On 21 April 2020, the UK Competition Appeal Tribunal (CAT) unanimously dismissed Ecolab’s appeal of the Competition and Markets Authority’s (CMA’s) decision to prohibit its completed acquisition of Holchem and require divestment of the large majority of Holchem’s business.
The CAT’s judgment, which follows close on the heels of the CAT’s dismissal of Tobii’s appeal of the CMA’s decision to prohibit its acquisition of Smartbox, confirms that the bar for successful reviews of CMA merger decisions is high: the CAT will be slow to interfere – particularly on the grounds of irrationality – unless the parties can prove, on the basis of strong evidence, that the CMA’s decision is without reasonable foundation.
The CMA’s decision to unwind the deal
On 30 November 2018, US head-quartered Ecolab acquired UK-based Holchem (both suppliers of cleaning chemicals and ancillary services to food and beverage (F&B) manufacturers in the UK).
Following an in-depth Phase 2 investigation, the CMA found that:
- the parties had an estimated combined market share of 30-40 per cent of the supply of formulated cleaning chemicals and ancillary food services to F&B customers in the UK;
- the merger had resulted or may be expected to result in a substantial lessening of competition (SLC), as the parties exerted a particularly strong competitive constraint on each other as compared to the other suppliers in respect of existing and new customers. There were only two other large suppliers within the UK market considered to be sufficiently close competitors;
- Ecolab’s alternative divestiture proposal (ADP), which comprised the divestiture of a portfolio of customers to an existing supplier over a transition period, had 'serious shortcomings and material risks with regard to its effectiveness'. The CMA decided that the ADP was not effective as, based on survey evidence, customers would be reluctant to switch and there was no guarantee that customers would stay with a new supplier; and
- Ecolab should divest Holchem Laboratories (the largest of the operating companies owned by Holchem) to an approved purchaser.
The CAT’s judgment
Grounds of appeal and the CAT’s decision
Ecolab brought its judicial review on four grounds, which the CAT unanimously rejected in their entirety:
- In respect of Ground 1 that the CMA’s SLC decision was irrational and unsupported by the evidence, the CAT found the evidence cited in the report was sufficient to support the CMA’s SLC decision in the whole relevant market as defined. Ecolab had argued that any SLC should be limited to large UK-only customers (on whom the impact of the merger was more marked and on which the CMA’s analysis was focused), but the CAT confirmed that the CMA was entitled to find an SLC over the whole relevant market, including small UK-only customers – a definition that was not challenged in the appeal.
- In respect of Ground 2 that the CMA’s rejection of the ADP was irrational, disproportionate and based on an error of law, the CAT held that the CMA was entitled, as a matter of policy, to seek a remedy in which it had a 'high degree of confidence' in remedying the SLC, particularly since the CMA’s intervention in merger cases was by definition a one-off circumstance. On this basis, the CMA’s rejection of the ADP was neither irrational nor based on an error of law.
- In respect of Ground 3 that the CMA had failed to take reasonable steps to investigate the effectiveness of the ADP, the CAT held that the CMA had acted within the remit of its 'wide margin of appreciation' to decide that further consultation on the effectiveness of the ADP was unnecessary – there was no reason to suppose that this would have overcome the ADP’s shortcomings and would have necessitated the CMA extending its statutory review deadline.
- In respect of Ground 4 that the conclusion that the ADP would not be effective was irrational in light of Ecolab’s further modification of the remedy proposal, the CAT found that the modified ADP did not address or mitigate the CMA’s objections to the inherent shortcomings of the original ADP. As a result, it did not merit further consideration by the CMA or lead to a conclusion that the CMA’s assessment was irrational.
The CAT’s approach to the CMA’s evidential analysis
As it did in Tobii/Smartbox, the CAT did not interfere with the CMA’s factual assessment when dismissing Ground 1 on rationality of the CMA’s SLC decision. The CAT held that the CMA’s conclusion on closeness of competition and customer switching was 'clearly open to the CMA on the evidence and cannot be regarded as manifestly without reasonable foundation'. The question was not whether the CAT would reach the same view, 'but whether the view reached by the CMA was one that a competition authority could reasonably arrive on the basis of the evidence from its inquiries'.
Also consistent with Tobii/Smartbox, the CAT refused Ecolab’s application for disclosure of communications between the CMA and third-party competitors during the Phase 2 investigation, or alternatively communications with competitors relating to the remedy. Ecolab’s argument, in essence, was that the disclosure sought was relevant to the issue that the evidence presented did not support the CMA’s key conclusions on competitive constraint from smaller suppliers and suppliers of unformulated chemicals and whether the CMA unduly relied heavily on main competitors’ views on Ecolab’s ADP. However, the CAT held on the facts in that appeal that the disclosure sought was either unnecessary or disproportionate for a fair determination by the CAT given the other evidence presented by the CMA and the parties.
The CAT agreed with the CMA’s approach to remedies
Preference for structural remedies
The CAT found that the CMA was correct, in carrying out its duty to find an 'effective remedy', to seek a remedy which addressed the adverse effects 'at source', such as divestitures which re-establish the structure of the market expected in the absence of the merger. The CAT agreed with the CMA taking 'divestiture of all or part of the acquired business as its “starting point”, since it [would] generally be a straightforward remedy', with other structure or quasi-structural remedies only being considered in 'appropriate cases'.
Considering the facts of the case, the CMA was correct in identifying risks with the ADP
The CAT decided that the CMA was entitled to conclude that there was considerable risk that:
- customers would not agree to transfer to a new supplier; and
- having transferred, those customers would remain with that new supplier.
As contracts either had change-of-control clauses in relation to suppliers or were non-existent altogether, Ecolab could only seek transfers by customer agreement. As such, the transfer of customer contracts over a long transition period was a less compelling remedy than a transfer of a whole business.
Notably, the CAT rejected Ecolab’s reliance on the CMA’s decision in Rentokil Initial/Cannon Hygiene, in which the CMA accepted a divestiture package including the divestment of certain customer contracts, as 'the characteristics of one market may be very different from those of another'.
The CMA was entitled not to exercise its powers to extend the review timeline in order to facilitate further exploration of the ADP
The CAT stated that, being well aware of the CMA’s 24-week statutory time limit to prepare its report, the parties were not 'entitled to expect the CMA to invoke "special reasons"' simply because they left the 'submission of a remedy right up against the deadline or prevented the CMA from consulting in due time [due to the protracted negotiations with potential third party suppliers] on… crucial aspects of the remedy'.
Appellants must meet the high bar for judicial review to successfully challenge the CMA’s merger decision on substance
The Ecolab judgment follows the standard set by the CAT in Tobii AB v CMA (PDF) and the line of precedents which confirm that, in order to bring a successful challenge, appellants must meet the high bar of judicial review: the parties in both Tobii and Ecolab were unable to clear the high bar and show that the errors on core substantive issues or non-disclosure of underlying evidence (such as data or surveys) were so fundamental and serious as to vitiate the CMA’s conclusions.
The CMA is likely to welcome the CAT’s confirmation that it has a broad margin of discretion in the way it carries out its investigations and analyses.
The CMA’s approach to remedies is becoming increasingly hard-line
As evidence of its increasingly hard-line approach, the CMA adopts a strong preference for structural remedies, such as divestment of entire businesses, over behavioural remedies. Other structural and quasi-structural remedies are only considered in appropriate cases, which the CAT found was 'precisely the course the CMA [had] followed' and there was 'no basis for detecting any error of law'. This approach was recently confirmed by Andrea Gomes da Silva (Executive Director for Markets and Mergers, CMA) at the GCR Live Miami conference, in which she came out as 'unapologetically in favour of structural remedies' for mergers. The CMA is likely to welcome the CAT’s endorsement of its approach.
The CAT also showed little sympathy for submissions that the CMA’s failure to extend statutory timelines meant that remedy proposals were not being sufficiently considered. It appears that it would take a particularly egregious procedural breach for the CAT to find in favour of an appellant, such as that demonstrated in Sainsburys/Asda v CMA (PDF), where an impossibly short CMA deadline for responding to detailed working papers, immediately before the main party hearings in the case, was held to be procedurally unfair, particularly given the extensive evidence gathering required.
Given this backdrop, it is crucial for companies to start remedies planning from the outset, considering the feasibility of any potential structural proposals and associated third party negotiations up-front.
The CMA is increasingly aiming to exert its presence on the international stage in the post-Brexit environment
The CMA has made no secret of its ambition to build its reputation as a leading competition regulator on the global stage, especially in the post-Brexit era. Earlier this year, the CMA’s chief executive Andrea Coscelli told the Financial Times (subscription required) that the CMA would be 'tak[ing] back control – genuinely – of the decisions': this approach is reflected in the CMA’s readiness to apply novel theories and analytical approaches. In doing so, the CMA has at times taken a markedly different approach from other major antitrust authorities considering the same merger case (for example, the CMA blocked the Sabre/Farelogix (PDF) acquisition two days after the case was cleared in the USA (PDF)).
The CMA’s determination to chart its own course will no doubt have been boosted by the Ecolab judgment and other recent successes.
The importance of each case turning on its own facts
While these recent judgments confirm that the CAT is inclined to defer to the CMA on fact-finding in often complex cases, the Ecolab judgment confirms that 'merger decisions of the CMA do not constitute precedents and it is axiomatic that each case turns on its own facts'.
The CAT refused to undertake a full merits review of the CMA’s evidential basis in reaching those key conclusions. But it is clear that the market was (as is not uncommon) characterised by a small number of larger competitors and a substantial but fragmented tail of smaller competitors, as well as substantial private tender competition that did not have the retrospective transparency of public tenders. However, without the wealth of authoritative third-party data on market size, shares and tender competition, the parties – and indeed the CMA – were faced with substantial evidential challenges in its market analysis.
This brings into sharp focus the importance of the evidential quality when it comes to internal sales records and strategic business documents, and the complex length that the parties must go to in order to reconstruct as complete a picture as possible, before approaching difficult cases in such markets.
For more on antitrust risk in strategic deals in an era of heightened global antitrust intervention, see Strategic acquisitions, part of the 10th edition of our annual antitrust report of 10 key themes for the year ahead.