Out-Law News | 21 Jan 2010 | 2:12 pm | 3 min. read
A competition law expert said that the case creates a new benchmark for companies and courts when considering at what point one company is controlled by another.
Sky bought a 17.9% stake in ITV in 2006 just as rival Virgin was finalising a takeover deal with ITV. The move was widely seen as a strategic move to prevent that merger.
The Competition Commission ruled that the share purchase reduced competition in the broadcast marketplace and ordered Sky to reduce its shareholding to 7.5%. It gave the company a secret timescale within which to comply to allow it to gain a full price for its shares.
Sky spent £940m on the shares, paying 135p each in a deal that made Sky the biggest shareholder in ITV. Shares closed at just under 58p yesterday, which represents a loss of £530m on the investment.
The Competition Commission investigated the acquisition under the Enterprise Act and found that the deal lessened competition in the market for television and operated against the public interest. Its ruling was appealed to the Competition Appeals Tribunal (CAT), and then through the courts.
Though the Commission said that the deal did not have an adverse effect on the plurality of ownership of UK broadcasters, that was overturned by the CAT.
The Court of Appeal found that the Commission had been right about the lessening of competition and that Sky should have to reduce its ITV shareholding to 7.5%.
"In practice Sky's large shareholding would be likely to influence ITV's policy and planning even without the matter being put to [a board] vote, if the attitude that it would or might take became known to ITV through meetings with shareholders," said the ruling, paraphrasing the Commission's conclusions.
It said that the Commission was right to conclude that Sky's shareholding gave it the "ability … to block a merger recommended by the board of ITV as part of its strategy".
Guy Lougher, a Competition Law expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said that the ruling will give companies and courts new benchmarks on which to judge when one company has 'material influence' over another.
"I think that a 17.9% shareholding, on the basis of previous cases, would be deemed to have given rise to ability to exercise material influence," said Lougher. "The reduction of the limit to 7.5% does create a benchmark for the future."
"It is always a question of a case by case analysis. In this situation the figure of 17.9% was considered too high. The Competition Commission looked at the likely need of ITV to raise future capital and patterns of shareholder votes in the past. It is possible that in other cases that shareholding might not be deemed to create situation of material influence."
"But it is a clear precedent for 17.9% to be deemed to be sufficiently high to give rise to material influence, so any company in another case would have to explain why it isn't in that case. It sets up an expectation that 17.9% is sufficient unless there are good reasons to distance future cases from it," said Lougher.
The Court of Appeal also backed the Commission's ruling on the issue of the plurality of media ownership, overturning the CAT's ruling.
The issue at stake was what account should be taken of how much control one company exercises over a company it has a shareholding in. The Commission had said that it should not be assumed that a company with a significant shareholding in another company has as much control over that as it would a wholly-owned subsidiary.
The Court's ruling said that there is a basic conflict in the law about how ownership should be considered. One clause of the Enterprise Act suggests that the degree of ownership and control should be taken into account, while another clause suggests it should not, it said.
"When it comes to assessing the plurality of the aggregate number of relevant controllers and to considering the sufficiency of that plurality, the Commission may, and should, take into account the actual extent of the control exercised and exercisable over a relevant enterprise by another," said the ruling.
"It seems to us unsatisfactory that the terms of the Act should have been open to the conflicting interpretations placed on it by the Commission and the Tribunal," said the ruling. "If it were thought that to limit the deeming effect to one of number alone does not allow for sufficient protection of the sensitive interest of media plurality, it should not be difficult to amend the legislation accordingly, now that possible difficulties in applying the current legislation have been identified."
The issue of how to view one media company's ownership of another did not change any part of the Court's decision on Sky's shareholding, the ruling said, but the Court decided to clear up the issue since it had been debated at the trial.