This is the sixth in a series of newsletters on competition law developments in England and Wales. In this edition, we report on the Office of Fair Trading’s (OFT) investigation of a minority acquisition, the OFT’s report on ownership and control of economic infrastructure in the UK, and the OFT’s closure of a “hub and spoke” cartel investigation.
OFT Investigates Minority Stake under Merger Rules
On 29 October 2010, the OFT announced it had started a merger investigation into Ryanair Holdings plc’s acquisition of a minority shareholding in fellow Irish airline Aer Lingus Group plc. Ryanair currently owns 29.82% of Aer Lingus, and the first question for the OFT is whether this gives rise to a qualifying merger under UK merger control law. The case is a reminder that UK merger control can apply to small stakes (and certainly to stakes lower than those relevant at EU level).
The stake arose out of Ryanair’s public bid for the entire shareholding of Aer Lingus, which was launched in October 2006. The European Commission investigated the bid and prohibited it in June 2007, under the EU Merger Regulation (EUMR). Aer Lingus subsequently appealed against the commission’s decision not to order Ryanair to divest its existing minority stake in Aer Lingus. However, in July 2010, the European General Court ruled that the commission did not have the ability to require divestment of minority shareholdings that do not confer “decisive influence” for the purposes of the EUMR. Ryanair’s separate appeal against the prohibition of the bid on the substance was also turned down.
An interesting issue (although specific to this case) is that the OFT’s investigation comes a considerable time after the acquisition of the stake. The OFT appears to claim it’s still able to consider the matter due to a provision of the relevant legislation (Enterprise Act 2002) allowing for a delay caused by a separate investigation under the EUMR.
So far as concerns the level of the minority stake, since the EUMR does not apply to the acquisition of the stake (no “decisive influence” means no “merger” under the EUMR), national merger control in the EU can apply (as well as, in theory, general EU competition law and in particular, Article 101 TFEU). The UK’s test for control giving rise to a merger under the Enterprise Act only requires “material influence” by the purchaser over the target.
Whether this is met, depends on the facts of a particular case, but any case where there is a shareholding of 15% or more, particularly involving competitors, will be looked at closely. In January 2010, the English Court of Appeal required satellite TV broadcaster British Sky Broadcasting to reduce its stake in terrestrial broadcaster ITV to 7.5% (it originally having been found that in the circumstances 17.9% gave rise to material influence).
Even if the transaction is found to give rise to a merger which can be investigated, there will be no direct consequence for Ryanair, as a result of its failure to file for clearance in the UK, since under UK merger control law there is no obligation to seek clearance even for qualifying transactions. However, if substantive issues are found, remedies can still be imposed in the normal way.
UK Economic Infrastructure Ownership and Control Described
On 3 December 2010, the OFT published a report on ownership and control of the UK’s economic infrastructure (Infrastructure Ownership and Control Stock-take). The key aims of the stock-take were to map ownership and control across the economic infrastructure sectors such as ports, airports, energy networks, and water networks; assess how ownership of infrastructure affects outcomes for consumers in these markets; and examine the different forms of ownership.
According to the OFT, this is the first time such information has been available in one place. The report shows that:
- There is high diversity in infrastructure ownership and sources of capital, with UK and with public listed (UK and non-UK) companies accounting for the largest share at 42%.
- There is a trend of ownership shifting toward specialist infrastructure funds, and also a trend for ownership to be increasingly internationalised, with many sectors drawing in global investment. At least 38% of UK infrastructure is owned by foreign firms and investors.
- Around 18% of infrastructure assets are in public ownership, whilst 9% are held in various forms of not-for-profit structures – typically trusts or companies limited by guarantee.
The report further shows there is cross ownership within and across markets – for example, around 30% of assets are held as part of wider infrastructure groups.
The OFT found there is no evidence that the UK merger regime, as it applies in this area, is not operating as intended, and it also has no immediate concerns about overall levels of concentration and cross ownership within the infrastructure market as a whole. However, the OFT found that the potential for market power exists in many infrastructure sectors, and that this can affect outcomes for consumers.
Four case studies – into ports, waste, toll roads and car parks – are used to highlight the importance of considering competition when awarding concessions and procuring infrastructure projects. For example, the case study on the M6 toll road found that the operator is likely to have pricing power, as alternative routes don’t provide a strong competitive constraint.
The OFT further indicates that the report provides clarity and greater certainty to businesses and investors on when the OFT might consider intervening in infrastructure sectors in order to solve perceived competition concerns. In this regard, it highlights the potential risks of intervention including the potential “chilling” effect on investment where firms have taken commercial risks in establishing their positions. The OFT would be more likely to intervene where there are long-term barriers to entry and where potential competition is constrained.
OFT Identifies Compliance Success as Reason for Closing “Hub and Spoke” Cartel Case
On 18 November 2010, the OFT closed on grounds of “administrative priority” and without reaching any conclusion as to a competition law infringement, a price-fixing investigation involving retailers and suppliers in the UK grocery sector. The investigation concerned suspected “hub and spoke” retail price coordination, in which a retailer passes confidential pricing information to a supplier, who in turn passes it to another competing retailer. There have been similar cases in the UK in recent years in which fines have been imposed. The OFT indicated that one reason for the closure was the apparent positive influence of competition compliance initiatives across the sector.