The Supreme Court’s recent decision in Eurotunnel II ( UKHL 75) brings some much-needed clarity to what was becoming a rather opaque corner of the UK merger regime. It also contains statements of general principle which are bound to make it one of the most frequently-cited merger cases.
The case concerns the circumstances in which an asset acquisition may constitute a merger. SeaFrance, a cross-channel ferry operator, had gone into liquidation and could not be sold as a going concern. Eurotunnel bought three ferries and various other assets. The OFT (now the CMA) investigated.
In deciding whether the acquisition was a merger, the essential question under the Enterprise Act was whether Eurotunnel had acquired “the activities, or part of the activities” of SeaFrance.
I complained in one of my earlier blogs about how the procedural history of the case was causing problems. The parties had apparently agreed that the underlying question of law had been decided by the Competition Appeal Tribunal in the first Eurotunnel case, Eurotunnel I  CAT 30, and that the only issue arising in Eurotunnel II was a rationality challenge to the CMA’s decision. The Court of Appeal accepted the limited scope of the challenge but could not resist suggesting that Eurotunnel I might have been wrongly decided.
Fortunately (and not surprisingly), the Supreme Court did not limit itself to the rationality challenge. It addressed the underlying question of law head-on, endorsing the CAT’s approach in Eurotunnel I.
In deciding whether an asset acquisition is a merger, Lord Sumption held (with the agreement of the rest of the Court), it is necessary to ask whether the acquiring entity has obtained more than it would have obtained by going out into the market and purchasing ‘bare assets’. If so, one must go on to ask whether the ‘extra’ which it has obtained is attributable to the fact that the assets were previously employed in combination in the target’s activities (para 39). Or:
“Put crudely, it depends on whether at the time of the acquisition one can still say that economically the whole is greater than the sum of its parts.” (para 40)
The word “economically” should be emphasised. The main reason why Lord Sumption adopted this expansive approach to the question of whether an asset acquisition is a merger was because of his concern to give effect to the purpose of the legislation. See in particular para 31, which contains the first statement of general principle that is bound to be relied on in later cases:
“The first point to be made is that in applying a scheme of economic regulation of this kind, the Authority is necessarily concerned with the economic substance of relevant transactions and not just with their legal form.”
Seen in this light, the fact that the target has ceased its operations will be a relevant factor in deciding whether there is a merger, but it will not necessarily be decisive.
As to the rationality challenge, the Supreme Court held that the CMA’s decision was rational. It also took the opportunity to emphasise – in the second passage likely to become familiar to competition lawyers – the respect which should be paid to the CMA’s expert judgment in merger cases (see para 44):
“This court has recently emphasised the caution which is required before an appellate court can be justified in overturning the economic judgments of an expert tribunal such as the Authority and the CAT: British Telecommunications Plc v Telefónica and others  UKSC 42;  Bus LR 765;  4 All ER 907 at paras 46, 51. This is a particularly important consideration in merger cases, where even with expedited hearings successive appeals are a source of additional uncertainty and delay which is liable to unsettle markets and damage the prospects of the businesses involved. Concepts such as the economic continuity between the businesses carried on by successive firms call for difficult and complex evaluations of a wide range of factors. They are particularly sensitive to the relative weight which the tribunal of fact attaches to them. Such questions cannot usually be reduced to simple points of principle capable of analysis in purely legal or formal terms.”
There is bound to be further debate about the precise point at which the sale of assets risks becoming the sale of part of a business’s activities, bringing the transaction within the Enterprise Act. However, that debate will now take place within the much clearer boundaries established by the Supreme Court.