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Third time unlucky: Lords leave Ryanair with no minority protection

21 August 2015

On 14 July 2015, the Supreme Court refused Ryanair leave to appeal in relation to an order of the Competition and Market Authority (formerly the Competition Commission) (“CMA”) which required Ryanair's to divest part of its minority stake in Aer Lingus (“AL”).

The judgment highlights how an acquisition of even a minority stake in a competitor can restrict competition and run into antitrust problems. Here, the CMA was prepared to order the share sale even though the EU Commission was not itself prepared to make such an order. The decision brings to an end a long running saga in which Ryanair has sought to obtain ownership and control of fellow Irish carrier Aer Lingus.

The Commission says “no”

Ryanair owns 29.82% of the issued shares in Aer Lingus, which is the national carrier in Ireland, the country in which Ryanair is also registered. Ryanair has sought unsuccessfully to obtain complete control of Aer Lingus on two previous occasions. In 2006, Ryanair launched a public bid to acquire its competitor. This was notified to the EU Commission as required by the EU Merger Regulation. Fearing the merger would remove effective competition on flights to and from Eire, the Regulator prohibited the deal. Ryanair’s appeal against the prohibition decision failed the General Court in July 2010. In the same judgment, the General Court also rejected a move by Aer Lingus to require Ryanair to divest its minority stake in the company.

On 19 June 2012, Ryanair announced its intention to make an all cash offer for the remaining 70.18% of the Aer Lingus share capital. The EU Commission again blocked the merger following a fresh notification. As before, Ryanair appealed the Commission’s ruling and an appeal decision is currently awaited from the EU General Court.

Minority interest: UK investigation

In a separate move, the UK Competition and Markets Authority (CMA) (then the Competition Commission) began an investigation into Ryanair’s acquisition of its minority stake of 29.82% in Aer Lingus’ issued share capital.

It was this stake that Aer Lingus had unsuccessfully urged the EU Commission and General Court to revoke under the EU Merger Regulation. The EU Regulation, however, does not allow a probe of any concentration which does not result in the transfer of corporate control to another entity (usually translating into a shareholding in excess of 50%), even if a lesser holding in the target confers a significant degree of power or restraint over the affairs and activities of the target undertaking. In contrast, UK law allows the CMA to investigate deals where one entity acquires a material influence (allowing an acquisition of shares which takes an individual holding beyond 25%).

The CMA concluded its investigation with a finding that Ryanair’s holding, whilst below 50%, did indeed have the capacity to significantly lessen competition. As a shareholder, Ryanair could constrain the commercial policy of Aer Lingus which, in turn, restricting its ability to compete effectively against Ryanair and lead to a significant lessening of competition on Irish routes. The CMA took account of evidence that Ryanair could block co-operation between AL and third party airlines in relation to flights to and from Ireland. It therefore ordered Ryanair to divest 5% of the issued share capital in AL, thereby taking its holding below the 25% threshold.

No sympathy on appeal

Ryanair appealed against the CMA decision to the UK Competition Appeal Tribunal. It argued that the divestment remedy would run counter to the UK’s duty of sincere co-operation with the EU. This duty, enshrined under the EU Treaty, requires Member States to abstain from any step which would run counter to any objective of the Union. Ryanair argued that the order to divest some of its AL shares would run prejudiced the ability of the EU General Court (in the pending appeal) to allow Ryanair to proceed to complete the acquisition of AL’s entire share capital.

The CAT did not agree that it was an EU objective that an acquisition, if and when approved by the EU Commission, should take place. The Tribunal similarly rebuffed claims relating to procedural unfairness. Under this head of claim Ryanair objected to the non-disclosure of the identities of certain airlines which had provided influential evidence to the CMA. Ryanair also failed in an argument that the CMA had committed an error of law in the application of in finding that the merger could lead to a Substantial Lessening of Competition) and of a violation of the proportionality principle.

Ryanair appealed further, this time to the Court of Appeal and again the Court dismissed its arguments. Ryanair argued that a merger which does not significantly impede competition will be declared “compatible with the common market” under Article 4(3) of the EU Merger Regulation. In Ryanair’s view, for the CMA to block a concentration which is otherwise compatible with the common market is to breach the duty of sincere co-operation with the EU authorities. The Court of Appeal disagreed. The objective of the EU Merger Regulation is to safeguard competition. Whilst a compliant merger may be compatible with that objective, it does not make it part of the policy goal. Furthermore, because UK merger law allows the regulator to consider minority stakes (whereas EU Law does not), there is no encroachment on the EU’s competence.

In seeking leave to further appeal from the House of Lords, Ryanair submitted that the case involved important questions on the right to property as well as due process (in particular with regard to allegations of reliance on secret evidence). In the Court’s decision of 14 July, it said that there was not a requisite degree of general public interest. It also noted that all of its points had been considered extensively, first at judicial review and subsequently on appeal.

The moral of the story….

Whilst this was third time unlucky for Ryanair, the long-running legal saga illustrates the importance of considering competition law issues when one rival acquires a minority interest in the share capital of another. Consideration must be given to the Enterprise Act 2002 where a purchase could lead to the transfer of material influence over a competitor’s behaviour. Usually, this is exactly the reason for buying the shares in the first place. A competitor shareholder may use its influence to hamper the activities of its rival, to align the behaviour with its own business activities or to misuse information which it is entitled to receive as an owner of shares. The consequence could be a forced sale of its shares for a fraction of their market price.

Modern Slavery Act – turnover threshold publicised

We reported last month on the Modern Slavery Act 2015 (“MSA”). The MSA is a high-profile piece of legislation which aims is to crack down on slavery and human trafficking. Section 54 of the Act, entitled “transparency in supply chains”, imposes an obligation on certain businesses to publish a “slavery and trafficking statement” for each financial year detailing the measures they have taken to ensure there is no modern slavery in their supply chains or business (or that they have taken no such steps). Section 54 will not apply to every business but only those which do business in the UK and have a global turnover above a level to be determined and publicised by the Secretary of State.

The Government is to provide detailed statutory guidance on what a statement should include. However, the Act gives some high level indication that a business’ statement may set out:

  1. “the organisation’s structure, its business and its supply chains;
  2. its policies in relation to slavery and human trafficking;
  3. its due diligence processes in relation to slavery and human trafficking in its business and supply chains;
  4. the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk;
  5. its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate;
  6. the training about slavery and human trafficking available to its staff.”

On 29 July, HM Government published a paper entitled “Modern Slavery and Supply Chains Government Response: Summary of consultation responses and next steps” (available here). The purpose of the consultation had been to seek the views of interested parties on what level the turnover threshold should be set at and the content of 

At the time of our last article, it was not clear which companies would apply be caught by this duty. The MSA stated that this reporting obligation would apply to companies which had a turnover above a threshold to be determined subsequently by the Secretary of State (the Home Secretary).

Most importantly, the response to the consultation makes clear that the reporting obligation will apply to businesses which have global turnover of £36 million or more, the single most popular option amongst parties responding to the consultation.

There is no minimum level of turnover which is generated in the UK. It is sufficient that a business entity (of any form, including for example a public or private company or indeed a limited or unlimited partnership) does all or part of its business here. The response paper also provides greater clarification on what can be expected from the guidance on the content of annual statements. The Government has said that based on consultation with NGOs and businesses there are five key areas that “should really be included in a slavery and human trafficking statement. They are:

  1. A brief description of an organisation's business model and supply chain relationships; 
  2. A business’s policies relating to modern slavery, including due diligence and auditing processes implemented;
  3. Training available and provided to those in 1) supply chain management and 2) the rest of the organisation;
  4. The principal risks related to slavery and human trafficking including, how the organisation evaluates and manages those risks in their organisation and their supply chain; and
  5. Relevant key performance indicators (Key performance indicators are measures that will assist the reader of a slavery and human trafficking statement to assess the effectiveness of the activities described in the statement. As the statements will be produced annually, performance indicators are likely to be useful in demonstrating progress from one year to the next. The choice of which measures to use will depend on the individual circumstances of the business). The Government has emphasised, however, that the guidance will set out the kinds of information that might be included in a disclosure, but it will only be guidance. Ultimately, the Government “want[s] businesses to take the issue of modern slavery seriously at the highest levels and for businesses to be able to determine, demonstrate and explain their policies and practices relevant and specific to their own circumstances. We fully expect slavery and human trafficking statements to differ from business to business.”

For those more prudent organisations who are looking to make a fuller statement, the following steps could be considered:

  1. how to conduct due diligence on their own business (particularly where based overseas)
  2. deciding from which members of their supply chain they will need to request information in relation to their own business practices
  3. deciding whether existing suppliers need to be changed (if they will become a PR liability) or encouraged to change their own practices
  4. whether in their dealings with suppliers they wish to impose obligations relating to the provision of information on production and other business practices or to make site inspections; and
  5. deciding how and when they will make the statement (bearing in mind one must be made each financial year)

Although in practice the Act demands merely a paper exercise from business, in order to be credible businesses will not only have to have an appropriate reporting system in place, but must also take active steps to ensure that slavery does not exist in their supply chains. In our view, prudent organisations should already be considering performing further due diligence on the businesses in their supply chains and may wish to include provisions in contracts allowing them to carry out spot checks on their suppliers. When thinking of “supply chain members” consideration should not be limited to overseas suppliers. For example, if a retailer of household goods outlet buys from a UK distributor of computers, televisions or vacuum cleaners, it may need to establish what steps the distributor has itself taken to establish that its own supply chain (including the manufacturer and its own suppliers) is free from practices prohibited under the Act. This illustrates how the Act creates a domino effect, under which many organisations who are under the reporting obligation turnover threshold will nonetheless be required to consider slavery issues, to do their own due diligence and report back to customers preparing their own statements.

The reporting obligation has not yet gone live. Aside from issuing guidance on the content of statements, the Secretary of State must now lay before Parliament regulations to implement the turnover threshold. It is expected that this will occur in October. Many businesses are already taking steps to ensure they are ready to comply once Section 54 enters into force. Of course, compliance could simply consist of a statement that the organisation has done nothing to ensure it is not furthering modern slavery. From a PR and CSR standpoint, this may not be the best approach. Ethical consumers may look to punish such minimalism, whether on the High Street or on social media. If the organisation is listed, ethical investors may punish it in the stock market, by dumping or overlooking its shares.

This article was written by Paul Henty. For more information please contact Paul on +44 (0)20 7427 6506 or at paul.henty@crsblaw.com