Law is one of my passions.  It is an area that I have studied at college and university (both undergrad and post-grad levels).  I am fascinated about how it plays such a pivotal role in our lives, and how it shapes the way we, as humans and organizations can act, or not act.

I have a particular interest, which will be evident here, in EC and UK Competition Law, and in particular Merger Control.  I hope you enjoy reading further, and gain a detailed understanding of law and its role it has.

MY LLM DISSERTATION – EC MERGER CONTROL

The 2004 Merger Regulation:

“The substantive test – a promising development, but more has to be done in practice”

SUMMARY

This thesis will demonstrate that the 2004 Merger Regulation has implemented a complete overhaul of the approach taken by the Commission when appraising notified concentrations (mergers).  It will become apparent that this has arisen from the departure from the pre-requisite finding of dominance, to one of finding a significant impediment to effective competition (SIEC).  Further, it will transpire that a more comprehensive, dynamic and legally certain merger control system has now been put in place within the EC.  This said, this author will argue that more has yet to be done; an effective merger control system in theory can only arise if implemented in practice, and to date questions can arise as to whether this has occurred. For the basis of this report focus will be paid to horizontal mergers due to them constituting the main problem area in merger control.

List of Legislation

Council Regulation (EEC) No 4064/89 of 21 December 1989 – On the control of concentrations between undertakings OJ L395, 30/12/1989 as amended by Council Regulation (EC) No 1310/97 of 30 June 1998, OJ L180, 9/7/1997

Council Regulation (EC) No 139/2004 of 20 January 2004 – On the control of concentrations between undertakings. Available at:                                                                                           <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004R0139:EN:NOT&gt;

Article 81 and 82 EC

Commission Documents

Horizontal Merger Guidelines , Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31available at:

<http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52004XC0205(02):EN:HTML>

List of Cases

Case C-68/94 Kali & Salz [1998] ECR I-1375

Case 27/76 United Brands Co v Commission [1978] ECR 207; [1978] 1 CMLR 429

Case T-2/93 Air France v Commission [1994] ECR II-323

Case T-342/99 Airtours plc v Commission [2002] ECR II-2585

Case T-102/96 Gencor v Commission [1999] ECR II-753

Case T-210/01 General Electric Company v Commission [2005] ECR II-5575

Case T-119/02 Royal Philips Electronics NV v Commission [2003] ECR II-1433

Case T-310/01 Schneider Electric SA v Commission [2002] ECR II-4071

Case T-5/02 Tetra Laval BV v Commission [2002] ECR II-4381

Case T- 374/00 Verband der freien Rohrwerke e.V v Commission [2004] 5 CMLR 13

Case COMP/M.41 Alcatel / Telletra [1991] OJ L122/48

Case COMP/M.2817 Barilla / BPL / Kamps

Case COMP/M.3178 Bertelsmann / Springer / JV

Case COMP/M.3696 E.ON / MOC

Case COMP/M.3440 ENI / EDP / GDP

Case COMP/M.3083 General Electric / Instrumentarium

Case COMP/M.4731 Google / Double Click

Case COMP/M.4747 IBM / Telelogic [2008] OJL 195/6

Case COMP/M.4439 Ryanair / Aer Lingus [2008] OJL 47/9

Case COMP/M.3653 Siemens / Va Tech

Case COMP/M.3333 Sony / BMG

Case COMP/M.3916 T-Mobile Austria / tele.ring [2007] OJL 88/44

Case COMP/M.4404 Universal Music Group / BMG Music Publishing

Case COMP/M.1980 Volvo / Renault

Case COMP/M.1672 Volvo / Scania [2001] OJ L143/74

Case COMP/M.4731 Google / Double Click

Case COMP/M.4744 INEOS / BOREALIS

Case COMP/M.4726 Thomson Corporation / Reuters Group

Case Heinz / Beech-Nut 246 F.3rd 708 (D.C. Cir.2001)

List of Abbreviations

SIEC Significant impediment to effective competition (The 2004 Merger Regulation Test)
ECJ European Court of Justice
Commission European Commission
CFI Court of First Instance
SLC Significant Lessening of Competition (US based approach)

Overview

The New Merger Regulation[i] came into force 1 May 2004[ii], replacing the 1989 version[iii] which had been in place for more than a decade.  It heralds a new era in EC merger control[iv].  Significant changes have been implemented, and can be briefly summarised as follows: (i) the substantive test has changed for appraising mergers; (ii) amendments have been made on the notification procedure, (iii) a fast track system has been implemented, and (iv) overall, a grounding in ‘sound economics’ have been put at the forefront[v].   This dissertation shall focus on the substantive test with a brief discu[1]ssion beforehand being given to economics.  However, as a note of caution, due to the infancy of the application of the New Regulation, arguably the impact cannot be truly and effectively assessed at this stage; indeed it is a matter of the passing of time which will result in a more detailed appraisal and assessment being made in the future.

To be in a position to understand the impact of the new merger regulation, and to assess whether the changes implemented are to be welcomed, this thesis will be broken down into four main chapters.  Chapter 1 will provide a summary of the merger control system and will highlight the aims of merger control and the role that economics have to play in this area. A brief discussion will also be given to the historical evolution of EC merger control.  Then, in Chapter 2 a discussion of the 1989 and 2004 Regulations will be given.  Here will be detailed the differing substantive tests, along with a discussion of the merger control gap before providing an insight into the similarities and differences that the substantive tests have to offer.  Enshrined in this will be a critical discussion of academic and practitioner thoughts.  Following from this an analysis will take place to see whether the merger gap discussed earlier has been effectively removed before proceeding to look at the potential oversights that have arisen.  In the ultimate chapter, this author will render a discussion and evaluation as to whether anything further can be done, along with rendering any predicted effects and impacts such changes might bring about.  After this has occurred, the conclusion will link together the various discussions, with the ultimate conclusion being reached that more has to be done.    By structuring this thesis in this way it is hoped that a detailed critique will be rendered on the new developments in EC merger control.

CHAPTER 1: A SUMMARY OF MERGER CONTROL

A discussion of the role of merger control and that on which economics have to play is fruitful; in as much that it is only by doing so that a solid understanding and appreciation of the change in substantive test can be realised.  It will help to facilitate an understanding of the reasoning behind the changes imposed, which it is hoped will result in a more coherent and legally certain EC merger control system.

The Aims of Merger Control

EC Merger control is concerned with those concentrations whereby a significant change in market structure[vi] enters into force.  A concentration arises when two or more undertakings enter into a transaction to create a new entity, as a whole, or in part for a particular purpose (commonly achieved by a joint venture), on a lasting basis[vii].  The aim of which, being the maintenance and development of effective competition within the common market.[viii] Put another way, to ensure that no lasting damage in competition arises, which can be achieved when undertakings are allowed to build up ‘excessive market power’[ix] allowing anti-competitive constraints being likely to come into effect[x].  By doing so, it is hoped that it will counter any discretion that undertakings might have to anti-competitively raise prices causing detriment to consumer and social welfare, whilst at the same time maximising individual profits.[xi] Accordingly, it is not aimed at preventing undertakings from entering into commercial transactions per se, as it is accepted that it is not only necessary but also central to commercial development.[xii] As highlighted by Attenborough:

“Corporate decisions are an essential part of private initiative and market dynamics.  They are the result of the balance of risks and opportunities taken by a firm, and they may improve the efficiency of the merged firm in a way that may ultimately benefit consumers.”[xiii]

To achieve its aims therefore, the concentrations in question must trigger the community dimension, turnover thresholds enshrined in Article 1.  Those fallings outside of these thresholds fall within the coverage of the national competition authorities.  Once satisfied a detailed appraisal has to be undertaken looking at such things as market positioning, economic and financial power, and barriers to entry.[xiv] By doing so, the Commission is then in a position to determine whether or not to permit, or prohibit the notified concentration, based upon the foreseen harm, and whether the commitments entered into (if any) are satisfactory.  To be able to understand this, a hypothetical example is given below.

A hypothetical example:

Say Apple were the only manufacturers of Mp3 and Mp4 players, then they would be able to price their product at an appreciable cost.  Moreover, they would not have the incentive to package multiple products such as phone, Bluetooth, internet and GPS capabilities.  Or, they may have the incentive to limit the range of such products to maximise profits of each form of technology.  As a consequence consumers would be at the behest of the manufacturer, with the only option being to purchase or not.  Another example is the super-market chain Tesco.  They want to ensure that there are enough commercial actors to prevent Tesco from unduly purchasing goods from the supply end.

The Role of Economics in Merger Control

The role and importance of economics in merger control cannot be over emphasised as it gives rise to “complex economic questions.”[xv] For example, if X & Y merge, what effect will it have on competitors A, B and C, and on potential entrant G? Will competition be restricted?  Are there any barriers to entry, if so, will these be further impeded?  Economics can comprehensively answer such questions as it provides a framework with its various economic tools and simulation models.  The result of this being that antitrust policies can be applied ‘coherently’[xvi] to a given matter.  Accordingly, the Commission is put in a situation whereby it can accurately predict the likely effects that will result from the proposed concentration, and render decisions backed up with sound evidence and logical reasoning.

There are three broad means in which the performance of markets can be assessed.  These are: (i) consumer welfare, (ii) total welfare, (iii) efficiency.  (i) looks at the benefits that will be conferred upon consumers, by contrast (ii) takes an approach that details the benefits and burdens that consumers and producers will incur.  By contrast (iii) looks at the types of efficiency that might arise, and as to whether there are any incentives for the parties concerned to pass these onto the end consumer in terms of pricing and product range selection.  Further, it allows for effective competition to be maintained because economics characterise in a detailed manner, perfect competition and monopolistic markets – the effect of which allows for a consideration to be rendered so that a balance can be maintained in the range between these opposite poles.  This can be demonstrated more clearly in figure 1.  The aim of merger appraisal is to ensure that effective competition is maintained so that benefits can be felt by all from the supplier, to producer to eventually the end consumer.  This will be achieved we competition runs between the two extremes shown below.

Figure 1 – The Competition Scale

Perfect competition arises where competitors set their prices independently at a scale where the market supply and market demand meet one another (intersect).  If the producer were to reduce the price of their goods and or increase supply then a loss would be made.  This can be differentiated from a monopolistic market.  In this situation the producer is under no competitive constraint, and accordingly can price there product in a range in which there marginal costs are met.  If the undertaking in question wishes to increase the cost of their product then they are likely to incur a lower demand for the goods in question.  However, they will generate more revenue from those willing to pay to costs imposed.

At either end of the scale negative effects can arise.  The former can result in stifling development and innovation of producers.  This can occur because a sufficient market power cannot be obtained where the demand for the product type is met by the market.  In the latter situation, inefficiencies can arise because consumers will pay the price that the undertaking sets for the item if they wish to have it.  They therefore have no incentive to reduce the production costs, as they can price however, they wish.  Accordingly, they may not invest in more efficient technologies to reduce the cost of production, where if they were competing with others it would be advantageous to do so in order to gain a higher profit margin.

It is imperative to maintain effective competition in the market.  As stated in the horizontal guidelines: “Effective competition brings benefits to consumers, such as low prices, high quality products, a wide selection of goods and services, and innovation”[xvii]

The Historical Development of EC Merger Control

Before the 1989 Regulation came into being there had been a continued debate as to the relevance of Article 81 and 82 EC in its coverage of merger control.  However, both of these were not apt to deal with this area, due to an inherent defect.  This defect rested on the nature of its appraisal.  In both circumstances they deployed an ex post analysis.  The analysis looks backwards on what has been done, what has been said and the impact it has had.  By contrast, merger control requires an ex ante approach, in that a prediction is being made as to the likely effects that will occur once a merger has taken place.  The Commission therefore can only use surrounding previous practice and economic tools to reach this prediction, it does not have concrete evidence to work from, as is the case when dealing with competition issues under Article 81 and 82 EC.

CHAPTER 2: THE EC MERGER REGULATIONS

The 1989 Merger Regulation & Practice

The 1989 Merger Regulation came into force in 1990.  It was the first time in which a consensus had been reached by the then member states on merger control.  There had been a continued debate over time as to where competence over these matters should rest.  The main cause of the delay came from Member States worrying about the implications it would have on their own competence, or put another way, their sovereignty to decide matters.  By 1989 a framework was agreed.  It heralded an era of high effectiveness in combating concentrations likely to result in detrimental impacts to competition within the Community.[xviii]

The substantive test was broken down into a two limb test: (a) finding of a dominant position to arise from the concentration; and as a result (b) gave rise to a significant impediment to effective competition being maintained within the common market or a substantial part of it[xix].  If such a finding was made by the Commission, then the concentration would be deemed incompatible and therefore prohibited unless the undertakings in question submitted remedies to sufficiently prevent this.  Interesting to note in this test is the mandatory requirement of a dominant position arising before going on to consider the second limb.  The effect of which, meant that those concentrations not resulting in dominant positions fell outside the purview of the Regulation.  This has several implications.  Firstly, it left a great deal of ambiguity, as it would fall to be considered under national competition law regimes of the member states concerned.  Undertakings were then put in the position of having to familiarise themselves in the relevant competition law regimes, which increased costs and could arguably have proved detrimental to entering into such transactions.  Secondly, and arguably the most important point, was that although such concentrations that emerged without dominance being found, nevertheless could pose significant competition concerns, yet it would appear at face-value to fall outside.  Thirdly, it had the outcome of undermining the aim of the Regulation to bring about a “one stop shop” for undertakings.  Yet as commented by Fountoukakos, the majority of problematic mergers could be dealt with under the dominance test because they would likely involve the creation or strengthening of market leaders, or, single large firms.[xx]

Accordingly, the substantive test under the 1989 Regulation requires dominance.  For some, the dominance test is considered to be mainly based on the monopoly model[xxi], in that a requirement of dominance is needed.  This gives rise to the question what does this mean?  Recital 15 of this Regulation held that market shares below the 25% threshold were to be consider insignificant and unlikely to result or be considered as dominant.  Yet, it even found that the ranges of 35-40% could not give rise to an assumption of dominance being raised.  It was only those higher than this range that could raise suspicion.  This author would argue that this created an unsatisfactory position – it creates ambiguity and uncertainty.  It demonstrates that it was unclear to those undertakings at the time as to how to calculate dominance.  Moreover, how do they calculate the ranges of dominance?  One may define one market as encompassing more than the Commission would.  This would mean that the calculation of percentage terms is context specific.

The concept of dominant position was defined by the ECJ in United Brands[xxii], as:

“a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave in an appreciable extent independently of its competitor, customers and ultimately of its consumers.”

This said, dominance was not sufficient to establishing a risk to competition[xxiii].  Alcatel[xxiv] demonstrates that market shares are only evidential grounds of an increased likelihood of causing abuse to competition, but also that this evidence is capable of being refuted.  Here the Commission found that the merger would have the effect of conferring on the undertakings in question an 83% market share.  Yet it was considered that there was sufficient countervailing buyer power despite this to combat the risk to competition from coming to fruition.  Moreover, it gave rise to confusion over the wording of dominant, and as to whether this was the same as for the purposes of dominant abuse under Article 82 EC[xxv].

A literal interpretation would seem to indicate the coverage of the Regulation gave rise to an appreciable gap in the window of coverage of certain forms of mergers, in particular vertical mergers.

However, the Commission and ECJ indicated that a literal interpretation should not be adopted[xxvi].  Instead they asserted that it should be looked at to see whether it would remove ‘key competitive restraints’ which were in place prior to the proposed concentration.  Again this demonstrates that consideration was given that market shares alone were not sufficient, nor as imperative as one might have thought.  The idea of finding dominance outside of the confines of market shares was developed hence forth.

The development of the case law on “collective dominance” can also be viewed as a marking ground on which a more liberal interpretation was being accorded to the substantive test.[xxvii] It is striking to consider that the courts showed an inclination to allow coverage for oligopolies, provided that it gave rise to tactic collusion, which in turn would allow their action on the relevant market to become co-ordinated.  Further, Kali & Salz[xxviii] made it clear that a purposive interpretation should be taken.  Or put alternatively, a teleological view point should be accorded.  Bearing this in mind, the court went on to say that:

“…the Regulation is intended to apply to all concentrations with a Community dimension insofar as they are likely, because of their effect on the structure of competition within the Community, to prove incompatible with the system of undistorted competition envisaged by the Treaty.” [xxix]

One can conclude from this that the court was willing to confer a wider remit than that one might envisage had a strict and liberal interpretation of dominance been taken.  It also gives rise to question as to how the authors of this Regulation would view the interpretation being accorded.

Moreover, the ECJ in Gencor[xxx] stated in 1999 that:

“…the main objective in exercising control over Concentrations at the Community level is to ensure that the restructuring of undertakings does not result in the creations of positions of economic power which may significant impede effective competition in the Common Market” [xxxi]

One might argue that this was a reflection on the part of the court as to a re-alignment of values of merger control, and that of looking at the core aim of competition policy – namely to maintain effective competition.

Gencor is particularly significant.  The case was decided in 1999, roughly ten years into the application of the 1989 Regulation.  It appears to signify a departure from rigid adherence to the dominance test, and in place of it, a broader approach. Economic power and control is the key, rather than a mere dominant position.  If economic power is not prevalent due to countervailing factors, then it would seem that the merger will not be prohibited as it did not fulfil the criteria set out in the substantive test.  Horner shares a similar view to this.[xxxii] It might be argued that the court is recognising and signalling a departure in the dominance test, in particular, that previous practice is too narrow and that a new avenue needs to be looked at for its application.  Indeed, it presupposes that in order for a significant impediment to effective competition to arise, that one has to be dominant, and thus ruling out those concentrations falling outside this threshold.  This has been formulated on the basis that merger control is ex ante, as opposed to ex post application of Article 82 EC.  Accordingly, dominance therefore, should only be one of a multitude of considerations when assessing the potential future market structure that possibly will occur if the notified mergers is authorised.

Gencor is also of vital importance because collective dominance was defined.  This relates to concentrated and confined markets in which only a handful of operators are present, (also known as oligopolies).  Collective dominance was used as a countering device to the previous restrictive interpretation of the dominance test.  The court held, that a significant impediment can arise where a causal connection can be establish that evidences the operators in the market in question as having the ability to adopt a common policy, allowing them to act independently, with the result that there is no real constraints imposed on them by other competitors, customers or consumers. [xxxiii] For some[xxxiv], this offered light at the end of the tunnel for a realignment and adjustment to the dominance test allowing greater coverage and effectiveness of the then present merger regulation.

However, then the Commission incurred in the late 1990’s and the early part of 2000, several major setbacks at the hands of the CFI. In the landmark case[xxxv], Airtours[xxxvi], the Commission had attempted to apply collective dominance in a situation where the number or competitors was reducing in size, as opposed to one in which an oligopoly was present, involving two undertakings.  As a result, legal uncertainty arose, because it was not quite clear as to the scope this decision had: (a) is it only to apply to mergers on similar circumstances or (b) to all those falling within the collective dominance framework?  Consequently, the CFI annulled the decision on the basis that the evidence did not support the Commissions conclusion.  In its judgment, the CFI clarified the concept of ‘collective dominance’, placing it in highly restrictive parameters, although it did not per se rule out the application of this theory in practice.  The court stated that in order for the Commission to satisfy the evidentiary burden with this form of dominance, three requirements must be met:

(i)              The market must be sufficiently transparent so that the undertakings in question are able to observe each other’s conduct and detect deviations in their practices.

(ii)            There must be provision in terms of mechanisms for retaliation by the parties, so as to act as disincentive to deviate from the common conduct

(iii)           That they are in a position to act independently from its competitors, in the sense that there are no countervailing factors – for example, competitors being able to increase productions if the prices were increased by the members’ buyer power and consumers.

The result of these requirements placed the Commission in a more perilous position to challenge mergers in similar circumstances.  Consequently, questions were raised as to whether the 1989 Regulation only applied to those firms that gave rise to clear single firm dominance.

Similarly there appeared to be a proliferation of discrepancies thereafter in the Commissions applications and findings under the 1989 Regulation.  In both Schneider[xxxvii] and Tetra-Laval[xxxviii] the CFI ultimately overturned the decisions. 

.

In Schneider, the Commission was criticised on its assessment of the entity’s economic power post-merger.  The CFI held that the Commission had not proved to the requisite standard that the merger could result in the creation of a world dominant undertaking in the low voltage electrical equipment sector.  It found that the Commission had overestimated the economic power of the French manufacturers, Schneider and Legrand, by taking into account the entire range of its products and brands when assessing the impact it would actually have on the national markets affected by the concentration, rather than those which would be utilised post-merger[xxxix] on those markets.  Further, it was made clear that transnational effects cannot be presumed by the Commission to exist, but instead economic evidence must be provided to support such a finding[xl].

The culmination of this triology of defeats for the Commission led to the criticisms being raised that the “Commission’s processes lacked objectivity, suffered from a lack of economic analysis, were non-transparent, and failed to incorporate the checks and balances necessary to produce sound results.”[xli] The impact of which meant that calls for reform became even louder over a short period of time because the Regulation now seemed confined solely to dominance in the horizontal merger sense, and therefore, vertical mergers would de facto, fall outside of its purview.  This led to much criticism as recognised and acknowledged by the then Competition Commissioner, Mario Monti[xlii].

Unilateral effects:

By contrast the dominance standard was not apt to deal with unilateral effects (now understood as non-coordinated effects).  These relate to the ability of the merged parties to raise prices of its products or services as a result of it eliminating the competitive constraints that were in place pre-merger situation.  As a result of them not being dependent on the pricing of other decisions and pricing practices of the remaining competitors, they cannot be said to be the result of a “common policy” as attributed with collective dominance.   An example of which is where two players that play a significant role in a market made up by a few competitors merge with one another, without achieving a dominant position in that market.  These firms might be inclined to increase their prices where they have highly substitutable goods.  As a result of the merger, consumers would remain with the undertakings in question, as the alternative group offering such products has now merged, and accordingly will not be able to act as a competitive constraint on the decision taken by the alternative party.

The problem here does not rest on the fact that they are dominant players, but by the fact of them both having highly substitutable goods which the other remaining competitors’ may not be able to offer at that immediate time, or would not be able to make available without appreciable amendments in their production practices, which would arguably require considerable expenditure of their part. Accordingly, they would not be able to counter the decision taken by the merged undertaking. As a corollary, as highlighted by Horner, the only way for it to fall within the purview of the dominance test would be to ‘define an artificially narrow market that excludes other competitors in the market.’[xliii] This would be an unsavoury result, as it ignores the ‘real competitive dynamics of the market.’[xliv] It emerges from this, that a different analytical framework is required, other than the reliance on the formulaic and restrictive market share analysis adopted by the dominance test.  This reinforces the fact that, the dominance test was too restrictive to this area of competition issue.  The matter does not rest on the basis that a dominant undertaking has arisen, but by the fact that a competitive restraint has been eliminated.

The argument that unilateral effects falls outside the purview of the dominance standard is supported by Kali und Salz in which collective dominance was allowed to come within the traditional understanding of dominance because a “common policy” can arise to distort competition.  However, in the situation of unilateral effects, no such “policy” arises.  This said, it does not appear from the case law that unilateral effects were left untouched.  This said, it was always considered in addition to the finding, and application of dominance, but never as an exclusive factor on its own.

For example, in Barilla/BPL/Kamps[xlv], the Commission looked at the substitutability of products proffered by Barrilla and Kamps.  This was done to avoid the difficult task put before them of defining the relevant market of the products manufactured, in particular, whether they should be classified as ‘bread substitutes’ or, on a narrower basis, ‘crisp breads.’  However, the Commission did not undertake a detailed economic based analysis in this case.  Instead, the Commission preferred to base its finding upon market share data from past conduct and treatment by the parties and others operating within that area.  Similar treatment was given in GE/Instrumentarium[xlvi] and the Volvo/Scania[xlvii] concentrations.  This said, they unilateral effects were always treated as obiter, as a means to an end to support dominance, rather than as a determining criterion.  Accordingly, the use of such analysis, did not act as a bar for them being used under the dominance test, but as Horner argues, it “certainly undermined claims that the Commission was well prepared to tackle unilateral effects under the old ECMR.”[xlviii] Therefore it can be concluded that the CFI in Airtours added the final nail in the coffin on the coverage of collective dominance.

“Merger Gap” – myth or legend?

The 1989 Regulation has been heavily criticised for its alleged gap in merger control.  This centres around its application requiring dominance.  It can be said that it resulted in a two-fold gap.  Firstly, with regards it application to concentrations between undertakings operating in oligopolistic markets, i.e. those dominated by a few operators, it required that a dominant position was created or strengthened.  As a result, it meant that those mergers in which dominance would not arise, but nevertheless had the ability to tacitly collude with its competitors, to the detriment of consumers, would not be covered.  This is unsatisfactory; it undermines the foundations of merger control, namely, effective competition be maintained within the common market.[xlix] If the merger allows competitors to distort the market vis-à-vis price fixing for example, it is hard to understand and comprehend how effective competition can take place.  Secondly, the test takes a restrictive focus range – too much attention being paid on market structure.  Accordingly, palpable opportunities arose in which competition could be curtailed and damaged because the effects of the proposed merger were considered as secondary.

This has been subsequently confirmed by Maudhuit[l], and later reinforced by the former Competition Commissioner, Mario Monti in 2001[li].  Maudhuit argued that the emphasis was misplaced.  The 1989 substantive test should not be founded upon dominance.  Instead the effect it would have on consumers is the crucial factor.  The key question therefore, is would consumer welfare be harmed should the notified merger be permitted?[lii] The need to shift emphasis was restated by Monti:

“the actual goal of competition law was to confer protection of consumer welfare, which is made possible when there is a high degree of competition in the common market.”[liii]

Furthermore, the liberal interpretation that was given to the dominance test, and the additional tweaking gave rise to legal uncertainties.  This is evident from the discussion given earlier of the cases of, Airtours, Tetra-Laval and SchneiderAirtours effected the emplacement of a strait-jacket on the coverage of collective dominance[liv].  This is seen with the culmination of non-coverage to unilateral effects.[lv] This is made clearer in the Sony and Bertelsmann merger. [lvi] It concerned a joint venture in the music industry aimed at the realisation of the discovery and marketing of music artists.  However, the Commission considered that the effect of which was to reduce the number of market leaders; in this instance from five to four.  Further, evidence of parallel pricing of music products was present.  Accordingly, there were grounds that there were potentially avenues in which effective competition could be harmed.  Yet, the criteria laid down in Airtour’s could not be met.  As a corollary, the merger proceeded.  It appeared therefore, that the end had been reached to a flexible interpretation of the dominance test.  Mergers with the ability of having detrimental effects could not be countered as the dominance thresholds could not be attained.  The effectiveness of the approach that had been adopted under the 1989 Regulation was rapidly declining, indeed it was dying.[lvii]

However, Müller and Böge have argued that there was no need to amend the substantive test.  In their opinion there is no merger gap, and that the dominance test, and US test of SLC arrive at the same results, even though the methods to achieve that result may be different[lviii].  They discredit the reliance on The Heinz/Beech-Nut[lix] example, which is often quoted as the key example of the merger gap.  They argue that dominance could have been established on the basis of showing that there was a lack of internal competition between Gerber on the one hand, and Heinz on the other[lx].  Further, they discredited the argument based on Airtours.  The made the contention that the appeal to the CFI was on the evaluation of evidence used to make its finding, as opposed to the validity of the dominance test[lxi].  They conclude by stating that, a change towards an SLC based test is illusory, because different competition authorities are inherently going to come to different conclusions about the operation of the merger in question.[lxii] However, there comments are highly subjective; Böge is the President of Bundeskartellamt and Müller the Head of Unit German and European Merger Control, Bundeskartellamt.  It is interesting in that the Bundeskartellamt undertook an empirical study in 2001[lxiii], concluding that the dominance test was satisfactory.  Accordingly, they are going to support the conclusions rendered by this institution, otherwise, they would undermine the organisation that they represent.  Moreover, the discussion rendered in their article is very brief and pays superficial attention to the issue at hand.

The substantive test in the 1989 Regulation appears to suffer from several flaws.  It transpires that mergers resulting in unilateral effects were left in a precarious position.  This was so where there existed only a limited number of undertakings being left in the post market situation, with none of them being in the position to be considered to have attained a dominant position.  It is questionable also whether collusion would be feasible in such markets[lxiv].  This gave rise to the potential for undertakings to increase prices where efficiency gains were not attainable after the merger, resulting in negative effects for consumer surplus and welfare.  This said, from the wording of the substantive test, it would appear that they could not be prohibited[lxv].  Further, the 1989 Regulation failed to take sufficient account of any efficiency gains that might arise from the proposed concentration with the result that mergers might be prohibited because dominance had been achieved, without looking at the countering facts to any finding of a significant impediment to effective competition.  These efficiency gains, far from impeding competition, could increase the consumer value and surplus, with the effect that their welfare would be increased.  Accordingly, it is evident that mergers that could give rise to a SIEC would be cleared, whilst on the other hand, mergers which could allow for increased consumer welfare could be prohibited.  These problems will become clear in the detailed discussion given below on the practice by the Commission, CFI and ECJ under the 1989 substantive test.


The 2004 Merger Regulation & Practice

The new substantive test is contained within Article 2(3) which states that:

“A concentration which would 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 dominance position, shall be declared incompatible with the common market.”

The new test is based upon a oligopolistic market model, the aim of which is to enable “…the Commission to intervene against all anti-competitive mergers…’[and to bring to]’… an end a long-running debate about the scope of the old ‘dominance test’”[lxvi].  On an initial interpretation of the substantive test, this would appear to be confirmed.  It can be seen that the Commission is charged with one task, namely determining whether a significant impediment to competition (SIEC) arises.  Looking to the wording of this provision, in particular, the requirement of a ‘significant impediment’, this implies that it has to be more than de minimis, and therefore will require evidence that a material reduction or hindrance in competition within the relevant market will potentially arise[lxvii].  It has been held arise where a ‘substantial alteration’[lxviii] arises, which will exist on a lasting basis[lxix].

It is also apparent that there is no longer a mandatory requirement of dominance – the “legal straightjacket”[lxx] has gone!  Instead, the sole question now for determination is “whether the remaining competition would be significantly weakened”[lxxi] in the post-merger environment.  As a corollary, the test appears to have been simplified, focusing in on the effects that the notified concentration might have[lxxii].  Put in another way, the “new Regulation now contains a clear and unambiguous, effects-based competition test”[lxxiii]; by contrast, to the rigid structure enshrined in the 1989 substantive test.  Therefore, it is arguable that the test has become broadened, as compared to the test under the 1989 Regulation.  As stated in recital 25, “…this Regulation permits effective control of all such concentrations”[lxxiv].

However, it is evident that the concept of dominance has not been confined to the scrap-heap.  A detailed inspection of the Regulation indicates that dominance still has a key role.  The use of ‘in particular’ in the wording of the new test gives the impression of this, and the fact that it has not been wholly eliminated from the substantive test supports this conclusion further, (even though it appears as an add on).  Further, although it might appear that the new test has been widened – by removing the requirement that dominance be present as a founding criterion – the breadth of it seems to be limited.  This is supported by Recital 25 of the 2004 Regulation where it states:

“The notion of “significant impediment to effective competition” in Article 2(2) and (3) should be interpreted as extending, beyond the concept of dominance, only to the anti-competitive effects of a concentration resulting from the non-coordinated behaviour of undertakings which would not have a dominant position on the market concerned.”

A strict interpretation of recital 25, gives the impression that dominance is of central importance to those concentrations which give rise to, or can be characterized by co-ordinated behaviour.  Therefore, it would seem that where this type of behaviour arises, that it must result in dominance, and nothing less.  Moreover, it can thus be deduced, that where non-coordinated behaviour arises, or has the potential to arise, then dominance does not have to be satisfied, and that a more flexible interpretation can be undertaken in this area.  As a result of recital 25, Völcker has come to the conclusion that the Commission “has no greater powers to challenge vertical or conglomerate mergers” under the 2004 substantive test[lxxv].

However, Lindsay is of the opinion that the SIEC test is flexible, and that recital 25 does not pose a problem to this viewpoint being adopted.  This is formed on the basis that co-ordinated behaviour requires that the criteria set out in Airtours arise[lxxvi], and that accordingly, those concentrations not fulfilling those criteria will be considered as non-coordinated[lxxvii].  This is further reinforced by Fountoukakos[lxxviii].  Adopting this viewpoint, Lindsay argues, that provided that the Commission treats vertical and conglomerate effects as non-coordinated, then the 2004 substantive test offers a wider coverage for the application of the merger control rules, to ensure that effective competition is maintained[lxxix].

Further support to the claim that the 2004 SIEC test is limited can be taken from recital 26 of the Regulation.  It highlights the desire to preserve the guidance given in the 1989 Regulation case law that developed until 1 May 2004.  As a result, one might presuppose that practice under the 2004 test will not substantially, or appreciably differ than under the old regime.  Indeed, as recital 26 states, a SIEC “…generally results from the creation or strengthening of a dominant position” (emphasis added).[lxxx]

As a result, some academics have concluded that nothing really will change[lxxxi] in their educated opinions in the way in which the majority of mergers will be dealt with.  This is formed on the basis that the majority of mergers are horizontal in nature.  Put in another way, concentrations between two or more undertakings from the same relevant product or service market; for instance, a merger between two supermarket chains such as Tesco and Asda.  They argue that dominance will still play a key role in assessing and determining whether a SIEC arises.  Accordingly, they consider the change in the substantive tests, in terms of its word arrange, as de minimis, and support this on the basis of the preamble stating that it has been recast to allow greater clarity.[lxxxii] However, as academics such as Heimler[lxxxiii], have argued, the nature of merger control has changed for the better, resulting in greater coherency and legal certainty – the effect of which resulting in a greater number of merger appraisals.  As a corollary, it will facilitate a clearer and more advantageous post merger competition climate that was not previously available.  This can be explained by the nature of the 1989 substantive test having a mandatory requirement that the concentration will result in dominance being achieved.

An additional observation that can be made at this stage, relates to international convergence.  The SIEC test is not too dissimilar to the American styled, significant lessening of competition, SLC test.  Both focus on the effects of the concentration, with the aim of facilitating and maintain effective competition in the market place.  As a result, it is arguable that now both Europe and USA can learn from one another, the effect of which may be to avoid the situation of Honeywell[lxxxiv], where it was cleared in the US and prohibited by Europe[lxxxv].  However, with still having ruminants with the concept of dominance, and as a result a hybrid test, it has been argued that we have the best of both worlds.[lxxxvi]

IN PRACTICE

In practice, the approach adopted by the Commission under the new substantive test is comparative to that which took place under the 1989 Regulation.  It is clear that there has been “no sharp break with the past.”[lxxxvii] Indeed, the former Competition Commissioner, Mario Monti even stated in the lead up to the change that the Commissions approach would not alter.  He reinforced the idea that the reform was one of clarification by adding that ‘…the wording of the new test focuses unambiguously on the impact of a merger on competition.’[lxxxviii] Lindsay offers the argument that the Commission had been applying the dominance test in an effects based manner in the past, to support the reasoning behind this.[lxxxix] However, there is evidence that a slight change in stance is being adopted (see case-law discussion below).

Before looking at the case law, there have been speculations made about how the new substantive test will develop.  According to Levy, three main predictions can be made:

(i)             More attention will be focused on “assessing the competitive effects” as opposed to the market definition

(ii)           Greater emphasis will be placed on looking at the “nature and extent of competition”

(iii)          The Commission will still be required to satisfy the requisite legal standard demonstrating anti-competitive effects.[xc]

The question now arises, have any of these predictions come true? Having undertaken a detailed analysis of the recent practice by the Commission[xci] in its merger appraisal, it is evident that a more economic based analysis is being undertaken. Whilst in some circumstances continued reference and reliance has been made on the notion of “dominance” in early cases under the 2004 Regulation[xcii], the most recent cases show promising evidence that a wider, and more detailed appraisal is being entered into.  A few examples are detailed below. 

Google / Double concerned a merger between the favoured internet search engine, Google and an ad serving management and reporting technology company, Double Click.[xciii] The Commission took a detailed assessment of the pre and post merger environment, with the ultimate conclusion that a SIEC would not arise. Principally this was reached on the basis that there were sufficient competitors[xciv] in the market for ad serving tools to prevent Google and Double Click from causing harm to consumers[xcv]. This was further supported by the finding that in the period between 2003 and 2007, Double Click had reduced its charges for its services and tools as a result of competitive pressure.  Moreover, it was identified that companies could deal with ad serving in house, and accordingly could use this internally and market it outside to others – further increasing competitive constraints on the new entity.[xcvi] In addition, it was considered that subscribers had alternatives to those offered by the new entity, and that the process of switching from one undertaking to another was feasible and not likely to be hindered[xcvii] – this was facilitated by the finding that the nature of the previous commercial transactions by Double Click meant that subscribers of their services were not tied into long term contracts, with the duration ranging between one to two years[xcviii].   However, it was accepted that for larger undertakings, this process might incur some time delays but that this was to be expected from such undertakings.[xcix] At the beginning of the process an initial concern was raised as a result of the market shares.  This said, it is clear that the Commission did not overly rely on these, and merely treated them as indicators.

Another example of a detailed analysis being undertaken in addition to utilising market shares alone is the proposed merger between Ryanair and Aer Lingus[c].  The Commission looked in detail at the flight operations of Ryanair and Aer Lingus, concluding that allowing the merger to proceed would result in a SIEC because Aer Lingus acted as a competitive constraint by Ryanair.   This was arrived at on the basis that the two airlines operated from Dublin Airport, and had overlapping routes, and the fact that it would result in approximately the combined entity having an 80% ownership of European bound flights.  Furthermore, other operators would not be able to compete effectively due to past behaviour of Ryanair.  This was evidenced when Easyjet had attempted to enter the market in the past and forced out.  The Commission also looked at the clientele of the airlines, reaching the conclusion that it was holiday makers and tourists that used these firms and that airlines, such as British Airways, served the business users due to their increased costs of travel.  Though reliance was made to market share that the combined entity would have, the detailed appraisal confirmed the concerns initially raised.

Another key example is Thomson Corporation / Reuters Group[ci].  The assessment highlighted that the merger would result in a combined entity reporting on financial markets and business operations which would not be able to be challenged effectively by its competitors.  This was reached when it was discovered that its competitors generally focused only upon the US markets.  Accordingly, a gap would emerge in the competition with the proposed entity having ‘the largest depth and breadth of data’ on business matters on a global basis, with almost exclusive coverage of the UK and European markets.  As a result, the Commission concluded that Thomson Reuters would have the incentive to increase prices for its services, and that barriers to entry would be present as a result of their reputation and expertise in this area.[cii] Interesting, the assessment did not focus upon the market shares of the undertakings, but more on the effects that it would have on the market.  This was achieved by looking at structural links, their expertise, the alternatives available and the likelihood of entry of new competitors.  Similar treatment is also given in the Commissions assessment in T-mobile.[ciii]

CHAPTER 3: THE IMPACT OF THE 2004 REGULATION

This chapter along with chapter 4 will look at the implications of the new substantive test.  It will comment on the potential oversights that have arisen since the 2004 Regulation came into force.  It will highlight that particular discrepancies arise and will need to be looked at in some detail by the concerned bodies if the aims of merger control are to be met to a very high standard.

Does the “Merger Gap” remain?

Since the application of the 2004 merger regulation, the treatment of merger appraisals has undergone a period of continuity in practice, not too dissimilar to the 1989 Regulation practice[104].

The gap in relation to oligopolistic markets characterised by the second largest firm merging with another competitor[105] seems to be closed.  Under the application of the dominance test, as stated earlier, it was unlikely that such concentrations would fall within the remit of the Regulation and therefore be left for national competition authorities to deal with, even if the Community dimension was engaged[106].  With the removal of the dominance test, providing the Commission can establish the required legal standard of SIEC, then coverage will be given, resulting in an assessment being rendered.  As a result of which, a wider array of concentrations will be checked to ensure that effective competition is maintained.

Furthermore, Fountoukakos and Ryan[107] are of the opinion that it is unlikely that we shall see similar overruling such as those given by the CFI in Airtours, Schneider and Tetra-Laval.  Indeed they stated that “by directly and unambiguously asking the right question and focusing on the economic consequences of mergers rather than on legal concepts, the new test ensures that all mergers that should be caught…[are caught].”[108]

Moreover, the new test has the effect of curtailing the opportunities for new gaps to emerge.  With the 1989 Regulation, a common theme throughout was to stretch the dominance to its perilous limits in order to attempt to bring the matter within the purview of the EC Merger control system[109].  By contrast, the new system, with its flexible ambit means that such creativity will not need to be adopted.  As a direct consequence, legal certainty in this area has been restored with explicit emphasis being given to SIEC.

Potential Oversights in the 2004 Merger Regulation

The new substantive test promises so much.  It has been seen that it now, in theory allows the Commission to undertake a more detailed analysis of notified mergers to see what the effect will be on the relevant markets.  However, in practice severe questions can be raised as to whether a detailed analysis will be undertaken, especially in the forming years of the case law in this area.  It is interesting to note, that to date, focus is still paid to market shares and the traditional, rigid formulaic approach adopted under the 1989 Regulation.  Indeed a similar comment has been raised by Volcker[110].  He points out that it may be some time before a detailed econometric analysis as undertaken in the United States will be achieved.  This said, there have been indications on the part of the Commission in their keenness and interest in this form of analysis[111].

This said, concerns have to be raised as to how successful the impact of the change will be.  On the one hand, it has equipped the Commission with a more flexible test, allowing for economic analysis to be undertaken.  However, on the other hand, considerable cut backs have been made in recent years in the work force dealing with mergers.  Accordingly, questions can be raised as to the ability of the staff members to appropriately apply economic analysis.  This has to be considered in light of their being a lack of Ph.D level analysts in the economic field.  As noted by Volcker, “it cannot be expected that the Chief Economist and his staff will be able to devote substantial time o the details of econometric evidence in individual cases, in particular given the current practice that a member of the Chief Economist’s staff joins the case team only in Phase II.”[112] Furthermore, it has to be questioned as to how effective the Chief Economist will be in ensuring that effective analysis is undertaken.  It has been suggested that the Commission tend to utilise information in their analysis to bolster their case, and therefore may overlook and engage in short-cuts[113].

Criticisms have also been made about the wording of the Regulation.  Schmidt is critical of Article 9 with the wording: “substantial part of the common market”, “distinct market” and “threaten to affect significantly competition” [114].  She argues that these clauses are inherently vague, and that perhaps more has to be done to clarify these[115].  However, she does accept that some guidance is made available from the case law and past Commission practices, with the decision in Royal Phillips[116] being of notable importance.  Furthermore, she levels criticism at Article 22 which deals with the referral system to the Commission, in which she considers it to be vague and liable to result in legal uncertainty, especially when dealing with the discretionary criteria for referrals[117].

Another concern might be made about the practice under the differing Competition Commissioners.  For instance, Bumgardner makes the comment that the impact of the Merger Regulation is dependent upon the governing Competition Commissioner, and the weight that they attach to competition policy.  He points out that Mario Monti was a harsh competition commissioner.[118] By contrast, Neelie Kroes, the current competition commissioner has been considered to be a more business minded individual, and therefore she might be more lenient in the application of the Merger Regulation.  However, during his discussion, he has pointed out that Kroes is particularly mindful of achieving fairness and justice in this area.  Ultimately, Bumgardner concludes that it is dependent upon the approach that she will adopt.

Concern has also been expressed about the number of substantive tests around the world on merger control.  Eklöf argues that due to their being three substantive tests being utilised globally, that more legal uncertainty will arise in the future – (these being the SLC, SIEC and dominance tests)[119].  However, this author is inclined to disagree.  Whilst it is accepted that presently, three test exist, the SLC and SIEC have similar operation, and it is likely that as time passes, and the operation of the SIEC test by the Commission, that those Member States operating with the dominance test, will either switch, or move their analyses more in line with the SIEC approach.  Additionally, Eklöf does point out that in the interim, that until the 2004 SIEC has been in place for a number of years and substantial practice under it arises, then some confusion may occur.  This said, she does accept that in the long run this will be ameliorated[120].

CHAPTER 4: “Reform & suggested implications”

An overview

It is this author’s contention that the Horizontal Merger Guidelines[121] places mis-emphasis as to how a significant impediment to effective competition arises.  The focus is too heavily tied to the concept of dominance which is evident in the opening introduction when it states:

“The creation or the strengthening of a dominant position is a primary form of such competitive harm.”

This, along with the omission to make specific reference as to other ways in which a SIEC arises at the outset implies to undertakings that they need not be too concerned when they believe the concentration that they propose to enter into will not give rise to such an event.  This is then further reinforced in paragraph 1.4, and is a recurring theme throughout the Guidelines.  Accordingly, it gives a wrong impression, as highlighted earlier, the Regulation now attaches to mergers that fall outside of the strict understanding of dominance.  This said, emphasis is made to ‘increased market power’, i.e. the ability to profitably increase prices post-merger.  This according to Heimler[122], and as expressed earlier by myself, is at the heart of all merger control systems.

Moreover, it has been seen that dominance is still the central concern in practice, when the Commission blocks a proposed concentration.  In itself, this should not be of too much concern, as dominance does play a vital role.  However, the Commission generally uses this criterion as an end in itself, rather than an indicator to come to the end conclusion – the latter being the interpretation, which should be adopted in my opinion.  This is a criticism which has also been made by Heimler[123].

Accordingly, it should be proposed that a new set of Horizontal Guidelines should be produced.  As stated in the Guidelines, “the Commission may revise this notice from time to time in light of future developments”.  Further, the Guidelines were produced and issued before the new Regulation came into place[124] and therefore, it needs to be synchronised with the practice that has come about under it. With this in mind, one might submit that this ‘time’ has arrived.  This argument being reached on the basis that the continued theme in the discussion leading up to the new test was the importance of economics (see discussion earlier).  As a result, this needs to be made paramount at the outset of the Guidelines, in the section labelled ‘introduction’, which is not prevalent at present.  Furthermore, included in this section should be a statement to the effect that merger control is concerned with the ability of the newly merged undertakings to profitably increase prices in the post merger environment.  This in itself should be set as the benchmark and not making explicit continued reference to dominance.  By doing so, it will import into the Guidelines, as read by the relevant persons of the concerned undertakings proposing a concentration, to determine whether it is likely that this will be achieved.  If the decision is reached that it will, then it can help them to formulate different forms of remedies at the outset of the notification, as opposed to the final stages.  This might then have the positive effect of being able to quicken the speed in which the notification is dealt with – as noted earlier; time is of the essence in such matters as usually a lot is at stake.

Moreover, the role of dominance should be downplayed.  Whilst it should state that dominance is an important factor, it needs to be unequivocally stated that it is only a factor in a multiple of other relevant factors when the Commission carries out its assessment.  Put another way, it should be considered to be part of the jigsaw, not a central feature, not an ancillary one, but a collectively integral one making up the whole of the complex puzzle.  The corollary being that the amendments will further bring it into line with the focus made in Regulation 139/2004 to the gap cases situation, discussed above.  This said, it is accepted that great care and attention will have to be made by the authors to ensure that legal certainty remains and eliminates the possible avenues of ambiguity.  Otherwise, it will risk undermining the Regulation which was sought to re-clarify this area of law.  As to how this should and can be achieved cannot be discussed here, due to it being a complex matter requiring a multi-faceted interchange of minds of such groups as: lawyers, economist and linguist (just as a few examples).

With regards the Merger Regulation itself, this author does not consider it necessary, nor prudent for amendments to be made at this time.  The Regulation has only been in place for 4 years and 4 months (at the time of writing).  To amend now would be to undermine the concerns behind it, namely maintaining legal certainty.  Indeed, it is arguable that no amendments need to be made.  As stated earlier, the new Regulation has inserted appreciable flexibility, removing merger control from the straitjacket which it was in previously[125].  Moreover, as a cursory statement, the 1989 Regulation was in force for over a decade, and arguably so to should the 2004 Regulation.  This decision being reached on the ground that it brings the EC merger control system more in line with international practices – the result of which being that a wider avenue of debate has been realised, as those authorities can now look at the merits and demerits of their neighbours operations.  Indeed, the task now is to let the course of time pass to allow for developments and understandings to be reached, otherwise severe damage may come to fruition in this area, that is EC merger control.  This said, this does not mean that one should get complacent.  The task now is to develop the system, but under a watchful eye, of practitioners, the European Community system itself, and by academics and economists.  Together, this will help ensure that the right developments take place and that active participation is realised.

The Proposal – ‘The future of EU Merger Control’

In terms of models, or suggestions that ought to be implemented in the Horizontal Merger Guidelines to come, it is suggested that the following should be considered.

As stated earlier, the focus of merger control rests with market power[126] that the newly proposed merged entity will have (hypothetically speaking, as circumstances might change post-merger).  However, to date, too much attention has been paid to market shares.  The new stance should inject flexibility, as made possible by the SIEC test, but not yet realised.  Accordingly, it should be states that, market shares should be taken into account, in as much as they act as an indicator of the effect that the proposed transaction with have on the relevant geographic and product markets.  However, this in itself should not mark the final stages of the assessment – merely a supporting factor.  Instead attention should be made to all relevant factors, including the ability of the remaining competitors to curtail any anti-competitive behaviour.  This can result whether they are in a position to increase output, reduce costs, or further increase consumer welfare by other means.  The Commission should undertake a detailed appraisal of the structural links, the effect of them, the economic ability of competitors to invest in expansion, the knowledge and expertise of the undertaking in question against that of other competitors on the market and any barriers to entry.  By doing so, the Guidelines will evidence the developments that have taken place in recent cases like Ryanair / Aer Lingus[127] and Thomson Corporation/ Reuters Group[128].

By demoting the status of market shares, it is hoped that this will have two effects.  Firstly, the Commission may be more inclined to render a broader, economic based assessment, ensuring that the Merger Regulation is read in a flexible manner taking into account the present financial markets.[129] Secondly, it should have the knock on effect of making those interested in entering a concentration to take a detailed consideration, to ensure that it can address the Commission properly, and present supporting documents.

Furthermore, is should be made paramount that efficiencies that may be generated to counter any concerns raised by the market shares themselves, will be taken into account, providing that they will be conveyed onto consumers, increasing their welfare in the medium to long term.  If the Commission then considers that these are likely to materialise in all likelihood, then it Guidelines should state that the merged entity will, in general, be cleared, subject to any anti-competitive effects offsetting them.  Conversely, if the Commission reaches the conclusion that this is very unlikely in the circumstances, the Guidelines should stipulate that the proposed transaction is unlikely to be cleared, unless sufficient remedies are entered into to ameliorate the problems so highlighted.  By doing this, it reinforces the notion that the Commission desires the undertakings to fully co-operate, and that they find it desirable for mergers to take place, providing a balance competitive environment remains.

Specific regard should be made to the definition of ‘medium to long-term’.  This should be defined as a period ranging between two to five years.  This will then allow the Commission to take into account that before the duration of 2 years lapses, that a period of transition should be allowed in order for the newly created entity to become fully operational, in which time, the proposed efficiencies may not be able to materialise.  Moreover, the Guidelines ought to reinforce the idea that Articles 81 and 82 EC as still directly applicable in the post-merger environment, and that any anti-competitive conduct may be considered to fall under their purview.  This said, it must also be made paramount, that the Commission will appoint an independent trustee to act as a monitor to review the said efficiencies gains[130].  This trustee should be charged with the task of reporting back and concerns be it anti-competitive or otherwise, in which these efficiencies are unlikely to develop, or if lapses in them arise.  By doing so, it will enable to Commission to ensure that effective competition is maintained.

Suggested developments alongside the Guidelines

Further investment needs to be made into the resources of EU Merger Control.  The current statistics released European Competition website[131] indicates that the number of notified cases has increased from 11 in 1990 to 402 in 2007.  Moreover, there has been an increase from 247 in 2004, with 2005 and 2006 seeing 313 and 356 cases notified respectively.  However, there have been cutbacks in the amount of staff.  Accordingly, it can be questioned as to the satisfactory nature of review and attention that is being given.  As a result, it is suggested that additional investment is made to the European Competition Commission to focus upon Merger Control, to ensure that they employ talented economic minded and intelligent individuals to ensure that the Commission is able to continue to meet the increasing demands of merger control.  One solution might be to employ junior and senior economists.  They could then appoint a junior economist to deal with Phase I merger control concentration and senior ones for the more complex appraisals falling in Phase II.  This will have the effect of allocating good resource management.  By doing so, it is anticipated that this will help facilitate the continued development of Merger Control with emphasis on the role of economics, in providing supporting evidence for conclusions and decisions to be reached.

CONCLUSION: ‘A GOOD START, BUT MORE IS NEEDED’

It has been seen that economics should, and indeed must play an important role in any merger control system – failure to implement them effectively, will have the negative effect of preventing a detailed assessment to be rendered.  With this in mind, it has been demonstrated that the 1989 Regulation has incurred appreciable problems over the decade in which it was in force.  In particular, the Commission had attempted to deviate from a literal wording of the substantive test set out, by the creation of the concept of “collective dominance”.  Accordingly, it resulted in a misfit in some areas.   Even though it did have significant inroads in this area, it has been seen that the effect of the Airtours case was to confine this to highly restrictive boundaries of application.  Furthermore, and more importantly, this case put the final nail into the coffin, in that unilateral effects were unequivocally ruled to fall outside the application of the dominance substantive test.

Moreover, this author has demonstrated that the 2004 Merger Regulation brought with it a significant development in this area, moving the boundaries of assessment from being mandatorily founded upon a finding of dominance to a more flexible situation in which a the central question is now whether a significant impediment to effective competition arises.  However, this said, it is evident that the Commission to date has been reluctant to undertake a more detailed, and sole reliance on other factors, and that in the main, market shares falling under the 1989 Regulation test is still being relied upon.  It has thus been argued that this is unsatisfactory, yet an explanation has been rendered to explain why this may be the case.

In light of this, this author argues that much more has to be done.  As the 2004 Regulation has equipped the Commission with a more flexible approach, it is time that it utilises this.  Market shares should be used as a factor, but should not be the founding point on which to rests its soul finding of a SIEC.  In the developing period now, it is arguably necessary for the Commission to consider re-evaluating the role that the Chief Economist and his team have to play, and shift its application from Phase II, to a more active role in Phase I.  It is hoped by doing so, that the Commission will be given the incentive to utilise the wider window in which it has been conferred.  Further, it is apparent that it is too early to speculate about making any amendments to Regulation 139/2004 at this time.  Nevertheless, the secondary sources, in particular the Horizontal Merger Guidelines should be amended so as to downplay the importance of dominance, and instead recast it as one as being a collectively integral piece of the merger control jigsaw.  This said, overall, the SIEC test gives rise to more coherency, legal certainty and importantly, better international convergence in merger control, similar to that of the US, which is an important trading economic area.


[1]


[i] Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings available at:

<http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004R0139:EN:NOT&gt;

[ii] Article 26(1) 139/2004

[iii] Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings

[iv] The former Competition Commissioner, Mario Monti even stated that it has now conferred on the “the European Union with a modern, more flexible and efficient legislations to cater for the interests of 450 million consumers from 1 May [2004].” – see further, Commission Press Release, 20/01/2004, IP/04/70 –  “EU gives itself new merger control rules for 21st century”, accessible from <http://europa.eu/rapid/pressReleasesAction.do?reference=IP/04/70&format=HTML&aged=0&language=EN&guiLanguage=en&gt; (last accessed 25 July 2008)

[v] This can be seen with the creation of the position of Chief Economist and see further Nicholas Levy “Mario Monti’s Legacy in EC Merger Control” (2005) Competition Policy International Vol. 1, No. 1 available at:<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=702649>  see page 100

[vi] Recital 8

[vii] Article 3(1) Regulation 139/2004 see also recital 20

[viii] Article 2(1)

[ix] Andreas M. Klees, “From ‘Airtours’ to ‘IMPALA’ – Collective dominance under European merger control” (2007) Panóptica 1(8) 351 at 351available at <http://www.panoptica.org/maio-junto2007/N.8_015_Klees.p.351-367.pdf&gt;

[x] See for example the recent prohibited merger, Case COMP/M.4439 Ryanair / Aer Lingus [2008] OJL 47/9

[xi] Klees ibid at 351

[xii] See further recital 4 Regulation 139/2004

[xiii] Attenborough, Jimenez & Leonard, “Are three to two mergers in market with entry barriers necessarily problematic?” (2007) ECLR 539 at 539

[xiv] See further, Article 2(1)(b)

[xv] Attenborough ibid at 539

[xvi] Alistair Lindsay, “The EC Merger Regulation: Substantive Issues” 2nd Edition (2006, Sweet & Maxwell, London) at p.1

[xvii] Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2004/C 31/03) available at

<http://eurlex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=en&numdoc=52004XC0205(02)&model=guicheti&gt;

[xviii] Kyriakos Fountoukakos & Stephen Ryan , “A new substantive test for EU merger control” (2006) European Competition Law Review 277 at 281

[xix] Article 2(2)-(3) of Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings OJ L395, 30/12/1989 with amendments introduced by Council Regulation (EC) No 1310/97 of 30 June 1998, OJ L180, 9/7/1997

[xx] ibid

[xxi] Alistair Lindsay ibid at 5

[xxii] Case 27/76 United Brands v Commission [1978] ECR 207; [1978] 1 CMLR 429

[xxiii] COMP/M. 41 Alcatel/Telletra [1991] OJ, L122/48

[xxiv] ibid

[xxv] See further Fountoukakos ibid at 280-281.  See also Case 27/76 United Brands Co v Commission [1978] ECR 207; [1978] 1 CMLR 429 which prescribed the definition to be given to dominance

[xxvi] See for example M.1672 Volvo/Scania [2001] O.J. L.143/74; and M.1980 Volvo/Renault [2000]

[xxvii] This started with Nestle/Perrier and confirmed by the ECJ in Kali und Salz and by the CFI in Gencor

[xxviii] Case C-68/94 Kali & Salz [1998] ECR I-1375

[xxix] ibid para 170

[xxx] Case T-102/96 Gencor v Commission [1999] ECR II-753

[xxxi] ibid at para 106

[xxxii] Neil Horner, “Unilateral Effects and the EC Merger Regulation – How the Commission had its cake and ate it too” [2006] Hanse Law Review Volume 2 Number 1, page 23 at p.24 available at <http://hanselawreview.org/pdf3/Vol2No1Art03.pdf&gt;

[xxxiii] ibid at para 126

[xxxiv] See Horner ibid

[xxxv] Ioannis Kokkoris, “The reform of the European Control Merger Regulation in the aftermath of the Airtours Case – the Eagerly expected debate: SLC v Dominance Test” (2005) European Competition Law Review 26(1) 37 ibid at 37

[xxxvi] Case T-343/99 Airtours plc v Commission [2002] ECR II-2585; [2002] 5 CMLR 7

[xxxvii] Case T-310/01 Schneider Electric SA v Commission [2002] ECR II-4071

[xxxviii] Case T-5/02 Tetra Laval BV v Commission [2002] ECR II-4381

[xxxix] ibid at paras 239, 256-257 & 262

[xl] ibid at paras 171 & 179

[xli] Deborah Majoras, “Reflections on the evolution of European Community Competition Policy Under Commissioner Monti” [2005] Geo. Mason L.R 13(2) 251 At 254

[xlii] At page 2, per Mario Monti, former Competition Commissioner, ‘Merger Control in the EU: a Radical Reform’ European Commission / IBA Conference on EU Merger Control, Nov 7, 2002 (Brussels) available at <www.europa.eu.int/comm/competition/speeches/index_by_the_commissioner.html>

[xliii] Neil Horner,”Unilateral Effects and the EC Merger Regulation – How The Commission Had Its Cake and Ate it Too” [2006] Hanse Law Review (HanseLR) Vol2, No 1, 23 at page 27

[xliv] ibid

[xlv] Commission Decision, M.2817, June 25, 2002

[xlvi] Commission Decision, M.3083, September 2, 2003 see in particular paras 142-148

[xlvii] Commission Decision, M.1672, March 15, 2000 paras 82-83 and 107

[xlviii] ibid at 29

[xlix] See the preamble of the 2004 Merger Regulation, ibid and the Commission Green Paper on the Review of Council Regulation (EEC) No 4064/89 Brussels 11/12/2001 COM(2001) 745/6

[l] Sylvie Maudhuit and Trevor Soames, ‘Changes in EC Merger Control: Part 2’ (2005) European Competition Law Review 26(2), 75 at 75

[li] Lawrence Summers, “Perspectives on Competition: Competition Policy in the New Economy’ (2001) 69 Antitrust Law Review 353 as referenced by Horner ibid at page 25

[lii] ibid

[liii] ibid

[liv] See Case T-374/00 Verband der freien Rohrwerke e.V. v Commission [2004] 5 CMLR 13 at para 121

[lv] See Airtours ibid para 62

[lvi] Case COMP/M.3333, Sony/BMG

[lvii] See further, K. Fountoukakos & Stephen Ryan, “A new substantive test for EU Merger Control” (2006) European Competition Law Review 277 at page 283

[lviii] Müller & Böge, “From the market dominance test to the SLC test: are there any reason for a change?” (2002) ECLR 495

[lix] ibid

[lx] ibid at 496

[lxi] ibid at 497

[lxii] ibid at 498

[lxiii] Bundeskartellamt Discussion Paper  “Prohibition Criteria in Merger Control – Dominant Position versus Substantial Lessening of Competition?” for the meeting of the Working Group on Competition Law 8-9 Oct 2001 available at <http://www.bundeskartellamt.de/wEnglisch/download/pdf/ProPap01-Mantel-e.pdf&gt;

[lxiv] See further, Motta, “EC Merger Policy, and the Airtours case”, pages 6-7 available at <http://www.iue.it/Personal/Motta/Airtours2.pdf&gt;

[lxv] See further, Korah “Gencor v Commission: Collective Dominance” [1999]ECLR 6 337

[lxvi] Competition Policy Newsletter (Special Addition) “Interview with Mario Monti, Commissioner  responsible for competition: The EU gets new competition powers for the 21st century” (2004) page 2 available at <http://ec.europa.eu/comm/competition/publications/cpn/special_edition.pdf&gt;

[lxvii] See further Case T-210/01 General Electric Company v Commission [2005] ECR II-5575 at para 543

[lxviii] Case T-2/93 Air France v Commission [1994] ECR II-323 at paras 78-79 and Case T-102/96 Gencor v Commission [1999] ECR II-753, para 170

[lxix] See further, Case T-342/99 Airtours plc v Commission [2002] ECR II-2585 at para 58

[lxx] Fountoukakos & Ryan “A new substantive test for EU merger control” [2005] ECLR 277 at 288

[lxxi] Case T-5/02 Tetra Laval BV v Commission [2002] ECR II-4381at para 285

[lxxii] Colley “From Defence to Attack? Quantifying Efficiency Argument in Mergers” [2004] ECLR 25(6) page 342-346

[lxxiii] “A Pro-Active Competition Policy for a Competitive Europe” (20 April, 2004) at page 12, available at <http://ec.europa.eu/comm/competition/publications/proactive/en.pdf&gt;

[lxxiv] In relation to both, non-coordinated and co-ordinated effects

[lxxv] Völcker, “Mind the Gap: Unilateral Effects Analysis Arrives in EC Merger Control” [2004] ECLR 395 at 404

[lxxvi] For the criteria see commentary earlier on the practice under the 1989 Regulation

[lxxvii] Alistair Lindsay, “The EC Merger Regulation: Substantive Issues” (2006, Sweet & Maxwell, London) 2nd Edition page 51

[lxxviii] Ibid at 290.  Ryan & Fountoukakos state that Recital 25 “…places no meaningful boundary on the substantive test”

[lxxix] Lindsay ibid at page 52

[lxxx] This is further supported by point 4 of the Horizontal Merger Guidelines

[lxxxi] And that there is ‘no great revolution compared to the past’ – An Renckens “The New European Merger Regulation: New SIEC versus Old Dominance Test: Does it Make a Difference?” (2006) University of Antwerp/European Commission, working paper based upon her internship at DG Competition available to download from <http://www.ua.ac.be/main.aspx?c=an.renckens&n-20944>  at p.1

[lxxxii] Para (1) ibid

[lxxxiii] Alberto Heimler, “Was the change of the test for merger control in Europe justified?  An assessment (Four Years after the introduction of SIEC).”  [2008] European Competition Journal, Vol. 4 No. 1

[lxxxiv] Case T-210/01 General Electric v Commission

[lxxxv] See further William Kolasky, “GE/Honeywell: Narrowing, But Not Closing, the Gap” (2006) Antitrust Magazine available at <http://www.wilmerhale.com/files/Publication/49399a50-556d-41ef-9bea-64b718ff4d46/Presentation/PublicationAttachment/6afaa85b-7e49-4b66-bdfe-6bb1979862ef/ABAKolasky_GE_Honeywell.pdf&gt; In particular as noted at page 69 – it “…triggered a remarkable public transatlantic debate between the two competition authorities…”

[lxxxvi] See further, Anna Eklöf “In the aftermath of the EC merger control reform – The relevance of efficiencies in merger assessments” available at <http://www.jur.lu.se/Internet/Biblioteket/Examensarbeten.nsf/0/68656B24F41B638AC125713700402639/$File/xsmall.pdf?OpenElement&gt;

[lxxxvii] An Reckens, “The New European Merger Regulation: New SIEC versus Old Dominance Test: Does it Make a Difference?” (2006) available at <http://www.ua.ac.be/main.aspx?c=an.renckens&n-20944&gt; see page 8

[lxxxviii] ibid

[lxxxix] ibid at page 55

[xc] Nicholas Levy, “Mario Monti’s Legacy in EC Merger Control” [2005] Competition Policy International Vol. 1 No. 1, 99 at page 117

[xci] In particular: ENI / EDP / GDP; Case COMP/M.4731 Google / Double Click; Case COMP/M.4747 IBM / Telelogic [2008] OJL 195/6; Case COMP/M.4439 Ryanair / Aer Lingus [2008] OJL 47/9; Case COMP/M.3653 Siemens / Va Tech; Case COMP/M.3916 T-Mobile Austria / tele.ring [2007] OJL 88/44; Case COMP/M.4404 Universal Music Group / BMG Music Publishing; Case COMP/M.4744 INEOS / BOREALIS

[xcii] In particular Case COMP/M.3696 E.ON / MOC; Case COMP/M.3440 at paras 397, 471, 475, 479-480

[xciii] Case COMP/M.4731 Google / Double Click

[xciv] These included Microsoft, ADTECH, BSkyB and Himedia – see paras 121-126

[xcv] see further paras 136 and 278

[xcvi] see para 177

[xcvii] paras 152-156

[xcviii] para 171

[xcix] para 156

[c] Case COMP/M.4439 Ryanair / Aer Lingus [2008] OJL 47/9

[ci] Case COMP/M.4726 Thomson Corporation / Reuters Group

[cii] paras 25-28

[ciii] Case COMP/M.3916 T-Mobile Austria / tele.ring [2007] OJL 88/44

[104] See Philip Lowe “EC Merger Regulation: is there really a new approach?” EC Competition Day, Vienna, 19 2006 available at <http://www.competition06.com/NR/rdonlyres/12CBC3C2-69FF-4108-BB3E-9EF69711EDD2/25532/PhilipLoweslides19June2006Vienna.pdf&gt;

[105] See the US example of Case Heinz/Beech-Nut, 246, F.3rd 708 (D.C. Cir.2001)

[106] See further, Fountoukakos & Ryan, “A new substantive test for EU merger control” [2005] ECLR 277 at 290

[107] ibid

[108] ibid at page 290

[109] Such attempts were met with disastrous consequences e.g. the CFI in Airtours, Schneider and Tetra-Laval along with Case No COMP/M.3333 Sony / BMG

[110] Sven Volcker, “Mind the Gap: unilateral effect analysis arrives in EC merger control” [2004] ECLR 395

[111] See further COMP/M.3083 GE/Instrumentarium, though falling under the 1989 Regulation, it is evident that the analysis was not merely focused upon market shares, with the Commission devoting considerable time to appraising the other features of the merger, i.e. the predicted effects it would have on the markets.

[112] Volcker ibid at 405

[113] See further, Volcker ibid at 405-406

[114] Jessica Schmidt, “The New ECMR: “Significant Impediment” or “Significant Improvement”?” (2004)CMLR 41, 1555 at 1560

[115] ibid at 1559-1562

[116] Case T-119/02, Royal Philips Electronics NV v Commission [2003] ECR II-1433, para 333

[117] Schmidt ibid at 1560

[118] Larry Bumgardner, “The European Union’s New Merger Regulation: Is EU Law Merging with US Approach?” available at <http://www.alsb.org/Proceedings%20Files/2005/Bumgardner.pdf&gt;

[119] ibid at page 25

[120] ibid at page 27

[121] Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2004/C 31/03)

[122] Alberto Heimler, “Was the change of the test for merger control in Europe justified?  An assessment (four years after the introduction of SIEC)” (June, 2008) ECJ 85 at 89

[123] ibid pages 90-91

[124] The guidelines were published 5/2/2004 and the Regulation came into force on 1/5/2004

[125] For further discussion on this, see Heimler ibid, in particular pages 93-94

[126] See Case T-102/96 Gencor v Commission [1999] ECR II-753 ibid

[127] ibid

[128] ibid

[129] Consider the Lloyd’s TSB/HBOS merger which has taken place in the downturn of the financial markets, which was announced 18 September 2008

[130] These can be the same as those used to monitor remedies

[131] “European Merger Control – Council Regulation 139/2004 – Statistics” (21 September 1990 – 31 May 2008) available at <http://ec.europa.eu/comm/competition/mergers/statistics.pdf&gt;


 

 

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