On 5 December 2013, the European Commission adopted a new filing regime - effective 1 January 2014 - under its "Merger Control Simplification Package," comprising a new EU Merger implementing regulation and amended merger notification and referral forms.
Though billed as reducing the administrative burden - particularly for non-problematic deals - a careful read of the fine print shows the information burden will often increase, potentially dramatically in some cases.
- Simplified Procedure category expands: Deals involving competitors with low combined market share (under 20%) or small increments in share (under 50% combined share with a de minimis increment) and/or no threat of input foreclosure (upstream/downstream market shares under 30%) qualify for the Simplified Procedure.
- Ex-EEA joint ventures: Deals involving ex-EEA joint ventures (which can be notifiable in the EU because the parents meet the EU revenue thresholds, even if their joint venture's business has zero impact in Europe) qualify for a "Super-Simplified" Procedure.
- Mandatory submission of documents going back years before the deal: The document burden increases. Deal-related internal documents must now be submitted even with short-form filings except if there are no overlaps or the joint venture has no activities in the EEA. For long-form filings, market related reports for the last two years plus any analysis of both the transaction filed, and any alternative transactions considered, must be submitted.
- "All plausible markets" data burden: The data burden also increases. The forms - both long-form and short-form - now require that data be collected and presented to correspond to "all plausible" geographic market definitions.
If your company is contemplating a deal that may trigger an EU Merger Regulation, these changes will need to be taken into account. Be mindful of the data and document disclosure requirements, and ensure that you have appropriate document creation guidelines in place so that your internal documents do not create any "hostages to fortune".
What are the main changes?
More Simplified Procedure cases
The welcome news is that the Commission has raised the market share thresholds under which transactions may qualify for a Simplified Procedure:
- for markets in which two merging companies compete ("horizontal overlap markets"), the threshold is raised from 15% to 20%;
- for markets where one of the merging companies sells an input downstream to a market where the other company is active ("vertically related markets"), the threshold is raised from 25% to 30%; and
- mergers can also qualify for a Simplified Procedure when the companies' combined market shares are between 20% and 50%, but where the merger's change to the level of concentration in the market (the so-called HHI delta) is less than 150 (the "safe harbour").
The Commission estimates that the Package will allow up to 70% of all notified mergers to qualify for a Simplified Procedure, an increase in around 10% from today's levels (in 2012, of the 283 notified cases, 170 were handled under the Simplified Procedure).
Therefore, an increasing number of merging parties can hope to have a less burdensome review process than under the current long-form Form CO procedure.
Note, however, that the Commission may revert to the long-form Form CO, for example, where the Commission considers that it is required, or where a Member State or a third party expresses substantiated competition concerns within the early stages of Phase I.
Therefore, parties seeking to take advantage of the Simplified Procedure bear the risk that their Short Form CO notification will be deemed "incomplete", with the notification only deemed "complete" once a full Form CO has been submitted. This is unlikely to happen bar exceptional circumstances (though we are aware of at least one case in the past where the Commission insisted on a long-form Form CO notification for a filing that was originally made on a Short Form CO notification).
No Pre-Notification for Certain Cases
The normal procedure requires notifying parties to engage the Commission in pre-notification contacts prior to lodging a formal notification (thereby starting the statutory merger timetable). Pre-notification is considered best practice, and allows the parties and the Commission to ensure that all the required information is contained in the notification form and the competition issues have been clearly identified and addressed prior to the clock starting.
The Commission proposes that parties should be able to notify certain mergers without these contacts in cases that do not give rise to horizontal overlaps and vertical links between the merging companies in the EEA. Based on 2008-2010 figures, the Commission estimates that around 25% of all cases may be lodged without pre-notification contacts.
Whether this encouragement by the Commission will have any practical effect is, however, debatable - except in all but the clearest of cases. This is because the Commission has also institutionalized the concept of "plausible markets" for the purposes of providing a basis for the assessment in the notification (Section 6).
Put simply, the Commission requires all data in respect of all plausible markets to be provided to it. Whilst guidance refers to previous Commission and Court precedents, industry reports, market studies and the parties' own documents, notifying parties will in any event want to engage in pre-notification discussions with the case team to ensure that no potential plausible market has been overlooked before formally filing.
More burdensome data and document disclosure requirements
The Commission claims to have streamlined the process in the Simplified Procedure and reduced the information requirements in the long-form Form CO.
It is doubtful however that the Commission's current practice of requiring parties to provide increasing levels of internal documents and data will be curtailed. A close review of the Package reveals that the burden on notifying parties is likely to be increased:
- New Section 5.3 of the Short Form CO requires parties to a transaction that does have horizontal or vertical overlaps yet remains under the Simplified Procedure to produce internal documents. This is an entirely new requirement. This Section requires the provision of "copies of all presentations prepared by or for or received by any members of the board of management, or the board of directors, or the supervisory board…or the other person(s) exercising similar functions…or the shareholders' meeting analyzing the notified concentration". Experience to date has shown that significant internal resources and time can be taken in efforts to locate, identify, review, catalogue and submit these documents. Previously, the Simplified Procedure did not require this additional effort from notifying parties; so this new requirement will clearly increase the burden of filing the Short Form CO.
- New Section 7.2 of the Short Form CO requires notifying parties relying on the "safe harbour" (i.e. combined market share <50% and market concentration increase in HHI terms <150) in a Simplified Procedure to explain why the transaction does not give rise to concerns. Regard must be had to the degree of market concentration, and whether the transaction would combine important innovators, eliminate an important competitive force or involve a firm that has promising pipeline products. In addition, the notifying parties must provide a description of: the intensity of research and development; the main innovations in products and/or services brought to market during the last 3 years; the pipeline products expected to be brought to the market within the next 3 years; and any important intellectual property rights owned or controlled. In short, additional work will be required of the parties to explain why the transaction does not give rise to any competition concerns. Whilst this is potentially less work that completing a long-form Form CO, it will remain to be seen if parties will be able to simply submit short explanations on these points or whether case teams will require submissions with extensive input from business personnel.
- New Section 8 of the Short Form CO requires notifying parties in transactions where there are no "reportable markets" (i.e. no horizontal or vertical overlaps at all) to provide descriptions of: each parties' business; the current and future business activities of the target; and why the transaction does not give rise to any reportable market in the EEA. For joint ventures with no activities in the EEA, there is an equivalent obligation to provide an explanation of the joint venture's current and future activities as well as an explanation as to why the joint venture will not have any effect (directly or indirectly) in the EEA. Again, further new work for notifying parties - that is likely to require comprehensive input from business personnel.
- New Section 5.4 of the long-form Form CO significantly broadens the scope of the document disclosure requirements. Whilst the adopted provision is narrower than had been originally proposed, and largely institutionalizes the existing practice of the Commission, its breadth will require notifying parties to produce increasing amounts of internal documents (the full text is replicated below).
"copies of the following documents prepared by or for or received by any member(s) of the board of management, the board of directors, or the supervisory board, as applicable in the light of the corporate governance structure, or the other person(s) exercising similar functions (or to whom such functions have been delegated or entrusted), or the shareholders' meeting:
- minutes of the meetings of the board of management, board of directors, supervisory board and shareholders’ meeting at which the transaction has been discussed, or excerpts of those minutes relating to the discussion of the transaction;
- analyses, reports, studies, surveys, presentations and any comparable documents for the purpose of assessing or analyzing the concentration with respect to its rationale (including documents where the transaction is discussed in relation to potential alternative acquisitions), market shares, competitive conditions, competitors (actual and potential), potential for sales growth or expansion into other product or geographic markets, and/or general market conditions;
- analyses, reports, studies, surveys and any comparable documents from the last two years for the purpose of assessing any of the affected markets with respect to market shares, competitive conditions, competitors (actual and potential) and/or potential for sales growth or expansion into other product or geographic markets.
Provide a list of the documents mentioned in this section 5.4, indicating for each document the date of preparation and the name and title of the addressee(s)."
The bolded text indicates of the principal areas where the disclosure obligation has been expanded - to the board of management's documents, to presentations, to documents discussing the transaction in the context of other alternative acquisitions, and a particular focus on documents related to affected markets (i.e. horizontal shares above 20% and vertical shares above 30%).
Current Commission practice requires parties to provide potentially hundreds if not thousands of internal documents, even below board of management level and also extending to e-mail correspondence. The EU Merger Regulation procedure requirements - particularly in Phase II cases - inch ever closer to the notoriously burdensome "Second Request" under the U.S. Hart Scott Rodino merger rules. This new Section essentially formalizes this practice.
- Revised Section 6 of the long-form Form CO (and Section 6.2 Short Form CO) stipulates that the parties must "submit, in addition to any product and geographic market definitions they consider relevant, all plausible alternative product and geographic market definitions". Plausible alternative product and geographic market definitions can be identified on the basis of previous Commission decisions and judgments of the EU Courts and (in particular where there are no Commission or Court precedents) by reference to industry reports, market studies and the notifying parties' internal documents. Whilst this clarification from the Commission is helpful, it does not reduce the potentially expansive effect of the requirement to provide all information for "plausible" markets. Experience to date has shown that case teams have a proclivity to ask for data on a very wide range of potential market definitions, segments, sub-segments and niches. This amendment confirms that trend, exposing notifying parties not only to more data disclosure requirements, but also to increased risks arising from incompleteness and failure to provide information. Greater pre-notification contacts - and the necessary time to facilitate them - is likely to arise as a result before a deal is notified.
Certain information requirements can be waived by the Commission
The Package flags those categories of information that may be suitable for an individual waiver request. The Commission commits to dealing with any such request within five business days as foreseen by its best practice guidance. However, this change represents a formalisation of existing practice and does not appear to offer notifying parties any increased opportunities to seek waivers of information.
Concluding Remarks - beware of the burden and ensure you have appropriate document creation guidelines for internal clients
Some of the changes will bring benefits to certain clients. In particular, the increase of the currently applicable market share thresholds for the identification of horizontally and vertically "affected markets" by 5 per cent to 20% and 30% respectively is a welcome development. The extension of the availability of the Simplified Procedure to transactions that only result in small increments in market concentration is also welcome.
However, these improvements are accompanied by other changes that are unlikely to streamline the information gathering requirements of the Form CO and the Short Form CO. The result is likely to be a significant net increase in the amount of information and documentation that must be submitted as part of a long-form Form CO or Short Form CO filing.
The Commission's efforts to increase transparency around the data and document requirements are welcome. But the concept of "plausible markets" and the effect of Sections 5.3 and 5.4 of the Short Form CO and the Form CO risk an overly broad interpretation and are likely to result in the submission of unrelated and irrelevant data and documents.
Whilst the Commission's accompanying press release provided some comfort by stating "documents that are completely unrelated to the notified transaction do not have to be provided", such statements are not binding on the Commission and are likely to be forgotten in practice.
Companies will err on the side of caution and over-inclusiveness to ensure compliance with the completeness obligation. Greater care will be required to ensure that internal documents do not create "hostages to fortune" in the merger review process (giving rise to what some have called "death by a thousand paper cuts").
More fundamentally, there is a total absence in the changes of any kind of commitment from the Commission to deal with pre-notification procedures in a more efficient manner or by reference to indicative timescales. Recent experience has been that pre-notification contacts have been increasingly lengthy and burdensome. It is unfortunate that the Commission has not provided indicative timescales for handling pre-notification matters, particularly in Simplified Procedure cases, to ensure that M&A transactions in Europe are reviewed efficiently.