September-08-2016 in Commercial & Business, Mergers & Acquisitions (M&A)
The lowering of the merger notification thresholds and a strengthening economy have resulted in a rise in the number of notifications being made to the Irish Competition and Consumer Protection Commission (CCPC). Under the 2014 Competition and Consumer Protection Act the compulsory merger control thresholds for notifying the CCPC of a qualifying merger are that, in their most recent financial year:
- the combined turnover in Ireland of the merging parties is at least €50 million
- the turnover in Ireland of each of 2 or more of the merging parties is at least €3 million.
The policy consideration behind introducing these lower filing thresholds was a concern that previous thresholds, which excluded acquisitions of a business with revenue of less than €40 million, permitted local markets to be monopolised. The revised thresholds have created a targeted system focusing more narrowly on mergers that are likely to substantially lessen competition in markets within the State.
Recent merger decisions by the CCPC have shown flexibility in conditionally clearing mergers. This has been done by embracing more diverse solutions to competition problems including the divestment of assets, the amendment of unreasonably restrictive covenants and the adoption of the failing firm defence.
Divestment of assets
The most common tool used by the CCPC to conditionally clear a merger is to direct the disposal of assets in order to remove a competitive advantage.
PandaGreen
In this decision the CCPC conditionally cleared the proposed merger of PandaGreen Limited and Starrus Eco Holdings Limited trading as Greenstar. The CCPC’s analysis involved an in-depth economic examination of the affected markets and submissions from the parties involved, competitors and third parties. In order to avoid a substantial lessening of competition, the conditions imposed by the CCPC required PandaGreen to sell Greenstar’s domestic waste collection business in Fingal and Dun Laoghaire-Rathdown to a purchaser agreed by the CCPC.
Acquisition of Wardell Roberts Limited and Robert Roberts (NI) by Valeo Foods UK Limited
In this merger the CCPC considered brown sauce to be a distinct product and the parties were unsuccessful in their argument that ketchup and brown sauces were interchangeable substitutes in the cold sauces classification. The CCPC’s divestiture condition provided for the disposal by the purchaser Valeo Foods of the 'YV sauce' business to an independent third party.
Acquisition of Esso Ireland by Topaz Investments
The CCPC required commitments that Topaz, as purchaser, sell Esso Ireland’s 50% interest in a sea-fed fuel terminal at Dublin Port. Topaz also committed to selling three service stations in the Dublin area.
Altering proposed restrictive convenants in mergers
Restrictions such as non-compete clauses are often imposed on the parties to an agreement to form a merger. These clauses must be directly related to and necessary for the proper functioning of the objectives envisaged by such an agreement. If these conditions are not met then the arrangements may be considered to be anti-competitive.
An ancillary restriction must be limited in terms of its duration, geographic coverage and subject matter to what is necessary to secure the adequate transfer of goodwill and to protect the value of the business being transferred.
The implementation of these guidelines was evident in the Musgrave Limited/Express Checkout decision where a two year non-compete clause covering the geographical area of "anywhere in Ireland" was sought to ensure the complete transfer of the goodwill of the business. This geographical restriction was too narrow and was revised to apply only in respect of business competing in the respective geographical areas of the target companies.
In the Lee & Company/Musgrave Limited decision the parties were required to alter their non-compete clause from a period of 3 years to 2 years to prevent the distortion of competition and to accord with the principle that an ancillary restraint cannot exceed what is necessary.
Other conditions of interest imposed by the CCPC have included ensuring that all of the proposed mergers in the sector in which a particular purchasing company would be involved would be notified to the CCPC for a period of three years.
Failing firm defence
The failing firm defence was employed for the first time in the acquisition of Fannin Limited by Baxter Healthcare. The parties submitted evidence that Fannin Compounding was a "failing division" of Fannin Limited and the CCPC undertook a detailed review of the failing firm argument. Consistent with the CCPC’s Guidelines for Merger Analysis, the failing firm defence was effectively used and the CCPC determined that the competitive structure of the relevant market would deteriorate in the absence of the proposed acquisition. On this basis this merger was permitted.
Conculsion
As a result of the new thresholds, deals involving transactions with an Irish target have now risen significantly to 80% of the total number of deals notified. Using international best practice, including European Commission guidance, the CCPC has adopted a flexible and practical approach to merger approvals and in 2015 no deals were blocked thanks to the use of a range of mechanisms to maintain competition post-merger.
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