Different classes of merger

Transcription

1 Merger Control

2 Different classes of merger Horizontal Vertical Conglomerate ICN Merger Working Group, Analytical Framework Sub-group The Analytical Framework for Merger Control (Final paper for ICN annual conference on 28 and 29 September 2002, Office of Fair Trading, London)

3 Why regulate merger activity? The purpose of merger laws is to capture mergers and acquisitions of undertakings that may have adverse effects on competition. To ensure that such reorganization of cooperation does not cause lasting damage to competition, it is important to regulate concentrations that will significantly impede effective competition in the common market or in a substantial part of it. Merger control is not about the protection of individual shareholder s interests. These are issues that company laws tackle. Merger control is carried out in the public interest rather than on behalf of shareholders.

4 Merger history Year Event 1962 Articles 101 (anticompetitive agreements) and 102 (abuse of dominance) come into force. Their application to mergers is limited and unclear EC Merger Regulation comes into force. Test in terms of dominance (dominance test) Nestlé/Perrier: First merger remedy obtained by the Commission based on collective dominance Kali & Salz: ECJ upholds collective dominance under ECMR 1998 Supplementary thresholds for determining when a merger has a Community dimension and so comes within ECMR New ECMR. Test directly in terms of effect on competition (SIEC). * Europe only developed merger control in 1989

5 Article 1 Scope Jurisdiction

6 Is there a concentration? A concentration shall be deemed to arise where a change of control on a lasting basis results from: (b) the acquisition by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings.

7 Concentration Concentrations COMP/M.1864 Glaxo Wellcome/Smith Kline Beecham (This was a concentration within the meaning of Article 3(1)(a)) Example Glaxo Wellcome and Smith Kline Beecham merger resulted in a new company called Glaxo Smith Kline whose board would consist of fourteen directors, drawn equally from the two merging parties. Case IV/M.1891 BP Amoco/Castrol (This was a concentration within the meaning of Article 3(1)(b)) The takeover whereby BP Amoco acquired sole control of the whole of Castrol by way of a public bid for all its share capital removed Castrol from the market. Case COMP/M.4439 Ryanair/AerLingus Ryanair began to acquire a substantial number of shares in Aer Lingus and held per cent of them before it launched a public bid for the entire share capital of Aer Lingus. The concentration was notified and blocked; however, Ryanair retained the per cent of shares that it had purchased before the notification, and the Commission refused to entertain Aer Lingus request that the purchase of these shares also constituted a concentration so that Ryanair should be ordered to sell these off. Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (European Commission) [2008] OJ C95/1

8 Is there a concentration? A concentration shall be deemed to arise where a change of control on a lasting basis results from:

9 T-411/07 Aer Lingus Group plc v Commission From a legal point of view, the concept of concentration used in the merger regulation is important since it provides the basis for the Commission s powers under that regulation. [...]... [a]ny transaction or group of transactions which brings about a change of control on a lasting basis by conferring the possibility of exercising decisive influence on the undertaking concerned is a concentration which is deemed to have arisen for the purposes of the merger regulation. Such concentrations have the following characteristics in common: where before the operation there were two distinct undertakings for a given economic activity, there will only be one after it. Unlike in the case of a merger in which one of the two undertakings concerned ceases to exist, the Commission thus has to determine whether the result of the implementation of the concentration is to confer on one of the undertakings the power to control the other, that is to say a power which it did not previously hold. That power to control is the possibility of exercising decisive influence on an undertaking, in particular where the undertaking with that power is able to impose choices on the other in relation to its strategic decisions. It is apparent from the above that the acquisition of a shareholding which does not, as such, confer control as defined in Article 3 of the merger regulation does not constitute a concentration which is deemed to have arisen for the purposes of that regulation. On that point, European Union law differs from the law of some of the Member States, in which the national authorities are authorised under provisions of national law on the control of concentrations to take action in connection with minority shareholdings in the broader sense.

10 Decisive Influence For the purposes of Article 3 of the Merger Regulation decisive influence means the power to determine actions which bring about the strategic commercial behaviour of an undertaking. This power may include both positive rights to manage and decide the commercial policy of another undertaking, as well as the ability to veto decisions relating to the strategic commercial behaviour of another undertaking such as, typically, the budget and the business plan in the context of a JV undertaking. It is the possibility of exercising decisive influence, rather than the actual exercise of such influence, that determines whether control has been acquired. In practice, whether a transaction gives rise to an acquisition of control depends on a number of legal and/or factual elements.

11 Direct or indirect control Normally control is acquired by the persons or undertakings which hold, or are entitled to, the rights conferring control over the undertaking. The obvious example is direct ownership of shares giving the right to cast sufficient votes to exercise decisive influence over the undertaking concerned. Less commonly, the formal holder of the rights conferring control differs from the person or undertaking which can actually exercise the rights. For example, undertakings may use another person or undertaking as a vehicle for the acquisition of the shares necessary for a controlling interest, and may also exercise the rights through that person or undertaking. In such circumstances control is acquired by the person or undertaking which, in reality, has the power to control the target undertaking and not the formal holder. In Cementbouw v Commission the General Court concluded that where rights conferring control are held by a commercial company, these can be attributed to its sole or majority shareholder or to those jointly controlling the company since the company will comply in any event with the decisions of its shareholder(s). Where a number of different entities in the same group each hold shares which, when combined, give rise to a controlling shareholding, the combined interests will normally be attributed to the parent company. In other cases, indirect control may be established by other evidence, including factors such as shareholdings, contractual relations, sources of financing or family links. (In Case T-282/02 Cementbouw v Commission [2006] ECR II-319, [2006] 4 CMLR 1561, para 58)

12 Object of control The object of control can be undertakings which constitute legal entities or the assets of such entities or only some of the assets. As defined in Article 3(1)(b) of the Merger Regulation, a concentration can occur where control of the whole or part of one or more undertakings is acquired. Thus, a concentration may arise where only some of the assets of an entity such as intellectual property rights (trade marks, patents or copyrights) are acquired or licensed on an exclusive basis, provided that those assets constitute a business which has a market presence and to which a market turnover can be clearly attributed.

13 Is there scope? Articles 1 and 5: concentrations having a Union dimension: the EUMR applies to concentrations that have a Union dimension. The meaning of this term is found in Article 1, and is further explained in the Jurisdictional Notice. It is determined by reference to the turnover of the undertakings concerned, including their affiliated undertakings as set out in Article 5. (Whish and Bailey)

14 Community (Union) dimension The Community dimension test is based on turnover, and attempts to identify those transactions that have an appreciable economic impact on the Union. Articles 1(2) and (3) state the criteria used to determine whether a concentration has a Union dimension. The Merger Regulation gives the Commission jurisdiction over concentrations which have an EU dimension, a concept which depends on the objectively quantifiable criteria of the respective turnovers of the undertakings concerned at the date of the transaction or its notification. The jurisdictional tests relate only to the economic size of the parties and do not depend on the substantive impact of the transaction, nor on whether the concentration will have any effects within the EU. This means that the Merger Regulation can apply to concentrations which take place outside the EU and regardless of the nationalities of the parties. There are two, alternative, sets of turnover tests. The fact that the undertakings are located outside the Community does not in itself prevent the application of the Merger Regulation. In Boeing/McDonnell Douglas, the undertakings concerned were located outside Europe, but because of the significant European market share involved the EC exercised extraterritorial jurisdiction.

15 Alternative Tests original tests (unchanged since their introduction in 1990) alternative tests (introduced in 1998) Worldwide threshold the combined aggregate worldwide turnover of all the undertakings concerned exceeds 5,000 million EU-wide threshold the aggregate EU-wide turnover of each of at least two of the undertakings concerned exceeds 250 million Two-thirds rule a concentration does not have an EU dimension if each of the undertakings concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same Member State According to Article 1(2) EUMR lower worldwide threshold lower EU-wide threshold additional three Member States thresholds two-thirds rule the aggregate worldwide turnover of all the undertakings concerned exceeds 2,500 million the aggregate EU-wide turnover of each of at least two of the undertakings concerned exceeds 100 million in each of at least three Member States: the combined aggregate turnover of all the undertakings concerned is more than 100 million; and each of at least two of the undertakings concerned achieves a turnover of more than 25 million (in each of the same three Member States identified); and a concentration does not have an EU dimension if each of the undertakings concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same Member State. Article 1(3) of the EUMR

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17 Article 5 Calculation of turnover Turnover shall comprise the amounts derived by the undertakings concerned in the preceding financial year from the sale of products and the provision of services falling within the undertakings' ordinary activities after deduction of sales rebates and of value added tax and other taxes directly related to turnover. Turnover, in the Community or in a Member State, shall comprise products sold and services provided to undertakings or consumers, in the Community or in that Member State

18 National Thresholds *Source: Linklaters European Merger Control

19 Community Dimension Does the concentration significantly impede effective competition in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position? The SIEC-test is the method of analysis

20 SIEC considerations Material assessment on-going process Market definition? Target s field of business? Identifying plausible relevant market(s) actually or potentially affected by the Transaction Effects on competition? Any horizontal overlap with the acquirer? Any vertical relationship between the markets of the target and acquirer The rationale for the transaction? Likely reactions Competitors? Suppliers? Customers?

21 Merger Control (Notification)

22 EUMR lays down the rules for notification of proposed transactions, establishes the timetable for the process, provides the investigative powers for the Commission and sets out the rights of the parties. The most significant innovations in the Regulation 139/2004 in terms of procedures include the update of Best Practice Guidelines, and the amendments regarding notification process.

23 Pre-notification The procedure of pre-notification contacts was in the early days of merger enforcement rather informal. Currently, however, prenotification meetings between the parties and the Commission are described in detail in the Best Practice Guidelines issued by the Commission and formally regarded as one of the most important aspects of notification procedures under the EUMR and recognized by the General Court as an example of the principle of good administration. Case T-3/93 Air France v Commission [1994] ECR II-121, para 67

24 Notification EUMR provides that concentrations that consist of merger or acquisition of joint control must be notified jointly by the parties involved. In all other cases, the notification must be made by the person or undertaking that acquires control of all or part of one or more undertakings. Proceedings under the Merger Control Regulation have two phases, known as Phase I and Phase II Commission Regulation (EC) No. 802/2004 implementing Council Regulation (EC) No. 139/2004 (the Implementing Regulation ) and its annexes

25 Form CO Section 1: Description of the concentration Section 2: Information about the parties Section 3: Details of the concentration Section 4: Turnover Section 5: Supporting documentation Section 6: Market definitions Section 7: Information on affected markets Section 8: Competitive conditions in affected markets Section 9: Efficiencies Section 10: Cooperative effects of a joint venture Section 11: Declaration

26 Notification (Article 4) Article 4 Prior notification of concentrations and pre-notification referral at the request of the notifying parties 1. Concentrations with a Community dimension defined in this Regulation shall be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest. Notification may also be made where the undertakings concerned demonstrate to the Commission a good faith intention to conclude an agreement or, in the case of a public bid, where they have publicly announced an intention to make such a bid, provided that the intended agreement or bid would result in a concentration with a Community dimension. For the purposes of this Regulation, the term "notified concentration" shall also cover intended concentrations notified pursuant to the second subparagraph. For the purposes of paragraphs 4 and 5 of this Article, the term "concentration" includes intended concentrations within the meaning of the second subparagraph. 2. A concentration which consists of a merger within the meaning of Article 3(1)(a) or in the acquisition of joint control within the meaning of Article 3(1)(b) shall be notified jointly by the parties to the merger or by those acquiring joint control as the case may be. In all other cases, the notification shall be effected by the person or undertaking acquiring control of the whole or parts of one or more undertakings.

27 Articles 4(4) and 4(5) provide that the parties may make reasoned submissions for the reallocation of cases to or from the Commission. 4. Prior to the notification of a concentration within the meaning of paragraph 1, the persons or undertakings referred to in paragraph 2 may inform the Commission, by means of a reasoned submission, that the concentration may significantly affect competition in a market within a Member State which presents all the characteristics of a distinct market and should therefore be examined, in whole or in part, by that Member State. The Commission shall transmit this submission to all Member States without delay. The Member State referred to in the reasoned submission shall, within 15 working days of receiving the submission, express its agreement or disagreement as regards the request to refer the case. Where that Member State takes no such decision within this period, it shall be deemed to have agreed. Unless that Member State disagrees, the Commission, where it considers that such a distinct market exists, and that competition in that market may be significantly affected by the concentration, may decide to refer the whole or part of the case to the competent authorities of that Member State with a view to the application of that State's national competition law. The decision whether or not to refer the case in accordance with the third subparagraph shall be taken within 25 working days starting from the receipt of the reasoned submission by the Commission. The Commission shall inform the other Member States and the persons or undertakings concerned of its decision. If the Commission does not take a decision within this period, it shall be deemed to have adopted a decision to refer the case in accordance with the submission made by the persons or undertakings concerned. If the Commission decides, or is deemed to have decided, pursuant to the third and fourth subparagraphs, to refer the whole of the case, no notification shall be made pursuant to paragraph 1 and national competition law shall apply.

28 5. With regard to a concentration as defined in Article 3 which does not have a Community dimension within the meaning of Article 1 and which is capable of being reviewed under the national competition laws of at least three Member States, the persons or undertakings referred to in paragraph 2 may, before any notification to the competent authorities, inform the Commission by means of a reasoned submission that the concentration should be examined by the Commission. The Commission shall transmit this submission to all Member States without delay. Any Member State competent to examine the concentration under its national competition law may, within 15 working days of receiving the reasoned submission, express its disagreement as regards the request to refer the case. Where at least one such Member State has expressed its disagreement in accordance with the third subparagraph within the period of 15 working days, the case shall not be referred. The Commission shall, without delay, inform all Member States and the persons or undertakings concerned of any such expression of disagreement. Where no Member State has expressed its disagreement in accordance with the third subparagraph within the period of 15 working days, the concentration shall be deemed to have a Community dimension and shall be notified to the Commission in accordance with paragraphs 1 and 2. In such situations, no Member State shall apply its national competition law to the concentration.

29 1. One or more Member States may request the Commission to examine any concentration as defined in Article 3 that does not have a Community dimension within the meaning of Article 1 but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. Such a request shall be made at most within 15 working days of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.

30 Phase I investigations The Commission is required by Article 6 to examine a concentration that has been notified by the parties in accordance with the EUMR as soon as the notification is received. It must then make a decision either that the concentration: is outside the EUMR (Article 6(1)(a)) or is compatible with the internal market (Article 6(1)(b)): this finding extends to any restrictions directly related and necessary to the concentration ( ancillary restraints ) or as modified by the parties no longer raises serious doubts and so may be declared compatible with the internal market: such a decision will be subject to conditions and obligations ( commitments )265 (Article 6(1)(b) in conjunction with Article 6(2)) or raises serious doubts as to its compatibility with the internal market (Article 6(1)(c)); in this situation the Commission must initiate a Phase II investigation In general Phase I decisions must, in accordance with Article 10(1) of the EUMR, be made within 25 working days at most of the day following notification; if the notification is incomplete the period begins on the day following receipt of complete information. The Phase I period may be extended to 35 working days where a Member State makes a request for a reference under Article 9, or where the undertakings concerned offer commitments pursuant to Article 6(2)

31 Phase I A decision under Article 6(1)(a) or (b) can be revoked where it is based on incorrect information for which one of the undertakings is responsible or where it has been obtained by deceit, (Case M 1397 Sanofi/Synthélabo, where the Commission revoked its decision as the notifying parties had failed to produce information about activities in a particular market), Where there has been a breach of an obligation attached to a decision (Case M 1069 World Com/MCI), or Where the decision is illegal in accordance with general principles of EU law (Case T-251/00 Lagardère SCA and Canal SA v Commission [2002] ECR II-4825, paras 130).

32 Phase II investigations Where a concentration raises serious doubts about compatibility with the internal market the Commission will commence proceedings in accordance with Article 6(1)(c) of the EUMR. An Article 6(1)(c) decision inaugurates an in-depth Phase II investigation. The decisions the Commission may make at the end of Phase II are set out in Article 8. It may decide that the concentration: is compatible with the internal market, having regard to the provisions of Article 2(2) and, in some cases, Articles 2(4) and 2(5) (Article 8(1)): this finding extends to any ancillary restraints or is compatible with the internal market, subject to commitments to ensure compliance with modifications proposed by the parties (Article 8(2)): again this extends to any ancillary restraints or is incompatible with the internal market (Article 8(3)) or in so far as it has already been implemented, or implemented in breach of a condition attached to an Article 8(2) decision, must be reversed, or modified in an appropriate way (Article 8(4)). Further the Commission may order such interim measures as may be appropriate (Article 8(5)) or revoke a decision taken under Article 8(2) where the Commission based its decision of compatibility on incorrect information or where the undertakings concerned have acted in breach of an obligation attached to the Commission s decision (Article 8(6)). Article 10(4) provides that the Phase II time limits may exceptionally be suspended where the Commission has had to obtain additional information owing to circumstances for which one of the undertakings involved is responsible. This provision is sometimes invoked; in Oracle/PeopleSoft the Commission did stop the clock pursuant to this provision in circumstances where it may have suited all the parties concerned, given that it meant that the decision under the EUMR could be taken after the proceedings instituted.

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34 Merger effects Non-coordinated effects (or unilateral effects) arise when firms producing nearly identical products merge. The combined entity is more likely to increase product price post-merger than if competitors whose products are less similar merge. If other companies in the market can alter their product line to offer products nearly identical to those of the merged entity, these effects will be mitigated. Coordinated effects arise in market structures that are prone to collusion. The General Court in Airtours articulated three criteria for coordination to be likely in the post-merger market. These criteria are transparency, retaliation mechanisms, and lack of countervailing reactions from consumers and competitors. The market structure that is prone to coordinated effects is characterized inter alia by product homogeneity, low demand growth, low price sensitivity of demand, symmetric cost structures, and multi-market contacts.

35 Substantive Analysis Once the Commission has jurisdiction in relation to a concentration its task is to determine whether it is compatible with the internal market. Article 2(1) sets out certain criteria that the Commission must take into account when making its appraisal:. Article 2(2) provides that: A concentration which would not significantly impede effective competition in the [internal] market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared compatible with the [internal] market. The burden of proof is on the Commission to produce convincing evidence that a merger is incompatible with the internal market. The Court of Justice has held that there is no presumption that a merger is compatible with, or incompatible with, the internal market; rather the Commission is required to adopt a decision in accordance with its assessment of the economic outcome attributable to the merger which is most likely to ensue.

36 Market test The substantive assessment of mergers under the EUMR begins with a definition of the relevant product and geographic markets, the main purpose of which is to identify the competitive constraints upon the undertakings concerned. In France v Commission the Court of Justice held that a proper definition of the relevant market is a precondition for any assessment of the effect of a concentration on competition under the EUMR

37 Horizontal mergers (examples) The Commission s Guidelines on the assessment of horizontal mergers provide guidance as to how the Commission assesses concentrations when the undertakings concerned are actual or potential competitors on the same relevant market. The Guidelines deal in turn with: market shares and concentration thresholds the likelihood that a merger would have anti-competitive effects countervailing buyer power the possibility of entry into the market as a competitive constraint efficiencies failing firms.

38 Market shares In Ryanair Holdings plc v Commission the General Court rejected Ryanair s argument that the Commission had placed excessive weight on the market shares that the merged entity would have had on some air routes. The Horizontal merger guidelines state that a merger may be presumed to be compatible with the internal market where the market share of the undertakings concerned does not exceed 25 per cent.

39 Significant impediment to effective competition (SIEC) The Commission will declare a merger to be incompatible with the internal market where it would significantly impede effective competition, in particular as a result of the creation or strengthening of a dominant position. The application of the SIEC test involves a comparison of the prospects for competition with the merger against the situation without the merger: the counterfactual. In many cases the conditions of competition at the time of the merger will be the counterfactual; however the Commission may take into account future changes to the market that can reasonably be predicted.

40 Herfindahl-Hirschman Index Market concentration and the Herfindahl-Hirschman Index (HHI) In some cases market share figures may be used in order to determine how concentrated a market is, or how concentrated it will be following a merger or the entry into force, for example, of a cooperation agreement. Competition concerns may be greater as the market becomes more concentrated. One way of determining the level of concentration in the market is to use the so-called HHI. This sums up the squares of the individual market shares of all the competitors in a market: the higher the total, the more concentrated the market. According to paragraph 16 of the European Commission s Guidelines on the assessment of horizontal mergers the concentration level will be low where the total is below 1,000; moderate if between 1,000 and 1,800; and high where it is above 1,800

41 Example 1 In the widget industry there are 15 competitors: 5 of them each has a market share in the region of 10 per cent, and 10 of them each has a market share in the region of 5 per cent The market concentration is low. Example 2 In the sprocket industry there are 4 competitors: 2 of them each has a market share in the region of 30 per cent and the other 2 each has a market share in the region of 20 per cent The market concentration is high.

42 Commitments The legal basis for commitments as a way of settling merger cases is provided by Article 6(2) of the EUMR for Phase I investigations and Article 8(2) for Phase II investigations. Each of Articles 6 and 8 provides that the Commission may attach conditions and obligations to a decision to clear a merger; such conditions and obligations are intended to ensure that the undertakings concerned comply with the commitments that they make to the Commission to modify their transaction. Recital 30 of the EUMR states that Phase I commitments are appropriate where the competition problem is easily identifiable and can easily be remedied: it adds that transparency and effective consultation of Member States and interested third parties should be ensured throughout the procedure. Recital 31 explains the various consequences of failure to comply with conditions and obligations. These include: the possibility of the Commission ordering that a merger that has already been carried into effect, but in breach of a condition given in Phase I (Article 6(3)) or Phase II (Article 8(4)), should be dissolved the power to take interim measures to restore or maintain conditions of effective competition in the event of a breach of a Phase I or Phase II condition (Article 8(5)) the power to revoke a decision where undertakings commit a breach of an obligation attached to a decision (Article 8(6)).

43 Commitments Article 14(2) of the EUMR provides for fines of up to 10 per cent of the aggregate turnover of the undertakings concerned to be imposed in the event of failure to comply with a condition or obligation attached to a decision; Article 15(1)(c) provides for periodic penalty payments to be imposed in the event of a failure to comply with an obligation. Divestiture of a business to a suitable purchaser Removal of links with competitors Other suitable remedies Nestlé/Ralston Purina and Johnson & Johnson/Guidant In Glencore/Xstrata Glencore agreed to divest its minority shareholding in Nystar as a condition of the Commission s approval. Case and market dependent