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26 November 2020
Ecolab's completed acquisition of Holchem
Rejection of Ecolab's alterative divestiture proposal
ADP's risk profile
Ecolab's challenge before CAT: CMA acted irrationally in rejecting ADP
Evidence considered by CMA
CMA's merger remedies guidance
Dismissal of Ecolab's challenge: required divestiture remedy
On 21 April 2020 the Competition Appeal Tribunal (CAT) dismissed a challenge by Ecolab, Inc of the Competition and Markets Authority's (CMA's) decision in its final report on Ecolab's completed acquisition of The Holchem Group Limited (Holchem),(1) including in relation to the CMA's required divestiture remedy.(2)
The CAT's judgment confirms the CMA's ability to reject proposed remedies where it does not have a high degree of confidence that they will effectively address identified competitive concerns.
In addition, the required divestiture remedy highlights the potential risks that purchasers face if they complete transactions without obtaining UK merger clearance and these transactions are subsequently investigated by the CMA.
On 30 November 2018 Ecolab completed its acquisition of Holchem, with Ecolab informing the CMA of the acquisition on 18 December 2018.
The CMA subsequently commenced a Phase 1 investigation into the acquisition on 14 February 2019 and referred the acquisition for a Phase 2 investigation on 10 April 2019.
In its Phase 1 investigation, the CMA found that Ecolab and Holchem were close competitors in relation to the supply of cleaning chemicals for food and beverage customers in the United Kingdom (F&B customers), and the acquisition gave rise to competitive concerns due to the loss of competition between Ecolab and Holchem.
Following its Phase 2 investigation, the CMA found that the acquisition had resulted in, or may be expected to result in, a substantial lessening of competition (SLC) in the supply of formulated cleaning chemicals (and ancillary services) to F&B customers. The CMA concluded that a partial divestiture (in the form of the divestiture of Holchem Laboratories, a subsidiary of Holchem) was required to remedy the identified competitive concerns.
In reaching this conclusion, the CMA rejected an alternative divestiture proposal (ADP) put forward by Ecolab, concluding that this would not provide an effective remedy.
The ADP comprised the transfer of a portfolio of customers to an existing competitor (the purchaser), so that the purchaser could then convert these transferring customers (the divestment customers) to the purchaser's own cleaning products during the course of a transitional period.
The ADP envisaged the transfer to the purchaser of:
In addition, among other aspects, under the ADP it was intended that during the transitional period Ecolab would:
Having obtained the view of third parties on potential remedies, the CMA found that the ADP had "serious shortcomings with regard to its comprehensiveness and material risks with regard to its effectiveness".(3)
In particular, the CMA considered that the ADP did not include all of the assets relevant to the identified competitive concerns, which in and of itself limited the ability of the ADP to act as a comprehensive remedy.
In addition, existing customers of the merger parties raised concerns about the possibility of being transferred to the purchaser under the ADP. In these circumstances, the CMA viewed the transfer of the divestment customers as a "fundamental source of risk".(4) The ADP did not constitute the transfer of a viable, standalone business, but rather it was the intended transfer of the divestment customers in a situation in which there was:
The CMA identified significant further risks to the effectiveness of the ADP, including the lack of clarity regarding:
The CMA therefore considered the ADP to be high risk and that it did not represent an effective or comprehensive remedy to the identified competitive concerns.
On 1 November 2019 Ecolab challenged the CMA's decision in its final report on the completed acquisition of Holchem.
Within one of four grounds of challenge brought before the CAT,(5) Ecolab argued that it was irrational for the CMA to have rejected the ADP on the basis that it would not provide an effective remedy.
In the context of this argument, the CAT observed that the effectiveness of the ADP was dependent on the divestment customers transferring to, and remaining with, the purchaser in order to establish the purchaser as a new, large supplier.
From the evidence set out in the CMA's final report, the CAT held that the CMA was clearly entitled to consider that there was a significant risk with regard to the divestment customers transferring to, and remaining with, the purchaser, particularly as Ecolab could not require the divestment customers to transfer in this way.
In addition, given that the adoption of a divestiture remedy is a one-off event, if this risk was to materialise, the CMA would be unable to address the resulting competitive concerns. The CAT observed that this was "one reason why the CMA, in our view entirely reasonably, does not favour a remedy for which it cannot feel a high degree of confidence of success".(6)
Further, the CAT considered that even if the transitional period was to be limited to one year (as proposed by Ecolab), that would nevertheless see Ecolab continuing to play an extensive role in supplying products to the divestment customers, such that the competitive concerns would not be quickly remedied.
The CAT also found that the CMA was entitled to take into account the lack of clarity regarding which customers would actually be designated as divestment customers for inclusion in the ADP.
In relation to the CMA's evaluation of the ADP, the CAT considered the CMA's merger remedies guidance (the remedies guidance),(7) and the stated importance of a remedy having an acceptable risk profile:
the CMA will seek remedies that have a high degree of certainty of achieving their intended effect. Customers or suppliers of merger parties should not bear significant risks that remedies will not have the requisite impact on the SLC or its adverse effects.(8)
On the evidence, the CAT considered that the CMA was fully entitled to find that the ADP lacked this high degree of certainty.
In addition, the CAT noted that the remedies guidance stated a preference for remedies which were effective in the short term, but that the ADP would not act quickly to remedy the competitive concerns in view of the transitional period.
The CAT also observed that the remedies guidance indicated a clear preference for the divestiture of an existing business that could compete on a standalone basis, as compared with the divestiture of part of a business (eg, a package of assets).
Where the divestiture of a package of assets is proposed, the remedies guidance provides that "the CMA will require the merger parties to specify the composition and operation of the package in detail".(9) However, the CAT found that the ADP was not even a package of 'assets'; the divestment customers were not controlled by Ecolab and there was no assurance that they would move to, and remain with, the purchaser.
The CAT therefore concluded that the decision that the ADP would not represent an effective or comprehensive solution to address the identified competitive concerns was "well within the CMA's margin of appreciation on the evidence before it".(10) In addition to dismissing this argument, the CAT dismissed all four of Ecolab's grounds of challenge.
Following the CAT's judgment, the CMA issued a statement welcoming the confirmation of its ability to reject proposed remedies and emphasising that "Ecolab must now continue with the sale of Holchem Laboratories to a purchaser approved by the CMA without any further delay".(11)
This required divestiture remedy highlights the potential risks that purchasers face if they complete transactions without obtaining UK merger clearance, and these transactions are subsequently investigated by the CMA.
For further information on this topic please contact Samuel Beighton at Gowling WLG by telephone (+44 207 379 0000) or email (email@example.com). The Gowling WLG website can be accessed at www.gowlingwlg.com.
(1) Completed acquisition by Ecolab, Inc of The Holchem Group Limited, Final Report, 8 October 2020, available here.
(7) CMA87, Merger Remedies, 13 December 2018, available here.
(11) See here.
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