Enforcement trends during 2007
This year has seen a further rise in the number of transactions notified: 389 to the end of November, compared to a total of 356 in 2006. It remains to be seen whether this trend will continue through 2008 given the current economic climate. During 2007, approximately 91 per cent of cases were cleared unconditionally after a Phase I investigation, with 5 per cent resolved through Phase I remedies and 4 per cent sent for Phase II scrutiny. See figure 1.
Looking beyond these basic figures shows several notable trends.
- Increasing use of the ‘reference up’ procedure. The 2004 EC Merger Regulation (ECMR) gave merging parties the ability to ask the Commission to review a transaction that does not satisfy the turnover thresholds but is notifiable in three or more Member States. This ability to avoid multiple filings and benefit from a ‘one-stop shop’ review has proved highly popular. Between 1 January and 31 November 2007, the Commission obtained jurisdiction under this procedure in 45 cases (ie over 10 per cent of all cases reviewed). This more flexible allocation of jurisdiction is indicative of a broader trend for greater co-operation between the Commission and national authorities, illustrated in the Veolia/Cleanaway merger in 2006 when co-operation between the Commission and the UK Office of Fair Trading on remedies avoided the case being referred back to the UK for investigation.
- The Commission enforces its exclusive jurisdiction. The year has seen the Commission persevering with attempts to prevent Member State actions from undermining the ‘one-stop shop’ principle. Neelie Kroes has repeatedly emphasised the Commission’s determination to outlaw measures taken to protect national champions and the Commission has taken action in several cases. Most recently, the Commission formally decided that Spain’s imposition of conditions on Enel and Acciona regarding their acquisition of Endesa was unlawful and that the conditions should be removed.
- Increasing proportion of simplified procedure Phase I clearances. Since the Commission introduced a simplified procedure mechanism in 2000 for handling cases in which substantive concerns did not arise, an increasing proportion of cases are now dealt with in this way. The year saw a further increase, with the significant majority of unconditional Phase I clearances being dealt with by a short-form decision – although this trend may be affected if the number of private equity transactions falls during 2008. The Commission has a short-form notification procedure that applies to many of these cases, but this still requires a significant amount of information to be provided on the parties and the markets. Given the number of cases now being dealt with in this way, it may be time for the Commission to consider further reducing the notification burden on parties in such cases.
Creative use of Phase I remedies to avoid a Phase II investigation
In recent years, a majority of cases where the Commission has found serious competition concerns in its Phase I review have been resolved by the parties voluntarily giving commitments to remedy these concerns. This has saved ‘fighting’ a detailed and lengthy Phase II investigation. See figure 2.
In 2007, as of 14 December, 18 cases have been cleared with Phase I remedies (compared to 14 cases in which a Phase II investigation was launched). The majority of Phase I remedies involve commitments to divest certain businesses or brands where the combined entity has particularly strong market positions. However, 2007 has seen some more innovative solutions that aim to regulate the parties’ behaviour rather than achieve structural change.
Freshfields Bruckhaus Deringer advised in seven of the 18 Phase I remedy cases in 2007, including:
- the proposed acquisition of English Welsh & Scottish Railway Holdings (EWS) by Deutsche Bahn – in which Deutsche Bahn gave behavioural commitments to protect competition in the rail freight market in France (fulfilling EWS’s expansion plans and providing non-discriminatory access to certain training activities and maintenance facilities in France); and
- the proposed acquisition of Kemira GrowHow by Yara – in which Yara offered a package of behavioural and structural measures to remedy concerns in certain fertiliser and chemical markets. The case is also notable because the Commission provided useful guidance on the limits imposed by the suspension obligation on stake-building in the context of public bids.
The ability of parties and the Commission to agree more innovative packages of remedies within the tight constraints of the Phase I process and timetable demonstrates the importance of forward planning by the business team and their advisers on the competition case. It also highlights the need for early and close dialogue with the Commission on possible remedies.
A second prohibition decision under the recast EC Merger Regulation
Outright prohibition decisions under the ECMR are still rare – just 20 instances out of over 3,500 notifications since 1990. Since the current ECMR was introduced in 2004, there have been just two prohibitions: EDP/GDP/ENI, which would have involved the merger of the Portuguese gas and electricity incumbents, and in June 2007 Ryanair’s proposed takeover of Aer Lingus, in which Freshfields Bruckhaus Deringer represented the Irish Department of Transport, the main complainant.
The Ryanair decision has spawned two appeals to the Court of First Instance (CFI). First, Ryanair lodged an appeal against the Commission’s prohibition decision in September. Second, Aer Lingus appealed the Commission’s separate refusal to require Ryanair to divest its minority (non-controlling) 29 per cent stake in Aer Lingus. The Aer Lingus appeal will provide useful guidance on a number of significant areas: how ‘control’ should be assessed in relation to public companies (and whether criteria beyond the ability to veto special resolutions are relevant); the limits under the ECMR on stake-building before a public bid is made; and the extent to which the Commission has the power to require divestment of minority stakes when it has found that a full takeover would be anti-competitive.
Commission held partially liable for damages for breach of procedural rights
The Commission was provided with an uncomfortable reminder of the trio of defeats it suffered before the CFI in 2002. In July 2007, the CFI decided that Schneider Electric should be partially compensated for the losses it suffered following the Commission’s unlawful prohibition of its merger with Legrand in 2001.
The CFI allowed Schneider’s damages claim on the basis of the Commission’s breach of Schneider’s rights of defence – but not on the basis of any substantive errors of assessment. In doing so, it sought to strike a delicate balance between upholding the principle that Community institutions should, in certain circumstances, make good the losses they cause and avoiding a situation in which future Commission decision-making is paralysed through fear of extensive damages claims.
The Commission has since appealed the judgment to the European Court of Justice (ECJ).
Commission publishes new substantive and jurisdictional guidance
This has been a busy year for the Commission in terms of the provision of new guidance for business and advisers on the interpretation of the ECMR. There are three new publications that are of significant practical importance.
- Non-horizontal merger guidelines. Following a consultation at the start of the year, the Commission published in November its finalised guidelines on the treatment of vertical and conglomerate mergers. The guidelines give a clear structure for determining when the Commission may have concerns about mergers between companies that do not directly compete but may have vertical or other links on the market. The Commission recognises that concerns are unlikely to arise unless the merged entity has a significant degree of market power on at least one market. Helpfully, the Commission provides a market share level (of 30 per cent) as an indicator of an absence of such power. The Commission also recognises that these mergers can produce substantial efficiencies and that these benefits should be considered alongside any potential anticompetitive effects.
- Consolidated jurisdictional notice. The consolidated jurisdictional notice replaces the existing notices on concentrations, undertakings concerned, calculation of turnover and full-function joint ventures, and therefore has a useful housekeeping role. However, the new notice also updates the Commission’s thinking in a number of important areas and provides new guidance in others. In its notice, the Commission provides some guidance to business on how ECMR rules apply to more innovative transaction structures, including break-up bids, inter-related and serial transactions and the use of ‘warehousing’ arrangements to avoid or delay notification.
- Draft new remedies notice. In April 2007, the Commission published a draft remedies notice for consultation. The new notice is designed to update the Commission’s guidance and to reflect its current decisional practice in this area. The finalised guidance is due for publication in early 2008 but, in the meantime, the draft is likely to be a more accurate reflection of the Commission’s approach than the existing 2001 notice.
What does 2008 hold for the EC merger regulation?
The following events are anticipated for 2008.
- Publication of the finalised remedies notice – expected in early 2008.
- Progression of the Aer Lingus/Ryanair litigation. Aer Lingus is seeking interim measures from the CFI to prevent Ryanair from ‘interfering’ in the running of Aer Lingus until the CFI determines whether Ryanair should be required to sell its minority stake. This will be an important case to watch in early 2008.
- Further ECMR litigation, including appeal to the ECJ of the CFI Impala judgment. There are a number of merger cases pending before the European courts. Judgments in these cases should provide guidance in various areas of considerable practical importance. As well as the issue of control, these cases will also consider issues such as the legality of ‘warehousing’ structures and the amount of information notifying parties must provide to the Commission. Of particular significance for the Commission is the appeal to the ECJ from the CFI’s 2006 Impala judgment (overturning the Commission’s clearance of the Sony/BMG joint venture). Advocate General Kokott delivered her opinion in the case on 13 December recommending the upholding of the CFI judgment. The Advocate General emphasised in her opinion that the Commission must demonstrate the same standard for the clearance of transactions as it is required to do for prohibitions.
- Consultation on revised ECMR thresholds. The Commission is required to report to the EU Council of Ministers on the operation of the current turnover thresholds by 1 July 2009. In addition, Neelie Kroes has spoken publicly of her concern that the operation of the two-thirds rule (under which the Commission loses jurisdiction) is preventing it from reviewing significant transactions. It is therefore possible that we may see significant proposals from the Commission to change the ‘shape’ of the turnover thresholds during 2008.