Marriage vows

After being criticised by the CFI, the European Commission is reforming its merger regulations. By Samantha Mobley

Last month, the European Commission announced the appointment of Professor Lars-Hendrick Röller to the new post of Chief Economist in its Directorate General for Competition.

This is just one of a large number of reforms that the Commission has proposed and is beginning to implement following criticisms by the European Court of First Instance (CFI) last year of the way in which it handles merger cases.

It is certainly in the Commission’s interest to up its game as regards the vetting of mergers. It was reported on 20 June that Airtours (now MyTravel) is suing the Commission before the CFI for damages in respect of its decision to block the holiday company’s bid for First Choice, which last year was found by the CFI to be erroneous.

There is speculation that another company, Schneider, may follow suit in connection with the Commission’s prohibition of its merger with Legrand. The risks for the Commission in getting it wrong are definitely getting higher.

The reaction of the Commission

The Commission’s reaction to the CFI’s criticisms was to propose, in December 2002, a package of reforms to change the way in which mergers are vetted in Brussels. In addition to a number of formal amendments to the EU Merger Regulation itself and the introduction of guidelines on how to assess mergers between rivals, the Commission has decided on a number of non-legislative changes designed to enhance due process. What follows is a brief description of the total package of changes.

Referrals between the Commission and EU countries

The first significant change is greater flexibility in the mechanisms for referring cases between the Commission and EU countries. The revised regulation makes referrals from the Commission to EU countries in particular much easier. All that is necessary for a referral to an EU country is that the proposed merger must significantly affect competition on a distinct market in that country. Since the majority of mergers remain national in scope, the reference criteria will be easily fulfilled in many cases.

As regards referrals to the Commission of mergers that do not meet the EU financial thresholds, the new regulation says that where at least three EU countries ask the Commission to look at the merger, it will be deemed to meet the EU financial thresholds. The Commission argues that these changes will mean that each merger is examined at the right level from a competitive impact point of view. However, the effect on business will be that it will be increasingly difficult to predict which authority is going to vet any particular merger or indeed how long the whole process is going to take. This aspect of the new regulation, therefore, remains controversial, at least from industry’s point of view.

The introduction of timing flexibility

The new regulation introduces greater flexibility as regards the timetable for notification and the Commission’s subsequent review. These changes will benefit the parties to mergers that must be notified to Brussels.

The strengthening of the Commission’s investigatory powers

The reforms strengthen the Commission’s fact-finding powers by including the power to interview individuals backed by the threat of fines for non-compliance. The fines companies may incur for supplying incorrect or misleading information will also increase, to 1 per cent of the company’s aggregate turnover.

It is not clear why the Commission needs these powers for merger inquiries. In antitrust investigations, the companies have little incentive to provide information about their activities. The same is not true of a merger case, where the parties are keen to cooperate in order to get their deal cleared. Presumably, the aim is to make it easier for the Commission to get third parties unconnected with the merger to supply information.

Change in the test for dominance

The Commission’s experience in unsuccessfully defending its Airtours decision in the CFI has convinced it that the substantive test in the Merger Regulation has a gap. Namely, that it does not cover anticompetitive mergers between two large, but not singly dominant, players in an oligopolistic market that will not necessarily result in collusion. (If collusion is likely, the collective dominance concept will suffice.) The Commission has therefore attempted, in the revised regulation, to extend the definition of dominance to expressly apply it to situations of mergers in non-collusive oligopolistic markets. Although it is true that if there is a gap in the Commission’s toolbox for prohibiting anticompetitive mergers, it should be filled, the Commission’s current draft has been criticised for being too wide and failing to achieve its objective.

Better decision-making progress

In addition to the substantive amendments to the EU Merger Regulation itself, the Commission has decided on a number of non-legislative changes designed to enhance due process.

The most important non-legislative change is the creation of the post of Chief Economist. The role will be to provide the Commission with detailed guidance in competition cases (both merger and antitrust) involving complex economic issues. The Chief Economist will have a staff of approximately 10 economists. On 16 July 2003, the Commission announced the appointment of Röller, an eminent economist who is currently Professor of Economics at Humboldt University in Berlin. He will take up this post with effect from 1 September 2003.

Devil’s advocate panel

The appointment of a peer review panel composed of experienced officials for all Phase II merger investigations is another key feature of the non-legislative reforms. The role of the panel will be to scrutinise the Commission’s conclusions with a fresh pair of eyes at key points of the in-depth merger inquiry, thereby offering a real and effective internal check on the soundness of the Commission’s preliminary conclusions.

Transparency

The parties to the merger will receive greater procedural rights, including earlier access to the contents of the Commission’s file during a Phase II investigation and the right to review third-party submissions that raise concerns about the impact of the proposed merger. Communication between the parties, the Commission and complainants will be enhanced through ‘triangular meetings’, in which the Commission, the parties and the third party meet to discuss the content of these submissions. In addition, routine ‘state of play’ meetings between the parties and the Commission will take place at decisive points in the procedure to guarantee that the parties are constantly aware of the progress of the investigation and to provide them with an opportunity to discuss the case with senior Commission officials.

Reorganisation of the Directorate General for Competition

The Merger Task Force (MTF) itself has been the subject of the most recently-announced reform. On 1 May 2003, a process that will eventually lead to the disappearance of the MTF was started. Case-handlers, who have until now conducted investigations on behalf of the MTF, are gradually being moved to the industry-specific directorates that already handle antitrust cases and which will, from now on, contain their own ‘mini MTFs’.

The aim of the reorganisation is to increase industry understanding among case-handlers and to make the merger review process more sensitive to the regulatory and policy environments in particular sectors. Although the MTF has been criticised for its poor economic analysis in some merger decisions, procedurally it has been a very efficient body. There is therefore some concern that reorganisation of the MTF may enhance the depth and accuracy of its merger analysis at the cost of efficiency.

Guidelines on the appraisal of horizontal mergers

The final part of the reform package is a draft commission notice on the assessment of mergers between competing firms. This draft notice seeks to clarify the approach taken by the Commission in its appraisal of horizontal mergers and, in so doing, to provide greater transparency, predictability and legal certainty regarding the Commission’s merger analysis.

The guidelines cover the substantive assessment of mergers under the revised regulation, including how the Commission will apply the notion of dominance in oligopolistic markets. The guidelines also look at mitigating factors such as efficiencies which, the Commission has stated, must be of direct benefit to the consumers, as well as being substantial, timely and verifiable, so as to negate any potential restriction on competition.

Conclusion

The EU merger reform package introduces greater flexibility in terms of the timetable for vetting mergers in Brussels and also makes for a more transparent procedure, which includes due process checks. In this regard, it is welcome. However, there are some sticking points. The changes to the substantive test of dominance requires further work. In addition, the new, more flexible rules for referrals between the Commission and EU countries introduce an unacceptable degree of uncertainty for business and need to be revisited. If these issues are resolved, the EU Merger Regulation looks ready for the next decade and the EU’s enlargement.

Samantha Mobley is a partner in Baker & McKenzie‘s EC and competition unit