On July 10, 2007, the European Commission (the Commission) adopted a Consolidated Jurisdictional Notice (the Notice). Its overall purpose is to provide up-to-date guidance on the Commission’s jurisdiction to review transactions under the current Merger Regulation. While the Notice is not legally binding, it reflects the Commission’s decisional practice and views on key aspects of EU jurisdiction. It is therefore an essential practical tool for the EU antitrust analysis of mergers.
The Notice consolidates and replaces four separate jurisdictional notices, adopted by the Commission in 1998 under the previous Merger Regulation (Council Regulation No. 4064/89). These dealt with, respectively, (i) the concept of concentration, (ii) the concept of full-function joint ventures, (iii) the concept of undertakings concerned and (iv) the calculation of turnover. The Notice covers all these issues of jurisdiction relevant for establishing the Commission’s competence under the current Merger Regulation, with the exception of case referrals. Referrals from national merger authorities to the Commission and vice versa are still dealt with by the Commission’s Notice on Case Referrals, which was adopted in 2005.
The Commission undertook this consolidation for several reasons. It considered that by bringing four notices into a single text it would provide more user-friendly guidance and allow the parties concerned to establish more easily whether the Commission has jurisdiction to review a planned transaction. Furthermore, this consolidation has provided the Commission with an opportunity to take into account recent case-law, in particular the position taken by the European Court of First Instance (the CFI) on jurisdictional issues, as well as to explain and update the Commission’s related decisional practice. Finally, the existing notices were to some extent outdated with regard to the current Merger Regulation (Council Regulation No 139/2004), in force since May 1, 2004.
While the Notice introduces some clarifications and new positions regarding the Commission’s jurisdiction in merger cases, it has also abandoned some of the proposals put forward in the draft version of the Notice, which would have widened the Commission’s jurisdiction over certain types of deals. Some of the key new points are set out below: Certain changes in the scope of pre-existing joint ventures are notifiable. Firstly, where the parents enlarge the joint venture’s activities and the enlargement entails the acquisition of the whole or part of another company from the parents, an EU merger filing may be required. Secondly, where parent companies transfer to the joint venture additional assets, contracts, know-how or other rights that constitute the basis of an extension of the joint venture’s activities to new product or geographic markets, the change is notifiable, if the joint venture performs those new activities on a full-function basis. Thirdly, the notification requirement is triggered where a joint venture’s activities change so that it becomes “full function”, for example, following a change in organizational structure. A joint venture is considered full function if it performs on a lasting basis all the functions of an autonomous economic entity. A concentration arises once the parents have taken a decision that leads to the joint venture meeting the full functionality criterion. As before, non-full function joint ventures are not caught by the Merger Regulation.
The Notice also highlights the specific challenges faced by private equity firms and other investors, who may need to monitor a multitude of investments in companies and joint venture projects and must identify the point at which a notifiable EU merger (concentration) arises, e.g. as a result of creeping changes in the control of one of their investments or significant changes in its activities or assets. This can be a particular challenge in the case of joint ventures where, as noted above, an EU merger filing can be triggered by the transfer of additional assets to a pre-existing joint venture or its gaining of more autonomy from its parent companies. Where such changes are sufficient to bring about a concentration, as this is defined in the Merger Regulation and the parties concerned meet the EU merger thresholds, the Commission’s approval must be obtained before such changes occur.
The Commission has in the past identified so called “antitrust warehousing” as an area of concern. It has now introduced more clarity in the Notice on EU jurisdiction over such deals. Antitrust warehousing involves the acquisition of a target by an intermediary buyer, usually by a bank, on behalf of the ultimate buyer. The target is “parked” with the interim buyer pending antitrust approval of the ultimate acquisition and the seller is paid regardless of whether EU approval is granted. This two-step process is sometimes used in transactions involving significant antitrust issues, so that the antitrust risk of the transaction is removed from the seller. The Commission does not favor such structures, as indicated in its review of Vivendi/BMG Publishing in 2006. Under the new Notice, where the first transaction is only undertaken to facilitate the second transaction and the first buyer is directly linked to the ultimate acquirer, the Commission will examine the acquisition of control by the ultimate acquirer as provided for in the agreements entered into by the parties. This will be considered as the first step of a single concentration. Accordingly, companies planning to rely on “antitrust warehousing” need to take a fresh look at whether such a technique can still be employed in light of the Notice.
For the first time in this type of Notice, the Commission addresses out-sourcing arrangements. The Notice underlines that outsourcing deals, e.g. where a company outsources IT services, can trigger an EU merger filing. A notifiable concentration can arise in an outsourcing transaction where associated assets and/or personnel are transferred to the outsourcing service supplier. In order to qualify as a notifiable “concentration”, such a transfer must include at least the core elements required to allow the acquirer to gain a market presence or to build up such a presence within a short time-frame (similar to the start-up period for joint ventures). In practice, this means that the outsourcing service supplier should be able to provide the outsourced services not only to the customer that has outsourced its business but also to other parties. The Commission’s view is that the turnover allocated to the outsourced business unit should normally be calculated on the basis of previously internal turnover or of publicly quoted prices, where such prices exist. If such an approach does not correspond to a market valuation of the activities in question, the forecast revenues to be received by the outsourcing service supplier from the former parent company may be a suitable proxy.
Finally, the Commission provides guidance on its assessment of control over investment funds and their portfolio companies. Although the Commission maintains that it will analyze structures involving investment funds on a case-by-case basis, it has nonetheless explained some general features of such structures based on the Commission’s experience and its current practice.