Merger hopefuls should take note of Sony-BMG debacle

The European Court of First Instance’s (CFI) groundbreaking rejection of the European Commission’s merger clearance of the Sony-BMG music joint venture following a complaint by an industry organisation took the market by surprise. Its true impact, however, is likely to be felt in the future by companies with acquisition or joint venture aspirations that give rise to more complex competition issues than just a simple overlap of business interests.

In 2004 Sony and BMG pooled their interests to create the second-largest music company in the world. The venture was given a Commission merger control green light after an intensive five-month competition review. One area of potential concern examined was the extent to which, in a concentrated market with four players representing approximately 80 per cent of sales, the combined companies could be considered collectively dominant.

The Commission announced that it did not find evidence of collective dominance following the transaction. Impala, an independent association representing more than 2,500 smaller music companies, disagreed and appealed to the CFI. On 13 July the CFI agreed with Impala and, for the first time in the Commission’s history, the CFI annulled its merger clearance decision, thereby requiring the Commission to carry out a fresh investigation.

Sony-BMG will continue to trade, but under the uncertainty that another review will inevitably bring – it is at least a theoretical possibility that the Commission could revise its view and require the venture to be discontinued. It is difficult to see how, with two years of trading and integration behind it, it is possible to separate an entity of its size without this itself having an impact on the competitive structure of the market. As well as representing a blow to the Commission’s internal merger review procedures and a period of uncertainty and cost for the companies concerned, the decision has wider implications for companies engaged in merger or joint venture activity in a range of markets. Those companies in transparent markets with few players will be keeping the re-examination of collective dominance issues under review.

Such a market structure forms the starting point for a collective dominance evaluation, which considers whether the players are acting competitively. This is notoriously difficult to prove and had been thought to have been tempered by the CFI’s 2002 Airtours judgment, which overturned a finding of collective dominance and clarified the Commission’s evidentiary burden. This latest judgment demonstrates that the collective dominance theory is alive and well and, given the CFI’s view on the level of analysis required from the Commission, it could trigger a resurgence in regulatory interest in this concept, which could in turn lead to greater merger control clearance risks for companies in affected markets.

This decision also represents the latest in a line of judicial scrutiny of Commission decisions. The UK has similarly experienced challenges to Office of Fair Trading (OFT) clearance decisions. The 2003 IBA Health case, the first to annul a clearance decision, also clarified the test to be applied for in-depth review. Increased perceived threat of challenge has led some to assert that the OFT is now more cautious. But not all UK third-party challenges have met with success. The Boots-Alliance UniChem merger is such an example, with its decision to clear with conditions challenged by a third party, but upheld on appeal.

The concern is that this latest Commission judgment could encourage a significant increase in competitor/customer challenge to its clearance decisions. If this were to become commonplace or be utilised by some as a tactic to disrupt pro-competitive mergers, it would lead to greater uncertainty for companies and increased cost to the Commission merger control process, traditionally regarded as offering certainty within a relatively short timeframe.

A judicially nervous Commission could lead to ‘fail-safe’, in-depth reviews of mergers in complex or complainant-rich markets, even though they are appropriate for clearance at their first phase, representing additional financial and time costs. It is hoped that, instead, the Commission will strengthen its analysis in the areas highlighted by the CFI and provide greater transparency on its reasons.

Clifford Chance associate Samantha Spence assisted with the writing of this article.