The Commission has adopted measures to simplify procedures under the EU Merger Regulation. They extend the scope of the simplified merger procedure, reduce the information required in an EU filing (or at least claim to), and streamline the process for pre-notification discussions. The aim is to cut red tape and to reduce the burden on business. But it is unclear that these objectives will be achieved: for example the Commission has actually extended in the Form CO the list of section 5(4) internal documents that have to be disclosed. We explore the changes and their impact
In March 2013 the European Commission (Commission) consulted on proposals to simplify procedures under the EU Merger Regulation. The proposals received heavy criticism from respondents to the consultation, who disputed whether the measures would actually result in reduced burden for business. Despite this, the Commission ploughed ahead with its reforms, and has now, albeit with some tweaks to address comments from respondents, adopted a package of measures (the Simplification Package) that it claims will “reduce the administrative burden and cost for business at a time when it needs it most”.
The reforms will apply from 1 January 2014. Businesses in the process of considering transactions that may require an EU filing should make sure they are aware of the changes and how they will impact the notification process.
The Simplification Package covers three main areas:
- Extending the simplified procedure for review of non-problematic mergers.
- Reducing the information requirements for the notification of all mergers.
- Streamlining the process for pre-notification discussions.
The Commission has also taken this opportunity to update its Best Practice Guidelines and template texts for divestiture commitments.
It is unclear whether the measures adopted will in fact reduce the burden on businesses. In particular, while the Commission claims to be reducing the information requirements for notification, the revised Form CO, for example, actually extends the requirements under section 5(4) for parties to submit internal documents. In this Alert we set out the key elements of the Simplification Package and analyse the extent to which they are likely to achieve the Commission’s objectives.
Extending the simplified procedure
What is the simplified procedure?
The simplified procedure allows companies to use a shorter notification form for mergers that are unlikely to raise competition concerns. The Commission will endeavour to clear such mergers as soon as practicable following the expiry of the 15 working day deadline for Member States to make an Article 9 referral request, although in the period leading up to the 25 working day deadline for unconditional “phase 1” clearancedecisions, it reserves the right to switch to the normal “long form” procedure. Under the current procedure, mergers benefit from simplified treatment in the following cases:
- Where the merging parties do not compete in the same product or geographic market, or parties are not in a “vertical relationship”, i.e. one party does not sell an input to a market where another party is active.
- Where the combined market share of competing parties is less than 15% and the individual or combined market share of parties in a “vertical” relationship is less than 25%.
- In joint venture cases, where the joint venture has turnover or assets in the EEA of less than €100 million.
- Where a party acquires sole control over a company which it already jointly controlled.
What will change?
The Simplification Package expands the scope of the simplified procedure. It not only increases the market share thresholds in 2 above to 20% and 30% respectively, but adds a new criterion: where the combined market share of competing parties is between 20% and 50%, but the increase in the level of concentration as a result of the merger is small (i.e. the “delta” in the HHI calculation is less than 150).
The Commission’s overall aim is to increase the number of cases that fall within the simplified procedure (from 50% to 60-70%) in order to give greater relief to businesses notifying non-problematic cases under the EU Merger Regulation.
Will the changes reduce the burden on business in practice?
It is unclear whether the Commission will achieve these aims in practice. While the increase in the market share thresholds should in principle allow more mergers to benefit from simplified treatment, the new HHI criterion is quite restrictive and will accommodate only very small increments in market share. For example, in a merger involving party A with a 30% market share and party B with a 2.5% market share, the “delta” in the HHI would be 2 x (30 x 2.5) = 150, which would therefore (just) fail this test. Yet in the vast majority of cases it will be reasonably obvious that an increase in market share from 30 to 32.5% should not be problematic. Arguably this additional HHI filter is too conservative.
Moreover, it is worth noting that the Commission retains a wide discretion to revert from the simplified procedure to the normal merger assessment in a number of situations, including where the market is already concentrated, or the transaction involves a maverick firm. The Simplification Package further broadens the scope of this “claw back” mechanism, adding, for example, that joint ventures satisfying the criterion in 3 above but whose turnover is expected to exceed the €100 million threshold in the next three years may be assessed under the normal procedure.
Reducing the information burden on notifying parties
What is the current situation?
The standard notification forms for merger filings under the EU Merger Regulation are the Form CO and Short Form CO (for simplified procedure cases). It is a widely held view that, compared to many other merger regimes around the globe, the EU filing is data intensive and onerous. It requires a huge amount of information and analysis on all aspects of the markets affected by the merger. In addition, parties must collect and submit a wide range of internal documents: the Commission believes that these give it a real in- depth understanding of the parties’ rationale for the merger and the way they view the markets.
What will change?
The Simplification Package, according to the Commission, reduces the information required for notifying mergers under the EU Merger Regulation. In particular, it removes from the forms the need to provide data that the Commission considers was, in past cases, unnecessary for its analysis. The aim of this streamlining exercise is to “significantly reduce business cost and resources for all merger cases”.
There are two key areas where the information requirements have been softened:
- Affected markets: for normal (non-simplified) cases, parties are required to submit information on all markets “affected” by the merger. The Commission has raised the thresholds for what constitute affected markets from 15% to 20% (for “horizontal” markets), and from 25% to 30% (for “vertical” markets). As a result, companies will need to provide detailed market information for fewer markets.
- Joint ventures active entirely outside the EEA: the Commission has amended the Short Form CO to introduce what it calls a “super-simplified notification” for such joint ventures. Parties will therefore only need to submit information on the transaction, their business activities, and turnover figures. The Commission has separately been consulting on reforms to the EU Merger Regulation to remove theneed to notify these joint ventures at all, but has not yet provided an updated on its thinking in this regard.
In addition, the Commission explicitly recognises that particular categories of information required by the forms may not be necessary for its assessment of certain mergers. The revised Form CO and Short Form CO therefore clearly identify information in relation to which the Commission may grant a waiver. This includes details of recent acquisitions by the parties, capacity estimates, and some internal documents. Parties must request any waivers at the same time as they submit a draft filing, and give reasons for the request. The Commission will usually deal with waiver requests within five working days.
Will the changes reduce the burden on business in practice?
The Commission’s statements on the benefits to business of this streamlining process are at first glance convincing. An increase in the threshold for affected markets should reduce the amount of market information required for some mergers. The outlook is also clearly good for joint ventures active outside the EEA. However, looking more closely at the revisions to the forms reveals that the Commission has actually increased the number of questions and data requirements in some areas.
The extension of the requirement to submit internal documents
The most notable area of expansion is section 5(4) of the Form CO on internal documents. During the consultation phase many respondents were critical of additions to this section. This prompted the Commission to pare back some requirements: it dropped, for example, the need to submit “presentations analysing different options for acquisitions, including but not limited to the notified concentration”.
But other new questions remain, and overall the disclosure requirements for internal documents have been greatly expanded, running clearly counter to the Commission’s claims that information requirements are being reduced. In particular:
- The current section 5(4) requires parties to submit copies of all analyses, reports, studies etc. prepared by or for members of the board of directors, the supervisory board or the shareholders meeting for the purposes of assessing the merger. The revised section extends this to cover documents prepared by, for, or received by the “board of management” of the company. The Commission does not clarify this term, but it appears to be wide enough to include senior management such as the CFO, COO or even the General Counsel (which in turn gives rise to potentially complex issues of waiver of privilege in non-EU jurisdictions).
- A new section 5(4)(i) requires the disclosure of minutes of meetings at which the transaction has been discussed. In a concession from the consultation draft, the Commission allows parties to submit “excerpts” of minutes as opposed to all minutes. But this is still a significant expansion from the current requirements.
- A new section 5(4)(iii) requires parties to submit “analyses, reports, studies, surveys and any comparable documents from the last two years from the purpose of assessing any of the affected markets” (emphasis added). Again, the Commission has tempered its position from the consultation draft, reducing the period from three to two years. However, as drafted, this requirement could clearly extend beyond documents analysing the transaction at hand and marks a significant expansion when compared to the current Form CO.
- It is also worth noting that the Commission has introduced into the Short Form CO the requirement (at section 5(3)) that parties to a merger that benefits from simplified treatment (except for joint ventures active entirely outside the EEA) must also submit internal documents. In particular, they must submit copies of all presentations analysing the transaction that were prepared by or for or received by the board of management, board of directors, supervisory board or shareholders meeting. This is an entirely new requirement that will add significantly to what are supposedly streamlined data requirements.
So what does this mean in practice? In many cases, given the importance the Commission attaches to internal documents of the parties, it would have requested most of these materials anyway. However, the Simplification Package turns these into an automatic requirement in all cases. There is the possibility for section 5(4)(iii) in any event, that parties can request waivers of the obligation to provide documents. But while the Commission’s newly stated approach to waivers is welcome, in the past the Commission has been unwilling to grant such dispensation, particularly where a merger gives rise to some competition concerns.
It is therefore vital that companies bear these far-reaching internal document disclosure rules in mind when planning for a transaction.
The requirement to submit data on “all plausible alternative” markets
The revised Forms require parties to identify, and provide information in relation to, “all plausible alternative” market definitions. This could impose a high administrative burden on parties to submit data on a whole host of different hypothetical market definitions, particularly in cases where there is no precedent indicating how the market should be defined. The Commission tries to counter this in its press release by stating it is its “long-standing practice that companies need to explain the impact of their merger on ‘all plausible’ relevant product and geographic markets”, and that the revised Forms do not change this. However, the addition of this wording to the Form CO is important, and it will be interesting to see if the Commission gets tougher on parties in relation to the market definition data they submit.
What is pre-notification?
Pre-notification discussions take place with the Commission before making a formal notification. The parties submit a draft filing and discuss with the Commission the precise amount of information required. These discussions are also useful for identifying up-front possible areas where competition concerns may arise. According to Commission Best Practice guidelines, parties should initiate pre-notification contacts at least two weeks before notification. In practice, however, such discussions can run to many weeks and sometimes months.
What will change?
The revised forms now include an introductory section setting out the benefits of, and encouraging parties to engage in, pre-notification discussions. The Commission believes that the Simplification Package should result in a streamlined pre-notification process for three reasons:
- The overall reduction in information requirements in the notification forms will shorten the time needed for discussions with the Commission prior to formal filing.
- The improved system for request and grant of waivers (including the five working day period to consider waiver requests) should result in shorter pre-notification.
- The Commission has identified some merger cases where parties may consider not engaging in pre- notification. These are mergers falling in the scope of the simplified procedure on the basis they do not give rise to horizontal overlaps or vertical relationships (which the Commission believes account for 25% of cases under the simplified review).
Will the changes reduce the burden on business in practice?
The revisions are welcome in principle, and should go some way to shortening pre-notification discussions in straightforward cases. However, the length of pre-notification discussions is directly linked to the complexity of the case, and so difficult cases will continue to involve lengthy pre-notification, despite the revisions. In addition, as noted above, it is questionable whether the information requirements in the notification forms are actually reduced. On the other hand, the ability to “start the clock” and avoid having to go through pre- notification in cases where there are no horizontal overlaps or vertical relationships (i.e. point 3 above) should prove beneficial where the lack of such overlaps is clear-cut.
The Simplification Package contains some welcome amendments. However, overall it is not clear that the measures will result in the reduced burden on business claimed by the Commission. Merging parties should continue to consider competition issues at the outset of their transaction, and should be prepared for a time and resource intensive process to put together any EU filing required. The far-reaching requirements to disclose internal documents should be borne in mind throughout the transaction planning process.
Businesses should also be aware of the wider efforts by the Commission to reform the EU Merger Regulation. Over the summer it consulted on controversial proposals to bring non-controlling minority shareholdings within the scope of the Regulation, as well as revising the mechanisms for mergers to be referred from the Member States to the Commission and vice-versa. The Commission is expected to provide an update on its current thinking on these proposals in the coming months.
And it is not just the EU that is refining its procedures and practice. At Member State level there are changes afoot. In the UK, for example, reforms to the merger regime will take effect from 1 April 2014, including the introduction of a statutory 40 working day phase 1 investigation period, and giving the new Competition and Markets Authority the power to impose interim orders requiring parties to anticipated mergers to hold their businesses separate (a significant development in what will remain a voluntary regime).
Also noteworthy is that, on the same day as the Commission announced its Simplification Package, the German Federal Cartel Office published draft guidance on how to apply the “domestic effects” test under the German merger rules. These are designed to help companies assess whether their transaction does in fact have effects in Germany and therefore whether it triggers a notification obligation. Interestingly, the President of the Authority states that it aims “to relieve concentrations that do not affect Germany of unnecessary bureaucracy” – very similar wording to that of the Commission.