The EU Treaty competition rules contained no specific provision dealing with mergers within the Community, although it is widely recognised that merger control is an essential element of competition policy. In the Continental Can case the European Court of Justice (ECJ) held that mergers which eliminated competition could infringe Article 86 (now Article 82). In Philip Morris the ECJ appeared to extend merger control by deciding that mergers might also fall within the scope of Article 81 which deals with restrictive arrangements between undertakings, although there was considerable disagreement among commentators regarding the implications of this judgment. Following the Philip Morris judgment the European Commission proposed that certain mergers should be subject to Community control. This gave rise to the implementation of Council Regulation 4064/89, known as the ‘Merger Regulation’, which came into force in September 1990.
Under the Regulation, which has direct effect, mergers or concentrations with a Community dimension are subject to exclusive examination by the European Commission. Article 1 provides that a concentration is deemed to have a Community dimension where:
The aggregate worldwide turnover of all the undertakings involved is more than €5,000m, and
The aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than €250m, unless each of the undertakings concerned achieves more than two thirds of its Community wide turnover within one Member State.
Mergers which do not have this Community dimension are subject to national law. (For information on Ireland’s merger legislation click here).
Under Article 9 a Member State may request the Commission to refer consideration of a merger with a Community dimension back to its national authority, although the Commission may refuse such a request. Under Article 22 a Member State may request the Commission to investigate a merger falling below the thresholds. This provision was included because at the time of the Regulation some of the smaller Member States did not have any merger controls.
Mergers with a Community dimension must be notified to the Commission. Under the Regulation the Commission has one month under a phase I investigation in which to decide either that the concentration is compatible with the common market, or that it raises doubts as to such compatibility and requires a phase II investigation, or that the Regulation does not apply. A phase II investigation will result in greater scrutiny of the deal by the Commission and the Commission must deliver a decision within a four month time limit.
The Regulation originally required the Commission to evaluate whether the concentration would ‘ create or strengthen a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it.’ In 2004 the test was changed. Under the new test a merger will be prohibited as being incompatible with the common market where it is likely to result in a substantial impediment to competition. (For a brief summary on the economics of merger analysis click here).
In adopting a decision the Commission may approve the concentration subject to structural modification of the concentration or subject to the parties having given commitments as to future behaviour. Structural modification of the concentration is generally preferred since it does not have to be scrutinised for compliance as would be the case for behavioural commitments.
The Commission’s overall record in merger cases since the introduction of the Regulation has been fairly good. Contrary to the initial fears of some observers its decisions have been based primarily on competition grounds. The quality of the Commission’s economic analysis in some cases has been criticised. It rejected industrial policy type arguments in TetraLaval. Nevertheless concerns have been raised about the quality of economic analysis in some cases. In AirTours/ First Choice the Court of First Instance overturned the Commission decision on appeal and was highly critical of the economic analysis in the Commission decision. ’ (For more on this case click here).
A standard feature of merger analysis is to weigh up any diminution in competition against any efficiency gains that might result from a merger. For example, any adverse effects on prices due to a reduction in competition may be more than offset by cost reductions arising from efficiency gains. Alternatively if a merger produces efficiencies but prices nevertheless rise due to reduced competition producers may gain while consumers lose out. The effect on total welfare will depend on the relative size of these gains and losses. Some argue that consumer losses should be accorded greater weighting than producer gains. The Regulation originally contained no efficiencies defence, although it was included in early drafts. In the past the Commission has blocked mergers on the grounds of efficiency gains, an approach that is completely inconsistent with economic analysis. Reforms introduced in 2003 provide for efficiencies to be taken into account.
A merger or take-over may provide a means of preventing company collapse. In the US mergers involving failing firms may be permitted even though they might significantly reduce competition. However, such a merger must satisfy quite strict criteria. There must be no possibility of a less anti-competitive outcome, which means there must be no prospect of an alternative buyer who would be prepared to pay more than the liquidated value of the assets of the failing firm. In addition the assets must remain employed in the industry as otherwise output and welfare would fall. The ECJ in Kali and Salz agreed with the Commission finding that the failing firm defence may be invoked to negate the prohibition in Article 2 of the Regulation if it can be demonstrated that there is no other means of saving the failing competitor, other than for it to be taken over by the stronger competitor.
Concerns have also been raised about certain procedural issues, particularly the fact that the same official is responsible both for the investigation and for drafting the decision. The obligation to give reasons in a statement of objections or for the affected parties to examine the Commission file is not a substitute for having an impartial decision maker who can evaluate the relative merits of different arguments. New procedural safeguards have been introduced, but whether these will prove sufficient to overcome these difficulties remains to be seen.
© CompEcon Limited 2004.
For information on EU competition rules click here.
For details of published articles on this topic click here.
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