Taken to task

In the wake of three overturned decisions, the role of the European Commission's merger taskforce is under scrutiny. But as Neil Warwick reports, the alternatives could be worse

“May you live in interesting times” is an oft-quoted Chinese proverb that could be more at home in the corridors of the European Commission's (EC) powerful competition department (DG Comp) right now. October certainly was an interesting time for DG Comp. First Europe's second-highest court, the Court of First Instance (CFI), overturned two decisions by DG Comp's merger taskforce (MTF) to block the Schneider-Legrand and Tetra Laval-Sidel tie-ups. This was closely followed by two important decisions by DG Comp's cartel-busters in Nintendo and Christie's-Sotheby's.

In the space of one working week, DG Comp received its second and third public 'slapdowns' by the CFI (the first was in June with the overturning of Airtours-First Choice). In what many see as a particularly tough fine to counterbalance the negative publicity that the MTF would undoubtedly receive, DG Comp quickly hit back by handing out well in excess of e100m (£65.4m) in fines to Nintendo and Sotheby's for anticompetitive behaviour.

Some commentators have used the CFI's three decisions to question the ability of the fiercely independent MTF to adequately deal with the big cases, and there have been calls for a 'devil's advocate' panel to effectively second-guess the MTF's decisions. But is the issue really that the MTF got its economic analyses wrong, or is it the delay caused by the CFI hearing the case that killed any chance of the mergers continuing? It is difficult to see how another panel, which would undoubtedly need the input of all of the current 15 member states, could speed up decisions.

A number of constitutional and practical issues arise as a result of this run of bad luck on the part of the MTF. The suggestion has been for the creation of a special competition court that would be part of the European Court of Justice (ECJ) and could sit under the watchful eye of a chief economist. If this were the case it would be ironic that the CFI had, through its own decisions, ceded some of its power to the ECJ – after all, the CFI was created to act as an appellate court overseeing the EC, not the ECJ.

From the perspective of a competition lawyer advising a company on potential takeovers, the most important element of advice to the client is the timing of the transaction. The inherent conflict in any merger clearance system is the need of the lawyers to have speed and a definite timetable, versus the need of the economists to have an indefinite time to carry out a thorough economic analysis. If you push the speed too much you risk losing accuracy; take more time for analysis and the delays can potentially kill the deal. It therefore seems odd to suggest that the current system, which is populated by lawyers, could be second-guessed by a body run by an economist. In very simplistic terms, this would seem to exacerbate the current criticisms about the existing system – namely, that there is a deficiency in the economic analysis at the beginning of the process and inordinate delays at the appeal stage.

The overturning of three merger decisions is probably not life-threatening to the work of the EC; but put these decisions into the wider context of competition reform and the picture is less cheerful. Potentially, there will be 10 new member states joining the EU through the enlargement process. Twenty-five member states, each lobbying to have its own say, will undoubtedly slow the system rather than speed the process.

The answer to the question of why the reform has been pushed ahead may be much simpler than many commentators think. A little-quoted, but nevertheless precedent-setting, clearance case from the summer of 2001, Govia-Connex South Central, may give a clue.

In this case, the MTF used its powers under Article 9(2)(b), which allowed it to refer a “simple” merger case back to the member state – the UK. This was the first time the MTF had ever exercised this power. Dickinson Dees, acting for Govia, found that although the MTF is fiercely independent, it has always been extremely approachable and helpful. But with the increased volume of activity and the number of companies now willing to use the MTF, there are certainly signs that the MTF is reaching breaking point. This is down to a simple and old-fashioned case of the MTF being overworked.

A solution to alleviate the overworked EC could be to devolve powers back to member states. It has long been the aim of the EC, particularly DG Comp, to be able to devolve powers to member states, especially in relation to “simple” merger cases. The devolving of powers to member states encompasses some of the broad principles of the entire European system.

Once uniform standards and a centralised system have been imposed, in theory it should be easy to empower member states to enforce European law at a local level. Conversely, devolving powers from a centralised system that is still unsettled could potentially be very dangerous. It therefore seems odd for both the European and UK competition authorities to be pushing forward radical reforms of the system when the current system is producing such anomalies.

In many ways, devolving powers to the UK competition authorities at this point in time could have disastrous results. In 1998 the Competition Act saw the most radical overhaul of UK competition law in 25 years. Four years on and it is safe to say that the authorities are still finding their feet with the new powers – three companies have received fines for anticompetitive behaviour and yet the Office of Fair Trading (OFT) has carried out more than 100 investigations.

The Enterprise Act, which received royal assent in November 2002, will catalyse even more radical changes. Mergers will now be subject to the 'substantial lessening of competition' test. The appeals functions will be removed, in part, from the Competition Commission (which has not been overworked to date) and given to a newly-created Competition Appeals Tribunal. Proposals to beef up the role of the Competition Commission could include powers to fine companies £2,000 a day and a fixed penalty of £100,000 for failing to provide the information it requests during an inquiry, the fear being that the threat of fines could be used to force companies to supply more information than is really necessary.

As if this was not confusing enough, a political debate now rages about the 'combining' of the newly-created roles of Chief Executive and Chairman of the OFT. Seen by some in Government circles as the policeman of the competition law system, the OFT has been moving to a more corporate structure to mirror the companies it investigates. Odd, then, that it should at the very outset of the process completely fly in the face of good corporate governance and try to combine these two traditionally separate roles. It would appear that competition lawyers are also living in interesting times.

Neil Warwick is a competition partner at Dickinson Dees