Antitrust Alert: UK Competition Commission Requires U.S. Company Unwind Completed Acquisition
On 21 March, the Competition Commission ("CC") announced that it will require U.S. firm Stericycle to sell Ecowaste Southwest Limited ("ESL") – a company it bought just over a year ago. On what basis has the buyer found itself in such an unsatisfactory situation? The answer probably lies somewhere between the "voluntary" nature of the UK merger control regime, an apparently high-risk strategy by Stericycle, and possibly the increasingly active policy by the OFT to investigate completed deals.
Key features of UK merger control
UK merger control law operates a so-called voluntary notification system, whereby an acquiring party can complete and implement its deal without notifying the UK Office of Fair Trading ("OFT") for merger clearance. However, whether or not a completed deal is notified, the OFT has power to investigate it on its own volition. If it establishes jurisdiction, the OFT has four months from the date that the deal was made public – or if not publicized, from the date that it was brought to the OFT's attention – in which to decide whether to refer the deal to the CC for an in-depth review.
The OFT may assert jurisdiction over a deal if either the target's annual UK sales exceeded £70 million (US$112 million) in the previous financial year or between them the merging parties purchase or supply 25% of the same category of goods or services in the UK or part of the UK.
From voluntary non-notification to compulsory divestiture
Stericycle's UK subsidiary provides waste management services to medical and other sectors in England and Wales. It acquired ESL in January 2011. ESL provides medical waste management services in the south west of England. Its annual UK turnover was just £1.5 million and it was experiencing financial difficulties. Stericycle did not issue a press release following completion of the acquisition, and none of the national, regional or trade press mentioned it. Therefore, material facts about the transaction were not "made public" so as to start the four month statutory clock following completion of the acquisition.
The OFT found out about the deal, perhaps by a complaint or on its own, and issued an enquiry letter to Stericycle in May 2011, following which it commenced a merger review. The OFT asserted jurisdiction based on the share of supply test. The parties had an estimated national combined share of supply of 20-30% of overall clinical waste treatment. But the OFT defined the geographic market more narrowly, as regional, and found that the parties had a share of supply of approximately 50-60% around the city of Bristol, where ESL was based. The OFT found that the merger had resulted or could be expected to result in a substantial lessening of competition, and therefore it referred the merger to the CC.
The CC confirmed the OFT's finding that the merger could be expected to result in a substantial lessening of competition. Prior to the merger, the parties were each other's closest competitors within both a 50 and 100 mile radius of Bristol, and the merged entity would not be sufficiently constrained by competitors. The CC acknowledged ESL's financial difficulties, but decided that it could have been sold to an alternative purchaser. In light of this, the CC considered several remedies, having regard to the effectiveness of the remedy options as well as their cost and proportionality. However, it concluded that only the full divestiture of ESL would be effective and proportionate.
Stericycle will now have to sell ESL in a short time frame – even if at a loss, a possibility the CC disregards when it is considering a divestment remedy. The CC considers that it is for acquirors to factor into the acquisition price the risk that a completed merger could be subject to a divestment remedy.
A full divestment order in a completed deal is rare. The current merger control regime became effective in June 2003, and since then the CC has issued 90 merger decisions. Of these, the CC has blocked just 5 anticipated mergers and required full divestments in 5 completed merger cases, or 14 when partial divestiture remedy decisions are added.
This latest CC decision should be read in the more general context of the increasingly aggressive approach of the OFT in asserting jurisdiction over completed deals in recent years – sometimes even without regard to the existence of prima facie competition concerns. This case serves as a reminder that the OFT monitors the market and there is a high risk that deals that are not notified to it will be uncovered and investigated. As described above, there are two alternative jurisdictional thresholds – based on revenues and based in shares – and therefore even if the target has little turnover in the UK the OFT still may have jurisdiction to investigate based on the parties' share of supply. In the words of former CC chairman Peter Freeman "while parties are entitled to complete mergers in the UK regime, they do so at their own risk".
The UK government has recently confirmed that it intends to retain the "voluntary" nature of UK merger control (See UK Government Announces Reform of the UK Competition Regime. Companies wishing to take advantage of the flexibility this offers must fully assess the risks of a decision not to notify – including an expensive merger review later on and a possible fire sale of the acquired business at some point in the future.Lawyer Contacts
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