Non-compete clause found to be a restriction of competition by object
The General Court confirmed the unlawfulness of the non-compete clause between Portugal Telecom and Telefónica in connection with Telefónica’s acquisition of the Brazilian mobile operator, Vivo Participacoes (“Vivo”).
PT (formerly Portugal Telecom) is the primary telecommunications operator in Portugal and has a strategic presence in other countries, in particular in Brazil and in sub-Saharan Africa.
Telefónica is the primary telecommunications operator in Spain and one of the largest European telecommunications groups, with an international presence in several countries of the EU, Latin America and Africa.
Vivo is one of the main mobile telecommunications operators in Brazil. Vivo was jointly controlled by Telefónica and PT.
In 2010, PT and Telefónica concluded a Share Purchase Agreement (the “SPA”) which had as its subject-matter the exclusive control of Vivo by Telefónica. In the SPA, they undertook “to the extent permitted by law, to refrain from participating or investing, directly or indirectly, through any subsidiary, in any project falling within the telecommunications sector (including fixed telephone and mobile telephone services, internet access services and television services, with the exception of any investment or any activity in progress on the day on which the present agreement is signed) which is liable to be in competition with the other company on the Iberian market”.
In January 2011, the Commission initiated a procedure against Telefónica and PT. In a decision of 2013, the Commission took the view that the clause amounted to a market-sharing agreement with the object of restricting competition in the internal market. The Commission imposed fines on Telefónica and PT of €66,894,000 and €12,290,000 respectively.
PT and Telefónica requested the General Court to annul the Commission decision and to reduce the amount of the fines imposed. They disputed, in particular, the finding that the clause constituted a restriction of competition by object since the Commission did not demonstrate that they were potential competitors and that the clause was therefore capable of restricting competition.
The General Court dismissed, almost in its entirety, the actions brought by PT and Telefónica. However, the Commission will have to determine once again the sales linked directly or indirectly to the infringement in order to calculate the amount of the fines. Regard being had to the fact that the very existence of the clause is a strong indication of potential competition between PT and Telefónica, that its subject matter consisted of a market-sharing agreement, that it had a wide scope and that it was part of a liberalised economic context, the General Court took the view that the Commission was not obliged, as PT and Telefónica asserted, to undertake a detailed analysis of the structure of the markets concerned and of potential competition between companies on those markets in order to conclude that the clause constituted a restriction of competition by object.
The Court of Justice recently gave a preliminary ruling regarding the Communication from the Commission on the application, from 1 August 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (the “Banking Communication”).
The Court of Justice found that the Banking Communication does not bind the Commission. Article 108(3) of the Treaty on the Functioning of the European Union gives the Commission discretion to assess the compatibility of aid with the internal market. The Commission cannot waive this discretion on the basis of the Banking Communication.
Therefore, the Commission must still examine the specific exceptional circumstances relied on by a Member State in seeking to grant aid.
CCPC’s first annual report
The Competition and Consumer Protection Commission (the “CCPC”) has published its inaugural annual report, which details the work undertaken by the CCPC during the period from 31 October 2014 to 31 December 2015. For further information, please see the news bulletin on our website dated 18 August 2016.
Control and Decisive Influence
One of the situations in which merger control requirements under the Competition Act 2002, as amended, (the “Competition Act”) need to be considered is if an individual, that already controls one or more companies, or a company acquires control of another company (Company X).
A key element, therefore, is when an acquisition of “control” of a company (Company X) occurs for the purposes of the Competition Act.
A person / company will “control” Company X for the purposes of the Competition Act if he / she / it is in a position to exercise decisive influence over Company X.
For these purposes, “decisive influence” may be capable of being exercised over Company X if a person / company becomes the holder of contracts, or other means, that:
- entitle it to the ownership of, or the right to use all or part of the assets of, Company X; or
- enables decisive influence to be exercised over Company X with regard to the composition, voting or decisions of the organs of Company X. This typically captures majority voting rights and / or veto rights over strategic decisions of Company X (including approval of budgets, business plans, appointment of senior management etc).
The acquisition of control via the use of assets (as opposed to the acquisition of assets) is unusual, although the prospect of it occurring is addressed in the Competition Act. In this regard, the EU Commission Consolidated Jurisdictional Notice (the “Notice”) provides that:
“Control can also be acquired on a contractual basis. In order to confer control, the contract must lead to a similar control of the management and the resources of the other undertaking as in the case of acquisition of shares or assets. In addition to transferring control over the management and the resources, such contracts must be characterised by a very long duration (ordinarily without a possibility of early termination for the party granting the contractual rights). Only such contracts can result in a structural change in the market”.
Based on the guidance provided by the Notice, for the use of assets to give rise to a merger control issue, the use of the assets must be on terms that are essentially akin to the de facto acquisition of the relevant assets. For example, the long lease of an asset – giving control over the management and resources of the asset despite the fact that property rights are not transferred.
News Corp / Wireless
This transaction involved the proposed transaction whereby News Corp UK & Ireland Limited, an indirect wholly-owned subsidiary of News Corporation, would acquire sole control of Wireless Group plc. (“Wireless”).
News Corporation and its subsidiaries are active in newspaper publishing, information services, book publishing, digital real estate and cable network programming.
Wireless is a media company operating commercial radio stations and digital media businesses in the UK and in the State.
The CCPC’s predecessor, the Competition Authority, has in previous merger determinations concluded that radio advertising is in a different product market to other forms of media advertising (eg newspaper advertising). The CCPC saw no reason to depart from this view.
There was a vertical aspect to the proposed transaction since News Corporation purchases radio advertising space from some of Wireless’ radio stations in the State. The CCPC considered that the proposed transaction was not likely to result in any vertical foreclosure concerns. Given News Corporation’s minimal radio advertising spend with Wireless in the State and its need to advertise across a broad range of media platforms (and not just Wireless’ radio stations) to obtain sufficient population coverage, the CCPC considered that News Corporation did not have the ability or incentive to engage in a foreclosure strategy post-transaction.