European merger control: Well-oiled machine or spluttering engine? | White & Case LLP International Law Firm, Global Law Practice

European merger control: Well-oiled machine or spluttering engine?

Commissioner Margrethe Vestager was in a celebratory mood when she addressed an audience in Brussels in March 2015 as the EU merger control body celebrated its 25th anniversary: "There is reason to celebrate because the system hums along nicely," she said. But practitioners and companies closely involved in the EU merger process are unlikely to describe the merger control engine in such glowing terms.

There's no doubt that the European Commission, which has received 5,876 merger notifications between 21 September 1990 and 31 June 2015, is an experienced and sophisticated merger regulator.

EU Merger Regulation (EUMR) has evolved considerably since its formation, and the EC has tried to reduce the burden of the merger notification process on participants. Since 2000, transactions that are unlikely to cause competition concerns under the EUMR have benefitted from a more streamlined approach. In December 2013, the EC adopted amendments in an attempt to further simplify the notification process and broaden the scope of transactions that can benefit from it.

If your deal does not fall into the “easy” category, life will be busy for a very long time for a larger number of people 

The new amendments mean that a non-problematic transaction can be notified under a "simplified procedure" for which considerably less information is required. Having said that, often a lengthy debate ensues with the Commission on whether the simplified procedure actually applies, so that it can be easier to just file under the usual procedure. The Commission also introduced a "super-simplified procedure" for extraterritorial joint EC purely on the basis of the parent company's takeover. While these changes are welcome, they fail to address the question of why extraterritorial joint ventures need to be notified at all, even in a super-simplified format.

Furthermore, while the burden under the simplified and supersimplified procedure has been reduced, more information is required than ever before for transactions that do not fall under the simplified rules.

One of the reasons for the increased burden is the obligation to provide market information not only on the relevant product and geographic markets, but also on all "plausible alternative relevant product and geographic markets"

5,876
Merger notifications were received by the EC between September 1990 and June 2015
Source: European Commission

The Commission says that plausible alternative markets can be identified on the basis of previous Commission decisions and judgments by the EU Courts and by reference to industry reports, market studies and internal documents,

"in particular where there are no Commission or Court precedents" In practice, however, the Commission goes beyond this remit, and it increasingly requests market data for a large number of very narrow micromarkets so it can be comfortable that the transaction would not lead to high market shares in any imaginable market.

As well as requiring parties to devote considerable resources simply to meet these new requests, the results of such onerous data-gathering exercises will likely amount to little more than "guestimates" and therefore have questionable value for the Commission's analysis. They will also unnecessarily inflate the standard merger notification Form CO, which would likely already have exceeded the boundaries of user-friendliness in any relatively complex case.

Another illustration of the Commission's increasing tendency to hoard information in the context of merger investigations is the new trend towards a document production similar to the "second request" discovery process in the US merger procedure.

In addition to the list of documents that must be prepared for the board or management of the notifying companies required in the Form CO, the Commission now requires an enormous number of internal documents, including emails from employees with management, sales, business development and other functions, to be provided within a very short time frame. By contrast to the US "second request" discovery process, which usually takes many months, in the EU the parties may be given a week to produce the required documents. As such, the process is not only extremely burdensome for the parties, who need to locate, identify, collect and process the potentially responsive documents within a tight deadline; it also compromises the rights of the parties who may not have sufficient time to properly review the documents prior to production so as to extract privileged and private documents, let alone review the contents of what is being produced.

Furthermore, the Commission is working under procedural deadlines that are not designed for such extensive document requests and thus hardly has sufficient time to conduct a thorough and reflective review of the documents required to form a balanced overall view of their contents. This potentially could lead to a superficial and unsatisfactory review focused on isolated points in a small number of documents.

The timing of merger services has also become less predictable. When it unveiled the amendments in December 2013, the Commission said the "overall reduction of information requirements that result from the Merger Simplification Package will shorten the time that is needed for pre-notification contacts"

25 years
EU merger control authority marked its 25th anniversary in March 2015
Source:
European Commission

In practice, the reverse has happened, with increasingly lengthy pre-notification periods appearing to be the norm. Given that the deadlines kick in once a merger is notified, the Commission understandably wants to cram a fair amount of substantive analysis into the pre-notification stage so as to have its market investigation questionnaires ready on day one of the procedure.

However, that means the parties involved are receiving increasingly numerous Requests for Information in the pre-notification stage and, given the scope of such requests, may suffer long delays in notifying the transaction. The problem is exacerbated by the requirement to provide market information on plausible markets, which extends the scope of the Commission's enquiries as its preliminary analysis advances. This leads to further Requests for Information and delays in making the filing.

The uncertainty of the duration of the pre-notification process is a genuine concern for those working within the broader time frame of a planned transaction, also prior to actually filing the notification.

But even once the deadlines start running following formal notification, the duration of the process remains unpredictable and has been made more so by the increasing use of the stop-the-clock option to extend the deadlines of the Merger Regulation. While these options give the procedure some flexibility, they make the timing of clearance increasingly difficult to predict. Since it is difficult to estimate when the overall process will end, the parties would certainly benefit from being able to estimate at the initial stages of their transaction when the formal review will begin.

These are some of the issues preventing the system humming along as nicely as Commissioner Vestager claims. Relief, however, appears to be arriving in one form: the requirement to notify the acquisition of certain noncontrolling minority shareholdings was proposed in the July 2014 White Paper, but the response was overwhelmingly negative, leading Commissioner Vestager to acknowledge that "the procedural burden of the proposal in the White Paper may not be the right one and that the issues need to be examined further"

To put it into a nutshell: if you have an easy deal that is only notifiable because the turnover thresholds are met, life has become easier since 2013; if your deal does not fall into the "easy" category, life will be busy for a very long time for a large number of people.
   

Selected JVs with no link to the EEA reviewed by the EC

• Acquisition of joint control by TNK-BP (which acquired its stake from BP its then parent) in a gas pipeline wholly located within Vietnamese territory.
• Acquisition of joint control by Goldman Sachs and Abertis Infraestructuras in a company managing and operating toll road concessions exclusively in Puerto Rico.
• Acquisition of joint control by Siemens and Sinara in a company manufacturing and selling Russian locomotives that could not be used on tracks in the EEA.
• Acquisition of joint control by Mitsui and Penske of a Lexus car dealership in Siberia.
• Creation of a JV by JCDecaux and Bolloré to provide outdoor advertising in Cameroon.
• Acquisition of joint control by Statoil and Svitzer of a tugboat operator on Grand Bahama.

 

A note on extraterritorial joint ventures

The EC's merger system will remain flawed as long as the rule requiring notification of extraterritorial JVs remains in place. This situation is unsatisfactory for a number of reasons. Firstly, it is at odds with public international law. In the case of South African mining firm Gencor, the Court of First Instance held that the application of the EU merger regulation is only justified "when it is foreseeable that a proposed concentration will have an immediate and substantial effect in the Community "The obligation to notify is also inconsistent with the views of the International Competition Network (ICN). The ICN's recommended practices for merger notification state: "jurisdiction should be asserted only with respect to those transactions that have an appropriate nexus with the jurisdiction concerned"

Secondly, given the Commission's global standing as a merger regime, it has the responsibility to set a good example to the rest of the world. Going against established ICN recommendations is not compatible with this responsibility. If other countries follow the Commission, it could lead to multiple needless reviews of JVs by jurisdictions where there is no local nexus.

Thirdly, the requirement to notify transactions with no actual or foreseeable effect within the EEA diverts Commission's resources away from scrutiny of concentrations that do effect competition within the EEA. From the industry's perspective, the current rules impose a disproportionate burden. Although the revised notification rules decrease the amount of information required for extraterritorial JVs, this has only had a limited impact on the overall filing burden.

The way forward
Perhaps the way forward is for the Commission to cease requiring notification of JVs with no impact on the EEA. This would require an amendment of the EU merger regulation to state that a JV would only be notifiable if it produced actual or potential effects within the EEA. Alternatively, the regulation could include a specific turnover threshold for the EEA activity of the JV itself. This would bring the merger regulation in line with public international law and ICN recommendations and provide clarity in respect of the acquisition of joint control of existing businesses.

 
 

To read the full report, please click here.

To read other articles in this report, please click here.

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2015 White & Case LLP