Corporate/Competition Review 2003: Time for action

Once upon a time, competition lawyers could make a living out of filling in forms, sending them off to the European Commission and waiting for a reply. Courts were only rarely involved in the enforcement of competition policy, few mergers were ever blocked and life was generally good – if a little boring.

That was until Mario Monti took over the helm of DG Competition in Brussels. An economist with serious academic credentials, he set about transforming the EU’s competition law system to align it with modern economic thinking and to bring it into the 21st century. First he concentrated on the rules of anticompetitive agreements, which was transformed through the use of new guidelines. Then followed the block exemption on general distribution agreements and the block exemption for motor vehicle distribution, both of which were made subject to new market share-based thresholds. Once that job was done, there was only one major reform left to do: the European Community (EC) Merger Regulation.

Merger control has always been the jewel in DG Competition’s crown. Whereas many parts of the Commission were rightly or wrongly seen as inefficient bureaucracies, the Merger Task Force had a reputation for efficiency and speed. In a merger investigation, it had a maximum of five months to reach a decision. Lawyers often compared this favourably with the rather cumbersome ‘second request’ process in the US, where companies have to supply hundreds of boxes of documents and where effective compliance can take many months.

There was also a darker side to this efficiency, however: individual officials could make a career out of being tough on mergers and there was internal competition between them. The Merger Task Force even adopted a logo – a piranha baring its teeth – which is seen as indicative of its attitude to mergers and its wide-ranging powers.

The officials leading the service became known in the competition community for their their unique mix of ideology and fervour. This culminated in an article in the Wall Street Journal where one official was pictured on the front page reassuring businesses that “I am not an ayatollah”, whereas Commissioner Monti was pictured on page 4. Something had to be done, but it took another year and some swingeing criticism from the European Court for Monti to announce his 2002 Christmas package of ‘radical’ reforms to the EC Merger Regulation. Exactly one year later, in December 2003, the Council of Ministers adopted a brand new EC Merger Regulation.

The term ‘radical’ in this context has to be taken with a pinch of salt. Monti was never going to propose a system that would result in the Commission losing ultimate control of mergers, so anything ‘radical’ had to operate within this basic constraint.

In essence, the reform has three strands. At the institutional level, the appointment of a chief economist and the dissolution of the Merger Task Force will help to remedy some of the perceptions of fervour and unfairness. The ‘ayatollahs’ have been reassigned to those parts of DG Competition that deal with general competition law and some have left the Commission for pursuits in the private sector. Furthermore, Monti has created devil’s advocate panels inside DG Competition, whose job it is to test and challenge colleagues’ cases. The new EC Merger Regulation also makes some procedural changes. The review periods are being increased to give additional time for comments, filings will be possible even on the basis of non-binding documents and references from the member states to the Commission and vice-versa will become easier.

The most important change, however, is in relation to the substantive test. Monti had advocated retaining the established dominance test on the basis that it was tried and tested. However, he proposed to make some changes to the definition of dominance itself to differentiate it from the concept of dominance under Article 82. Many EU member states were uncomfortable about these proposals and, after changes in the Council of Ministers, the new regulation adopts a ‘significant impediment of effective competition’ test, which is conveniently shortened to SIEC (and rather unfortunately pronounced ‘sick’).

This new test has baffled competition lawyers. From the recitals it appears that it includes all cases of dominance. In other words, in a traditional situation where a dominant position is being created or enhanced, there would also be a SIEC. So far, so good. The next question is what else it could include. As a result of a last-minute German amendment, the recitals state that the only thing the test covers in addition to dominance are so-called unilateral effects. Such unilateral effects are situations where a merger can have anticompetitive effects even in the absence of a dominant position through the reduction of consumer choice.

Commission officials are eager to stress that the SIEC test is not the same as the ‘significant lessening of competition’, or SLC, a test employed in the US, the UK and Ireland, and that it will not result in the blocking of more mergers. In their view, the new test is a “widening of the bar”, not a “lowering of the bar”. Only experience (and in some cases judicial review) will tell whether the intervention threshold has in fact been lowered.
So what does all this mean for business?

One basic point that has been wholly ignored is that, in an enlarged EU after 1 May 2004, more mergers will meet the EU turnover thresholds. It is also certain that cases will flow more easily between the Commission and the member states, thereby making the allocation of cases more efficient, but also much more uncertain. The ‘one-stop shop’ that was once the hallmark of EU merger control has effectively been consigned to the dustbin. Businesses are particularly concerned that there are no longer any fixed decision periods that apply to cases referred to or from the Commission. With the UK process, for example, taking up to nine months in difficult cases, bankers will have to get used to more open-ended merger timetables. Competition lawyers will also have to adapt. The form-filling days are over and life will become definitely less predictable but infinitely more enjoyable.

Oliver Bretz is a partner at Clifford Chance