Last year on this Blog we wrote about the uptick in enforcement action by European competition authorities against violations of merger control procedure (see here).
Yesterday, the UK Competition and Markets Authority (“CMA”) indicated that this trend is set to continue, issuing a fine of £100,000 for a breach of an Interim Order imposed on Electro Rent in its acquisition of Microlease. This is the first time the CMA has fined a company for such a procedural breach.
On the face of it, the fine seems harsh given that the relevant action – serving notice of termination of a lease without the CMA’s prior consent – was discussed with the appointed Monitoring Trustee prior to coming into effect. Indeed, the European Court of Justice (“ECJ”) recently confirmed that parties may take certain actions without violating the standstill obligation imposed under the EU Merger Regulation – including terminating agreements – where such actions do not contribute to the implementation of a transaction. In doing so, the ECJ’s ruling confirmed the commonly held view that merging parties are permitted to take certain steps allowing them to prepare for implementation of a transaction without violating merger control procedural rules.
Given the developing case law on standstill obligations, companies involved in M&A will need to revisit pre-completion protocols, noting that the EU approach seems to be diverging from the CMA’s somewhat more rigid approach to merger control.
Why was the fine imposed?
Electro Rent completed its acquisition of Microlease on January 31, 2017, with the CMA issuing an Initial Enforcement Order (“IEO”) a day later, on February 1, 2017, and subsequently opening an investigation into the transaction on April 18, 2017. The CMA’s Phase 1 investigation found that the transaction may be expected to result in a substantial lessening of competition in the UK, referring it for in-depth Phase 2 investigation on October 19, 2017 after the parties failed to provide remedies adequate to address the CMA’s concerns.
Following the referral to Phase 2, the CMA imposed an Interim Order designed to ensure that no action was taken pending final determination of the CMA’s investigation which could prejudice the investigation or otherwise impede the taking of any action by the CMA (i.e. effectively a continuation of the IEO imposed at the start of Phase 1). As part of this Interim Order, Electro Rent was required to maintain and operate the businesses separately, to seek the prior consent of the CMA to take certain actions affecting the businesses, to ensure compliance with the Interim Order and to notify the CMA promptly of any breach or suspected breach of the Interim Order.
In April 2018, the CMA became aware that Electro Rent had served notice to terminate a lease of Electro Rent premises in the UK. Moreover, the transfer of the lease to a third party purchaser had been included in the remedy package proposed by Electro Rent to the CMA to resolve the CMA’s concerns and obtain merger clearance.
The CMA found that Electro Rent failed to comply with the Interim Order by failing to seek the prior consent of the CMA for serving notice of termination on its lease and that it had “no reasonable excuse for its failure to comply.” Electro Rent argued that it had informed the Monitoring Trustee of its intention to serve the notice and that the Monitoring Trustee did not indicate that doing so would be a breach of the Interim Order, but the CMA dismissed these arguments. The CMA also disregarded Electro Rent’s attempts to remedy the breach by entering into a new lease, noting that the new lease was on worse terms.
The level of fine
The CMA imposed a fine of £100,000 on Electro Rent, in doing so describing its “significant” failure to comply with the Interim Order as a “flagrant breach […] committed in large part by the senior management of Electro Rent.”
The CMA also stressed that, given its “sufficient administrative and financial resources available to ensure compliance” with the Interim Order, Electro Rent was aware of its obligation to seek prior consent from the CMA for certain actions and also its obligation to bring any breach or suspected breach to the CMA’s attention.
Although the fine is “substantially below” the maximum available penalty of up to five percent of the parties’ combined global turnover, the CMA considered it to be proportionate in the circumstances of this particular case.
A copy of the CMA’s Penalty Notice imposed on Electro Rent can be found here.
Reminder: What is an IEO?
The UK operates a voluntary merger control regime, meaning that – unlike the majority of regimes around the world – it is not a requirement to obtain prior approval for a transaction from the CMA if the relevant jurisdictional thresholds are met.
However, the CMA has powers to retroactively investigate completed transactions. In doing so, the CMA’s standard practice is to issue an IEO that applies worldwide, with immediate effect, suspending integration of the businesses involved in the transaction until it has the opportunity to investigate the deal.
Our recent, in-depth, look at the effects of IEOs on international transactions can be found here.
 A third party appointed to monitor the actions taken by the transaction parties subject to an Interim Order.
 Provided, of course, that such actions do not constitute other forms of infringement of EU competition law. Case C-633/16 Ernst & Young P/S v Konkurrencerådet, ECLI:EU:C:2018:371 (judgment of May 31, 2018).