The applicant, a social media provider, concluded a merger with a company whose business involved producing an online database of short soundless videos (GIFs) and stickers, most of which were accessed without charge through an application programming interface embedded into third party apps. A month later the Competition and Markets Authority imposed an initial enforcement order under section 72(2) of the Enterprise Act 2002 in order to prevent pre-emptive action so that the businesses could operate separately while the authority made a reference under section 22(1) in respect of the completed merger. The authority had the statutory duty to make a reference where it considered that a merger might lessen the competitive structure of the market in the United Kingdom for goods and services. The applicant contended that the initial enforcement order placed considerable restrictions on its global business, such as obligations not to integrate the businesses, not to transfer any of the applicant’s subsidiaries, not to make changes to key staff, and not to change the nature, range and quality of goods and services it supplied in the United Kingdom. After the authority had refused specific derogations which the applicant sought from the order and instead requested further information, the applicant applied to the Competition Appeal Tribunal for a review of the authority’s refusal on the basis that it was irrational, disproportionate and contrary to legal certainty. The tribunal refused the application, holding, inter alia, that the definition of pre-emptive action was wide enough to enable the authority to take action which would not prejudice a reference, including action not to affect the competitive structure of the market during the investigation, and that the authority had a wide margin of appreciation as to the information it could seek, so that its actions were not irrational.
On the applicant’s appeal—
Held, appeal dismissed. (1) The Competition and Market Authority’s ultimate statutory powers were not limited to requiring divestiture in a completed merger of the acquired corporation. Section 41(2) of and Schedule 8 to the Enterprise Act 2002 had a broad scope and enabled the authority to take such action as it considered reasonable and practical to remedy, mitigate or prevent the substantial lessening of competition it had found, and any adverse effects resulting from it. Since a significant consequence of the merger regime in the United Kingdom being prospective was that the authority was required to act quickly in appropriate cases, it had developed a broad template for initial enforcement orders. The process provided for in section 72 was intended to hold the ring while the authority obtained the information it inevitably lacked, and the process would break down if a party against whom an order was made refused to co-operate. That was what had happened in the instant case when the applicant did not properly engage with the authority, but rather after making requests to derogate, sat on its hands and refused to answer the authority’s questions (paras 44–46).
(2) While it was undesirable to give a comprehensive definition of what was or was not pre-emptive action, section 72 of the 2002 Act gave the authority a wide margin of appreciation and allowed it to issue initial enforcement orders to prevent all kinds of such action. Section 72(2) was broad enough to allow the imposition of obligations as to the carrying on of any activities and/or the safeguarding of assets, and was broad enough to encompass the terms of the order in the instant case. Schedule 8 allowed the taking of a range of actions many of which could affect the acquirer’s business beyond the specific steps it might take to integrate the target business. If the authority could not make an order impinging on the acquirer’s existing business, a divestiture of the merged businesses after a lengthy process might be unable to restore the status quo at the time of the merger or protect the market. The tribunal had therefore been correct to say that the authority had power to regulate any activity the merging parties might take as a result of the merger, and right to reject the applicant’s complaint that there had been no basis to make the enforcement order (paras 55–60).
(3) If the applicant had engaged with the authority and provided the information sought, the authority would have been able to deal with the its requests properly. The authority would consider derogations from the broad template of its initial enforcement order after considering representations from the merging parties as soon as reasonably practical. That could only be achieved if the parties co-operated by answering reasonable questions. Unless the information sought by the authority was so manifestly without reasonable foundation, it was not for the tribunal to second guess what information was sufficient for the authority to answer the applicant’s requests. The tribunal had found that the authority had good reasons for its concerns and that specific obligations imposed in the enforcement order were aimed at actions that the merging parties might take and gave rise in the authority’s experience to concerns as to the possibility of pre-emptive action. Accordingly, the authority had been right to refuse to release the applicant from the obligations in the order until it co-operated, the tribunal had applied the correct legal principles and had been correct to hold the standard of review to be one of rationality, so that the authority’s requests were not irrational (63–64, 68–69).
Robert O’Donoghue QC, Gerard Rothschild and Tom Pascoe (instructed by Latham and Watkins (London) LLP) for the applicants.
Marie Demetriou QC, Ben Lask and Emma Mockford (instructed by Solicitor, Competition and Markets Authority) for the authority.