On 19 September 2006, the Competition Appeal Tribunal (CAT) dismissed an application by Stericycle International LLC, Stericycle International Limited (Stericycle) and Sterile Technologies Group Limited (STG) for review of the decision by the Competition Commission to make an interim order and give directions under section 81 of the Enterprise Act, regarding a merger between Stericycle and STG. The CAT held that the CC had acted within its margin of appreciation in deciding to appoint a Hold Separate Manager to ensure the separation of the businesses during its inquiry.
The merger took the form of an acquisition of the entire issued share capital of SGT by Stericycle International LLC on 27 February 2006, following which integration of the Stericycle and STG businesses began. The merger gave the two businesses combined shares of 65% and 55% in the UK markets for high temperature treatment of healthcare risk waste and alternative technologies treatment of healthcare risk waste, respectively.
On 28 June 2006, the OFT announced that it had decided to refer the merger to the Competition Commission (“the CC”) under the Enterprise Act 2002 (“the Act”). Soon after the reference, in accordance with section 80(3) of the Act, the CC adopted the “hold separate” undertakings that had been accepted by the OFT.
On 18 July, the CC made an order (“the Order”) to prevent Stericycle and STG from taking any pre-emptive action pending the outcome of the CC’s inquiry into their merger. The Order was supplemented by directions issued on 25 August (“the Directions”) requiring that Stericycle and STG take specified steps to put in place organisational arrangements, as set out in the schedule to the Directions, in order to achieve an appropriate separation for certain defined functions (which included marketing and finance) and appoint a Hold Separate Manager (HSM).
On 21 July 2006, Stericycle and STG lodged a notice of application with the CAT, under section 120 of the Act, for review of the CC’s decision to make the Order. On 31 August 2006 there followed an application regarding the Directions.
The central issue before the CAT was the reasonableness of the CC’s decision to order the appointment of a HSM.
The CAT first examined the powers given to the CC under section 81 of the Act. It noted that this section gave the CC wide powers for preventing pre-emptive action including “the appointment of a person to conduct or supervise the conduct of any activities” – i.e. including a HSM. Moreover, the word “might”, used in section 80(10) (which defines the term pre-emptive action as “action which might prejudice the reference concerned or impede the taking of any action… which may be justified by the [CC’s] decisions…”), implies a relatively low threshold of expectation that the outcome of the reference might be impeded. Accordingly, while the CC must exercise its powers reasonably and proportionally, it had a considerable margin of appreciation under section 81.
The CAT then reviewed the context in which the CC took the decision to appoint a HSM. It noted in particular that:
- The OFT’s intervention as regards pre-emptive action came “rather late in the day” - the process before the OFT had been underway for more than 2 months before the OFT suggested initial undertakings.
- The initial undertakings given to the OFT lacked clarity.
- The applicants seemed to have interpreted the undertakings given to the OFT as if they were to all intents and purposes ineffective (and therefore continued with the integration of the Stericycle and STG business).
- Notwithstanding the delay before the OFT sought undertakings, it was foreseeable that the OFT would refer the merger to the CC. Therefore the applicants took a substantial risk in continuing to integrate, particularly after giving the undertakings to the OFT.
- It should also have been foreseeable to the applicants that the CC was likely to exercise its powers under sections 80 and 81 of the Act.
- The CC’s guidance on interim measures indicated “risk factors” that made it more likely to appoint a HSM. These factors included past breaches of interim measures, substantial integration, of the merged businesses, the likelihood of further or continued integration, the absence of the pre-merger senior management of the merged businesses and the risk that the current senior management would run the merged business in the interest of the acquirer. Factors akin to most of these were present here.
- Despite having serious concerns at the outset and despite the existence of these “risk factors”, the CC did not go down the route of appointing a HSM. Instead the CC first appointed a monitoring trustee, held a number of meetings with the applicant and accepted a number of modifications to its proposals to the benefit of both businesses. The CC also permitted the flow of confidential information between the two businesses in limited circumstances.
In this context, it was for the applicants to show that the decision taken by the CC was unreasonable. It was not sufficient to show that the CC could have taken a different decision. Further, the CC did not have to give detailed reasons for not adopting each of a whole range of possible alternatives that could have been envisaged. It was enough for it to give sufficient reasons for adopting the alternative which it did decide to adopt.
The applicants argued that the CC’s concerns were limited to sales and marketing and that the effects of joint decision-making in these two areas did not provide any adequate basis for imposing a HSM. However, the CAT held that on the evidence submitted, the CC’s overarching concern was that under the applicants’ proposals the merged businesses would still have only one “directing mind”. As a consequence, there was no safeguard that each of the businesses would be managed separately. Given that the applicants had already taken significant steps to integrate the two businesses, it was not disproportionate for the CC to consider that an external safeguard, in the form of a HSM, was necessary.
The CAT rejected the applicants’ submissions that there was no role for a HSM to play. The CAT commented that the HSM would hold ultimate responsibility for the management of the STG business with all the normal responsibilities of the CEO of a business. The CAT further noted that while the ultimate structure envisaged by the Directions was complex and involved an imposition on STG, such complexity had arisen largely because the applicants continued an integration programme when they could have foreseen that a reference was possible. The degree of integration made it more, not less, important to appoint a HSM.
The CAT concluded that the CC had acted within its margin of appreciation in deciding that it was necessary to appoint an independent HSM to be ultimately responsible for the STG business during the remainder of the CC’s inquiry.
The applicants brought an alternative challenge to other restrictions imposed by the Directions. In particular, they challenged the terms of the provision which limited the flow of confidential information between the two businesses to that which was “strictly necessary” in the ordinary course of business. The CAT dismissed the application, holding that there was nothing unreasonable or unworkable in such restrictions.
This is the first test in the CAT of the CC’s powers to prevent pre-emptive action under sections 80 and 81 of the Act. This was also the first case in which the CC has made an interim order under section 81.
The CC has welcomed the CAT’s judgment, commenting that it established the very important principle that the CC can, where necessary “take appropriate action to ensure that companies in a merger inquiry stay as separable, viable businesses, capable of competing with each other”.
The CC, having provisionally found that the merger leads to a substantial lessening of competition, is consulting on its remedies.
Source: Stericycle International LLC, Stericycle International Limited, Sterile Technologies Group Limited v Competition Commission, case 1070/4/8/06, judgment of 19 September 2006 ([2006 CAT 21). Competition Commission press release 50.06.