Tuesday, May 13, 2014

Salomons II

Last July, I got quite miffed about the Competition Appeals Tribunal’s judgement in Akzo Nobel v. Competition Commission. I argued that the CAT had bent the rule of Salomon v. Salomon, which says that shareholders and the company they own are legally treated as distinct entities, past the point of breaking. For this reason, I recommended an appeal.

Apparently, so did Akzo’s solicitors, because in April the Court of Appeal ruled in its version of Akzo Nobel v. Competition Commission, deciding unanimously to dismiss the appeal.

While the Briggs, LJ.’s judgement for the Court is clearly better than the CAT’s, I’m not quite sure that I’m entirely convinced. While he stays light years away from the Single Economic Unit case law invoked by the CAT, when you get right down to it the result isn't so easily distinguished.

The logic of the Court of Appeal is quite straightforward:

  1. The legally relevant criterion, from s. 86(1)(c) Enterprise Act 2002 is that Akzo Nobel must be “a person carrying on business in the United Kingdom”.
  2. Firstly, it is important to note that that doesn’t have to be the same business as the business that is seeking to merge or acquire. All that is needed in order to establish jurisdiction is that Akzo Nobel carries on any kind of business in the UK.
  3. The Akzo Nobel group “may fairly be described as carrying on business in the Netherlands and in the UK.” (par. 33)
  4. The only question is by whom, i.e. by which legal person, this business is carried on.
  5. Akzo Nobel NV, the Dutch parent company, is held to be managing the business “both strategically and operationally” (par. 36)
  6. For this reason, Akzo Nobel NV is carrying on business in the UK, meaning that the Competition Commission is entitled to make an enforcement order against it.
In order to distinguish Salomon v. Salomon, Briggs, LJ. makes a distinction between a parent who does nothing more than “to exercise its rights as shareholder in the traditional fashion, leaving the entire management of the business to the subsidiary’s directors” (par. 37) and “the exercise of the strategic and operational management and control of a manufacturing and sales business” (par. 34).

Even on its face, this strikes a huge blow against the rule of Salomon v. Salomon, given that something akin to Akzo’s management structure is used by “most modern corporate groups” (par. 12). Are we really to believe that the parents of all those groups have a sufficient presence in the UK for the Competition Commission to go after them?

While the judge contrasts his test with the presence test advocated by Akzo, which Parliament could have but did not enact (par. 30), where he seems to have landed is that almost any international group that trades in the UK is “carrying on business” there, which is also not what Parliament enacted. Parliament could have easily extended the jurisdiction of the CC to all companies that trade in the UK, i.e. that buy or sell goods or services there, but it did not. To do so would have made the CC’s jurisdiction to make enforcement orders essentially equivalent to its jurisdiction to investigate. That would have been convenient for the CC, but it is not the law. (As the Judge admitted in par. 25.)

A potential tie-breaker is the purpose of s. 86(1), which is to establish possible connecting factors between the addressee of an enforcement order and the UK, so that the UK does not violate international comity in seeking to regulate behaviour outside its borders (par. 26). This is certainly true, as far as it goes, but in order to apply this tie-breaker the judge would have had to survey the general international understanding of comity, which he did not do.

Briggs, LJ. might have referred to internet regulation cases in the European Court of Justice, like the Google Adwords case or today’s Google Spain, or to the US Supreme Court’s case on the Alien Tort Statute last year in Kiobel v. Royal Dutch Petroleum, where the Supreme Court sharply limited the jurisdiction of US courts over torts outside its borders. In competition law specifically, there seems to be quite a bit of patience with extraterritorial decisions, but there are limits. The € 1.06 bn fine against Intel, for example, drew criticism from the US on comity grounds. (The judgement from the General Court is expected on 12 June.) 

The same goes for the Commission’s decision to block the proposed merger between Honeywell and GE in 2001. (See also this research paper commissioned by the Commission.) If comity does not prevent the EU from blocking a merger between Honeywell and GE, presumably it does not prevent the UK from blocking the Azko/Metlac takeover either. But the Court of Appeals made no findings in this regard.

Returning to the rule of Salomon v. Salomon, there is one final question that troubles me: If Akzo Nobel N.V. is carrying on business in the UK because it “exercise[s] the strategic and operational management and control of a manufacturing and sales business” in the UK, where does that leave Mr. Salomon? As a shareholder/director, he surely did the same thing. So was he, as a private person, carrying on a business in the sense of s. 86 EA2002? To be sure, the criterion enacted there is particular to competition law, but that doesn’t mean the question isn’t important. If the shoemaker Mr. Salomon had lived in France while selling his shoes through his shop in the UK, would that have meant that Mr. Salomon himself – as opposed to his company – was carrying on business in the UK? Could the Competition Commission have prevented him from merging his business with the business of Mr. X, also resident in France with a shop in the UK? Given the Court of Appeal’s judgement, it seems clear that the CC could have. But I’m not sure where that leaves corporate legal personality.