108/07    30 July 2007

The OFT welcomes the judgment by the Competition Appeal Tribunal (CAT) to dismiss the judicial review application brought by Co-operative Group (CWS) Limited (CGL) and award the OFT its costs.

This is the first time an OFT decision has been challenged by a merging party. It is now the second unsuccessful challenge to an OFT merger decision following the dismissed appeal by Celesio AG of the OFT's Boots/Alliance Unichem decision in May 2006 [see note 1].

The application was made against the OFT's decision to reject Southern Co-operatives Limited (Southern) as a proposed purchaser of a number of divestment funeral businesses pursuant to undertakings in lieu of a reference. These undertakings had been given in connection with the completed acquisition by CGL of Fairways Group UK Limited (Fairways).

On 3 April 2007, the OFT declined to grant permission to Southern as a potential purchaser of twelve former Fairways funeral businesses on the basis that the requirement in the undertakings that the purchaser be 'independent of and unconnected to' CGL was not met. The OFT concluded that there would be a continuing structural link between Southern and CGL because Southern's CEO sits on the Board of CGL.

The CAT held that the OFT's decision to refuse purchaser approval in this case was reasonable. The judgment is also an important clarification of UK merger law. CGL had argued that the OFT had applied an unlawful remedies standard by seeking to 'restore competition to pre-merger levels'.
 
However, the CAT ruled that this approach can be appropriate as indeed it was in this case. The CAT also confirmed that the OFT is not required to conduct a detailed investigation at the purchaser approval stage of remedies implementation. Finally, this case is the first time that the OFT has recovered its costs from the applicant in a merger appeal under the Enterprise Act 2002.

As the CAT has unanimously dismissed CGL's application for review, the OFT's decision refusing purchaser approval to Southern stands.

Simon Pritchard, Director of Mergers at the OFT, said

'Where possible, the OFT prefers remedies that completely undo the harm threatened by a merger by restoring competition to pre-merger levels. In a case like this, we investigated, found problems, and intervened to solve them. As a general policy, it makes little sense to incur the costs of intervention and then ultimately settle for less competition than before the merger. That is why restoring competition reflects international best practice. We very much welcome the fact that the Tribunal has endorsed that approach in this case.'

NOTES

1. See OFT press release 85/06, 'OFT welcomes CAT judgment on Celesio judicial review'.
 
2. The Reference Test - The OFT has a duty to make a reference to the Competition Commission if the OFT believes that it is or may be the case that a relevant merger situation has been created; and the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

3. Under the Enterprise Act 2002 a relevant merger situation is created if two or more enterprises have ceased to be distinct enterprises; and the value of the turnover in the United Kingdom of the enterprise being taken over exceeds £70 million; or as a result of the transaction, in relation to the supply of goods or services of any description, a 25 per cent share of supply in the UK (or a substantial part thereof) is created or enhanced.

4. Under section 73 of the Enterprise Act 2002 the OFT may, instead of making a reference, and for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned, or any adverse effect which has or may have resulted from it or may be expected to result from it, accept from such of the parties concerned as it considers appropriate undertakings to take such action as it considers appropriate. In doing so, the OFT will have regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects resulting from it.

5. Before accepting any such undertakings the OFT shall give notice of the proposed undertakings under Schedule 10 of the Enterprise Act 2002, and consider any representations made in accordance with that notice.

6. On 19 July 2006 the OFT decided not to refer the completed acquisition by the CGL of Fairways Group UK Limited ('Fairways') to the Competition Commission on the condition that CGL provided satisfactory divestment undertakings to address the competition concerns. The OFT had identified five local areas where the merger may have substantially lessened competition in the provision of funeral directing services. The parties offered to divest a number of funeral businesses within these areas to address the concerns raised by the OFT. On 29 November 2006, the OFT accepted from CGL Undertakings in Lieu of reference to the Competition Commission to divest 13 funeral businesses to a purchaser or purchasers approved by the OFT. A copy of the OFT's decision and the Undertakings can be found on the OFT's website.

7. On 1 May 2007 CGL applied for judicial review of the OFT's decision of 3 April 2007 to reject Southern as a purchaser. The CAT's decision is available on the CAT website.