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Licence to thrill: KY undertakings consulted on before Reckitt Benckiser deal is rubber stamped…

20 October 2015

Following on from last month’s acceptance by the Competition and Markets Authority (“CMA”) of undertakings from Reckitt Benckiser Group plc / Reckitt Benckiser (Brands) Limited (together, “RB”) to alleviate the CMA’s concerns regarding its anticipated acquisition of the K-Y Brand from a subsidiary of Johnson & Johnson, Inc (“J&J”), the CMA has now published the content of the agreed undertakings for consultation.

The undertakings were released on the CMA’s website on 9 October 2015 and comments were invited until 23 October.

The undertaking: eight year licensing of the brand

As outlined in the August edition of Compliance Inform, the CMA has provisionally accepted that RB’s aquisition of the K-Y brand may proceed provided that it is immediately licensed for a period of eight years to an approved licensee.

The rationale behind this condition is that it will enable a viable competitor to the K-Y and Durex brands (both of which RB will own post-completion) to break into the market by operating the former.

By the time its licence expires it will then have established itself in the personal lubricant (and associated product) space and (per the CMA’s reasoning) be able to maintain competitive pressure on RB when it resumes operation of the brand (after a ‘blackout’ period of one year, whereby the brand cannot be used by either party, which has also been made a condition of the licence RB undertakes to offer).

Importantly, whilst the licensee will have to cede the K-Y brand itself back to RB upon expiry, a further pre-requisite of the CMA’s conditional clearance is that it be licensed to use the underlying production formula in perpetuity.

This would appear a key access right enabling it to sustain a credible rival brand post-expiry.

Securing viable competition: finding a suitable licensee

An integral element of the undertakings being agreed by the CMA is the commitments RB are making to identifying a suitable licensee of the K-Y brand for the eight-year license period.

These include ensuring that any proposed licensee is entirely independent from RB and J&J, has the desire, permission, resources and expertise needed to operate K-Y and compete effectively in the market (preferably already being present in the market or, if not, at least able to enter it in the short-term).

RB are also being required to provide the CMA with a business plan explaining the commercial strategy the licensee will be employing during the licensing period.

In addition, from a practical perspective, the K-Y business’ operations are to be licensed to the licensee together with the brand, and all personal lubricant products currently sold under the K-Y brand in the UK are to be supplied by RB to the licensee for a transitional period of 12 months, in order to give the licensee time to establish its own manufacturing and/or independent production arrangements.

Furthermore, to ensure that the licensee is given as fair a chance to succeed in operating the K-Y brand as RB would have had were it allowed to complete the acquisition unconditionally (as well as ceding the K-Y brand and operations to the licensee) RB will also have to procure from J&J or use “all reasonable efforts” to supply (at its cost) any additional services it would have received to help it transition K-Y into its business post-completion.

RB will also have to assign its existing supply contracts (including with the NHS) to the licensee.

In short, RB is having to deliver a licensee that the CMA is satisfied demonstrably can and has all independent motivation to devise an offering to viably rival its own Durex label during the licensing period and, ideally, that will then have established itself such as to be able to compete in the long term with RB after the subsequent ‘black-out’ period expires.

Plus, a ‘referee’ to officiate: possible appointment of a Monitoring Trustee

The draft undertakings agreed by the CMA include setting out a proposed timetable for implementation of the licensing arrangement.

To ensure that this is followed and that the arrangement substantially takes the form the CMA is envisaging, they also make provision for the possible appointment of (and duty of co-operation with) a Trustee to oversee the licensing process and take measures, if necessary, to help find and install a suitable licensing party.

Two sides to the coin: obligations on the Seller

The undertakings that remain subject to consultation responses also contain draft requirements on J&J to assist in ensuring the proposed licensing arrangement safeguards viable on-going competition to the merged brand in the long term.

These include, notably:

  • refraining from completing the sale of the K-Y Brand until an approved licensing agreement has been signed and brought into effect
  • ensuring personal lubricant products are sourced and supplied to the licensee to enable continuity of the UK K-Y business
  • allowing RB to procure from them on behalf of the licensee the transitional services described above, and
  • not disclosing confidential information to RB about the personal lubricant business (other than, strictly, between legal advisers for the purposes of concluding the licensing agreement and acquisition).

So, a WARNING: further emphasis on compliance for business transactions

As highlighted in our previous update on the K-Y brand acquisition, the far-reaching undertakings that the parties have been forced to provide to secure the CMA’s approval only serve to emphasise the ultimate power the regulator has to restrain and impose conditions on proposed transactions (and, indeed, retrospectively on completed ones, if necessary) if it has concerns as to how the competitive landscape in the relevant market will look post-completion.

Indeed, the feedback prompted from third parties and consumers by the consultation process may even encourage the CMA to impose further, even tougher conditions on the parties.

This article was written by Rory Ashmore. For more information, please contact Rory on +44 (0)20 7427 1031 or at rory.ashmore@crsblaw.com