On 7 October 2016, the EU Commission launched a public consultation ("the Consultation") on the functioning of certain procedural and jurisdictional aspects of EU merger control as set out in Council Regulation No. 139/2004 ("the EU Merger Regulation").
The EU Merger Regulation is one of the main instruments of EU competition law and it grants the EU Commission exclusive competence to vet certain large scale mergers defined by a number of turnover-based jurisdictional thresholds. Its principal objective is to ensure that competition in the internal market is not distorted or restricted by companies engaging in mergers or "concentrations" (as they are referred to in the EU merger regulation).
The Consultation builds on the feedback received from the EU Commission's White Paper of 2014 entitled "Towards More Effective EU Merger Control" (COM (2014) 449 Final) ("2014 White Paper") but also highlights recent worries that the acquisition of certain fledgling technology and pharmaceutical companies with significant potential may be escaping appropriate EU merger control scrutiny.
The EU Commission has invited comments from businesses, trade associations and public authorities, which closed recently, on the 13th of January 2017.
The EU Merger Regulation, which was originally adopted in 1989 and came into force in the year 1990, has been the subject of regular reviews (notably those in 2003 and from 2013 onwards) to assess its functioning and identify possible areas for refinement, improvement and simplification of its provisions.
In the 2014 White Paper the EU Commission put forward a cocktail of highly controversial reforms, namely the proposed regulation of minority non-controlling shareholdings and on the other highly technical and procedural refinements such the simplification of the notification process for certain categories of merger that normally do not raise competition concerns.
Following the results of the feedback on the 2104 White Paper the introduction of controversial proposals to review minority non-controlling shareholdings were shelved (at least for the time being) but they considered that proposals to take certain transactions that are not a threat to competition outside the Commission's merger scrutiny should be taken forward.
Generally however it concluded that the EU merger control system worked well and that no fundamental overall of the system was needed.
However, following on from the above, recent experience in enforcing the EU merger control rules showed that the effectiveness of current solely turnover- based jurisdictional thresholds should also be a subject of further consultation.
The Consultation principally covers the following areas.
- Review of turnover thresholds: whether it is appropriate to amend the solely turnover based jurisdictional threshold to catch highly valued acquirers of target companies principally in the digital and pharma sectors that have not yet generated substantial turnover and are at the moment slipping EU merger scrutiny.
- Simplification of the merger control process: whether certain categories of cases that do not generally raise competition concerns can be removed altogether from the EU merger control net.
In addition the Consultation covers a number of other more detailed technical and procedural reforms primarily relating to the referral of cases between the EU Commission and the Member States and the other workings of the EU Merger Regulation. In the interests of space, these more technical proposals are not covered in this article.
Review of turnover thresholds
Currently the EU merger control regime only applies if the turnover based jurisdictional thresholds apply as set out in Article 1 of the EU Merger Regulation. However, a debate has emerged on the effectiveness of these turnover-based jurisdictional thresholds. The issues turn on whether these thresholds allow the capture of all transactions which could potentially have an impact on competition in the internal market.
Recent experience under the EU Merger Regulation has shown that transactions in certain crucial sectors of the economy could be slipping the net. The sector most affected is the digital economy where new services/product offerings are able to build up a significant user base before the business concerned is able to earn a substantial turnover. Businesses such as these can have a significant impact on the relevant market's competitive landscape.
Certain tech business models may also involve collecting and analysing large amounts of data. The initial gathering phase does not generate, in most cases, significant turnover. Data gatherers can also have a similar marked effect on competition within their sector.
Therefore the EU Commission has concluded that players in the digital economy may have considerable actual or potential market impact. This impact is usually reflected in high acquisition values despite the fact that little or no turnover has been generated.
Acquisitions of such companies with no substantial turnover are unlikely to be captured under the current turnover-based thresholds under the EU Merger Regulation. This is despite the fact that the acquired company may already play a competitive role, hold commercially valuable data and/or have considerable market potential for the future.
As part of the Consultation the Commission is seeking views as to whether it should complement the existing turnover based jurisdictional thresholds of the EU Merger Regulation with additional notification requirements based on additional criteria such the transaction value.
But it is not just in the digital economy where an enforcement gap may exist. Other sectors also bear consideration such as the pharmaceutical industry. The EU Commission cites a number of instances where major pharmaceutical companies have entered into high value acquisitions of small bio-tech companies which predominantly concentrate their activities on researching and developing new treatments which may have significant impact on the market but do not yet generate substantial turnover.
In December 2013 the Commission adopted a package of measures ("the Simplification Process") aimed at simplifying merger control procedures to the greatest possible extent without having to resort to amending the provisions of the EU Merger Regulation itself.
The simplified procedure allows companies to submit less market share and other information than the full merger notification needed under the EU Merger Regulation which helps reduce the burden on business.
The Simplification Package resulted in a widening of the scope of the application of the simplified procedure for non-problematic cases as well as streamlining and simplifying the forms for notifying mergers to the Commission. Since that package entered into force on 1 January 2014, the number of cases dealt with under the simplified procedure has increased between January 2014 - September 2016 to around 69%.
The Commission Notice on the Simplified Procedure ("the Notice") applies to each of the following categories of concentration):
(i)Non-EEA Joint Ventures: These are transactions where two or more undertakings acquire joint control of a joint venture provided that the joint venture has no or negligible actual or foreseen activities in the EEA where the turnover of the contributed assets is less than €100 million in the EEA and the total value of the assets transferred to the joint venture is less than €100 million at the time of notification.
(ii)No Overlapping Activities: These cases are where two or more undertakings merge or where one or more undertakings acquire sole or joint control of another undertaking provided that none of the parties to the concentration are engaged in business activities in the same product and geographic market or in a product market which is upstream or downstream from the product market in which any other party to the concentration is engaged.
(iii) Overlapping Activities below Certain Market Share Thresholds: Transactions where two or more undertakings merge and the combined market share of all the parties to the transaction is in the context of horizontal relationships is less than 20% or in the case of vertical relationships 30%.
(iv)Acquiring Sole Control: Transactions where a party is to acquire sole control of an undertaking over which it already has joint control; and
(v) Low Concentration: Transactions where two or more undertakings merge and both of the following conditions are fulfilled:(a) the combined horizontal market share of all parties concerned is less than 50%; and (b) the increment of the HHI index resulting from the transaction is below 150.
The EU Commission under the Consultation is now seeking views as to whether any or all of the above transactions currently subject to the simplified procedure such as the creation of non- EEA joint ventures should be excluded from the scope of the EU Commission's merger review altogether. This would require amendments to the EU Merger Regulation. The Commission hopes that by making the procedure simpler it could further cut costs and reduce the administrative burden on businesses.
The EU Commission's current initiative to cut the costs of notifications and reduce the administrative burden on businesses in non-problematic cases is to be widely welcomed as are making other procedural aspects of the EU Merger Regulation process more efficient.
The unknown quantity in this Consultation will be the third parties' reaction to the extension of the EU Commission's jurisdiction to transactions of high value. Whilst the high level case for those extra controls is argued well in the Consultation paper, the way, and crucially, the level at which they are introduced is important because it could impose more, not less, administrative burden and cost.
This article first appeared in Governance + Compliance Magazine.