Bulb sale upheld despite allegations of unlawful subsidy

British Gas Trading Ltd, R (On the Application Of) v Secretary of State for Energy Security and Net Zero [2023] EWHC 737 (Admin)
What factors will a Court consider in determining whether to overturn a distressed sale involving a government subsidy?

Overview

In this case, Lord Justice Singh and Mr Justice Foxton of the High Court were tasked with determining whether to uphold the sale of Bulb Energy Limited ("Bulb") to Octopus Energy Group Limited ("Octopus"). The sale had been challenged by rival energy suppliers British Gas Trading Limited ("British Gas"), Scottish Power Retail Energy Limited and SP Smart Meter Assets Limited ("Scottish Power") and E.ON UK plc, E.ON Next Energy Limited and E.ON UK plc ("E.ON"). These parties argued that the marketing process for Bulb was flawed, the sale was secretive, discriminatory, and uncompetitive, and the subsidies granted by the Government were unlawful.

The Court ultimately upheld the sale, finding that it was open to the Secretary of State to conclude that the other options were inferior to proceeding with the Octopus bid, involving significant execution risks and higher forecast costs. The Court also found that the marketing process was lawful, and noted that the disclosure by the Government, Bulb's administrators and Octopus was substantial, and more than would typically be expected in this kind of hearing.

Background

Bulb was incorporated in 2013 and held electricity and gas supply licences. It supplied around 1.5 million domestic customers, 1.1 million dual fuel customers and 400,000 single fuel customers. In 2021, Bulb ran into serious financial difficulty as a result of the rise in wholesale energy prices. On 23 November 2021, the Office of Gas and Electricity Markets applied for an Energy Supply Company Administration Order in relation to Bulb, which was granted on 24 November 2021. Matt Cowlishaw, Matthew Smith and Daniel Butters of Teneo were appointed Joint Energy Administrators ("JEAs").

The JEAs embarked on a sale process for Bulb's business. Phase-1 was launched on 7 March 2022 with a deadline for indicative offers of 4 April 2022, although this was subsequently extended. On 16 March 2022, E.ON withdrew from the sales process. British Gas made an indicative offer on 7 April 2022. The only other bid in Phase-1 was by an entity referred to as Tulip on 8 April 2022. At that stage both Octopus and Scottish Power advised that they would not be making a bid.

From mid-April 2022, the JEAs and representatives from Lazard & Co Ltd ("Lazard"), which had been engaged to assist with the sale process, communicated with Octopus to see if it would be willing to consider re-entering the process to make a bid, and on what basis. During these discussions, Octopus first raised the issue of Government support.

Around the same time, the JEAs had similar communications with Scottish Power, sharing that Lazard was now open to proposals that contemplated some kind of Government support package.

On 25 April 2022, Lazard began the Phase-2 process with the two surviving bidders (British Gas and Tulip), requesting bids by 30 June 2022.

Press reports of possible British Gas involvement surfaced in late April, which suggested that British Gas was asking for Government support. In a conversation on 27 April, British Gas told Lazard that the press coverage was unfair, had "upset a number of people there" and that Lazard might not hear from them for a while. During May-June, Lazard appears to have advised British Gas that the Government was open to possible support to enable a transaction, and encouraged British Gas to put forward their requirements in order to commence a discussion on possible structures. British Gas made clear that it was not willing to take on Bulb's entire book (with notes suggesting British Gas was only willing to take on a maximum of 500,000 customers). British Gas ultimately withdrew from the sales process in June and, when subsequently contacted by Lazard, remained consistent in its position that it was only willing to take on some of Bulb's customers.

On 24 May 2022, Octopus' re-entry into the process was approved. Octopus submitted its Phase-2 offer just after midnight on 1 July 2022. The bid proposed two funding structures, both involving support from the Secretary of State for Business, Enterprise and Industrial Strategy ("BEIS"). This was the only Phase-2 bid received.

In the ensuing months the JEAs recommended that this bid should be accepted. Ernst & Young LLP ("E&Y") were retained by BEIS to provide an independent review of the JEAs' final recommendations.

On 23 October 2022, the Accounting Officer provided an assessment of the proposed transaction, recommending that the Government agree to the Octopus bid. On the same date, BEIS provided its subsidy control assessment. The Octopus transaction was approved by the Government on 27 October 2022 (the "Funding Decision") and signed on 28 October 2022. On 29 October 2022, the Government published a press release stating that it had approved the acquisition of Bulb by Octopus. On 7 November 2022, the Secretary of State granted approval for the Energy Transfer Scheme (the "Approval Decision"). The Approval Decision was published on 9 November 2022 and Scottish Power was notified of it on 10 November 2022.

On 28 and 29 November 2022, British Gas, Scottish Power and E.ON sought permission to bring a claim for judicial review to challenge two decisions made by the Defendant, the Secretary of State for Energy Security and Net Zero (formerly BEIS): to approve the takeover and to provide “very substantial central government funding” to help with the transfer.

The Parties' Positions

British Gas, Scottish Power and E.ON argued that the sale was secretive, discriminatory, and uncompetitive. Specifically, they claimed that the Government had misdirected itself as to the fairness of the marketing process run by the JEAs, and that the Government had unlawfully granted subsidies, committing billions of pounds of taxpayer money to facilitate the acquisition. British Gas also argued that the handling of the sale prevented it from making a better offer that could have saved money for taxpayers.

The Government took the position that the claims against it were without merit, arguing that the participants in the sales process were aware they could seek Government support. The Government said it made rational decisions after receiving expert advice that Octopus’s offer was fair. It also warned that unwinding the sale at this point would be “liable to cause chaos”.

The Court's Decision

The Court ultimately rejected British Gas, Scottish Power and E.ON's applications on the ground of undue delay, but stated that it would have refused permission on the public law grounds advanced by the claimants because they were not reasonably arguable. Interestingly, the Court stated that, if it had not been for undue delay, it would have granted permission to the claimants to bring a claim for judicial review on certain grounds related to the subsidy, but would have rejected those grounds on their merits.

With respect to undue delay, the Court criticised the claimants as being "disingenuous" for stating that they first appreciated that an urgent application might be necessary only on 24 November 2022. On the facts of this case, the two relevant decisions were taken on 27 October 2022 and 7 November 2022. In the case of the first (the Funding Decision), the Government published a press release about its approval of Bulb's acquisition by Octopus on 29 October 2022. Although the Approval Decision of 7 November 2022 was not published until 9 November and Scottish Power was notified of it on 10 November 2022, there was a need to move very speedily from that time onwards. The Claimants themselves clearly appreciated this, as British Gas applied to be joined to the application on 11 November 2022. Despite this, British Gas did not issue its claim form until 28 November 2022 and the other Claimants issued theirs on 29 November 2022.

The Court also found that the marketing process was lawful, and that the Secretary of State was entitled to conclude on the facts of this case that the process had been conducted in an open and competitive way. The Court agreed that the cost paid for Bulb by Octopus was “a fair reflection of the value which the market placed on Bulb’s business in the prevailing circumstances”, and found that any subsidy granted by the Government was proportionate to what was needed.

Finally, the Court emphasised the discretion of the Secretary of State in considering the paths available to him in the circumstances. In response to British Gas's argument that the Secretary of State failed to have regard to the option of splitting the customer book across multiple energy suppliers, the Court found that this was wrong as a matter of fact, and that it was the kind of criticism which was not appropriate to make in the context of a judicial review of this kind.

In circumstances where there may have been more than one means of achieving the desired objective of avoiding the social hardship that would would ensue from a "hard close insolvency", the Court found that it was for the Secretary of State to form a rational view as to which of those alternatives was the most proportionate means of achieving the objective. This included concluding that the other options were inferior to proceeding with the Octopus bid, involving significant execution risks and higher forecast costs.

The Court ultimately concluded that "in circumstances in which the Octopus transaction was the only bid to emerge from a lengthy M&A process which the Secretary of State was entitled to conclude was open, transparent and competitive, that was an assessment lawfully open to the Secretary of State."

Judges: Lord Justice Singh and Mr Justice Foxton

Counsel: Paul Harris KC, Azeem Suterwalla and Ewan West of Monckton Chambers (instructed by Towerhouse LLP and Shearman & Sterling (London) LLP) for British Gas; Kieron Beal KC, Naina Patel and Warren Fitt of Blackstone Chambers (instructed by Allen & Overy LLP) for Scottish Power; George Peretz KC, Julian Gregory and Harry Gillow of Monckton Chambers (instructed by Pinsent Masons LLP) for E.ON; Jason Coppel KC of 11KBW, Malcolm Birdling of Brick Court Chambers, Patrick Halliday of 11KBW and Alastair Richardson of Brick Court Chambers (instructed by the Treasury Solicitor and Hogan Lovells International LLP) for the Secretary of State; Tom Hickman KC and Sean Butler of Blackstone Chambers (instructed by Linklaters LLP) for the JEAs and Bulb; Lord Pannick KC and Will Bordell of Blackstone Chambers (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for Octopus