On the mysteries of the UK's merger review process, one competition lawyer complains: “I don't understand why it should be an exercise in tea leaf reading.” When the Government forced the Belgian brewer Interbrew to divest itself of Bass, the view of the Belgians was that the UK authorities might as well have been staring into a mug of Tetley's for all the sense their decision made. A less-than-happy chief executive Hugo Powell told the press at the time that the ruling both defied logic and was “grossly disproportionate to the supposed disease”. Last month, a court overturned a decision of the Competition Commission for the first time on the grounds that Interbrew did not have a fair chance to discuss alternatives to its chosen solution of disposing of Bass Brewers, which it had acquired last summer for £2.3bn.
Although Mr Justice Moses did not find fault with the commission's remedy, he did conclude that the procedure by which the commission came to that conclusion was unfair. It is a judicial observation that has struck a chord with nearly every competition law practitioner in the land. It has also prompted commission chairman Derek Morris to accept the need for a review.
So what is the legacy of Interbrew? It could be viewed on “a very narrow issue of fact”, reckons Nicholas Green QC of Brick Court Chambers, who represented the brewer in the judicial review. But Green understands why the commission wants to look at the case and see whether there are any “wider lessons to be learnt”. He says: “Personally, I hope they do, because many, many lawyers find it a deeply frustrating experience.”
Dealing with the commission can be a guessing game, the silk observes. “The frustration is that you don't know which way the commission's going,” he continues. “You go to the hearings and put in your submissions, but you have no idea what they're thinking.” One of the skills that competition lawyers have to develop is “trying to read between the lines”. But why, asks Green, should one have to go through that process?
Certainly, many competition experts were taken aback at the Government's ultimatum in January that Interbrew should offload Bass. After a three-month inquiry, the commission ruled that its purchase of the brewer would create a duopoly in the market, with Interbrew and Scottish & Newcastle controlling up to two-thirds of the market.
Interbrew had already acquired Whitbread's breweries (a third of the size of Bass) and would have a market share of more than 30 per cent and four of the UK's top 10 selling beers, including Carling and Stella Artois. In a three-to-one ruling, the commission decided that nothing short of a complete divestment of Bass would protect the market.
It was “by far the worst outcome” for Interbrew, recalls Philip Vaughan, head of litigation at Simmons & Simmons, who represented the brewer. If the accumulative effect of acquiring Bass and Whitbread was the problem, he argues, then undo the combination. But he adds: “It seemed a bizarre decision that the only way to solve that problem was to sell three-quarters of the business.”
Interbrew challenged the Government on the two separate grounds that the remedy was disproportionate to the problem and the procedure unfair. It was only a partial success. The judge disagreed about the remedy and also ruled that inviting Interbrew to comment on issues before declaring the merger was not contrary to public interest.
The Government's decision, however, was overturned on the wider procedural issue. Faced with a decision to divest either Whitbread or Bass, the commission considered the fact that Interbrew licenses Whitbread to brew Stella Artois. It concluded that an independent Whitbread would necessarily be linked to its main competitor and, consequently, the larger Bass was to be sold off. Interbrew won last month because the rationale behind the decision was never made clear to it.
The commission went so far as to greet the judgment as a victory. “I'm pleased Mr Justice Moses supported the Competition Commission's report on all matters of substance on all but one point,” says upbeat chairman Derek Morris.
It seemed an odd response to those that read the High Court judgment as a blow to the commission's credibility. “You could be forgiven for thinking that the commission had won,” recalls Mark Friend, a competition partner at Allen & Overy (A&O). “It struck me as completely bizarre. They obviously tried to put a positive spin on it, but in reality it was a significant defeat for them.”
Last month's review represents the first successful challenge to be made against the watchdog and comes after 12 failed attempts. According to Vaughan at Simmons, Interbrew represents a validation of the UK courts. “We had a brave judge,” he says. “The case underlines the independence of the judiciary in that it's willing to oppose its own government in favour of another country.”
But not all practitioners see Interbrew as a seismic shift in competition policy. For example, Richard Taylor, chairman of CMS Cameron McKenna, believes that its success was “a very limited one to the procedure and a specific aspect of procedure”. “Perhaps it demonstrates the increasing use people are making of judicial review and an increased readiness of judges to upset what are essentially administrative tribunals,” he adds.
However, Interbrew does articulate fundamental problems that many practitioners have in their day-to-day dealings with the commission – namely, that its workings are opaque and that there is little opportunity for negotiation.
Like many practitioners, Taylor also complains that the present merger control system lacks transparency. Parties to merger inquiries feel that the whole process is “rather telescoped”, he claims. The frustration for the lawyers lies in the fact that they have to consider whether their clients have breached competition law and, at the same time, consider hypothetical remedies.
As Taylor says: “One's never quite sure whether the commission is putting forward a hypothetical remedy as something real, or whether this is because they have to do everything at the same time.”
From the start, companies are immediately on the defensive. “You have to say, 'I'm not guilty, but if you feel that I am, don't send me to prison, give me community service',” says Vaughan. “It's terribly unfair in that regard and it's a marked contrast to what happens to a merger at European level.”
It became apparent following last month's judgment that the inquiry did not even have a copy of the Stella Artois licence between Whitbread and Interbrew, despite the fact that the commission was examining the relationship between the two parties. “Quite extraordinary,” says Green.
The UK system was created under the Fair Trading Act 1973, and many lawyers believe that for a long time it has been showing its age. Alastair Gorrie, a competition partner at Coudert Brothers, questions whether a system where the parties have not been told the case against them would survive a challenge under the Human Rights Act.
Last October the Department of Trade and Industry (DTI) launched a consultation exercise to look at a major overhaul of process. But Gorrie, like many of his peers, detects “genuine efforts” by the commission to increase its openness, independent of any formal review process. For example, there have been public hearings and investigations into the Lloyds TSB-Abbey National deal, wider consultations and more information published on its website. “I bet they're kicking themselves that they've slipped up,” reckons Gorrie.
There has been much speculation that the commission will follow the European two-stage model. The European Communities' (EC) merger taskforce identifies the competition issues in a statement of objections before it negotiates the issues that arise.
Friend at A&O also complains of “an element of unreality” in the process, in the way in which remedies are discussed in the UK. But he is cautious about following Brussels too wholeheartedly. There are problems with fixed positions being adopted by the watchdog too quickly. “You can find that case-handlers' views become pretty entrenched, even at this early stage,” he says. Gorrie also points out that the EC has its own “fundamental flaw”, in that the case is always heard by the same officials throughout its review. “So they're prosecuting attorney, investigating judge and jury, all in one team,” he says. As he points out, in the UK there is the distinction between the Office of Fair Trading (OFT) and the commission.
According to Green, amending the system does not even require new legislation. “Even with a modicum of creativity, they could revise their procedures dramatically,” he says, adding that they could publish, for example, “a heavily caveated” document outlining their provisional views. “At least then you'd know precisely what matters to make your submissions on and you wouldn't be wasting time on irrelevant issues,” he says.
Reform of competition law is close to the heart of New Labour at the moment. Only two weeks ago, Chancellor of the Exchequer Gordon Brown announced that directors of companies operating price-fixing cartels would face prison in a crackdown on anti-competitive behaviour, designed to illustrate that New Labour had hit the ground running in its second term.
There was something there for the lawyers too. It was also concerned that the commission was too top-heavy with directors and lawyers and needed to be staffed by, for example, more economists.
“If you take off some of the lawyers, will the commission lose some of its procedural rigor?” queries one competition law practitioner. He suggests that in view of the Interbrew judgment, it is not such a great idea. “Lawyers might not be the greatest economists, but at least their antennae start buzzing when something does go wrong.”
|Acting for Interbrew
Lead adviser Simmons & Simmons' head of litigation Philip Vaughan led the matter with associate Fiona Buckley.
Competition issues were led by partner Martin Smith with assistants Morven Hadden and Emily Roche.
Baker & McKenzie dispute resolution partner David Fraser also worked on the inquiry.
At the bar, Jonathan Sumption QC and Nicholas Green QC (Brick Court) and human rights barrister Monica Carss-Frisk (Blackstone Chambers) were instructed.
Acting for the Competition Commission
Acting for the Department of Trade and Industry