#97 - Merger Regulation Notes - Competition Law

Merger Regulation Notes

• By reducing the number of competitors in a market a merger may increase the likelihood of a cooperative solution to competition being adopted by the remaining firms in the market

• Horizontal mergers are more likely to raise competitive concerns than vertical ones

• Although vertical may raise concerns where effect is to gain control of an input/distribution source which is vital for competitors

• Where a firm is failing, a merger that would otherwise be anti-competitive might be efficient and welfare enhancing

  Intro

• Most commentators agree that there should be some kind of merger control

• The attainment/ extension of dominance is attacked in EC, rather than dominance itself

  • Difference between merger control and dominance control is that former is normally ex ante

• Merger = any situation where the ownership of two or more undertakings is joined together

• 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

  Commission Notice on appraisal of horizontal mergers

• Identifies two aspects in which concerns might be raised :

  • Competitive oligopolies in which competitive constraints might be weakened by the fact of the merger

    • Commission will pay attention to mkt conc. and will be concerned about the ability and incentive of merging firms to increase prices

  • Merger will lead to a more concentrated mkt where oligopolistic collusion will be facilitated

    • I.e. by leading to greater coordinated interaction between the remaining non-merged firms

    • Even if this is tacit

• Factors highlighted are:

  • Concentration (i.e. up to a max of 3 firms)

  • Product homogeneity

  • Symmetry of mkt shares and costs

  • Transparency in pricing

  • Ease with which firms may retaliate to competitive action

  • Barriers to entry

  • Inelastic demand

  • Absence of buyer power

  • “maturity” of market

• Collusion can take various forms

  • I.e. increasing prices, as was feared in Gencor/Lonhro

  • Or reducing capacity/ production, with the end result of increasing prices albeit in a competitive mkt structure Airtours/Firstchoice

    Four stages to be considered

1. Is there a plausible mechanism whereby collusion can take place?

2. Market must be analysed to determine whether it has characteristics which could support collusive mechanism

3. Do those features actually exist in mkt being considered?

4. Is there past evidence to suggest that a collusive outcome might occur in new situation?

   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 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

  • In the absence of a merger the failing firm would inevitably exit

    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

  The EC Merger Control Regime and the treatment of joint ventures

• where a merger (“concentration”) meets the relevant thresholds it falls within the exclusive competence of the EC Commission to examine

• undertakings contemplating such a merger are required to compulsorily notify the EC

• Test of a merger’s acceptance is whether it substantially impedes effective competition in the common mkt, in particular but not exclusively by creating or strengthening a dom position

• Under the Merger Regulation, the commission may authorise the merger in a two-stage process

• MS are sometimes able to take over control over aspects of, or the whole merger

  Intro

• Under the EC regime only the largest mergers need to be reviewed

• Most answers are to be found in EC Reg 139/2004 on the control of concentrations between undertakings (the Merger regulation), ECMR

• A joint venture is a form of arrangement between undertakings which is usually designed to facilitate long-term cooperation

  • Their control at a community level is closely related to merger control

• At ec level, a distinction is drawn between joint ventures which are concentrative – which are dealt with under the ECMR and those which fall under 81

  81 and 82 and development of Merger regulation

• 81 and 82 do not explicitly provide for the control of mergers

  • For some time the general consensus was that they could not be applied to merger situations

• Older ECSC treat explicitly dealt with mergers at art 66 whereas EEC treaty did not mention it

• But 82 was used to control mergers – first instance in Continental Can

  • Commission found breach of 82 by way of takeover by larger of smaller company

• Note that the takeover went ahead anyway, and on appeal the ECJ rejected the Commission’s case on the grounds that it had failed to correctly analyse the relevant market

• But the court did confirm that art 82 could be applied to situations in which a dom undertaking sought to reduce further comp by the takeover of another

  • Even where the transaction was in no way coerced

• Commission had been given power to adopt interim measures Camera Care, question next was whether it could use these to prevent a proposed merger

  • In BAT and RJ Reynolds, two tobacco companies challenged the capacity of the Commission to grant a clearance to merger, and the court rejected this a) on the facts and b) on the principle

• These decisions led to great uncertainty as to whether proposed mergers needed to be notified, and whether 3^rd parties could challenge such mergers on the basis of 81 or 82 in nat courts

  • Application of 81(2) to a proposed merger could have disastrous consequences

• First merger regulation, recognising that 81 and 82 could not be a complete scheme was published in 1989

• Fundamental principle was the fact that EC would have exclusive competence, with defined exceptions

• In 2001 the commission launched a major review, noting that other jurisdictions used a “substantially lessen competition” test (i.e. UK and USA). Noted the importance of companies only having to satisfy one particular test

• Commission has always been very keen for the thresholds for referrals to be reduced

  Application of ECMR

• 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

    Meaning of Concentration

• Given at art 3 of reg:

  • Essence of test is whether “there is a change of control on a lasting basis”

• Such a change of control may result from:

  1. The merger of two or more previously independent undertakings or parts of undertakings, or

  2. The acquisition, by one or more persons already controlling at least one undertaking, by one or more undertakings, whether by purchase or securities or assets, by contract or other means, of direct or indirect control of whole or parts of one or more undertakings

• 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

  • Quaere the difference...

    Community dimension

• Art 21(3) provides that no MS shall apply its nat legis on comp to any conc that has a community dimension

  • Encapsulates idea of “one stop shop” underpinning EC merger control

• Community dimension exists where:

• This threshold is higher than that first sought by the commission – originally it wanted worldwide turnover of 2 billion and community level of 100mil

• So a compromise was reached. 1(2) is kept intact, but a further complicated gloss is put on by 1(3)

• Under 4(5), where a concentration is capable of being reviewed under...