"Creeping Mergers" and References to the Monopolies and Mergers Commission

Author(s): Valentine Korah

Source: The Modern Law Review, Vol. 40, No. 3 (May, 1977), pp. 346-350
Published by: Wiley on behalf of the Modern Law Review
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346 THE MODERN LAW REVIEW [Vol. 40

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COLIN MUNRO

"CREEPING MERGERS " AND REFERENCES TO THE MONOPOLIES

AND MERGERS COMMISSION

WHEN in 1965 the Government took power to refer mergers to the

Commission, these were defined in terms of a situation in which
two or more enterprises cease to be distinct. This is not confined to
outright acquisition, but arises whenever enterprises are brought
under common control or ownership. This occurs when each of
three stages is reached: first, when enterprise A becomes able
materially to influence the policy of enterprise B; secondly, when
A, being already able to influence its policy, becomes able to
control B; and thirdly, when A, having already achieved one of
these stages of control, acquires a controlling interest in B (s. 65).
Until recently, all the mergers referred, both actual and potential,
were mergers in the company law sense; the bidder was entitled, or
would have been, to acquire any outstanding shares. In the last
two years, however, partial mergers have been referred and, where
they have already taken place, these may raise difficult problems of
timing. The Secretary of State has only six months after each of the
stages acquiring control in which to make a reference.' The Com-
mission may not consider the public interest issues unless it con-
cludes that one of these stages was reached within six months
before the reference, or that the merger was then in contemplation.
If enterprise A is buying 5 per cent. of enterprise B's shareholding
each year, it may not be at all easy for the Secretary of State to
decide at what point to make the reference.
In Weidmann and Whiteley,2 the Commission was asked to con-
sider a proposal that 33-4 per cent. of the ordinary shares in
Whiteley, which had previously been held by four Swiss companies,
should be held indirectly through a subsidiary by Weidmann, which
had previously owned just under 10 per cent. The Commission found
that there had been no agreement between the four Swiss share-
holders, so that before the proposed acquisition, Weidmann was not
able, directly or indirectly, to control or materially to influence
Whiteley's policy. It went on to find that if the 33-4 per cent. of
Whiteley's equity were to become controlled by Weidmann, the two
undertakings would cease to be distinct. Weidmann had stated that
1 s. 64 (1) (4). Unless he is given notice of the merger, time runs only from
the date on which he should have known of it (s. 64 (4)). In the case of prospective
mergers, which may be referred under s. 75, the six month limit cannot apply, but
again, in theory, it may not be easy to decide whether the contemplated arrange-
ments will result in a further stage of control being acquired.
2 H. Weidmann A.G. and B. S. & W. Whiteley Ltd.; a Report on the Proposed
Merger. Cmnd. 6208 (August 1965).

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May 1977] NOTES OF CASES 347

one of the objects of the arrangement was to give it a significant

influence in the management of Whiteley and the Commission had
no doubt that it would do so. Nevertheless, it concluded that the
merger would not operate against the public interest, so no prob-
lems arose about the extent of the order making power.
In considering the proposed merger between Amalgamated Indus-
trial Ltd. (A.I.) and Herbert Morris,3 the Commission had a more
difficult task. A.I. had built up its shareholding in Herbert Morris
as opportunity had occurred. By the beginning of November 1975,
A.I. and its associates held 33-44 per cent. of the Morris issued
ordinary share capital. On the other hand, the Morris family and
Morris directors not associated with A.I. held 25-56 per cent. A.I.
did not dispute that at that time it was able materially to influence
the policy of Morris. On November 3, 1975, A.I. bought a further
4-52 per cent. of the issued share capital of Morris, bringing the
total holding to 37-96 per cent. The Commission stated that at no
time had A.I. been exercising de facto control over Morris. It could
proceed to the public interest issues only if the purchase of the final
4-52 per cent. of the shares resulted in a further stage of control
being achieved. A.I. did not dispute that before that acquisition,
A.I. had power materially to influence Morris' policy, so the ques-
tion arose whether the additional shares enabled A.I. to control
Morris.
A.I. had two nominees on the Morris Board before the final
acquisition, and obtained no others as a result of it. The Chairm
of Morris, however, thought that if it wished to exert its stren
A.I. would be able to replace members of the board with its ow
nominees. The Commission recognised that the percentage of
shareholding which gives ability to control a company must depend,
inter alia, on the disposition of the remaining shares. It thought
that at a shareholders' meeting little part would be played by share-
holders other than those associated with Morris or with A.I. When
A.I. held 33-44 per cent., the Morris group would have needed only
7-88 per cent, support from the financial and other institutions hold-
ing its shares to oppose A.I. After the latest acquisition, it would
have needed 12-40 per cent.-95 per cent. of the shares held by
institutions. The Commission therefore concluded that A.I. was able
to control Morris and that a merger situation, as defined in the
Act, was created by the purchase of the shares in November 1975.
This conclusion implies that A.I. was not able to control Morris
before that acquisition.
Having decided that the merger was contrary to the public
interest, and that any further acquisition that might result from the
offer required to be made in accordance with the City Takeover Code
would also be expected to operate against the public interest, the
Commission recommended that A.I. should not exercise voting rights
3 Amalgamated Industrials Ltd. and Herbert Morris Ltd.; a Report on the Existing
or Proposed Merger, May 26, 1976, H.C.P. 434.

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348 THE MODERN LAW REVIEW [Vol. 40

in excess of those supported by 10 per cent. of the Morris c

that over a period it should be required to reduce its sha
no more than 10 per cent. This is the first occasion on whic
of the power taken in 1965 to order divestiture has be
mended. Since there had been no intermingling of the a
two companies, implementation of divestiture shoul
difficulty than after a more complete merger. Yet the
triggered the powers was the acquisition of only 4-52 per ce
shares. The question might, therefore, have arisen 4 whethe
tary of State could have compelled divestiture of more s
this. Would it have been necessary "for the purpose of
. . . the adverse effects specified in the report" within
of section 73 (2)? Presumably, it is only the adverse effe
from the referred merger situation that are relevant.
Whether or not an order to dispose of shares acquired
occurrence of the merger situation condemned by the
would be ultra vires, the question also arises whether it
proper use of the power. An order to dispose of the shar
hybrid, and require an affirmative resolution in both H
sequently, a petition could be brought in the House of L
done by Roche under the 1965 legislation.5
In the event, no order was needed. A.I. sold its entire s
in Morris to Babcock and Wilcox, and this latter acquisit
investigated by the Commission. As one might have ex
found that a new monopoly situation had arisen, but con
merger by a majority of only 3-2, not sufficient to enable t
to make an order.6 On this occasion, then, it will not be
decide whether an order could be made requiring share
posed of to different persons in parcels of, say, not more t
cent. of the equity of the target company.
Part II of Schedule 8 to the Fair Trading Act provides
division of any business by the sale of any . . . assets or
but does not expressly provide for separate sales to diffe
of different parcels of shares. Since a premium for control
be paid in the circumstances, it may well be that the poin
be contested, but, personally, I doubt whether the Mini
direct.

4 Had it not been for the transfer of the Morris shares described two paragraphs
below.
5 Before challenging the order in the courts [1974] 2 All E.R. 1120, Hoffman-
La Roche petitioned the Lords not to affirm the order on the ground that it was
not a proper use of the power. Without waiting for the limited inquiry recommended
by the Special Orders Committee, the House in fact confirmed the order. The litiga-
tnon on the merits has now been settled and the matter withdrawn from the English
courts.

6 Sched. 3, para. 16 (2). "For the purposes . . . of s. 75 . . . [a misprint for

s. 73; it is understood that the reference in the authentic text is correct] a con-
clusion contained in a report of the Commission shall be disregarded if the report
is made through a group and the conclusion is not that of at least two-thirds of
the members of the group."

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May 1977] NOTES OF CASES 349

In its report on Eurocanadian,7 the Commission had to conclude

whether an acquisition raising a 10 per cent. holding into one of 20-6
per cent. resulted in power to influence the policy of the target com-
pany. It was argued (para. 376) that such a shareholding would suffice
to defeat special resolutions requiring a majority of three-quarters
of the votes cast and might defeat ordinary resolutions. The bidder
argued (para. 224) that the power materially to influence policy would
arise only if the shareholding would enable it to place nominees on
the board of the target company. The Commission refused to decide
whether material influence could be achieved only in these circum-
stances, since it thought that the bidder would have a reasonable
chance of achieving a nominee director through a general meeting.
E.C.S. had stated that it intended to increase its shareholding to
29-9 per cent. (just under the 30 per cent. treated under the City
Takeover Code as giving control). The Commission found that, in the
absence of any large blocks of shares, this would enable E.C.S. to get
sufficient nominees elected to the Board to control Furess Withy's
policy and, consequently, another merger situation would occur,
although at the time of the report the bidder's shareholding had
reached not quite 25 per cent. It recommended that the proposed
merger be prohibited and that over a period of up to, say, two years,
the existing merger should be reversed by the disposition of shares
until not more than 10 per cent. be held.
It is far easier to decide when the third stage of control-a control-
ling interest-has been acquired. In N.F.U. Development Trust Ltd.
and F.M.C. Ltd.8 the Trust argued that since it already held 40 per
cent. of the F.M.C. shares, and since there were no other large share-
holders, it already had a controlling interest and that, consequently,
the acquisition of the remaining shares would not constitute a merger
situation qualifying for reference. The Commission answered this
point quite shortly:
"215. We are of the opinion that a person (or group of
persons) has a controlling interest in a company if and only if his
(or their) shareholding is such that he (or they) can at a general
meeting of the company outvote the aggregate of all other share-
holders. His (or their) shareholding must therefore exceed 50 per
cent. We consider that this view is supported by legal authority
to which we were referred, including the following decisions:
B. W. Noble v. C.I.R. (1926) 12 T.C. 926; British American
Tobacco v. I.R.C. [1943] A.C. 335; I.R.C. v. Bibby & Sons Ltd
[1945] 1 All E.R. 67. The Trust's holding of 40-9 per cent. of
F.M.C.'s ordinary shares (41-5 per cent. if the N.F.U.'s shares
are added) does not in our view give the Trust (or the N.F.U.) a
controlling interest in F.M.C.; therefore the Trust's offer if imple-
mented, would result in a situation in which F.M.C. would cease
7 Eurocanadian Shipholdings Ltd. and Furess, Withy & Co. Ltd., and Manchester
Liners Ltd.; a Report on the Existing and Proposed Mergers, October 14, 1976,
H.C.P. 639.
8 July 15, 1975, H.C.P. 441. In A.I./Morris, the Commission referred to this
report as establishing the meaning of a controlling interest.

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350 THE MODERN LAW REVIEW [Vol. 40

to
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the order-making
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Morris. Where
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order
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sharesbe disposed
be disposed
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of in separate
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buyers.
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~considerations. VALENTINE KORAH.
CONTRIBUTORY NEGLIGENCE DEFENCES FOR THE
DRUNKEN DRIVER

A STRANGE omission from the decided case-law in England 1 has been

the situation where a passenger who has accepted a lift from an
9 Where shares are obtained from the same holder over a period of up to two
years, he has power under s. 66 (1) to treat all the acquisitions as taking place
on the date of the last acquisition. But this does not help when the shares are bought
on the market, or from different holders.
1 But not throughout the British Isles: see the Scottish case of Bankhead v.
McCarthy, 1963 S.L.T. 144, where it was held that an averment that the plaintiff
passenger knew the driver had been drinking and so had failed to take reasonable
care of his own safety, was "irrelevant" and should be deleted; see also the Irish
case of Judge v. Reape [1968] I.R. 226, where the Supreme Court directed a retrial
on the finding by the jury that the plaintiff passenger had not been negligent in
accepting a lift with a drunken driver.

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