The European Community Merger Regulation Essay Sample

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The European Commission has on December 11, 2002 decided the most far-reaching reform of its merger control regime since the entry into force of the EU Merger Regulation in 1990. Besides a proposal for a revised Merger Regulation, which still requires approval by EU ministers, the Commission has also adopted draft guidelines on the appraisal of mergers between competing firms (‘horizontal mergers’) providing guidance to the business and legal community.

In order to understand the main differences between those two regulations it’s essential to understand the basic rules of the EU Merger Regulation and the interplay between this regulation and Notice on the appraisal of horizontal mergers.

The European Community Merger Regulation (before amendments)

The European Community Merger Regulation 4064/89 (the ECMR)1 was intended to provide “one-stop” control within the EU for mergers falling to its jurisdiction, so that such mergers would avoid risk of being investigated under two or more national systems of control. Hence national authorities may not normally apply their own competition laws to mergers falling within the ECMR.

The ECMR applies where a “concentration” has a “Community dimension”.

The term “concentrations” is defined widely, covering mergers, acquisitions and “full-function” joint ventures (i.e. essentially joint ventures which function as independent businesses). A concentration is deemed to arise when two or more previously independent undertakings merge to become one new independent undertaking; or an undertaking acquires direct or indirect control of the whole or parts of one or more other undertakings. ‘Control’ is defined as the possibility of exercising decisive influence, by whatever means, for example through the acquisition of assets or shares, or by contract.

The thresholds defining where a “Community dimension” exists are calculated by reference to the turnover of the merging companies.

A concentration will have a Community dimension if:

* the combined world-wide turnover of the undertakings concerned amounts to at least ECU 5 billion; and (b) the aggregate Community-wide turnover of at least two of those undertakings is more than ECU 250 million; or

* the combined world-wide turnover of the undertakings concerned is more than ECU 2.5 billion; and (b) in each of at least three Member States the combined turnover of all those undertakings is more than ECU 100 million; and (c) in each of at least three of those Member States the aggregate turnover of at least two of the undertakings concerned is more than ECU 25 million; and (d) the combined Community-wide turnover of each of at least two of the undertakings is more than ECU 100 million.

* However, the concentration will not have a Community dimension if, in either case above, more than two-thirds of the Community-wide turnover of each of the undertakings concerned is in one and the same Member State.

Mergers are assessed under the ECMR to determine their compatibility with the common market. The test of compatibility is based firmly on competition criteria. The Regulation provides that a merger will be incompatible with the common market if it “creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or a significant part of it.” Conversely where these conditions are not met, a merger must be declared compatible.

Mergers falling within the jurisdiction of the ECMR must be notified to the European Commission within one week of the conclusion of the agreement, the announcement of a public bid, or the acquisition of a controlling interest. A merger must not be implemented prior to notification or until it has been declared compatible with the common market. If companies fail to notify, or to suspend implementation, they risk fines and the invalidity of their transactions.

* The Commission has one month from receipt of a properly complete notification to decide whether the merger falls within the scope of the Regulation and, if so, whether there are serious doubts as to its compatibility with the common market (the “Phase I” investigation). If doubts exist, the Commission will initiate a full (“Phase II”) investigation. Clearance of a merger at Phase I or Phase II may be conditional on commitments given by the parties to allay competition concerns. The time-limit at Phase I may be extended to six weeks if the parties negotiate commitments. Fines of up to 10% of turnover can be imposed if the parties fail to honour commitments given, or if they put into effect a merger which has been blocked

* Anyone to whom a decision is addressed, and anyone to whom the decision is of “direct and individual concern” may bring an action for annulment against it to the European Court of First Instance. The Court can review Commission decisions imposing a fine, and can annul decisions made under the ECMR on certain grounds.

The European Commission normally has exclusive jurisdiction over mergers falling within the ECMR provisions. However, under ECMR Article 9 the Commission may refer part or all of a case back to a Member State, at its request, so that it can be considered under its national competition legislation. This can happen if the Commission considers that there are certain competition concerns in a distinct market within the Member State, or where competition is affected on such a market which does not constitute a substantial part of the common market.

Reforms of EU merger control

On December 11, 2002, one year to the day after launching its Merger Review (Green paper on the Review of Council Regulation (ECC) No. 4064/89, 11.12.2001), the European Commission adopted a proposal to amend the EC Merger Regulation (ECMR) and a draft notice on the appraisal of horizontal mergers. These two reform are two of a four parts of a so called ‘reform package’ which has been submitted to the Commission in December last year.

Proposal to amend the EC Merger Regulation

The Commission has adopted the following proposed changes to the Merger Regulation:

* The proposed new Merger Regulation seeks to rationalize the timing of the notification of proposed mergers to the Commission, by introducing the possibility for notification prior to the conclusion of a binding agreement, and by abolishing the requirement that transactions be notified within a week of the conclusion of such an agreement. These measures are intended to remove unnecessary regulatory rigidities.

* A simplification of the system for the referral of merger cases from the Commission to Member State competition authorities for investigation, and vice versa, is also foreseen. This reform will seek to ensure, consistent with the principle of subsidiarity, that the best-placed authority should examine a particular transaction;

* The Commission is proposing to introduce a degree of flexibility into the timeframe for the conduct of merger investigations, in particular for complex cases. Where a notified merger is the subject of an in-depth enquiry, it is proposed that an additional three weeks should be added to the timetable following the submission of a remedy offer, thereby allowing more time for the proper consideration of remedies, including the consultation of Member States. It is also proposed that up to four extra weeks could, with the agreement of the merging companies, be added to the timetable for the purpose of ensuring a thorough investigation, particularly in view of the high evidentiary burden that is incumbent upon the Commission in cases where it proposes to intervene;

* The Commission’s fact-finding powers would also be strengthened under the new proposal, thereby enabling it to more easily obtain information for the purposes of an investigation, including the possibility of imposing higher fines for failure to comply with requests to supply such information. This would, for example, mean an increase to 1% of aggregate turnover (from a current level of �50,000) in the fine companies may incur for supplying incorrect or misleading information. This increase is in line with investigative powers granted to the Commission under the new Regulation for the enforcement of Articles 81 and 82 adopted by the Council of Ministers on 26 November 2002;

* The Commission’s Green Paper launched also a reflection on the merits of the ‘substantive test’ enshrined in Article 2 of the Merger Regulation. In particular, it invited comment on how the effectiveness of this test compares with the “substantial lessening of competition” (SLC) test used in many other jurisdictions, including the USA, Canada, South Africa, Japan, Australia, and New Zealand (this test creates a lower legal threshold for intervention than one based on dominance). The Commission is not changing this test: the “dominance” test will stay, but it will be redefined so as to bring it close enough in reality to be tantamount to the substantial lessening of competition (SLC) test. The new definition does this by expressly encompassing consideration of so-called unilateral effects in oligopolistic markets which the Commission has presented as a clarification rather than a change of substance. This is when the notice on horizontal mergers comes behind the corner. In its draft notice on horizontal mergers, the Commission sets out in more detail the application of the dominance test to mergers between the competitors or potential competitors, stressing how the test will function in oligopolistic markets.

Draft notice on the appraisal of horizontal mergers

The draft Notice on the appraisal of horizontal mergers, as part of the ‘reform package’, deals with how the effect of a merger on competition in a market should be analyzed, providing clarity, among other issues, about how the Commission will apply the notion of dominance in oligopolistic markets (see before, last point of the ‘proposals to amend the ECMR’).

The notice also deal with particular factors that could mitigate an initial finding of likely harm to competition – factors such as buyer power, ease of market entry, failing firm defense and efficiencies. Especially this last point is in this case particularly relevant.

It is well established in the economic literature that efficiency gains might offset the enhanced market power of merging firms and result in higher welfare2. This is because the merger might cause the insiders to be more efficient and save on their unit costs. If these savings are large enough, they will outweigh the increase in market power and result in lower prices, to the benefit of consumers.

By looking at the wording of the Merger Regulation No. 4064/89 one cannot say that an efficiency defence is explicitly allowed, but neither that this is ruled out.

The current Article 2(1)(b) of the Merger Regulation provides a clear legal basis in that respect by stating that the Commission shall take account, inter alias, of “the development of technical and economic progress provided it is to consumers’ advantage and does not form an obstacle to competition”.

So far, the EC Commission in its decisions has not explicitly ruled out the possibility of using an efficiency defence, but nor has it showed much sympathy for such an argument3.

Whenever cost reductions have been claimed by the merging parties, the Commission has dismissed those claims on various grounds. The most interesting decision in this respect is A�rospatiale-Alenia/DeHavilland, where the Commission argued that the cost savings would have been negligible, had not been properly quantified, were not merger-specific (they could have been attained without the need of a concentration) and would have not gone in any case to consumers’ advantage4.

With the notice on the appraisal of horizontal mergers the commission has explicitly recognized the merger-specific “efficiencies” without having changed any present wording of the substantive test in the Merger Regulation. So, although, in reality, providing nothing new (any efficiency claims will be just another consideration in the overall assessment of the merger), the Notice explicitly accepts the parties’ right to raise efficiencies to counteract any finding of dominance. But such arguments will only be of importance in borderline cases and the burden will be on the parties to satisfy the Commission that any efficiencies are directly beneficial to consumers, generated by the merger under assessment, substantial, timely and verifiable. The draft guidelines also indicates that it is very unlikely that efficiencies could be accepted as sufficient to permit a merger leading to monopoly or quasi-monopoly to be cleared.

To sum up, the EC Merger Regulation was a source of rather inefficient biases in the treatment of dominance and efficiencies, but also other factors that could mitigate an initial finding of likely harm the competition like buyer power, ease of market entry, failing firm defense, etc. This, on the one hand, by restricting attention to mergers which create dominance implying that some welfare detrimental mergers are not to be approved. On the other hand, failure to account for efficiency considerations were resulting in beneficial mergers being blocked by the EU authorities. The aim of the reforms is to substantially improve the current EU Merger Control system, but without loosing sight of the merits inherent in that system. The Merger Regulation has provided a “one stop shop” for the scrutiny of large cross-border mergers, it has guaranteed that merger investigations are completed within the deadlines, a remarkable degree of transparency has been maintained in the rendering of decisions (every merger notified to the Commission results in the communication and publication of a reasoned decision), etc.

It has to be acknowledged, however, that whilst the current EU merger control system has performed well, it has shown some strains. That is why, among other things, the Commission has come up with this Notice. The Notice reflect the experience acquired through the examination of the cases notified to the Commission and the European Courts’ case law. It should resolve the shortcomings of the ECMR that have been appearing these years by clearly and comprehensively articulating the substance of the Commission’s approach to the appraisal of “horizontal” mergers, thereby providing transparency and predictability regarding the Commission’s merger analysis, and consequently greater legal certainty for all concerned, but it should at same time ensure that the original goals and merits of this regulation stay preserved.

1 Council Regulation 4064/89, which came into force on September 21, 1990 (OJ L395 30.12.1989, corrected version OJ L257 21.9.1990). A number of amendments were made to the Regulation by Council Regulation 1310/97 which came into force on 1 March 1998 (OJ L180 09.07.1997).

2 The first to point out that efficiency gains might offset enhanced market power was Williamson, Oliver E., 1968, “Economies as an Antitrust Defense: The Welfare Trade-offs”, American Economic Review, 59,954-959. See also Farrell and Shapiro (1990) for a recent and elegant contribution which emphasizes the role of efficiency gains.

3 The Commission used possible cost reductions as an argument against the merger in at least one case. See AT&T/NCR, Case IV/M.050 (18 January 1991).

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