#96 - Joint Ventures And Mergers - Competition Law

Competition Law Reading Session 3

See lecture notes and cases/points referred to in Jacob’s notes not covered by reading

Furse Textbook notes

Joint ventures and the ECMR

• JVs are encompassed within the definition of “concentration” at art 3(4)

  • Two key elements are that the JV must be

    • Lasting

    • Autonomous

  • Commission notice on concept of “full function JVS” draws distinction between

    • Full function JV: which operates on a mkt, performing functions normally carried out by undertakings operating on the same mkt

      • Jv must have management dedicated to its day-to-day operations

  • But note that a JV will not fall within ECMR if it performs only a single ltd function on behalf of its parents, i.e. an R&D activity

    JVs and Art 81

• Cooperative JVs are horizontal agreements which fall to be considered within the terms of art 81(3) where they do not have the concentrative aspects to bring them within the ECMR

• Guidelines on applicability of Art 81 to horizontal cooperation agreements confirms that the fact of horizontal cooperation, and not its form which should form the basis of analysis

• Simple function JVs can come within art 81, whereas full function JVs are dealt with under ECMR art.3(4) i.e. if the JV is ‘performing on a lasting basis all the functions of an autonomous economic entity’.

  Appeals

• These may be made by the parties, or by 3rd parties with appropriate locus standi, i.e. competitors

• A fast track process may be used where an urgency test is met, i.e. for a merger that has not been abandoned despite a decision by the commission blocking it

  • This was used in Schneider

    Art 288

• Applicant in Schneider sought damages under 288, which provides for non-contractual liability of the commission

  • CFI found that Schneider was entitled to damages

  • CHECK FINAL AMOUNT

    Third party rights

• It is not the purpose of merger control to protect undertakings from better competition

  • I.e. shareholders in the Zunis case were directly affected under 230, but not individually, as there were 140,000 of them

    An Efficiency Defence?

• Big debate over whether there is a defence to the SIEC test based on efficiency

• In the guidance on horizontal mergers (see below) the commission states that it is possible for the efficiencies generated by a merger to counteract the effects on competition and any harm to consumers that would otherwise occur. In this respect factors considered by the the commission ‘include’ (NB doesn’t say these factors exclusively) those mentioned in art 2(1) ECMR: development of technical and economic progress, provided that it is to the consumers’ advantage and does not form an obstacle to competition.

• Commission says it will consider any substantial efficiency, and these may lead to the merger being cleared if the commission believes that the efficiencies will allow the firm to act pro-competitively for the benefit of consumers The efficiency must benefit consumers, be merger-specific and verifiable.

• The test for assessing efficiency claims is whether consumers will be no worse off than before the concentration.

• Efficiencies in marginal or variable costs are more likely to lead to lower prices that reductions in fixed costs, so that they are more likely to benefit consumers.

• The greater the possible negative effects on competition, the more the commission has to be sure of the substantial efficiencies and their being passed on to the consumer. It is v unlikely that a concentration leading to something close to monopoly could be justified by efficiencies.

  Intro:

  Mergers can be vertical, horizontal or conglomerate (where firms in different markets merge, and their products are to some extent substitutes)

  Merger may have advantages when an undertaking wishes to diversify into a new market

  • Overcomes barriers to entry

  • Avoids intense comp should incumbent choose to defend territory

  • Mergers also tend to break into profit quicker (although see citi, and timewarner...)

    Horizontal Mergers

• May be substitutes for cartels – Neumann

• Mergers tend to be more efficient than cartels, as they generate economies of scale and scope

• Where a merger would lead to a monopoly, then it will usually be blocked

  Control under ECMR

• Control relates to the possibility of exercising decisive influence on an undertaking

  • Even a minority shareholder can have a “decisive influence” depending on the rights attached to those shares

  • Essential factor is the level of influence over the business strategy of the entity concerned

• Decisive influence not defined, but would appear to be limited in almost all cases to holding in excess of 25% share capital by a single person

  • But note CCIE/GTE, 19% (although all remaining shares were held by an investment bank, whose approval was not needed for significant decisions)

• Note that individuals may be considered undertakings by virtue of their holdings of other companies, i.e. Asko/Jacobs/Adia

• Note that states can be considered persons, even though they are not undertakings... see Airfrance/Sabena, re Belgian state’s holdings

  • But note that this rule does not apply where state acts qua public authority, rather than commercial actor

    Remedies under ECMR

• Neelie Kroes (Commissioner for competition) stated in Oct 05 that the Commission should accept remedies only when they “clearly and unambiguously eliminate the identified threats to competition”

  • Structural remedies have the advantage over behavioural remedies in that they do not require ongoing monitoring or complex supervisory measures

• Principle set out in remedies notice is that most effective way to restore comp is to create the conditions for emergence of a new competitor or strengthening of an existing one. Preference expressed for structural remedies over behavioural ones.

  • All sounds v interventionist

• It may be argued that the CFI approach in gencor is overly conservative, and creates a strong bias against the acceptance or imposition of behavioural remedies

  • Where divestment is required, the commission will insist that the divested remedy is viable

• When considering what type (behavioural e.g. agreeing to licence IP, or structural e.g. requiring divestiture) of commitments to ask of Ps to ensure that the merger is cleared, the commission will take into account the following factors: type, scale and scope of the remedy proposed, together with its full and timely implementation by the parties. (Remedies Notice).

  The failing firm defence

• Sometimes argued that a merger which saves a failing firm should not be blocked, on the grounds that were it not for the merger, the mkt would be more concentrated following that firm’s exit

  • And there would be social costs of merger

    • But surely failure is all part of efficient markets – if there genuinely was extra capacity then it would be filled by existing participants/ taken up by new entrants

• Note that it was considered by the CC in the AirCanada/Canadian Airlines merger, but dismissed by the CC in the Safeway merger case

• Commission and CFI in Kali & Salz indicated that 3 factors were relevant:

  • Allegedly failing firm would in near future be forced out of mkt because of financial difficulties

  • There is no less anti-competitive alternative purchase than the notified merger

  • The acquiring undertaking would gain the target firm’s market share anyway if that firm were forced out

    Vertical Mergers

• Can make entry more difficult by foreclosing rivals from previously independent firms

  • Either at the vertical level, by increasing capital requirements associated with entry

  • and promoting product differentiation

• vertically integrated oligopoly is insulated from comp pressures that come from vertically related com levels

Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) [2004] OJ L 24:

• Applies when two conditions are fulfilled:

  • There must be a concentration of two or more undertakings

  • The turnover of the undertakings concerned must meet the thresholds set out

• Art 1 (Scope): The Reg applies to all concentrations with a community dimension, which arises where (1)

OR (2)

• Art 2 (substantive test): Test is whether the concentration would ‘significantly impede effective competition’ (SIEC) in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position. Art 2(1)(b) allows the commission to take into account, inter alia, the “development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition”.

• Art 3 (Concentration and Control): concentration occurs where there is ‘change of control on a lasting basis’, either by

(a) the merger of two or more previously independent undertakings or parts of undertakings, or

(b) the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of 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 (art 3(2)). Recital 20 explains that the concept of concentration is intended to relate to operations which bring about a lasting change in the structure of the market.

• Various Articles (One-Stop Shop): The Commission alone has jurisdiction to permit or refuse concentrations (as defined in art 3) that have a community dimension (as defined...