| What you need to know - key takeaways |
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Regarding the merger/divestment decision:
- The merger decision highlights the considerable weight the CMA is likely to place on internal documents and customer views when assessing transactions. The CMA has recently published draft guidance relating to internal documents in merger investigations.
- In terms of remedies, the CMA will be unlikely to take into account the cost of any divestments to the merging parties, as it considers this to be an avoidable cost/risk parties take when completing prior to obtaining CMA approval.
- Whilst the CMA generally prefers the divestment of a stand-alone business, it is willing to consider the divestment of a collection of assets, although this may result in the imposition of stricter suitability criteria on potential purchasers.
Regarding the penalty for breach of the interim order:
- The CMA has sent out a clear message - it will be actively enforcing its interim orders.
- The onus is on the addressee of an interim order to seek the consent of the CMA if it requires a waiver - a monitoring trustee has no authority to give consent on behalf of the CMA.
- Parties can be fined up to 5 per cent of their combined global turnover for breaching a CMA interim order.
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The divestment remedy
As explained in the CMA's Final Report, Electro Rent and Microlease both supply TME, which is used to test and measure electronic devices in order to validate their performance. The Parties operate globally in the supply of TME for purchase, leasing and rental, across sectors such as telecommunications, aerospace and defence, industrial, and IT.
The CMA found that Microlease is the leading supplier of TME rental in the UK and Electro Rent, which is based in the US and is substantially smaller than Microlease in the UK, is nevertheless its closest competitor. This was supported by the Parties' internal documents and evidence received from third parties. Therefore, the CMA found that the transaction would lead to the removal of each Party's closest rental competitor in the UK and a substantial reduction in the alternatives available to a significant proportion of the Parties' rental customers. A high proportion of customers also expressed concerns about the transaction.
The CMA considered a number of possible remedies, and concluded that divestment of the assets that Electro Rent was using to serve UK customers (Electro Rent UK) would be an effective and proportionate remedy and the least onerous of the possible options. This includes, for example, the lease for Electro Rent's premises in the UK, existing supplier contracts, staff, and a pool of TME stock/inventory. The sale must be to a suitable purchaser, subject to very strict criteria (i.e. going beyond those usually specified by the CMA), and, along with specific transitional arrangements, must be approved by the CMA.
It is notable that Electro Rent offered to sell its UK business at Phase 1, in order to address the CMA's concerns and avoid a Phase 2 reference and an "up front buyer" requirement being imposed by the CMA. However, the proposed purchaser withdrew from the deal, leading to the reference decision. While the ultimate divestment package set out in the Final Report is slightly different, this highlights the strategic importance of considering potential remedies, and engaging with the CMA on these, early on in the Phase 1 process, as well as the risks of an up-front buyer requirement.
Penalty for a failure to comply with interim order
The CMA has discretionary powers to impose an initial enforcement (or "hold separate") order to suspend all integration of merging businesses from the outset of a Phase 1 investigation, as well as powers to reverse any integration steps which have already taken place. The CMA can utilise these powers in respect of both anticipated and completed mergers.
In this case, the CMA imposed an interim order on Electro Rent on 7 November 2017 (which replaced the initial enforcement order made by the CMA on 1 February 2017 at Phase 1). However, the CMA has found that Electro Rent breached the interim order by giving notice to terminate the lease over the only premises Electro Rent had in the UK (and which formed part of a potential remedy package on which Electro Rent had made representations) without first seeking the consent of the CMA, as required by the interim order. The CMA's Penalty Notice states that Electro Rent terminated the lease without reasonable excuse, in particular:
- it is not sufficient that it had informed the monitoring trustee appointed to monitor compliance with the interim order. The CMA has stated that the onus is on the addressee of the interim order to seek the consent of the CMA;
- the monitoring trustee has no authority, delegated or implied, from the CMA to give consent on behalf of the CMA;
- the reasons given by Electro Rent for terminating the lease relate to the decision to terminate the lease, and do not amount to a reasonable excuse for failing to comply with the interim order;
- whilst the monitoring trustee had not indicated that Electro Rent's action would be in breach of the interim order, this did not amount to a reasonable excuse for failing to comply with the order, but has been taken into account in determining the level of penalty (indicating that the penalty would have been higher without the monitoring trustee's involvement).
The CMA also noted the following factors which contributed to setting the level of the penalty:
- whilst Electro Rent had taken steps to remedy the breach by entering into a new lease, this is on worse terms than the previous lease;
- this was a "flagrant breach" and was committed in large part by the senior management of Electro Rent;
- the actions of the monitoring trustee was a significant factor in substantially reducing the level of the penalty;
- whilst Electro Rent had not brought the breach to the CMA's attention, there was no indication of any attempt by Electro Rent to conceal the failure to comply; and
- Electro Rent gained no advantage from the failure to comply.
Whilst the penalty relates to Electro Rent's breach of the interim order, it is also intended as a deterrent to other merging parties, who should ensure they have processes in place to comply with CMA hold separate orders. It should be noted that parties can be fined up to 5 per cent of their combined global turnover for breaching a CMA interim order. The £100,000 penalty imposed in this case was considerably below that, reflecting the mitigating factors of the case.
With thanks to Danica Barley of Ashurst for her contribution.
