Impact of the economic downturn
Unsurprisingly, the global economic downturn played a significant role in shaping the European Commission’s (the Commission) enforcement policy and activity in 2008. This manifested itself in at least three ways.
- First, the number of merger filings made to the Commission in 2008 (namely, 347) fell back from the record number seen in 2007 (402). But this did not mean a quieter year for the Commission’s mergers staff – they had to deal with many large and complex mergers, as industries restructure.
- Second, the perilous financial situation faced by a number of target businesses – particularly in the banking and insurance sectors – forced the Commission in several cases to show a more flexible approach to its merger review procedure. In particular, it showed an increased readiness to grant individual derogations from the EC Merger Regulation’s (ECMR) suspension obligation, which otherwise prohibits the closing of a notifiable merger before clearance. Recognising the potentially fatal impact that any delay could have had on a proposed emergency rescue merger, the Commission granted six such derogations in 2008, including to Banco Santander on its proposed UK acquisition of Bradford & Bingley (reportedly, within 24 hours of the deal’s being notified).
- Third, as part of its broader attempts to be seen as a ‘consumer champion’, the Commission has scrutinised very closely mergers that could have a direct effect on consumers – for example, in the petroleum and food sectors.
That said, the Commission has been at pains to emphasise that, even in these exceptional times, any such procedural flexibility will not extend to the substantive competitive assessment. It continues to apply the same (stringent) criteria to any ‘failing firm’ arguments put forward by the parties, has required divestment remedies in BNP Paribas’s acquisition of Fortis’s Belgian business and is enforcing the remedies given by Fortis on its acquisition of ABN AMRO assets. Despite the short-term political pressures that the Commission is inevitably facing, it clearly has one eye on ensuring that, as and when the downturn ends, what emerges on the other side are markets that remain as competitive as possible.
Phase I cases
During 2008, 91 per cent of cases were cleared unconditionally in Phase I, with 6 per cent resolved through Phase I remedies and 3 per cent sent for in-depth Phase II scrutiny. See the pie chart on the next page.
Well over half of the Phase I unconditional clearances were dealt with under the ‘simplified procedure’ mechanism, which allows parties to submit slimmeddown filings in cases where certain criteria are met, indicating that substantive issues do not arise. However, in at least five cases where the Commission initially accepted notification on the simplified procedure basis, it subsequently changed its mind and required the parties to submit full notifications instead (in some cases, causing the review clock to be restarted). This is consistent with its tendency to demand ever-greater levels of information from merging parties. Not only does this place additional burdens on the parties, but it can prolong the regulatory timetable, in turn delaying closing and creating uncertainty. For chart, see original document
Phase II cases
In 2008, the Commission decided 14 cases after a Phase II process. Nine of those were cleared unconditionally (compared with five out of 10 in 2007) and the remainder were cleared with remedies. There were no outright prohibitions, although two deals were abandoned – BHP Billiton’s bid for Rio Tinto and OMV’s bid for MOL – apparently because the scale of the remedies being demanded by the Commission in Phase II was unacceptable to the bidders. A consistent feature in 2008 was the Commission’s use of its powers to stop the review timetable while the merging parties responded fully to its supplemental information requests.
‘Referral up’ from member states
The most recent set of changes to the ECMR, which came into effect in May 2004, introduced a mechanism allowing (but not obliging) merging parties to ask the Commission to review a transaction that does not satisfy the ECMR turnover thresholds but is notifiable in at least three member states. The main attraction of this mechanism for merging parties is the ability to avoid multiple national filings across the EU, thereby (at least in theory) reducing the overall information burden and getting onto a single-track, possibly quicker, timetable.
From 2004 to 2007, the system appeared to be popular, attracting a steadily increasing number of applications year-on-year. However, in 2008 the number of applications fell sharply, from 52 in 2007 to just 23. This may reflect a growing dissatisfaction with the procedure among those businesses and advisers who have experienced it first-hand: for example, concern has been voiced about the length of the administrative timetable and the unduly heavy information burden that the process places on the merging parties.
The Commission has launched a public consultation on how well the mechanism is working and is obliged under the ECMR to report its findings by July 2009. If the latest statistics do indeed reflect reservations among potential users about the existing system (and hence a reluctance to use it), it is hoped that the rules will be amended to address them. The availability of an effective referral procedure is not only in the interests of business, but also achieves a more efficient allocation of regulatory resources across the network of EU competition authorities.
Co-operation with US agencies
During 2008, a series of high-profile mergers raising ‘non-horizontal’ issues (discussed further below) triggered notification requirements on both sides of the Atlantic. The Commission has stressed publicly its close co-operation with the US antitrust agencies in those cases, including exchanging of information (following waivers from the parties) and of views on analytical methods.
The respective agencies are clearly keen to avoid a repeat of the politically charged fall-out from previous cases in which they reached divergent outcomes, notably in GE/ Honeywell (2001), which also involved non-horizontal merger issues, and in the Microsoft decision (2004) concerning abuse of dominance.
From the perspective of merging parties, such cooperation should in many cases be beneficial, particularly to the extent that it facilitates greater procedural efficiency as well as consistency of approach on substantive matters and, if required, remedies.
Treatment of non-horizontal mergers
In late 2007, the Commission published new guidelines on its approach to vertical mergers (between parties at different levels of the supply chain) and conglomerate mergers (between parties whose activities are neither horizontally nor vertically related, but who may be active in closely related markets). Those guidelines were applied for the first time in 2008, in a series of cases that provide some interesting insights.
Of the 14 cases decided in 2008 following a Phase II review, six were examined solely or predominantly on the basis of non-horizontal issues. At first sight, this proportion may seem surprisingly high, particularly given the clear acknowledgement in the Commission’s guidelines that non-horizontal mergers are generally less likely to lead to competition concerns than horizontal mergers. However, this apparent tendency towards a longer and deeper review of non-horizontal cases may be explained by the complexity of the economic theory involved in such analysis and the often-difficult task of applying it across multiple markets (eg upstream and downstream markets in the case of vertical mergers, and also two-sided markets).
Moreover, the picture for 2008 may to some extent have been skewed by the fact that among the six nonhorizontal Phase II cases, four involved products in ‘hightech’ markets (TomTom/Tele Atlas; Nokia/Navteq; Google/ DoubleClick and IBM/Telelogic). Such markets typically raise additional challenges for the substantive competition analysis: for instance, assessment of market power can be difficult in emerging or fast-moving, innovation-driven markets and/or where network effects are involved.
Equally important to note, though, is that all bar one of those six non-horizontal Phase II mergers were ultimately approved unconditionally. So, although the parties involved needed to be patient in navigating the Commission process, they were in the end able to allay the Commission’s preliminary concerns.
Comparisons with the US approach are also worth drawing. It is widely acknowledged that the Commission’s stance on non-horizontal mergers remains tougher than that of the US agencies. This appears broadly to be supported by the respective treatment of the cases that were notified on both sides of the Atlantic in 2008. The TomTom/Tele Atlas, Nokia/Navteq and IBM/ Telelogic mergers were all approved unconditionally by the US agencies in under one month. In contrast, the Commission took those cases into Phase II proceedings before granting unconditional clearance, with the longest case (TomTom) lasting close to seven months. Even allowing for the fact that the competitive structure and dynamics of the markets in each case may have differed materially between the EU and US (and hence justified different levels of scrutiny), it is striking how much longer the Commission took than the US agencies in arriving at the same outcomes.
Revised guidance on remedies
The Commission published a revised notice on merger remedies in October, following a period of public consultation. Rather than introducing any wholesale reforms, it largely consolidates the recent case law of the European courts and crystallises the Commission’s existing practice. Such clarification is welcome.
The notice does introduce one potentially significant new procedural requirement, however. Parties wishing to offer remedies in merger cases now have to do so using a ‘Form RM’, which requires detailed information to be provided (although the Commission generally required such information to be provided in any event and may be willing to waive certain requirements in appropriate circumstances). This may have an effect on the parties’ remedies strategy, particularly if commitments are offered in Phase I, where timing is tight. It is likely that preparation of the Form RM will need to begin before the parties have their first ‘state of play’ meeting with the Commission – ie when the precise scope of the remedy (or even the need for a remedy) may still be unclear.
The Commission remains conscious that this is a difficult – and important – area to get right. The difficulty is evidenced by the results of a detailed internal study carried out by the Commission in 2005, which showed that, across a sample of past cases, only 57 per cent of the remedies it accepted turned out to be fully ‘effective’ in addressing the competition concerns identified. The importance is evidenced by the number of cases that continue to be resolved by remedies. In 2008, as with most recent years, a majority of cases (67 per cent) in which the Commission identified serious competition concerns during its Phase I review were cleared with commitments, rather than being sent to Phase II. Similarly, the five cases that were not unconditionally cleared at the end of a Phase II review were all resolved by remedies instead of outright prohibition.
The European Courts handed down judgments in three high-profile merger cases in 2008 (Aer Lingus, SonyBMG/ Impala and MyTravel). Each has important implications going beyond the particular case.
Treatment of non-controlling minority stakes
In 2007, the Commission prohibited Ryanair’s proposed public takeover of Aer Lingus. Two appeals were made to the Court of First Instance (CFI). First, Ryanair appealed the prohibition decision – its appeal is still pending. Separately, Aer Lingus appealed the Commission’s refusal to require Ryanair to divest the 29 per cent non controlling stake it had built up in Aer Lingus. Aer Lingus also applied for interim measures to prevent Ryanair from exercising the voting rights attaching to those shares, pending the outcome of the main appeal.
In rejecting Aer Lingus’s interim application in March 2008, the CFI president made some important, preliminary observations on a variety of issues that are of wider application:
- if the Commission blocks a proposed merger, it (the ommission) has no power to require divestment of a stake in the target that does not amount to ‘control’ within the meaning of the ECMR;
- during its review, the Commission is entitled (but not obliged) to ask parties to refrain from exercising voting rights attached to those shares; and
- the acquisition of such a stake remains open to scrutiny under those national, member state merger control regimes that apply a lower threshold of control (such as Germany and the UK). In principle, it also remains subject to the EC Treaty rules prohibiting anticompetitive agreements (article 81) and abuse of dominance (article 82).
Procedural safeguards for merging parties
In July, in Impala, the European Court of Justice (ECJ) set aside a judgment of the CFI in an appeal brought by a third party complainant against the Commission’s clearance in 2004 of the Sony-BMG joint venture. The ECJ’s judgment clarified a number of important procedural safeguards and rights of defence for merging parties. Details are contained in our briefing from July (ECJ reinforces procedural safeguards for merging parties). Damages claims against the Commission In September, the CFI rejected MyTravel Group’s claim for damages arising from the unlawful prohibition by the Commission in 1999 of the proposed merger between MyTravel (formerly Airtours) and First Choice. In doing so, the CFI emphasised the Commission’s wide margin of discretion in mergers cases and the need to protect its proper functioning against undue fear of damages claims. Details are contained in our briefing from September (European Court rejects claim for damages arising from unlawful merger prohibition).
What to expect in 2009
The following key developments are anticipated for 2009.
Possible reform of ECMR jurisdictional thresholds and referral mechanisms
In conjunction with the consultation on referral mechanisms (see above), the Commission is considering whether the ECMR’s turnover-based notification thresholds need adjustment. Both reviews should be completed in 2009 and may lead to reforms.
There are several high-profile merger cases pending before the European courts, including further appeals arising from the Ryanair/Aer Lingus and SonyBMG/ Impala cases referred to above. It is also hoped that judicial clarification on the treatment of ‘warehousing’ structures under the ECMR will be given in the longawaited Lagardère case.
A new administration
The present Commission’s term will expire in autumn 2009. The identity of any new Competition Commissioner is always awaited with interest, given the fresh perspectives they are likely to bring to the role and, perhaps, different enforcement priorities.
Effect of the financial and economic crisis
If, as widely expected, the current downturn continues to dominate the economic landscape well into 2009, the Commission’s competition policy (including in the mergers field) is likely to come under increasing political pressure from a number of quarters. Whether, in the face of such pressure, the Commission will be able to maintain the firm stance it has adopted to date remains to be seen. For all concerned, there may be challenging times ahead.