Antitrust Alert: OFT decision in Zipcar/Streetcar highlights complexities of UK’s "voluntary" merger review regime
On 10 August 2010, the UK Office of Fair Trading (OFT) referred Zipcar's already-completed acquisition of Streetcar to the UK Competition Commission (CC) for an in-depth investigation. Zipcar and Streetcar now must suspend further integration of their businesses, pending the outcome of the CC's investigation. The OFT's reference decision is an important reminder that – although merging parties may complete UK transactions without UK merger clearance – the competition authorities still may investigate the transaction, suspend further integration of the businesses, and in exceptional circumstances require the completed transaction to be unwound.
Zipcar/Streetcar completed prior to notification
Zipcar operates the world's largest car club service. It started operations in the UK in 2007 and had grown to be the second largest car club operator in London. In April 2010, Zipcar completed its acquisition of Streetcar, the largest London car club operator.
Zipcar and Streetcar chose to complete the transaction without notifying it to the OFT, which they were entitled to do under the UK merger control regime. Even where the OFT has jurisdiction to investigate a merger – which in this case it did because the merger created a 25% share in UK car club services – there is no obligation to notify and no obligation to suspend completion pending receipt of merger clearance. Some other regimes require that the parties notify and then suspend closing pending government review, as is the rule in the European Union, some other EU Member States, and the United States, if the transaction meets jurisdictional thresholds. By contrast the decision whether to notify UK authorities before or after completion, or at all, is a strategic one that merging parties must make case-by-case.
When should a notification be made?
The OFT is under a statutory duty to refer to the CC mergers that it believes may substantially lessen competition, although no reference can be made more than four months after the later of closing or publication of a transaction. Therefore, the OFT carefully monitors press and industry reports for news of transactions that may affect UK competition but that have not been notified to it. It is quite common for the OFT to contact merging parties that have not notified to request information about their deals.
The decision when or whether to notify a transaction within the OFT's jurisdiction may turn on a number of factors. If the potential competition concerns are insignificant or non-existent, merging parties may conclude that the OFT is not likely to be interested in the merger, in which case notification often is ruled out. By contrast, if a merger may raise competition concerns, the decision whether to notify generally is determined by commercial imperatives. For example, a bidder in an auction process may be disadvantaged if it makes merger clearance a condition of its bid and therefore may agree to complete the deal without notifying, taking the risk of subsequent intervention by the OFT. More often merging parties condition completion on merger clearance, in order to benefit from the certainty offered by pre-completion notification.
Zipcar and Streetcar have not disclosed why they decided to complete without notifying the transaction to the OFT.
What are the consequences of not notifying?
If Zipcar/Streetcar had not given rise to any competition concerns, the OFT could have chosen to ignore it, allowing the four-month CC reference deadline to expire. However, as noted in the OFT's press release, the transaction combined “the two largest and most closely competing car clubs in London, and…notwithstanding its smaller size Zipcar was a particularly strong and dynamic competitor to Streetcar.” Given the transaction's high profile, intervention by the OFT may have seemed quite likely.
The UK authorities have made clear they prefer merging parties to notify potentially problematic mergers prior to completion and have expressed concern that an increasing proportion of completed mergers are being referred to the CC. Investigating completed mergers is more resource intensive and more risky for all concerned. Of the 15 merger cases referred by the OFT to the CC since April 2008, eight were completed mergers and the majority of those investigations were started at the initiative of the OFT. This has led Peter Freeman, Chairman of the CC, to recommend a mandatory UK notification system.
When it initiates investigation of a completed merger, the OFT will as a matter of course require the merging parties to suspend further integration – to make "hold-separate undertakings." After the OFT requested information about their deal, Zipcar and Streetcar gave hold-separate undertakings to the OFT. The CC is expected to issue its final decision in January 2011; therefore, almost eight months after completing their deal, the parties will be no closer to integrating their operations. Zipcar commented, "Naturally, we're disappointed by the decision of the OFT, which imposes a delay on a transaction from which consumers and the environment stand to benefit enormously."
What now for Zipcar/Streetcar?
Zipcar and Streetcar now must demonstrate to the CC that their combination will not result in a substantial lessening of competition. If the CC concludes that the transaction will lessen competition, it may accept commitments from the parties to remedy the CC's concerns (such as divestments or behavioural undertakings). The suitability of remedies in a given case depends on their effectiveness in resolving the CC's concerns and on the willingness of the parties to make those sacrifices. If the CC believes this transaction is anticompetitive and no remedies are offered by the parties to restore the lost competition, the CC will prohibit the transaction, requiring that Zipcar and Streetcar unwind the deal.
Parties to a merger that triggers UK jurisdiction must consider carefully how the particular circumstances of their transaction will affect their decision whether and when to notify the OFT of the deal, taking into account the risks of uncertainty, delay, and possible imposition of remedies or prohibition of their proposed combination.
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