In last month’s Akzo Nobel v. Competition Commission, the Competition Appeal Tribunal treaded a number of fine lines to end up with what would have seemed at first glance to be a no-brainer of a result. Yes, the Competition Commission (“the CC”) has jurisdiction to forbid Akzo Nobel from acquiring a company called Metlac, given its finding that the merger would result in a substantial lessening of competition in the UK.
Judging from the language of the judgment, the difficulty of this question seems to have surprised everyone involved. The legal trickery involved is as follows: While the familiar question is whether the competition authorities have the right to look at a merger in the first place, here the question is only whether the CC has the right to impose this particular remedy. After all, parties did not dispute that the proposed merger might affect market conditions in the UK (par. 21), and that the relevant turnover exceeded the £ 70 million threshold of section 23 of the Enterprise Act 2002 (“the Act”). No-brainer.
Things went horribly awry, however, when the CC decided to forbid the merger, relying on section 41 and section 84 of the Act. Forbidding, per se, was not the problem. Forbidding an anticompetitive merger is the most obvious remedy imaginable, which is why it is listed first in Schedule 8 of the Act. No, the problem was whether the CC had the power to forbid Akzo Nobel from performing an agreement, given that arguably neither that company nor the agreement was located in the UK. The key language is in section 86 of the Act:
86 Enforcement orders: general provisions
(1) An enforcement order may extend to a person’s conduct outside the United Kingdom if (and only if) he is—
(a) a United Kingdom national;
(b) a body incorporated under the law of the United Kingdom or of any part of the United Kingdom; or
(c) a person carrying on business in the United Kingdom.
(3) An enforcement order may prohibit the performance of an agreement already in existence when the order is made.
(4) Schedule 8 (which provides for the contents of certain enforcement orders) shall have effect.
Given that the parent company Akzo Nobel Holding, the legal entity that would perform the offending agreement, is incorporated in the Netherlands and has its headquarters there, the only possible way for the CC to get at it is to show that Akzo Nobel Holding is carrying on business in the United Kingdom, something it didn’t have to show in order to get jurisdiction over the merger as such, and something it wouldn’t have to show if its remedy had instead focused only on Akzo Nobel’s conduct within the UK. (In other words, if they’d chosen a behavioural remedy instead of a structural one.) And that is a problem, because – as one would expect given the name – Akzo Nobel Holding NV doesn’t really carry on any real business whatsoever. (Although given the definition of section 129 of the Act, it carries on business in the Netherlands. Cf. par. 111.) The holding company just owns shares, directly or indirectly, in about 450 subsidiaries, several of which do carry on business in the UK.
Which brings us, much to everyone’s great surprise, to Salomon v. Salomon, an 1897 case so fundamental that every British and Irish law student – and probably many more in the rest of the world – has to study it on the first day of Introduction to Company Law. In that case, the House of Lords was asked to say that Salomon the majority shareholder was liable for the debts of Salomon Ltd, given that the company in question was nothing more than a sole proprietor shoe maker doing business as a company with the six other shareholders being nothing more than placeholders. (Under the Companies Act 1862 a company had to have at least seven shareholders.) The Lords, however, declined to “pierce the corporate veil” and held that plaintiff person and the defendant (bankrupt) company were distinct entities, meaning that the liquidator of the company could not recover the company’s debts from Mr. Salomon.
And now, 116 years later, the CC needed some way around that doctrine in order to be able to say that Akzo Nobel Holding NV – as opposed to its subsidiaries – was carrying on business in the UK. The solution was to take refuge in an idea that suggests that no piercing of veils is in fact happening, the idea of the “Single Economic Unit”. Like so many bits of creativity in English law, this one comes to us ultimately courtesy of Lord Denning, although the CAT does not cite him. The CC itself seems to have been reluctant to go there explicitly (cf. par. 99), but the CAT seizes on it with abandon. It lists several pages of authorities to the effect that the rule that a Single Economic Unit can be treated at law as such does not exist because the whole story amounts to nothing more than piercing the corporate veil in a way that is forbidden by Salomon (par. 100-107) before concluding that, in this case, none of those concerns matter.
It must be said that if ever there was a case where the Single Economic Unit argument fit like a glove, it was this one. Akzo’s de facto organisational structure involved an Executive Committee and a slew of Business Areas, Business Units and Sub-Business Units, none of which corresponded even remotely to the legal structure of the group (par. 49-50). Individual corporations tended not to have individual strategies, or even natural persons as directors or secretaries. But then again, much the same could be said for A. Salomon & Sons Ltd; while it at least had human beings for shareholders, its corporate strategy was determined entirely by its majority shareholder. By checking against the Salomon case, it becomes clear that the CAT comes dangerously close to distinguishing the Salomon precedent – and the many other precedents that build on it – on no firmer basis than that the Akzo case involves shareholders who are themselves corporations. And even though from an economics point of view, that might be sensible, legally it is extremely dicey. As the CAT itself said:
82. In our judgment, the appeal to the economic purposes of the Act and the apparent irony in that context of allowing technical legal concepts to limit the achievement of those purposes is, in the present context, misconceived. It is, of course, true that the subject-matter of the Act comprises the assessment and regulation of economic issues but that subject-matter is realised through a legally constituted framework of procedure and enforcement. (…) There can be no special dispensation from those general principles, in the absence of any statutory provision to the contrary, simply because the substance of the issues under consideration is economic.
There is another reason why the CAT’s reasoning might be considered weak. The quoted language comes from a discussion of why the jurisdictional basis for considering a merger in the first place should be different from the jurisdiction to forbid it. Essentially the Tribunal’s reply is that the different language used in the two provisions is quite deliberate, that Parliament had clearly made the distinction on purpose, and that therefore Parliament’s will should be respected: Not all mergers that are within the jurisdiction of the CC can be forbidden by the CC.
And yet, looking at this Single Economic Unit approach, it is not obvious that there are in fact many cases left that fit that description. As the CC itself concluded, Akzo’s governance structure is typical for large multinationals (cf. par. 66). And small multinationals that operate in a UK market will normally have a more direct presence there. So, realistically, does the CAT’s interpretation of section 86(1)(c) really preserve the difference with section 23? A disinterested reader may well conclude that the CAT in fact did the opposite of what it said it would do in par. 82: it put the economic logic of the case, and of merger review in general, before the law.
For this reason, if I were advising Akzo Nobel, I would suggest taking this case to the Court of Appeals. Given that this case touches on important issues of jurisdiction over mergers and company law, with the former being tackled in this case for the first time (par. 74), there is no reason why the CAT or the Court of Appeals should not give leave to appeal.