CN06 - CMA imposes record fines for breaches of initial enforcement order in merger cases

Within the last six months, the UK's Competition and Markets Authority ("CMA") has issued its three largest fines for breaches of an initial enforcement order ("IEO"). These include fines of GBP 50.5 million and GBP 1.5 million for breaches of an IEO imposed in connection with the completed acquisition by Facebook (now Meta Platforms) of GIPHY, and a fine of GBP 4.7 million for breach of an IEO relating to JD Sports' completed acquisition of Footasylum.

Key takeaways

• The CMA imposes IEOs in completed mergers (and in some cases anticipated mergers) to prevent "pre-emptive action" or integration between the merging parties whilst the CMA undertakes its investigation. The CMA has powers to impose fines of up to 5% of merging parties' combined worldwide turnover for breaching an IEO.
• The GBP 50.5 million fine imposed in October 2021 is by far the largest the CMA has ever imposed for breach of an IEO. The second highest fine of GBP 4.7 million for JD Sports/Footasylum followed in February 2022.
• A failure to comply with the obligations set out in the IEO is sufficient to incur a fine. The CMA is not required to demonstrate that the conduct would impact the competitive structure of the market, prejudice the outcome of the CMA's assessment or impede remedial action by the CMA.

Background

An IEO (sometimes known as a "hold separate order") is an important feature of the UK's voluntary merger control regime and is typically imposed by the CMA to prevent (further) integration between merging entities whilst the CMA completes its investigation. IEOs allow the CMA to prevent "pre-emptive action" by the parties which might prejudice the CMA's assessment of a merger or which might impede remedial action by the CMA (eg integrating the Target's business with that of the acquirer, making it more difficult to separate that business out again if the CMA decides that divestment of part of the relevant business is necessary). 

In April 2014, the CMA's powers to impose IEOs were strengthened under the Enterprise and Regulatory Reform Act 2013, which in practice has resulted in IEOs being imposed in substantially all investigations involving completed acquisitions (and, in more limited circumstances, anticipated acquisitions).  However, until October 2021, the CMA had only imposed fines for breach of an IEO in a small number of cases, and the highest fine imposed was for GBP 325,000.

The CMA imposed IEOs in connection with its investigations into JD Sports/Footasylum in May 2019 and into Facebook/GIPHY in June 2020.  The IEOs in both cases included standard restrictions on changes to "key staff" and the exchange of commercially sensitive information (without the CMA's prior consent).  As is always the case, the merging parties were also required to provide the CMA with regular IEO compliance updates and reports on material developments to enable the CMA to monitor and enforce compliance with the IEO. 

Alleged breaches of the IEO

In Facebook/GIPHY, the CMA found that the merging parties had breached the terms of the IEO in four respects:

1. Qualified compliance statements. The CMA found that fortnightly compliance statements had not been provided in an appropriate form as they were accompanied by significant qualifications.
2. Tenor outage. After the IEO came into force, Tenor, one of Facebook's two GIF suppliers, became globally unavailable on Facebook Messenger for a period exceeding 24 hours. Facebook did not inform the CMA of this loss of service. The CMA became aware four months later when Facebook submitted a document which referred to the outage.
3. Change of key staff at Facebook. Facebook changed its Chief Compliance Officer ("CCO") on two separate occasions after the IEO became effective. The CMA considered the CCO to be a "key staff" member and found that Facebook should have sought the CMA's consent in advance.
4. Change of key staff at GIPHY. Three GIPHY staff members resigned and were replaced whilst the IEO remained in force. All three staff members had previously been included on a list of key staff provided to the CMA, but the CMA was not informed of these staff changes.

In JD Sports/Footasylum, the CMA found that the merging parties had breached the terms of the IEO in three ways:

1. Governance structures. The parties had failed to implement robust measures to prevent breaches and ensure compliance, which meant that there was an environment where information exchanges were "almost inevitable".
2. Exchange of confidential information. Commercially sensitive information was exchanged between the two parties' CEOs during two meetings in July and August 2021 (which was initially brought to the CMA's attention by a third party that had obtained video footage of the meeting). The meetings included discussion of stock allocations from key brands, information regarding Footasylum's financial performance and contract negotiations with suppliers, and possible store closures.
3. Failure to self-report. The sharing of commercially sensitive information was not reported to the CMA, contrary to the terms of the IEO.

Sanctions imposed

In October 2021 the CMA issued Facebook with a fine of GBP 50 million for having not provided compliance statements in the form required and a further fine of GBP 500,000 for Facebook's two key staff changes without the CMA's prior consent. The CMA did not fine Facebook for the Tenor outage, on the basis that it considered it an example of the concerns underlying the failure to provide appropriate compliance statements and that it was a less serious violation.  However, the CMA imposed another fine of GBP 1.5 million in February 2022 in relation to the changes of key staff at GIPHY. 

Notably, the CMA confirmed in the October 2021 penalty notice that when assessing whether to impose a penalty for non-compliance with an IEO, it does not need to demonstrate that the conduct of a merging party would impact the competitive structure of the market, nor that it caused actual prejudice to the outcome of the reference or impeded remedial action. A failure to comply with IEO obligations is in itself sufficient to engage penalty provisions.  

In JD Sports/Footasylum, the CMA fined the parties nearly GBP 4.7 million for the IEO breaches, comprising fines of: (i) GBP 2.5 million and GBP 200,000 for JD Sports and Footasylum respectively for failing to have robust safeguards in place; and (ii) GBP 1.8 million and GBP 180,000  respectively for sharing commercially sensitive information and then failing to alert the CMA of the same. 

JD Sports and Footasylum were simultaneously each fined GBP 20,000 for another procedural violation in connection with these events. Specifically, the CMA found that the parties had not complied with its request to provide details of all meetings between the parties from July 2020, which followed the CMA's discovery of the sharing of commercially sensitive information. 

Comment

Facebook's October 2021 sanction represents by far the largest fine that the CMA has imposed on a party for breaching the terms of an IEO, which has been shortly followed by the second highest IEO fine in February 2022 imposed on JD Sports and Footasylum. 

The Facebook and JD Sports/Footasylum fines demonstrate an escalation in the CMA's approach to breaches of IEOs, with previous fines significantly lower than in these two cases. Prior to Facebook's fine, the highest IEO penalty was imposed in August 2021 on ION Trading Technologies Ltd and its parent totalling GBP 325,000. 

The fines described above can be seen in light of recent updates to the CMA's guidance on interim measures published in December 2021, which now sets out the minimum steps that the CMA expects from merging parties to ensure effective compliance with IEOs, such as internal communications, tailored guidance and staff training, clear governance structures and internal reporting mechanisms. 

Each of these recent developments reflect the importance the CMA places upon interim measures in merger cases and is an important reminder that parties should ensure that they abide closely by the terms of IEOs.

With thanks to Louisa Northover of Ashurst for her contribution.