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19 March 2014
Poor old Clifford Chance. The competition practice has hardly been having an easy time of it recently, what with head of department Chris Bright jumping ship to join Shearman & Sterling and now its highest profile piece of work is falling apart around its ears. To say that it should have foreseen the European Commission's objections to the GE-Honeywell deal is unfair, and it's clear that it hasn't exactly gone according to plan.
At the moment, the world's largest industrial merger has hit a stalemate. GE has offered a package of concessions to try to get the deal approved, but it thinks the commission is unlikely to clear it. GE says it won't offer anything else; the commission isn't happy. It has until 12 July to make a ruling, while GE has until 3 July to amend its package of remedies.
If the commission blocks the £30bn deal, it will be the first proposed merger between two US companies approved by US officials to have been blocked by European regulators - not the best addition to a competition lawyer's CV. At least Simon Baxter, the Brussels Clifford Chance partner leading the bid for competition clearance, knows that no one thinks he should have seen it coming.
What has thrown everyone is that the commission has given enormous consideration to the 'range effects' theory, which says that if you're able to supply a range of products to particular customers, it gives you an advantage over your competitors. Instead of just looking at horizontal crossovers such as engines, where both companies compete, they are looking at the whole raft of products that the new company will be able to give to the market.
One of the most contentious issues has been the aircraft leasing arm of GE, Gecas. The argument goes that it will unfairly dole out financing to companies only if they first agree to buy GE aircraft engines. GE has agreed to ringfence it, but the commission wants it to sell a minority stake without giving up control.
The range effects theory is not one that has been given much credence in the past, and last year when Honeywell merged with Allied Signals, the commission considered the theory and decided that it wasn't a risk in the industry because consumers didn't buy packages of products. That was no douBT the precedent that Clifford Chance was relying on, and who can blame it?
All in all, the decision has come as a complete shock, not least to the lawyers involved. With the benefit of hindsight, rival firms will crow that Clifford Chance and Skadden Arps Slate Meagher & Flom, which is acting for Honeywell, should have seen it coming, but the truth is that it is just the latest example of the unpredictability of Brussels. European Union Competition Commissioner Mario Monti is being labelled a maverick. His move to extend the commission's jurisdiction into conglomerate mergers is eliciting shrieks of surprise. No other commission in the world has tried to extend its powers so far.
The US authorities could see no issue with the merger. Interestingly enough, Rogers & Wells' antitrust stars were not responsible for that piece of good news either, although that was because GE instructed Washington DC's Arnold & Porter to deal with it stateside. So it was no thanks to Kevin Arquit that Baxter got the call to deal with Europe - Baxter had worked with GE before and won the work for himself. No credit goes to Bright either, because although he was helping Baxter out before he left, he hadn't won the work. He is still working with Baxter on it from Shearmans, taking responsibility for the hearing and some of the lobbying. It was Shearmans that advised GE on the merger, so Baxter might be looking over his shoulder, hoping Bright doesn't muscle in.
The main difference between the US authorities and the commission has been the role of GE's competitors. The likes of Rolls-Royce, advised by Freshfields Bruckhaus Deringer, have made known to the commission their objection to the merger on the basis of the range effects. It didn't get nearly as much say in the process in the US, so couldn't derail it until it arrived here. All in all, Clifford Chance has been the victim of a shock move from Brussels. There seems to be new scepticism there about big companies and more of a willingness to diverge from what the US authorities might say.
For the system to work, there needs to be more predictability - not even the world's biggest law firm can work effectively in a regime where it isn't clear what the policy is until after the event. At least Clifford Chance gave it it's best shot. And don't give up - it's not 12 July yet.