On 10 July 2023, the UK Competition Appeal Tribunal (CAT) dismissed an appeal by Canadian software company Dye & Durham’s (D&D) against a decision of the Competition and Markets Authority (CMA) to reject a proposed “dual-track” remedy.  The case arose out of the CMA’s investigation of D&D’s completed acquisition of TM Group (TMG), which resulted in the CMA requiring D&D to divest TMG to a suitable purchaser. 

D&D sought the CMA’s permission to pursue a dual-track process to divest the business.  In parallel with a private sale process, D&D suggested admitting TMG’s shares to trading on the London Stock Exchange’s (LSE) Alternative Investment Market (AIM) as a means of divestment.  The CMA rejected the proposal and D&D challenged that decision before the CAT. 

The CMA’s Merger Investigation

D&D and TMG overlap in the supply of property search report bundles in England and Wales. 

On 3 August 2022, following its Phase 2 investigation, the CMA found that D&D’s acquisition of TMG – which completed in July 2021 – had resulted or might be expected to result in a substantial lessening of competition (SLC) in the supply of property search report bundles in England and Wales.  The CMA concluded that only the divestiture of the whole of TMG to a suitable purchaser would effectively remedy the SLC.

Remedies Process

On 13 October 2022, the CMA accepted Final Undertakings given by D&D to divest TMG to a purchaser approved by the CMA.  Any purchaser would have to meet the CMA’s suitability criteria of:

  • Independence:  The purchaser should not have any connection with the parties that could compromise its ability or incentives to compete with D&D.
  • Capability:  The purchaser should have access to appropriate financial resources, expertise and assets to enable TMG to be an effective competitor.
  • Commitment:  The purchaser should demonstrate that it has credible plans for TMG to compete in the supply of property search report bundles in England and Wales through appropriate business plans and objectives.
  • Absence of competition concerns: Divestment to the purchaser should not give rise to further competition or regulatory concerns.

More than four months later, on 23 February 2023, D&D proposed to the CMA an alternative means of divesting TMG through the admission to trading of its shares on the AIM, which it would pursue in parallel with the private sale process. [1]  It would be effected in the following way:

  • Through a reorganization sanctioned by the Canadian court, the ultimate shareholders of D&D would acquire shares in TMG (replacing D&D as its owner).
  • Some of D&D’s shareholders are members of D&D’s management or associated persons.  Their shares (~16.5% of TMG’s total shares) would be placed in a blind trust and sold in an orderly market process following the AIM admission. 
  • By following this process, TMG would not raise any new capital or admit new ultimate shareholders.  Accordingly, the admission to trading would not constitute an “Initial Public Offering” or “IPO” (that term, conventionally, refers to a listing and admission to trading of a company which takes place together with a transaction in the shares of the listed company, involving the acquisition by third party investors of either (i) existing shares sold by current shareholders; or (ii) new shares issued by the company).

D&D intended to use the dual-track process to maximize the value it would obtain for TMG.  Although negotiations with potential purchasers of the business were ongoing, D&D was concerned that it might ultimately be unable to divest TMG on favourable financial terms due to (i) bidders’ knowledge that D&D must sell TMG by a certain date and (ii) bidders’ expectation that the downturn in the UK property market since September 2022 would have a negative impact on TMG’s valuation.[2]

On 29 March 2023, the CMA rejected D&D’s dual-track proposal (Decision) on the basis that: [3]

  • The Final Undertakings provide for the disposal of TMG to a single purchaser via a private sale process and cannot accommodate the AIM proposal;
  • D&D failed to justify its request to vary the Final Undertakings and the CMA “does not normally take account of costs or losses that will be incurred by the merger parties as a result of a divestiture remedy”; and
  • The AIM proposal would not meet the purchaser approval criteria, specifically independence and capability/commitment, in the Final Undertakings.
    • Independence:  D&D and TMG would have identical shareholders at the time of the AIM admission and this “common ownership” would “create unilateral incentives to maximise value by reducing competition between TMG and D&D”.  The CMA considered that there was a risk that the institutional shareholders would exercise influence over TMG management “via either formal or informal means which might compromise their incentive or ability to compete with D&D.” [4]
    • Capability/commitment:  The CMA expressed concerns about TMG’s ability to raise funds under the AIM proposal given that (i) TMG would not be part of a larger corporate group with access to additional resources and (ii) TMG’s share price might be depressed “due to an expectation that D&D shareholders would be looking to sell their shares”, thereby impairing TMG’s ability to raise equity finance.

CAT Appeal

On 21 April 2023, D&D filed an application for review of the Decision to the CAT under section 120 of the Enterprise Act 2002.  On 15 May 2023, TMG was granted permission to intervene in the proceedings.  TMG did not support D&D’s AIM proposal because (i) it “constituted a profound change to its corporate structure” and (2) threatened to complicate and delay the divestiture.[5]

On 10 July 2023, the CAT dismissed D&D’s appeal on the following grounds. [6]

  • The AIM proposal did not fall within the Final Undertakings, which contemplated a private sale to a single purchaser. 
  • The CMA was entitled to conclude that there was no sufficient change in circumstances to justify a variation to the Final Undertakings.  Specifically, the CMA rejected “the prices being offered were significantly less than [D&D] may have hoped” as a proper basis for variation.  The CMA was also entitled to take account of timing of the request and the impact it would have for the divestiture process given that it was “raised very late in the day, after the Final Undertakings had been given and mid-way through the divestiture period”.
  • The CMA was entitled to conclude that the AIM proposal “posed an unnecessary and not easily quantifiable risk to the quality of competition which it was its duty to protect” and thereby failed to satisfy the independence criterion.  The CMA was also entitled to find that TMG may be in a less advantageous position under the AIM Proposal to raise funds than would have been the case following a sale to a single purchaser.

Implications

On the same date the CAT handed down the Judgment, D&D announced that it had entered into an agreement to sell TMG to a financial investor for “up to £91 million”, comprising “approximately £50 million in cash at closing, with up to £41 million in potential additional earn-out payments between 2023 and 2026” (D&D acquired TMG for £91 million on 8 July 2021).  D&D stated that the transaction had received approval from the CMA.  In light of this development, the Judgment is unlikely to be appealed. While divestiture by way of an IPO has been accepted as a remedy in some jurisdictions (notably the U.S.),[7] the CMA has never approved such a divestment method.  D&D’s AIM proposal did not involve an IPO and only envisaged the admission to trading of TMG’s shares.  Nevertheless, the CMA’s substantive objections in this case suggest that parties offering any similar remedy in future will have to find ways to address possible concerns about common ownership between the merging parties and divestment business.

[1]        Dye & Durham v. Competition and Markets Authority [2023] CAT 46 (Judgment), paragraph 29.

[2]        Judgment, paragraphs 25–26.

[3]        Judgment, paragraphs 43–50.

[4]        The CMA cited economic literature and the European Commission’s decision in Dow/Dupont (Case COMP/M.7932) to support its position.

[5]        Judgment, paragraph 12.

[6]        Judgment, paragraphs 81–89, 104–117, 131–150.

[7]        Footnote 8 of the Judgment listed a few examples, including Oerlikon-Buhrle Holding 119 FTC 117 (1995) and First Data Corp 121 FTC 1 (1996).  George Cary, then Senior Deputy Director of the U.S. Federal Trade Commission, discussed these two cases in a 1997 speech.