Introduction and Summary
An appeal has been launched against the UK competition regulator, the Competition and Markets Authority’s (CMA) first decision fining a party for gun jumping.
On 20 July 2018, the Competition Appeal Tribunal (CAT) announced that Electro Rent Corporation (Electro Rent) had lodged an appeal against the decision of the CMA to impose a penalty of £100,000 on Electro Rent for failure to comply with an interim standstill obligation while its completed merger with Microlease was being investigated by the competition regulator .
Electro Rent had notified the Monitoring Trustee of its intention to terminate the lease over its only UK premises but the CMA argued that the Monitoring Trustee had no authority to bind the CMA and Electro Rent should of but failed to seek direct consent to such a move from the CMA. Therefore Electro Rent was guilty of gun jumping
Under UK merger control rules notification of mergers qualifying for investigation under the UK Enterprise Act 2002 to the CMA is voluntary. However the CMA does have “own initiative” powers to call deals in for investigation. In completed merger cases where it commences an investigation it routinely imposes initial enforcement orders or “standstill obligation “ demanding that the parties take no steps to put the merger into practice until their investigation concluded . Parties can be fined up to 5% of their worldwide turnover for breach.
Electro Rent and Microlease both supplied testing and measurement equipment (TME) which was integrated into specialist equipment to test and measure electronic devices in order to validate their performance, across sectors such as telecommunications, aerospace and defence, industrial, and information technology. Their markets namely the supply, leasing and rental of TME were global..
Originally the CMA had conducted a Phase I inquiry under which Electro Rent had lined up an upfront purchaser to buy Electro Rent’s UK business. However this deal fell through and on 19 October 2017, the CMA referred the deal for a detailed Phase 2 investigation. On 7 November 2017, the CMA made an interim order pursuant to section 81 of the Enterprise Act 2002 extending a previous interim order made at Phase I to ensure that no action was taken pending final determination of the reference which might prejudice the reference or impede the taking of any action by the CMA. The interim order required the parties to maintain and operate both the acquiring and acquired businesses independently, to seek the consent of the CMA to do or not to do certain things affecting them, to ensure compliance with the Interim Order and to notify the CMA promptly of any breach or suspected breach of the Order.
The CMA finished its investigation on 17th May 2018 and concluded that the merger has resulted, or may be expected to result, in a substantial lessening of competition (SLC) within the market for testing and measurement equipment (TME) rental. The CMA found that Electro Rent, though much smaller than Microlease in the UK, was the only other rental company operating in the country to have the resources and stock to compete effectively with Microlease. Therefore the merged business was now the only suitable UK supplier for a large number of customers . The CMA accordingly decided that the merged business will have to sell Electro Rent UK to a new owner, to be approved by the CMA, in order to preserve competition.
Breach of Interim Order
On 12 June 2018, the CMA published a notice of a penalty of £100,000 imposed on Electro Rent Corporation for failure to comply with the requirements imposed on Electro Rent by the interim order issued by the CMA.The CMA found that Electro Rent failed to comply with the interim order made on 7 November 2017 by failing to first seek the consent of the CMA, as required by the interim order, before terminating the lease over the only premises Electro Rent and its subsidiary, Electro Rent Europe NV had in the UK.
Electro Rent argued that they had alerted the Monitoring Trustee to the intention to terminate the lease and he had not indicated that this would be a breach of the Interim Order. The CMA however found that this did not amount to a reasonable excuse as the obligation is upon Electro Rent to seek the consent of the CMA. The Monitoring Trustee, although under an obligation to monitor compliance with the interim order and report to the CMA, has no authority, delegated or implied, from the CMA to give consent on behalf of the CMA. Given the above, the CMA considers it appropriate to impose a penalty of £100,000.
The failure to comply was significant as the lease was over the only premises Electro Rent and Electro Rent Europe had in the UK and from where Electro Rent Europe’s UK branch operated, and the remainder of the lease was part of a potential remedy package on which Electro Rent had made representations.
Subsequent to the CMA’s Notice Electro Rent took steps to remedy the breach by entering into a new lease but this is on worse terms. However the CMA argued that Electro Rent had at all material times sufficient administrative and financial resources available to ensure compliance, had engaged external legal advisers and had previously sought derogations directly from the CMA from its obligations under the interim order and was therefore aware of its obligation to do so.
The CMA concluded that this was a flagrant breach and was committed in large part by the senior management of Electro Rent. Electro Rent did not bring the breach to the CMA’s attention and more significantly potential prejudice was prevented only by action taken by the CMA once it discovered the breach
Therefore the imposition of an administrative penalty reflects the seriousness of a failure to comply with an interim order without reasonable excuse. It is also necessary to ensure Electro Rent did not commit further breaches and more generally to ensure that there is a deterrent effect on businesses under the UK merger control regime to comply with interim measures orders and prevent the possible prejudice to the efficient enforcement of the UK merger control regime.
Electro Rent is now appealing against the penalty decision. Its grounds for appeal are that the CMA erred in finding that Electro Rent did not have a reasonable excuse to breach the Order through the service of the break notice under the lease as it had informed the Monitoring Trustee. It also claims that the penalty imposed by the CMA was excessive and should be reduced to nil or a nominal sum. The CAT has listed a first case management conference to be held on 1 August 2018
Compliance is a Priority
This case shows that strict compliance with hold separate orders is vital if parties are going to avoid sizable financial penalties.
The CMA , in common with the EU Commission, is focusing upon procedural merger control infringements. A series of recent cases at both EU and UK level of which this is the latest is testament to that policy. Therefore companies engaged in merger transactions which may be caught by UK or EU merger control legislation need to be particularly careful that they fully cooperate with competition regulators during their investigations. In particular they should ensure that they fully comply with all information requests sent by regulators as well as strictly observing the terms of any hold separate orders. The fines for non compliance are only likely to increase. They should consult their legal advisers at the earliest possible opportunity to avoid the type of issues thrown up by the Electro Rent case.
Case 1285/10/12/18 – Electro Rent Corporation v Competition and Markets Authority