13 August 2001
Until the GE-Honeywell decision in July this year, the accepted wisdom was that European Commission (EC) and US merger control processes differed little on substance, despite differences in the procedure and differences in the test itself - namely, the "creation or strengthening of a dominant position" for the EU, and "substantial lessening of competition" for the US. That accepted wisdom has been blown away by the decision, which was the first time that the EC has blocked a merger already cleared by the US antitrust authorities. The decision appears to confirm what has long been suspected by our US cousins: that the EU test takes more account of harm to competitors than to competition - a process, it should be noted, that US companies are willing to take part in if it suits their interests.
The decision has implications for the reform of our own UK merger control process. The UK system is overdue for reform following the modernisation of other aspects of UK competition policy by the Competition Act 1998, and is now more urgent in light of the Interbrew-Bass debacle. Broad consensus appears to have been reached on the general shape of the post-reform regime, including adoption of the US rather than the EC standard for assessing mergers. This divergence of UK law from EU law seemed relatively uncontroversial in light of the general view that there was little divergence on the substantive assessment of mergers, whichever test was used. Clearly, with the adoption of the different tests, there is a possibility of divergence in assessment between European dimension concentrations and those that are considered at a national level.
Other aspects of the proposed merger control regime appear less controversial. By empowering the Competition Commission with final-decision-making powers and removing the Secretary of State from the process, an extra phase of uncertainty and second guessing will be removed. This should be welcomed by the companies involved in a transaction, although speculators may find that arbitrage opportunities are reduced.
A string of recent decisions at both EU and UK level has shown that merger control is getting tougher. Airtours was blocked on the basis of the creation of a three-way oligopoly; and the EMI-Time Warner merger was called off before it was blocked on the basis of the creation of a four-way oligopoly. Both the Interbrew-Bass and Lloyds TSB-Abbey prohibition decisions were taken on the basis of market shares of around 30 per cent. Parties to a transaction need to consider not merely the resulting market power of the merged entity, but also whether the structure of the market as a whole is such that competition is likely to be restricted. A robust, consistent competition enforcement process is needed for such analysis to be undertaken.
The keenness of the UK Government to follow the US antitrust enforcement model is further evidenced in its most recent white paper on further competition law reforms, proposing jail sentences for company officers involved in price-fixing or market-sharing, encouraging damages actions by victims of cartels, and proposing class actions for consumer bodies. By proposing new sanctions, the Government appears to be of the view that further deterrent is needed against cartel behaviour. The haste appears almost unseemly, with the Competition Act barely having time to settle. Also, the proposal may not achieve the hoped-for effect, since the burden of proof for criminal sanctions is much higher than is required for proving a competition law infringement.
While there is little doubt that the "substantial lessening of competition" is a more effective test for controlling mergers (witness the contortions the EC has had to go through to control collective dominance with Airtours and Time Warner-EMI), the UK Government, keen as it is to play a pivotal role between the US and EU, would do well to hold its line on merger control reform but draw the line at the litigious vagaries of US antitrust enforcement. Its efforts would be better spent trying to persuade the EC to think the unthinkable and amend its own merger control test.
Alastair Gorrie is a competition partner at Coudert Brothers in London