Gun-jumping has been in the spotlight this year both at the European level and in the UK. At the EU level, first there was DG Competition’s record fining of Altice of € 124.5m (here) and then the Court of Justice of the EU (“CJEU”) ruled on the scope of the EU law standstill obligation in its EY/KPMG Denmark preliminary ruling (here). Now the Competition and Markets Authority (“CMA”) has fined Electro Rent Corporation (“Electro Rent”) £100,000 for breaching the UK standstill obligation. Although there are particular features of this example which mean that the scenario is far from the norm, it does provide a reminder that standstill obligations can arise even under the UK’s voluntary regime and sends a warning of the additional complexity that may arise post-Brexit.
In January 2017, Electro Rent acquired Microlease Inc. and Test Equipment Asset Management Limited. As the UK merger regime is voluntary, the parties were not obliged to notify, however, the CMA exercised its powers to investigate of its own accord. This led the CMA to issue an interim order on 7 November 2017 (“Order”) under which the parties were obliged to continue to operate their enterprises separately and required Electro Rent to seek the CMA’s consent before doing anything which might impede the taking of any action by the CMA. A Monitoring Trustee was appointed to monitor compliance with the Order.
In February 2018, the CMA concluded that the merger resulted in a substantial lessening of competition. In March, several remedies were discussed, including the transfer of Electro Rent’s lease over its registered place of business in the UK (the “Lease”), a provision which appeared both in the 13 March remedies paper and the 5 April remedies supplementary working paper. On 15 March, Electro Rent informed the Monitoring Trustee that it intended to terminate the Lease the same day and received oral confirmation from the Monitoring Trustee that Electro Rent could do so. Neither the Monitoring Trustee nor Electro Rent informed or requested permission from the CMA.
On 13 April 2018, the CMA became aware of the Lease termination and raised concerns with the Monitoring Trustee. Having made those inquiries, the CMA then wrote to Electro Rent advising that it considered that terminating without the CMA’s prior consent was a breach of the Order. In responding, Electro Rent mentioned new heads of terms which had been agreed regarding the UK premises but which had also not been notified in advance to or authorised by the CMA.
On 2 May 2018, the CMA wrote to Electro Rent directing them to refrain from concluding any further agreements regarding the Lease without the CMA’s prior consent. On 10 May, the CMA consented to the new Lease.
Decision of the CMA
On 11 June 2018, the CMA issued a notice of penalty of £100,000 for Electro Rent’s breach of the Order by terminating the Lease. In its defence to the administrative proceedings, Electro Rent effectively pointed to its consultation with the Monitoring Trustee as affording it a defence to the charge. The CMA was unimpressed. It emphasised that Electro Rent’s obligation was to obtain consent from the CMA and that the Monitoring Trustee has no delegated authority – express or implied – to consent to a proposed action that is in breach of the Order. Moreover, Electro Rent had previously sought the CMA’s consent to other proposed actions before engaging in activities which were potentially in breach of the Order and had not sought to rely on any potential notification by the Monitoring Trustee. Accordingly, Electro Rent had no reasonable excuse for failing to comply.
The CMA concluded that the level of the penalty was appropriate because the failure in this case was significant and had a potentially adverse effect on the merger investigation. The CMA emphasised that the purpose of an Order of the kind in place in this case is to preserve businesses under investigation so that the CMA has the full range of remedy options open to it if required.
Although informing the Monitoring Trustee did not obviate Electro Rent’s need to inform the CMA, the CMA did indicate that the level of penalty that would have been imposed if Electro Rent had not even informed the Monitoring Trustee would have been “very significantly” higher.
There are several reasons why this decision is noteworthy. First, it serves as a reminder that standstill obligations can arise even under the UK’s voluntary regime. Second, it illustrates that, like DG Competition, the CMA takes standstill obligations extremely seriously. This is the first time a company has been sanctioned for breaching a UK standstill obligation and the CMA was at pains to emphasise its intention that the fine in this case should have a strong deterrent effect.
Further, the decision clarifies that despite the Monitoring Trustee’s role is being to ensure compliance with the Order, he has no authority to provide consent on behalf of the CMA and that it is the parties’ responsibility to ensure that they obtain consent directly from the CMA.
Finally, there was no reference to a “change of control” threshold for gun-jumping sanctions, which was the centre piece of the CJEU’s recent EY/KPMG preliminary ruling reasoning – and it would certainly appear that the conduct in this case fell below that threshold. The very different nature of this case may well explain the absence of any consideration of any “change of control threshold”. However, the case does suggest that, in a post-Brexit world, if a CMA interim order is in place, parties may be required to obtain prior CMA consent in respect of conduct that would not cross the EU “change of control” threshold, adding a further layer of complexity to transactions in the future.
The Covington Competition Blog will continue monitoring this space to update you on any developments affecting the enforcement of gun-jumping rules throughout Europe.