] See http://www.catribunal.org.uk/237-10444/1285-10-12-18-Electro-Rent-Corporation-.html


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