#5313 - Merger Regulation - Competition Law

Merger Regulation

Competition Law LLM Notes

[Author]

Overview of EU Merger Regulation 3

Introduction 3

Overview of EU Merger Control 3

Jurisdiction 3

Concentration (Article 3) 3

Control 3

Community Dimension 4

Substantive Analysis 5

Market Definition 5

Affected Markets 5

Vertical 5

Horizontal 5

The SIEC Test 5

Horizontal Mergers 5

Market Shares and Concentration Levels 6

Market Shares 6

Concentration Levels 6

Non-Horizontal Mergers 6

Overview of EU Merger Regulation

The EU merger regulation contains the EU rules on merger control, and mending all previous regulations, it governs the allocation of jurisdiction as what is the substantive test analysis.

Mergers with the community dimension must be pre-notified to the Commission. It is an offence to consummate a merger without prior clearance. Imagine having a community dimension is determined by reference to the turnover of the undertakings in transaction. If there is a community dimension, the Commission has sole jurisdiction, and operates as a “one-stop shop", but can, and sometimes has to, cede jurisdiction. Member states may also transfer their jurisdiction to the Commission. The Commission has a fixed time limit to determine whether the merger will lead to a substantial impediment to effective competition in the Common Market, or a substantial part thereof, and in particular, whether it will create or strengthen a dominant position. The Commission has 25 working days to decide whether the investigation will proceed from stage 1 to stage two, which is 90 working days, to investigate compatibility. The Commission has wide powers, including the power to prohibit the merger in its entirety. Usually, though, it only permits the merger after parties have offered commitments to remedy concerns, which are legally binding. This commitment may be behavioural, or structural.

Article 3 (1) of the EU Merger Regulation states that a concentration is a "change in control, lasting basis resulting from:

A) A merger of two or more previously independent undertakings or parts of undertakings

B) The acquisition of the control of the whole or part of one or more undertakings by one or more undertakings or persons controlling at least one undertaking"

Of these, the latter is more common.

Control is all about exercising decisive influence over an undertaking, including ownership or the right to use all or part of the assets of an undertaking. It may also include decisive influence on the composition, voting or decisions of the organs of an undertaking. This is very broad, and includes legal or factual control. The acquisition of assets is only considered a concentration if they amount to a business with a market presence to which turnover can be attributed. It must lead to a lasting change in the structure of the market. Warehousing agreements, and where several transactions are unitary in nature, can be regarded as a single concentration. Successive transactions in a two-year period, for example, are regarded as a single concentration as a bulwark of against anti-avoidance procedures.

Sole control can be legal or factual. Legal sole control requires a majority shareholding, or a minority shareholding of shares that confer special rights to determine the strategic direction of the company to be acquired. Factual sole control is negative control under Article 3(2), where veto power exists, or whether minority shareholder is likely to be able to achieve a majority based on past voting behaviour, see Electrabel. The option to purchase or convert shares does not amount to control unless this option will be exercised in the near future according to a legally binding agreement.

Joint control is where two or more undertakings have the possibility of exercising decisive influence over another undertaking. This is usually because the undertakings enjoy negative control. This must go beyond the protection accorded to minority shareholders to protect shareholding investment, and must be related to strategic decisions of the joint venture.

Changing the quality of control can be regarded as a concentration, including sole to joint control, a change in the identity of the parent company, or joint to sole.

Article 3(4) governs full functionality in joint ventures. This is required for the EUMR to apply; otherwise this is left to Article 101, a national merger control. The jurisdictional notice provides considerable detail on this requirement. It's all about “operational autonomy". One specific function taken on by a joint venture is not sufficient.

If a merger has a community dimension, the Commission has exclusive jurisdiction to investigate the merger.

Turnover is used as a proxy the economic resources combined because of the concentration. This is allocated geographically. This is not about market power.

Article 1(2) is all about the overall size of the undertakings involved. In Gas Natural, Article 1(3) was used, but this was very controversial, and challenged in the General Court. This is an alternative basis for jurisdiction, whether as a substantial impact in three or more member states. Not many cases come under this, but Ryanair/Aer Lingus did. Instead, parties outside Article 1(2) use Article 4(5) EUMR and to use the Commission as a one-stop shop.

Substantive Analysis

The Burden of Proof is on the Commission, once it has jurisdiction, to show that the merger would be incompatible with the Common Market. IMPLA stresses that there is no presumption either way. This is assessed with regard to the economic outcome attributable to the merger, which is most likely to ensue. Article 2(1) sets out the criteria for the analysis, and 2(2) sets out the compatibility, and 2(3) incompatibility.

This is the starting point, and the emphasis is on the competitive constraints that undertakings face. Maybe too much emphasis is put on this, as it isn't really necessary to protect whether concentration will lead to increased prices. However, the Court of Justice held in multiple cases that a proper definition is a necessary precondition for an assessment under the EU Merger Regulation.

All markets where there is an individual or combined market share of at least 25% at one or more levels of the market.

All markets where there is an individual or combined market share of at least 15% nationally, or at EU level.

The required numbers are for the total size of the market, the HHI before, and the HHI after the merger, as well as the parties’ market share for the last 3 financial years. For every market affected. In return, the undertakings will get a speedy decision on the legality of the merger. A decision on a market definition is not binding on future decisions – each case must turn on the particular facts and circumstances prevailing at the time. See Coca-Cola.

The SIEC test looks for a Substantial Impediment to Effective Competition. This is the threshold for the merger to be found to be unlawful. This can be differentiated from the 1989 Merger Regulation, which was solely about creating or strengthening a dominant position. The problem with this was highlighted in Airtours, where a non-collusive oligopoly meant that effective competition was harmed, even though there was no market power or collective dominance.

This solution closes the gap while preserving the old jurisprudence, since any case that would be decided as being against the Merger Regulation would still be against the Merger Regulation, though other cases may be brought under it. Dominance will still normally be the trigger, but it's not the exclusive test, and it's certainly not necessary to enable the Commission to prohibit or require the modification of a major that leads to a substantial impediment of effective competition. This deals with the gap, see T-Mobile. The defence of the failing firm emphasises the requirement for the need for a causal link between the concentration and the impediment to effective competition, if the counterfactual is a failing firm, with the market share accruing to the acquirer, there is no causal link.

The Commission's guidelines on the assessment of horizontal mergers explained how the Commission assesses concentrations when the undertakings concerned or actual, or potential, competitors. The Commission has wide discretion over taking particular factors into account, or not. It needs to make an overall assessment, not a mechanical application of rules. This was approved in Sun Chemical Group.

Market shares and concentration levels provide a useful first indicator, but are never determinative...