Eurotunnel: when buying assets is a merger

When is an asset acquisition a merger? As the Eurotunnel litigation shows, the answer is not clear-cut.

The background is the 2011 liquidation of the cross-channel ferry company SeaFrance. It could not be sold as a going concern, so instead there was an asset sale. Eurotunnel bought three ferries and various other assets including the SeaFrance logos, brand and trade name, computer software, websites and domain names, and IT systems.

The Enterprise Act 2002 provides (in summary) that there is a relevant merger situation if one business acquires, “the activities, or part of the activities, of [another] business.” At the risk of stating the obvious, the focus should therefore be on whether the acquiring enterprise has acquired all or part of the activities of its target.

The OFT decided that Eurotunnel’s acquisition of the SeaFrance assets was a merger and should be prohibited. That decision was the focus of the first Eurotunnel case ([2013] CAT 30, Eurotunnel I”). The CAT held that, to decide whether Eurotunnel had acquired all or part of SeaFrance’s activities, the OFT should have asked three questions: (a) whether Eurotunnel had obtained more than “bare assets”; (b) if so, whether that placed Eurotunnel in a different position than if it had simply gone into the market and acquired the assets; and (c) if so, whether this difference turned what would otherwise be an acquisition of bare assets into an acquisition of the “activities of a business”.

This three-stage approach might seem a rather elaborate way of answering the simple question of whether Eurotunnel acquired some of SeaFrance’s business activities. However, Eurotunnel I was not appealed, and so that is the approach which the OFT (now the CMA) had to adopt when the matter was remitted.

One thing which becomes apparent, on reading the second Eurotunnel case (Eurotunnel II, [2015] CAT 1), is that the three-stage approach endorsed in Eurotunnel I leads to a range of questions about such things as the nature of a “bare asset”, or what kinds of assets Eurotunnel could have purchased on the market, which add a level of complexity to the analysis which is not obvious from the statutory language.

The key issue – which is really the third of the Eurotunnel I questions – is whether what was purchased was the activities of a business. On this key issue, the CAT in Eurotunnel II held that it is “a question of fact and degree” which “calls for the exercise of judgment by the decision-maker for which there is not necessarily a clear-cut answer” (at [74]).

Applying that approach, the CAT upheld the CMA’s decision that Eurotunnel had acquired part of SeaFrance’s business activities. Of particular importance was the fact that the combination of assets purchased enabled Eurotunnel to establish ferry operations more quickly, easily, cheaply and with less risk than had they been purchased on the market. Although it did not purchase the SeaFrance assets as a going concern, the reality was that it obtained much of the benefit of so acquiring them.

One issue which may benefit from further clarification in light of Eurotunnel II is whether it is ever appropriate to treat assets with the potential to be turned into a business activity as though they are already a business activity. The CMA placed some emphasis on the fact that Eurotunnel could, and indeed did, use the acquired assets to resume the business activities previously undertaken by SeaFrance within a very short period of time following the acquisition. That may be an important point, but of course the CAT in Eurotunnel I had held that the fact that (after the acquisition) Eurotunnel resumed SeaFrance’s business activities was not by itself sufficient to make the acquisition a merger.

The line between (on the one hand) the acquisition of a business activity, and (on the other hand) the acquisition of assets with the potential to create a business activity, therefore remains open for debate.


Filed under Mergers

2 responses to “Eurotunnel: when buying assets is a merger

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