01 October 2019 by Robert Bell
Competition Appeal Tribunal clarifies limits of CMA and Secretary of State’s ability to intervene in mergers under UK merger control regime
A recent case (16th August 2019) in the Competition Appeal Tribunal (CAT) – the UK’s specialised competition law court – has put under the microscope how and when merger control review deadlines under the Enterprise Act 2002 can be enforced by the Competition & Markets Authority (CMA) and the Secretary of State.
Under the merger control regime in the Enterprise Act 2002 the CMA and the Secretary of State may investigate a merger:
if a 'relevant merger situation' exists which is defined in the Act as long as they make a reference for a Phase II detailed investigation carried out by the CMA Panel no later than four months after full details of the transaction have been made public or communicated to the CMA.
The CMA can investigate the merger on competition grounds but the Secretary of State can under Section 42 issue a public interest intervention notice (PIIN) to intervene in relevant merger situations. He can do this if he thinks there are public interest issues at stake.
(i) Transaction Details
This case involved the acquisition of 30% of certain media companies which published among other things the Evening Standard and Independent newspapers by a number of Saudi Arabian investors through a number of share sales in 2017 and 2018.
Evening Standard Ltd, which publishes the London evening newspaper The Evening Standard, is majority owned by Lebedev Holdings Limited (LHL), which was wholly owned by Russian media tycoon, Evgeny Lebedev. Independent Digital News and Media Limited (IDNM) which is majority owned by Mr Lebedev.
In July 2017, 30% of the share capital of IDNM was acquired by Scalable Inc (Scalable), a company incorporated in the Cayman Islands. Scalable owned by Mr Sultan Mohammed Abuljadayel, a Saudi Arabian citizen, and Wondrous Investment Holdings LP (Wondrous). Then between 7 December 2018 and 20 February 2019, 30% of the shares in LHL were acquired by International Media Company (IMC). IMC is also a Cayman Island company and has the same shareholding as Scalable. Mr Lebedev’s shareholding in LHL was reduced to 60%.
As a result of the two transactions, through the intermediate Cayman Islands companies, Mr Abuljadayel and Wondrous together hold 30% of both LHL and IDNM.
(ii) Public Announcement of the Deal
Details of the transaction were made in a piecemeal fashion. Some aspects of the 2017 transaction were reported in a Middle Eastern newspaper on 28 July 2017 and in The Guardian on 29 July 2017. However, neither announcement gave accurate details of the shareholding acquired and only referred to Mr Abuljadayel and not to Wondrous or to National Commercial Bank.
Some 18 months later in January 2019, there were references in The Daily Telegraph and The Financial Times to the acquisition of a stake in The Evening Standard by a 'mystery investor'.
These press reports prompted some questions in Parliament. In response, the then Secretary of State stated that DCMS officials would contact LHL about the transaction to obtain further information to determine whether there has been a change of control which would give rise to a merger situation under the Enterprise Act. DCMS officials sent a letter to LHL on 12 February 2019. In response a letter of 19 February 2019 from LHL to the DCMS gave full details of the transactions concerning LHL, including the identity and participation of Wondrous. This letter also stated that Mr Abuljadayel and Wondrous separately own indirectly 30% of the issued shares in IDNM.
However the DCMS did not sent a copy of this letter to the CMA until 1 March 2019. The Financial Times also ran a further article on 25th February providing more details of the transaction but did
not disclose the names of all the parties involved.
Following the questions in Parliament and subsequent correspondence between DCMS and LHL on 27 June 2019, the Secretary of State issued a public interest intervention notice (PIIN) in relation to the transactions.
The PIIN stated that the Secretary of State had reasonable grounds for suspecting that control over both LHL and IDNM had been obtained and that the transaction amounted to a relevant merger situation. The Secretary of State required the CMA and Ofcom to investigate and report by midnight at the end of 23 August 2019. The CMA provided its report to the Secretary of State on 28 June 2019.
LHL and IDNM (the applicants) brought an application before the CAT under section 120 of the Enterprise Act 2002 for review of the PIIN and seeking its annulment.
On 16th August 2019 the CAT delivered its judgment. The CAT considered when sufficient material facts were made known to start the four month time period running under the Enterprise Act 2002.
In its judgment the CAT decided that in determining whether all material facts had been made public it would take into consideration that:
it was not sufficient to start the time running for a newspaper simply to report that a Saudi buyer was rumoured to have purchased a significant minority stake in The Independent and The Evening Standard, even if that might provoke questions in Parliament and prompt inquiries by the Secretary of State. However enough factual details need to be made known including the names of all the parties involved there does not need to be sufficient public information to ascertain that the turnover test or the share of supply test is likely to be satisfied. It would be sufficient if the information showed that this is a serious possibility other than in exceptional circumstances, the information should include facts which provide a reasonable basis for considering that there is or may be a 'merger' for the purpose of the Enterprise Act (a situation where two enterprises cease to be distinct).
The applicants argued that the article in The Financial Times on 25 February 2019 met the criterion of making public material facts and, as the PIIN was issued more than four months later, it was out of time. However, the Secretary of State disputed that the article set out sufficient facts to satisfy the statutory criterion.
It was argued that, at the earliest, sufficient material facts were given (but not made public) in the letter from LHL to the Secretary of State of 19 February 2019. That letter was sent to the CMA only on 1 March and it was this communication that constituted the notice to the CMA of material facts.
The CAT held that The Financial Times article of 25th February did not disclose all material facts. Therefore the notice period commenced when the relevant information was given to the CMA on 1 March.
The applicants argued that even if the issue of the PIIN was valid, the Secretary of State can only make a reference for a detailed investigation in a public interest case under Section 45 of the Enterprise Act within the four month notice period. Therefore, as there has been no extension of the period, even if the four months began to run on 1 March 2019, the timescale expired on 1 July 2019 and no reference can now be made.
The Secretary of State argued that the Enterprise Act imposed no time limit on his making a reference in a public interest case as long as the PIIN had been issued in the four month notice period.
CMS are currently considering whether to appeal this ruling to the Court of Appeal.
This case shows the importance of executives making sure that when they enter into a transaction they obtain legal advice as to whether the transaction is a relevant merger situation.
If such a situation exists even if the parties do not wish to notify the CMA it is important that full material facts of the transaction are published in a UK national newspaper to ensure the four month period starts to run under the Enterprise Act 2002.
This applies to all mergers and not just public interest cases like the present case.
Failure to do so can result in the UK Government or the CMA having the power to reopen the transaction several years after it has been closed.