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Legislation, triggers and thresholds
Legislation and authority
What legislation applies to the control of mergers?
EU merger control is governed by the EU Merger Regulation. This is accompanied by the Implementing Regulation 802/2004, which provides detailed rules.
The European Commission has also published a number of non-binding notices and guidelines, as well as its best practices on substantive issues (eg, horizontal and non-horizontal merger guidelines) and procedural matters (eg, the Consolidated Jurisdictional Notice). These, along with consolidated versions of the legislation, are available on the Directorate-General for Competition’s website (http://ec.europa.eu/competition/mergers/legislation/legislation.html).
What is the relevant authority?
At the EU level, all competition enforcement is carried out by the European Commission, the administrative arm of the European Union. Day-to-day case work happens within the Directorate-General for Competition (DG COMP), under the leadership of Competition Commissioner Margrethe Vestager.
In the field of merger control, simplified case decisions are taken by the director general of DG COMP and Phase I decisions are taken by the competition commissioner acting alone under delegated authority. Phase II decisions require the approval of the entire college of commissioners, which will for the most part be guided by the competition commissioner’s recommendations.
Transactions caught and thresholds
Under what circumstances is a transaction caught by the legislation?
The European Commission has jurisdiction over transactions that amount to a ‘concentration’ and have an ‘EU dimension’ (ie, that meet the jurisdictional thresholds set out in the EU Merger Regulation).
A ‘concentration’ means a transaction which gives rise to a change of control, and encompasses full mergers between two previously independent companies (‘undertakings’), as well as acquisitions of control over an independent company by either one company (sole control) or two or more companies (joint control).
The EU Merger Regulation defines ‘control’ as the ability to exercise a decisive influence. The possibility of exercising decisive influence on an undertaking can exist on the basis of rights, contracts or any other means, either separately or in combination, and having regard to the considerations of fact and law involved. Therefore, a concentration can occur on a legal or a de facto basis, may take the form of sole or joint control and may extend to the whole or parts of one or more undertakings. Control may be acquired by one company acting alone or by several acting jointly.
If the transaction constitutes a concentration, in order for the European Commission to have jurisdiction it must also meet the turnover thresholds set out in Article 1(2) or (3) of the EU Merger Regulation.
All European Economic Area member states (except Luxembourg and Liechtenstein) have their own national merger control regimes administered by national competition authorities, which apply to cases falling outside the European Commission's jurisdiction under the EU Merger Regulation. However, the EU Merger Regulation contains various provisions allowing for transfer or jurisdiction between EU and national levels, intended to ensure that jurisdiction is ultimately exercised by the authority or authorities best placed to review the deal.
Do thresholds apply to determine when a transaction is caught by the legislation?
Whether a transaction is notifiable to the European Commission depends on whether it meets the turnover (ie, revenue) thresholds for EU dimension set out in Articles 1(2) and (3) of the EU Merger Regulation. There are two types of threshold:
Primary thresholds –a merger will require notification to the European Commission where:
- the parties have a combined global turnover of more than €5 billion; and
- the parties have individual EU-wide turnovers of more than €250 million.
Secondary thresholds – a merger that does not meet the primary thresholds may still require notification to the European Commission if:
- the parties have a combined global turnover of more than €2.5 billion;
- the combined aggregate turnover of all undertakings in each of at least three EU member states is more than €100 million;
- the aggregate turnover of each of at least two of the undertakings in each of at least three EU member states is more than €25 million; and
- the aggregate EU-wide turnover of each of at least two of the undertakings concerned is more than €100 million.
Only about 5% of all notifications to the European Commission result from the secondary thresholds being met.
Even if the primary or secondary turnover thresholds are met, the transaction will not be notifiable to the European Commission if two-thirds of each party's EU-wide turnover stems from the same member state. The two-thirds rule has the effect of allowing the competition authority of that country to review the case (reflecting an underlying assumption that it will have the most direct interest).
While the above rules are mathematical rather than discretionary, discretionary mechanisms also exist, allowing a national agency to review cases which trigger the EU Merger Regulation thresholds, but which may significantly affect competition in a market within a member state which presents all characteristics of a distinct market. In these rare cases, the notifying party can use the mechanism in Article 4(4) of the EU Merger Regulation to ask the European Commission to refer the case ab initio to one or more national authorities.
Where a case has national characteristics, a national competition authority may alternatively request that the case be transferred to it after a notification to the European Commission.
Where a transaction falls short of the EU Merger Regulation primary or secondary thresholds, but triggers a notification obligation in three or more European Economic Area countries under national merger control laws, the notifying party may choose to use the mechanism in Article 4(5) of the EU Merger Regulation to seek approval for ‘one-stop-shop’ review by a single authority – the European Commission – by means of a reasoned submission (Form RS), which, if successful, is then followed by a notification to the European Commission.
In addition, where a deal is first notified to one or more national competition authorities, the European Commission may accept referral of the case from one or more national agencies if the transaction “affects trade between Member States” and “threatens to significantly affect competition” within a specific member state (the 2014 white paper reform proposal would eliminate the ‘significantly affect’ requirement).
Turnover (‘revenue’ in US parlance) is calculated on the basis of the entire group of companies, not just the entity that is party to the transaction. Special rules for the calculation of turnover apply to private equity firms, financial institutions and insurers. The European Commission’s Consolidated Jurisdictional Notice contains extensive guidance on how to calculate turnover and allocate it geographically to member states, as well as information on when a change of control occurs for jurisdictional purposes. The notice is available on the Directorate-General for Competition’s website (http://ec.europa.eu/competition/mergers/legislation/draft_jn.html).
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
Yes. If there are doubts as to whether the European Commission will have jurisdiction under the EU Merger Regulation after a thorough review of the legislation, guidance notices and precedent by the parties’ lawyers, informal contact can be made with the Directorate-General for Competition (DG COMP), which will generally encourage the notifying party to complete and submit a case allocation request form (available on DG COMP’s website), on which it is specified that this is a consultation request only.
Notifying parties use the same form to apply to DG COMP for the allocation of a case team and case number as the first step in the notification process. This marks the beginning of the (de facto obligatory) pre-notification stage, during which the case team will review and comment on at least one draft of the notification document, and may (in more complicated transactions) have one or more meetings with the parties, before it gives the informal green light to proceed with formal notification.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
Yes. EU merger control applies to transactions that have ‘EU dimension’. Thresholds are based on geographic turnover. Thus, a transaction that meets the EU-wide thresholds because the parties have the requisite sales in the European Union must be notified, no matter whether the parties are European based.
One situation which has been caught since EU merger control was introduced – and where it is difficult to see how the transaction could feasibly affect competition in the European Union – is the so-called ‘canteen in Tanzania’ joint venture scenario. For example, if two large multinationals set up a joint venture in Tanzania (or any other non-European Economic Area (EEA) country) to run a lunch canteen for their local employees, the EU Merger Regulation would be triggered (assuming that the joint venture is ‘full function’ – that is, one which performs all functions of an autonomous economic entity on an ongoing basis) due to the size of the parent entities, even though the new joint venture has no nexus with Europe. At present, such joint ventures benefit from the use of the simplified procedure and short-form notification, but notification is still required. The European Commission’s 2014 white paper suggests that review be excluded altogether for joint ventures that operate and are located outside the EEA, but as yet the European Commission has presented no concrete proposals to amend the EU Merger Regulation to this effect.
What types of joint venture are caught by the legislation?
EU merger control applies to full-function joint ventures, provided that the turnover thresholds are met.
A ‘full-function’ joint venture is one which performs all the functions of an autonomous economic entity on an ongoing basis. To be considered a full-function joint venture, the joint venture’s activity and market presence must be distinct from those of the parent companies.
Other non-full-function joint ventures (eg, research and development joint ventures) are not caught by EU merger control, but are subject to self-assessment under the general antitrust regime of Article 101 of the Treaty on the Functioning of the European Union.
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