Merger Control
1. Origin and legal foundation
The first European merger control was part of the ECSC Treaty of 1952. This treaty expired in 2002.
The Treaty on the European Economic Community of 1958 provided for a prohibition of cartels with exceptions in Art 81 and a prohibition of abuse by dominant undertakings in Art 82. There were no provisions for merger control. Merger control was introduced through Reg 4064/89 of 21 December 1989 ‘on the control of concentrations between undertakings’, amended through Reg 1310/97 of 30 June 1997, and replaced through Reg 129/2004 of 20 January 2004—the EU Merger Control Regulation (MCR). These regulations were based on Art 83 EC in connection with Art 308 EC (now Arts 103, 352 TFEU). The Art 83 competence by itself was deemed insufficient because it enables the Council to give effect to the principles relevant in Arts 81 and 82 EC only (now Arts 101 and 102 TFEU); but not every merger is covered by these provisions.
A merger that strengthens an existing dominant position may, under the jurisprudence of the European Court of Justice (ECJ), constitute an abuse under Art 102 TFEU/82 EC (ECJ Case 6/72 – Continental Can [1973] ECR 215). A system of complete merger control must, however, also cover mergers that lead to a dominant position. The Continental Can case established the structural dimension of Art 102 TFEU/82 EC and remains relevant outside merger control. Article 101 TFEU/81 EC is applicable to mergers only if the participating undertakings remain independent undertakings after consummation of the merger (ECJ Joined Cases 142/84 and 156/84 – BAT and Reynolds [1987] ECR 4487). Merger control must, however, cover mergers even if the participating undertakings cease to exist as independent undertakings after the merger’s consummation. The distinction of mergers and agreements within the meaning of Art 101 TFEU/ 81 EC remains relevant, particularly in its application to joint ventures (Art 2(4) and (5) MCR).
The governing principles of the MCR are:
(1) The prohibition of mergers that significantly impede effective competition within the common market or a substantial part thereof, in particular as a result of the creation or strengthening of a dominant position (Art 2(1)(b)) (competition (internal market)).
(2) The system of ex ante merger control that relies on the obligation to notify planned mergers (Art 4); on a prohibition of implementation before notification (Art 7(1) and Art 14(2)(b)); and on the European Commission’s power to dissolve contravening transactions (Art 7(4)).
(3) The definition of mergers (Art 3) and quantitative criteria of their ‘Community dimension’ (Art 1).
(4) The exclusive jurisdiction of the Commission for applying the MCR to mergers with a Community dimension (Art 21(2)—One-Stop-Shop).
(5) Special provisions for the competence of Member States to apply their own merger control.
2. Scope
a) Art 1(2) and (3) MCR
The MCR is applicable to mergers with a ‘Community dimension’ (Art 1(1)). The Community dimension is determined on the basis of worldwide turnover or Community-wide turnover of the participating undertakings (Art 1(2) and (3)). The turnover thresholds trigger control irrespective of the merger’s competitive relevance. Mergers below these thresholds may still be subject to Member State merger control.
The turnover criteria apply to all mergers even though the participating undertakings are domiciled outside the European Union. Prohibition of such a merger requires, however, that the public international law standards of extraterritorial applicability of Union law are satisfied.
b) Member State merger control of mergers with a Community dimension
In exceptional cases, Member States may apply their law to mergers with a Community dimension. Under Art 9, they may ask for transfer of a case if the merger threatens to create or to strengthen a dominant position on a separate national market that represents all the characteristics of a distinct market which is not a substantial part of the common market. The Commission decides whether to refer the case to Member State authorities or to keep jurisdiction (Art 9(4)).
c) Community merger control of mergers without a Community dimension (Art 22 MCR)
One or more Member States may request the Commission to apply the MCR to a merger without a Community dimension where the transaction significantly impedes competition in the Member State’s territory and is likely to affect trade between Member States (Art 22 (1) MCR). If the Commission takes the case, Member State merger control ceases to be applicable. If the Commission considers that the conditions of Art 22 (1) are met, it may ask Member States to request a transfer (Art 22 (5)). There is no obligation to comply with the Commission’s proposal.
3. Procedure
In the proceedings of merger control there are different stages with strict timetables applicable to each stage. Every stage is concluded by a decision (Art 6(1)(c)(2)). If the Commission has not taken a decision within the applicable period, the merger will be deemed to have been declared compatible with the Common Market (Art 10(6)).
a) Notification
A concentration with a Community dimension has to be notified to the European Commission one week after the conclusion of the agreement or the announcement of the public bid or the acquisition of a controlling interest. The Commission must decide within 25 days after notification whether the notified merger comes under the Regulation (Art 6(1)(a)). If the notified concentration comes under the Regulation but does not raise serious doubts, it has to be declared compatible with the Common Market (Art 6(1)(b)). Proceedings are initiated if the concentration raises serious doubts (Art 6(1)(c)). From this point in time, one of the following Commission decisions has to be adopted within 90 days (Art 10(3)): to transfer the proceeding to a national competition authority (Art 9); to declare the concentration compatible with the Common Market (Arts 8(2) and 2(2) and (4)); to declare the concentration incompatible with the Common Market (Arts 8(3) and 2(3) and (4)). A concentration that has been implemented in spite of a prohibition must be separated (Art 8(4)). These decisions are subject to judicial review in accordance with Art 263 TFEU/230 EC before the ECJ.
b) Commitments
Participating undertakings may so modify a notified concentration that it becomes compatible with the Common Market. The Commission’s commitment decision (Arts 6(2), 8(2)) may provide for conditions and obligations to ensure that the undertakings comply with their commitments. Commitments are admissible if they prevent the creation or strengthening of a dominant position permanently. A commitment not to abuse a dominant position does not satisfy this requirement. Commitments to sell certain assets, to bring long-term requirement and sale contracts to an end, to end or to enter into licence contracts or to consolidate networks are effective and frequent.
c) Suspension of concentration (Art 7)
A concentration as defined in Art 1 shall not be put into effect before its notification or as long as no decision on its compatibility with Union law has been adopted (Art 7(1)). Contravening transactions are void. Further legal consequences are to be determined under Member State law. The implementation of a prohibited concentration is illegal and subject to fines (Art 14(2)(b)). Concentrations that have been implemented illegally may be dissolved (Art 7(4)).
4. Transactions that constitute a concentration
a) Participating undertakings
The Regulation applies to all undertakings which participate in the relevant transaction. Undertakings are entities engaged in business activities. This concept is a general concept of European competition law. Having no relevance to this assessment are the type of organization at issue, whether the entity has the purpose of making profits or the legal classification of the entity’s conduct under Member State law. The MCR applies in harmony with Art 106(1) TFEU/86(1) EC to public undertakings.
b) Control and acquisition of control
The transactions that lead to a concentration are defined in Art 3(1)(b) consonant with Art 66 § 1 ECSC Treaty as acquisition of control of one or more undertakings. Control consists in the capability of exercising decisive influence on another undertaking (Art 3(2)). Control and acquisition of control are Union law concepts. They differ from concepts of Member State corporation law as well as from Member State merger control regulations.
c) Joint ventures
Art 3(4) and (5) define as a concentration the establishment of a joint venture that, on a lasting basis, has all the functions of an autonomous economic entity. If such a transaction has the purpose or effect of coordinating the competitive behaviour of independent undertakings, it is subject to Art 101 TFEU/81 EC. In such a case, Art 101 TFEU will be applied according to merger control proceedings.
5. Concentrations that are compatible or incompatible with the Common Market
a) Dominant position and effective competition
Under the MCR in force until 30 April 2004, a concentration that created or strengthened a dominant position, a result of which effective competition in the Common Market would be significantly impeded, had to be declared incompatible with the Common Market. The concept of dominant position was to be interpreted in accordance with Art 102 TFEU/82 EC, taking into account the special characteristics of merger control. Preventive merger control requires a probability judgment on the concentration’s effect on market structures. The relevant effect is the creation or strengthening of a dominant position. The additional test of a substantial impediment of effective competition became inoperative because market dominance indicates a high degree of restricted competition and necessarily impedes effective competition.
The MCR changed the definition of oligopoly (Art 2(3)) and added and stressed the relevance of efficiency through development of technical and economic progress that is to the advantage of intermediate and ultimate consumers (Art 2(2)). Article 2(3) reads: ‘Concentrations that significantly impede effective competition in the common market or a substantial part thereof, in particular through creation or strengthening of a dominant position, are to be declared incompatible with the common market’. The amendment is to reach concentrations that may impede effective competition on oligopolistic markets even if the participating undertakings do not coordinate their market conduct after implementation of the concentration. It follows that on oligopolistic markets, coordinated and uncoordinated effects of a concentration have to be examined and may lead to a finding of substantial impediment of effective competition. Recital 25 interprets the amendment as aimed at anti-competitive effects of a concentration which follow from uncoordinated conduct of undertakings that do not have a dominant position on the relevant market. Recital 26 clarifies that all other kinds of concentrations are to be judged in accordance with the market dominance test as interpreted by European Courts and the Commission. The regulation confirms this interpretation if ‘effective competition is substantially impeded in particular through the creation or strengthening of a dominant position’.
The relevance of a finding of a significant or insignificant impediment to competition (SIEC Test) follows from the possibility that a concentration may create a dominant position without substantially impeding effective competition. Recital 29 explains the rationale of this test: in order to determine whether the effects of a concentration on competition in the Common Market are substantiated and likely, efficiencies are to be taken into account when presented by the participating undertakings. In such a case, ‘it is possible that the efficiencies brought about by the concentration balance the effects of the concentration on competition, in particular the possible damage to consumers, with the effect that the concentration does not impede effective competition on the common market or in a substantial part of it, in particular through creation or strengthening of a dominant position’. It is for the Commission to examine whether the new combination of economic resources brought about by the concentration will be more efficient than their further independent management. The new enterprise is planned by the participating undertakings. The verification and implementation of efficiencies falls to the new economic entity. Relevant efficiencies depend upon a finding that it will be rational for the new entity to pass efficiency advantages on to consumers without being forced to do so by the market. To be taken into account are the new conditions of competition that in turn influence the integration of so far separately organized and managed activities. The final arbiter of success or failure is competition on all markets affected by the concentration. This is why so many concentrations disappoint the expectations of their organizers.
b) Overview of relevant criteria
There is a tendency to treat a significant impediment to effective competition as determinative. This interpretation does not, however, find support through a comparison with § 7 of the US Clayton Act, and legislative history speaks against the elimination of market dominance. Also, whether the Commission’s practice will substantially change under the new text of Art 2(2) and (3) is still uncertain. Even more uncertain is whether the ECJ will follow suit. Relying on legislative history, the Commission favours, even for non-horizontal concentrations, the distinction of coordinated and uncoordinated effects. This is, however, not a new standard for the assessment of competitive effects of the concentration between the participating undertakings (coordinated effects) and on the relevant market (uncoordinated effects).
As far as the creation or strengthening of a dominant position within the meaning of Art 2(2) and (3) is concerned, the most important guidance is still the ECJ’s jurisprudence on Art 102 TFEU/82 EC. A dominant position is a position of economic power that enables the undertaking to prevent the maintenance of effective competition on the relevant market and that enables the undertaking to act in substantial disregard of competitors, customers and finally consumers. This definition includes the significant impediment of effective competition.
A concentration that strengthens an already existing dominant position may be declared incompatible with the Common Market. Competition law in general protects that competition which, in spite of dominance, is possible on the relevant market. The circumstances that have to be taken into account in examining the effects of a concentration are enumerated in Art 2(1)(a), (b). They specify that the purpose of merger control is to maintain effective competition. Prominent among the different criteria are market structure and the structure of integration. The probable effects on actual or potential competition on all markets affected for all undertakings within or outside the Common Market concern mainly concentrations of competitors (horizontal integration). The effects on the access to supplies or markets concern mainly concentration of undertakings that are active in different stages of the market (vertical integration). In exceptional cases, concentration of undertakings without horizontal or vertical ties may contribute to the strengthening of a market dominant position (conglomerate concentration).
c) Relevant markets
To determine the impact of a concentration on competition, the definition of the relevant market is a necessary but not a sufficient condition. The delimitation of the relevant market has to take into account the product that is subject to competition and the geographical area in which the same product is offered and where undertakings meet their competitors. These are the most important but not the only indicators of viable competition.
Part of the relevant product market are those products and/or services which are regarded as interchangeable or substitutable by consumers because of the products’ characteristics, prices and intended use. Substitutability has to be determined from the perspective of the opposite market; in cases of supply markets that is the perspective of customers, and in cases of demand markets it is the perspective of suppliers. The relevant geographic market is the area in which the undertakings concerned participate in the supply and demand of products or services—where the conditions of competition are sufficiently homogeneous and can be distinguished from neighbouring areas because conditions of competition are appreciably different (definition in s 9(8)). The relevant geographic market must be a substantial part of the Common Market. The territory of Member States, including smaller Member States or separate areas in larger Member States, are as a rule substantial parts of the Common Market.
Market shares determined on the basis of the relevant market are crucial in the determination of competitive effects of concentrations. That applies to horizontal as well as non-horizontal transactions. According to recital 32, a market share below 25 per cent indicates that the concentration will, as a rule, not interfere with effective competition. A high market share of 50 per cent or more indicates, as a rule, that there is a dominant position. The significance of market shares varies with the specific competitive conditions on the market.
e) Entry barriers
Concentrations may create or strengthen entry barriers. The theory of contestable markets argues that there are no substantial differences between actual and potential competition. An important indicator of actual effects of potential competition are sunk costs. These are costs potential competitors have to incur if they want to enter the market and which will be lost if entry fails. In the Commission’s practice entry barriers are frequently counted as strategic advantages contributing to the long-term maintenance of an undertaking’s market position. Examples are the undertaking’s degree of integration, economies of scale, technical or contractual networks, distribution system, product differentiation and research and development activities protected by patents.
Access to supply and demand markets is the foremost standard to judge vertical integration. The organization of buying or selling within the same organization, as a rule, saves transaction costs and reduces market uncertainties. Vertical integration may nevertheless lead to conflicts with the requirements of effective competition if the integrated undertaking has a dominant position in one of its successive markets. Such an undertaking is in a position to discriminate against the less integrated competitors that are its buyers or sellers.
Neighbouring markets may be so connected that a concentration of an undertaking with a dominant position on the first market with an undertaking in a leading position on the other market may create leverage to extend the dominant position to the other market (ECJ Case T‑80/02 – Tetra Laval [2002] ECR II‑4519 para 151; partly confirmed by ECJ Case C‑12/03 P – Tetra Laval [2005] ECR I‑987 paras 71–8). Anti-competitive conglomerate effects are to be expected where the undertakings concerned offer complementary products.
Literature
Ernst-Joachim Mestmäcker, ‘Merger Control in the Common Market: Between Competition Policy and Industrial Policy’ in Barry Hawk (ed), Fordham Corporate Law Institute Annual Proceedings (1989) 20–1; Swedish Competition Authority (ed), The Pros and Cons of Merger Control, EU Small Member State Interests (2002); Lennart Ritter and W David Brown, European Competition Law: A Practitioner’s Guide (3rd edn, 2004); Christopher Bellamy, Graham Child and Peter Roth, European Community Law of Competition (6th edn, 2009); CJ Cook and Christopher Kerse, EC Merger Control (5th edn, 2009); Ulrich Schwalbe and Daniel Zimmer (eds), Law and Economics in European Merger Control (2009); Maik Wolf, Effizienzen und europäische Fusionskontrolle (2009); Ivo Van Bael and Jean-Francois Bellis, Competition Law of the European Community (5th edn, 2010); Jan Hansen, Fusionskontrollpraxis von Bundeskartellamt und EG-Kommission (2010); Ernst-Joachim Mestmäcker, Wernhard Möschel and Martin Hellwig (eds), 50 Jahre Wettbewerbsgesetz in Deutschland und in Europa (2010).
