Mergers and joint ventures: An overview of EU and national case law

Introduction

With merger control regimes in place in a very large number of jurisdictions around the world - all EU Member States but one and an increasing number of countries worldwide have merger control regimes - the topic of mergers and joint ventures encompasses numerous issues and questions of jurisdiction, procedure, substance and policy, at both national and EU level. These issues affect directly businesses and practitioners involved in M&A transactions who are faced with a multitude of merger control regimes affecting deals.

This foreword can only touch on a number of these issues and is therefore necessarily selective. We highlight below some recent developments and trends in merger control law. We focus, in particular, on those which relate to the co-operation and harmonisation (or otherwise) between regimes and regulators, and those which are common to merger control enforcement at an EU level and at a national level, as highlighted in a number of the cases selected by e-Competitions for this special issue.

Implications of the financial and economic crisis

Deal flow

The most obvious effect of the financial and economic crisis on EU and national merger control practice has been the reduction in notified transactions.

As at 30 September 2011, the European Commission reported [1] that for 2011 it has received 251 notifications, broadly consistent with the number of notified cases in 2009 and 2010, but down from the significantly higher numbers of notifications in the 2005-2008 period (there being 402 notifications in 2007 alone for example).

The picture is similar at a national level. For example, in the financial year 2010-2011 the UK Office of Fair Trading ("OFT") issued 73 decisions (covering both notified transactions and those reviewed on its own initiative, given the voluntary nature of the UK merger control regime, on which see further below), compared to a high of 210 in 2005-2006 [2]. A similar trend can be seen in other national jurisdictions.

Nonetheless, a consistent flow of cases has continued, nationally and supra-nationally. These cases have led to further interesting precedent in some areas. Important recent cases include a rare outright prohibition by the Commission in Olympic Air/Aegean Airlines [3], as well as the first merger prohibition in China in Coca-Cola/Huiyuan [4], and by a number of European national competition authorities, such as the decision of the German Federal Cartel Office ("FCO") in RTL/ProSieben/SAT.1 [5]and of the Italian competition authority in Compagna Valdostana delle Acque/Deval/Vallenergie [6]), together with the throwing up of complex issues for policy-makers, regulators, parties and practitioners in others.

The economic crisis has also led to an increase of notified transactions in some sectors, for example where this has led to industry consolidation (for example in relation to aviation), and in particular industries where undertakings have been forced to divest divisions or businesses to satisfy Commission State aid conditions (see, for example, RBS assets/Banco Santander [7]).

Failing and flailing firms

In terms of other implications of the crisis, despite initial speculation about a proliferation of such cases, and a number of competition regulators emphasising the flexibility of merger control rules to take into account the impact of the economic crisis [8], successful invocation of the failing firm defence has been limited (in particular at the EU level, where the Commission has said that "No particular trend towards an increase of the use of this defence as a result of the economic and financial crisis can be observed") [9]. This illustrates that the Commission [10] and national regulators have continued to apply the doctrine strictly to ensure that competition is not harmed [11].

In some cases, however, the merging parties have been able to satisfy the reviewing authority (either as part of a counter-factual analysis or through the formal application of the failing firm defence) that exit of the target is inevitable and that no less anti-competitive alternative to the merger existed, or at least that the prospect of exit, or diminished ability to compete, was sufficiently likely to be taken into account when assessing the impact on competition of the merger.

For example, in the UK, the OFT accepted the failing firm defence in order to clear the acquisition of Zavvi music retail stores by HMV [12]. In addition, whilst the UK Competition Commission ("CC") explicitly rejected the failing firm defence in its decision in Stagecoach Group/Eastbourne Buses/Cavendish Motor Services [13], it did take into account the precarious financial position of the target as part of its substantive analysis [14].

In other jurisdictions, the Turkish competition board [15] has also accepted the failing firm defence in recent times, while other national merger authorities have taken into account the financial state of the merging firms absent the transaction in a counter-factual or efficiencies analysis [16].

Procedural flexibility

Whilst the Commission has resisted softening the requirements for the failing firm defence, it has been willing to demonstrate procedural flexibility (for example accelerated review periods and derogations from the standstill obligation) where needed in order to ensure that a transaction is reviewed and completed quickly, or that capital and resources can be injected into a struggling target.

For example, in the BNP Paribas/Fortismerger [17], the Commission reviewed the transaction quickly, issuing a decision within 25 working days following notification, despite the case raising substantive concerns and requiring a remedy. The Commission also reportedly [18] allowed BNP Paribas to monitor Fortis’s Belgian trading floor activities prior to approval of the transaction and also did not object to BNP Paribas putting capital into the target.

The Commission was also prepared to grant a derogation from the standstill obligation under Article 7(3) EUMR in Santander/Bradford & Bingley Assets [19], allowing the transaction to be completed immediately [20]. In 2011, as at 30 September 2011 the Commission reports [21] that 3 such derogations have been granted.

Similarly, the Belgian competition authority granted a derogation (its first) from the Belgian standstill requirement in relation to the Belgian State’s acquisition of a stake in Fortis through the Belgian Federal Participation and Investment Company [22].

Non-competition considerations

Despite potential political pressures, for some time the (near) lone example of crisis considerations being relied on by governments to clear a transaction has been the UK Government intervention to clear the Lloyds/HBOS merger (which crucially did not have a Community dimension), despite the competition issues identified by the OFT, on the basis of the overriding public interest of ensuring financial stability [23].

The other exceptional instance of such powers being exercised has been the Italian legislation [24] limiting the power of the Italian competition authority to the ability to impose behavioural remedies only in relation to mergers between large companies "in crisis" (in relation to which it is prevented from prohibiting the merger or imposing structural remedies), as applied in relation to the acquisition of Alitalia assets by the consortium Compagnia Aerea Italiana, which involved a merger to monopoly on one route [25].

The paucity of such cases reflects the importance (advocated by competition authorities across Europe and elsewhere) of ensuring that the maintenance of competitive markets in the medium to long term is not subjugated to short term concerns. However, it remains to be seen whether other similar examples of wider public interest considerations overriding competition concerns [26] will follow in future and whether any such interventions give rise to issues or challenges under EU law. In this context it can be noted, for example, that the German government has the, rarely used, power to overrule a merger prohibition if the merger is justified by an overriding public interest or the negative impact on competition is outweighed by the benefits to the economy as a whole [27], and the Irish government has powers to clear mergers on the basis of financial stability grounds [28].

Remedial strictness

Finally, the economic crisis has clearly had an impact in relation to remedies, in particular divestment remedies, given the reduction of the number of potential realistic acquirers on the market in many cases. In some instances, notably at the UK level, this has led to an increased insistence on up-front buyer solutions; we return to this theme in the discussion on remedies below.

Jurisdictional procedures and pitfalls : dealing with multiple authorities in merger deals

Fundamental to the assessment of a merger or joint venture (or other collaborative arrangement) is the question of jurisdiction: is this a concentration and which authority is going to review it?

EUMR referrals

Within the EU, key issues to consider in the jurisdictional assessment of a concentration may often include the questions of referrals under the EUMR (whether initiated by the Commission or a national competition authority, or requested by the parties), in particular as this can impact on deal timing.

Article 4 EUMR

The parties will need to consider whether they wish to request a pre-notification referral from the Commission to a Member State (under Article 4(4) EUMR) (see the recent Article 4(4) referral from the Commission to the OFT in Anglo American/Lafarge, followed by a phase II reference to the CC) [29], or a referral up from the Member States to the Commission (under Article 4(5) EUMR).

This will involve strategic consideration of the advantages and disadvantages of review at an EU and national level, including as to likely approach to substantive assessment, as well as issues such as timing, multiplicity of filings and respective information provision and cost requirements.

Article 4 referrals at the request of the parties continue to be the most common form of EUMR referrals. The Commission has reported [30] that (as at 30 September 2011) there had been 65 requests under Article 4(4) and 226 requests under Article 4(5) [31] since the introduction of the referral mechanism (the vast majority of which were successful). Article 4(5) referrals, which can ease the administrative burdens on parties and do not require a demonstration of the potential to significantly affect competition, are by far the most common.

Article 9 EUMR

Post-notification requests by Member States for a reference continue to be made (and granted), and have resulted in some recent decisions by national authorities to prohibit the referred transaction, for example the blocking by the FCO of the proposed RTL and ProSieben/SAT1 joint venture [32], or requiring remedies [33], as well as lengthy national phase II proceedings in addition to the time taken at Commission level [34].

The risk of such referral (as a derogation to the EUMR’s "one stop shop" principle) can be important in the parties’ risk assessments, in terms of substance as well as timing, for example if it is considered that the national authority(ies) may undertake a stricter substantive approach with scope for a different outcome from a Commission review.

Parties may also need to be prepared to offer remedies to avoid a referral (and therefore extended review period, potentially also in parallel with Commission proceedings in respect of other elements of the transaction). For example, in T-Mobile/Orange [35] the OFT made a (partial) Article 9 referral request on the basis that the transaction threatened to significantly affect competition in mobile telecommunications markets in the UK, but France Telecom and Deutsche Telekom offered a remedies package which was accepted both by the Commission and the OFT (which withdrew its request).

Article 22 EUMR

An interesting development which can have a direct impact on deals notified in a number of national EU jurisdictions is the increasing use of upward referrals. There have indeed been an increasing number of requests from Member States in recent years for referrals of pan-European deals up to the Commission pursuant to Article 22 of the EUMR in relation to transactions which do not meet the EUMR thresholds. These cases have included referral requests where the transaction did not meet the jurisdictional thresholds in one or more of the Member States making the request.

For example in SC Johnson/Sara Lee [36] (which was ultimately abandoned after the Commission opened phase II proceedings) the referring Member States included France, Belgium, the Czech Republic and Greece, none of which had jurisdiction over the transaction.

The unpredictable potential for such referrals can cause issues in deal planning, in particular in terms of conditionality and time periods. This is, in particular, given that the additional time taken as a result of the referral and review process can be significant. For example in Syngenta/Monsanto Sunflower Seeds [37] it took nearly 3 months from notification in Spain until the Commission opened an investigation (with the Commission’s final decision, after a phase II investigation and remedies negotiation, only being issued over a year later). It also took the Commission significant time to determine referral requests in other cases, for example Proctor & Gamble/Sara Lee Air Care [38].

Article 22 requests continue to be made, for example recently in Caterpillar/MWM [39]. It remains to be seen how regularly this mechanism will be utilised in future, and how outstanding questions (for example the extent to which the Commission can and will review the effects of a transaction in Member States not making a referral request, and the question of compliance with EUMR deadlines) will be resolved.

Non-EU notifications

Finally, in light of the increasing number of jurisdictions in which a merger or joint venture may trigger a notification (more on which below), for practitioners it is ever more important to co-ordinate the EU (or EU Member State) filings with those in other jurisdictions, in particular in terms of timings (and any potential remedies).

The question of co-ordination and co-operation with other jurisdictions is of course also important for regulators, reflected, for example, in the recent publication by the US Federal Trade Commission ("FTC") and Department of Justice’s Antitrust Division ("DOJ"), and the Commission, of revised US-EU Best Practices on Cooperation in Merger Investigations [40].

Fines for breach of the standstill obligation

At both the EU and the national level, the last few years have seen increased enforcement of the notification and standstill requirements present in the majority of merger control regimes (or gun jumping).

Notably, the Commission has imposed by far its highest fine [41] to date for failure to file a notifiable concentration. The Commission imposed on Electrabel a fine of Euro 20 million in respect of its acquisition of its acquisition of shares in Compagnie Nationale du Rhone [42], which the Commission found amounted to an acquisition of de facto sole control (noting that Electrabel, as a sophisticated company with knowledge and experience of the EUMR rules should have been aware of this). Whilst it remains to be seen what the outcome of Electrabel’s appeal of this decision will be [43], the case is an expensive reminder of the potential consequences of getting a control analysis wrong.

An assessment of whether there is a change of control on the basis of factors such as attendance and voting patterns at shareholder meetings is not straightforward, as is the case where a finding of a concentration depends on a full-functionality assessment in a joint venture context for example. The potential pitfalls are increased in those jurisdictions where there is a lower level of clarity as to the relevant qualifying tests, and where the relevant national competition authority may be less willing than the Commission to give jurisdictional guidance. We return to this theme below.

National competition authorities have also been active in enforcing their merger control rules and penalising failures to file, or other breaches of standstill obligations such as early implementation. The German FCO has traditionally been particularly vigilant on this front, for example having fined Mars Euro 4.5 million for early implementation of its acquisition of Nutro Products, following clearance from the US authorities, but prior to FCO’s approval [44].

In 2011 the FCO fined Interseroh [45] Euro 206,000 (following the company’s voluntary notification to the FCO of the failure to file) for having failed to seek merger control approval for the acquisition of (joint) control as a result of the increase in a stake through the exercise of an option and the acquisition of a veto right. It also fined ZG Raiffeisen Euro 414,000 [46] (as part of a settlement) where it had only notified a second part of what the FCO considered to be one overall acquisition, and had already implemented the first stage of the transaction.

Similarly, in France fines have been levied for failure to file, for example the imposition of a fine ofEuro 250,000 on SNCF for failure to notify its acquisition of de facto control over Novtrans [47] (again looking at shareholder dispersal and voting patterns). Previous examples of fines being imposed include the fines imposed on Pan Fish for the failure to notify the acquisition of Fford Seafood (as a result of inaccurate calculation of the target’s turnover) [48].

Fines for failure to file have also been imposed in recent years by, for example, the Greek competition authority [49], the Latvian competition authority (including in relation to a de facto concentration as a result of co-operation and outsourcing arrangements) [50], the Norwegian competition authority [51], the Romanian competition authority [52], the Spanish competition authority (including in relation to a notification being found to be required on the basis of the market share threshold) [53] and the Turkish competition authority [54].

Proliferation of mandatory regimes - jurisdictional complexities

These penalties for failures to notify (in some cases in circumstances where it was arguably not clear cut that a notification was triggered) bring into focus the challenges of jurisdictional analysis for practitioners and parties today.

Over 90 jurisdictions now have merger control regimes, the majority of which require mandatory notifications with suspensory effect, with China [55] and India [56] being notable additions over the previous few years. It is a list that continues to grow (for example, recently Ecuador [57] has passed a competition law including mandatory merger control, and Brazil has adopted a new law which will move it to a mandatory and suspensory system of merger control) [58].

However, although many regimes take a similar approach to key jurisdictional questions (for example the concept of control or the notifiability of joint ventures) and in many cases explicitly follow the approach of the Commission as set out in its Jurisdictional Notice [59], as between some countries there are significant divergences in relation to a number of areas.

A notable example is the issue of the level of control required for a concentration and the question of minority stakes (as discussed in further detail below), as well as whether arrangements such as licences or outsourcing agreements constitute concentrations [60], but others are the question of whether joint ventures are only notifiable if they meet the full functionality criterion (where the approach in China and South Korea can be contrasted with that of the Commission and many other jurisdictions), or how the turnover generated by joint ventures should be allocated to the parent undertakings (where the approach of the Commission can be contrasted with that in Germany for example), or the approach to the geographic allocation of turnover.

Moreover, in certain jurisdictions, there remains a lack of clarity on some key issues, for example whether the turnover of the seller group is to be taken into account when determining whether thresholds are met, or even whether the jurisdictional thresholds relate to worldwide or national turnover.

This causes practical challenges when conducting multi-jurisdictional assessments in multi-national transactions.

There are also significant challenges in determining whether a transaction is notifiable in jurisdictions which have a market share or share of supply test, causing considerable uncertainties. Therefore developments such as Turkey removing its market share threshold [61] and Spain introducing a de minimis exception in relation to its market share threshold [62] are welcome.

Reforming the UK regime

These jurisdictional uncertainties are of course most acute where the regime imposes a mandatory suspensory notification obligation. This brings us to the question of the UK, which is a lone voluntary regime in Europe, and relatively exceptional worldwide (with notable exceptions such as Australia and New Zealand).

With further jurisdictions adopting or moving to a suspensory mandatory system, is it time for the UK to follow?

This is of course one of the questions currently being considered by the UK government consultation on reform of the UK competition regime [63].

The reform options are, broadly, maintaining the current voluntary system (with some "tweaks", for example to reduce the likelihood of "scrambling the eggs" through implementation of the transaction prior to a decision), or introducing (i) mandatory notification but with adjusted filing thresholds (based on relatively low turnover thresholds) and a standstill obligation, or (ii) a hybrid system with mandatory notification for transactions meeting the current turnover thresholds and the ability for the OFT to investigate transactions falling below these thresholds but meeting the current "share of supply" threshold.

It is not clear, however, that the latter proposals would improve the current regime, and would have the negative impact of removing the advantage of the flexibility of the current voluntary regime for both the parties and the regulator.

Non-controlling minority stakes : does a gap need filling?

If the UK were to move to a mandatory suspensory regime then the question of the level of control required for a transaction to trigger the application of the merger control rules would assume even greater importance.

In the UK acquisitions of "material influence" are sufficient to trigger the rules, which is a lower threshold than the EUMR "decisive influence" test (as is the "competitively sensitive influence" threshold under the German rules [65], which exists in addition to the 25% shareholding threshold and applies to acquisitions of shareholdings below that level).

However, there are no bright line rules as to when material influence will be regarded as having arisen, and in particular no minimum shareholding threshold; this must be assessed in light of all facts of the case. Whilst material influence is likely to be assumed where a shareholding of 25% or more (and therefore the ability to block special resolutions) is acquired, this can also arise at a lower level.

This is well illustrated by the decisions of the OFT and the CC in BSkyB/ITV (confirmed on appeal), in which material influence was held to arise in connection with BSkyB’s acquisition of a shareholding of 17.9% (and only regarded as ceasing to exist once BSkyB reduced its shareholding to 7.5%). [66] In contrast, in Sports Direct/Blacks [67] the OFT did not consider that a shareholding of 14.5% was, in that instance, sufficient to confer material influence; see similarly the decision of the OFT in RREEF Pan-European Infrastructure Fund LP/Kelda Holdings Limited that a shareholding of 23.37% was not sufficient in this case to establish material influence [68].

Aside from any question marks about the material influence threshold in the context of a mandatory regime, it is clear that this lower threshold allows the UK authorities to review transactions which would not constitute a concentration under the EUMR. This has been brought in sharp focus recently as a result of the Ryanair/Aer Lingus saga, where the General Court confirmed that Ryanair’s minority stake of 29.3% did not confer control over Aer Lingus within the meaning of the EUMR, and therefore that the Commission did not have the power to order divestment of the stake [69], but the OFT is now reviewing the acquisition as one of material influence under the UK merger control rules [70]. A previous example of this gap was Microsoft/Media Liberty/Telewest [71], where the UK authorities were able to review the transaction when the Commission could not (as a result of the parties’ restructuring the transaction).

Commissioner Almunia announced in March 2011 that the Commission services would be examining the issue of minority shareholdings and whether it was significant enough to warrant trying to close this gap in EU merger control (when compared to national jurisdictions such as the UK and Germany, and also the position in the US) [72].

It is a fine balance as to whether this is a gap that needs filling. For example, although it is possible for the Commission to consider the acquisition of minority stakes under Articles 101 and 102 TFEU [73], there are limitations to such an ex post review. The Commission can take account of the existence of minority shareholdings in its analysis of subsequent notifiable concentrations (see, for example, E.ON/MOL [74] and Siemens/VA Tech [75]), but the ability to do so will not occur in all cases, and may lead to disparities in treatment. In some cases these situations can be assessed under national law (as in Ryanair/Aer Lingus), but this would not be the case in relation to all acquisitions.

However, there are likely to be a relatively low number of cases that cause competition concerns which could not be dealt with under the other mechanisms identified above. Moreover, there are likely to be practical difficulties of amending the EUMR such to catch acquisitions of minority stakes, both in defining the appropriate threshold, and in terms of potential uncertainties for parties, and of increased workload for the Commission due to increased notifications and requests for consultations on jurisdiction.

Selected topics in substantive assessment

Much of the discussion above has concentrated on issues of jurisdiction and procedure, but the last few years have also seen some important decisions and developments in relation to the substantive assessment of transactions, through decisional practice, guidelines and the result of judicial scrutiny of the decisions of the Commission and national competition authorities.

We highlight just two examples below.

Economic assessment and alternatives to market definition led assessments in horizontal mergers

In 2010 the US FTC and DOJ published revised Horizontal Merger Guidelines [76] outlining the principal analytical techniques and practices, and the enforcement policy of the FTC and DOJ in the assessment of horizontal mergers. The revised guidelines make it clear that market definition is not an end in itself, or a necessary starting point of merger analysis, but that market definition and market concentration are considered alongside other tools for the assessment of anti-competitive effects. In practice this has involved the use of merger simulation and quantative indicators such as UPP (Upward Pricing Pressure) or IPR (Illustrative Price Rises) to assess unilateral effects, in particular in cases involving differentiated products.

A similar trend can to some extent be seen in the UK. The OFT and CC published in September 2010 joint Merger Assessment Guidelines [77]. While the final guidelines recognised the important role of a market definition and concentration analysis (following responses to the consultation on the draft guidelines), they make it clear that this is not an end in itself and that there are other tools to assess merger effects, reflecting increasing focus, in appropriate cases, on an economic analysis of closeness of competition and competitive constraints in order to assess likely price impacts.

The UK competition authorities are in practice increasingly using quantative evidence and economic techniques in some cases, for example utilising (consistent with the approach in the US) metrics such as GUPPI (Generalised Upwards Pricing Pressure Indicator), UPP and IPR to assess closeness of competition and predict merger effects without needing to explicitly define a market (despite emphasising that this is still an important element). These methods have been used in particular in retail mergers, looking at fascia issues in certain local areas, for example by the OFT in Asda/Netto [78], and also in other cases such as those involving consumer goods, for example Unilever/Alberto Culver [79]. Similar approaches have been adopted by the CC, for example in Zipcar/Streetcar [80].

This has not been without criticism, for example given that it is not clear at what "thresholds" such indicators will be regarded as evidence that the merger is problematic. Moreover, such analyses depend on the quality of the data inputs (including survey evidence), and are based on various assumptions which are potentially subject to challenge or error. Some concern has also been raised as to the amount of time-consuming and expensive economic analysis required (in particular in a phase I review context), with the data requirements that this involves, in circumstances when it is not clear what weight will be accorded to the results of such analyses when compared with other evidence, nor what the relationship with a traditional market definition exercise will be.

At the Commission level, there have also been examples of an increasing use of econometrics and other economic techniques to estimate closeness of competition, and conducting merger simulations, for example in Unilever/Sara Lee [81]. The Commission has also published a paper on best practices on the submission of economic evidence [82], which cover mergers, to facilitate the Commission and the parties assessing and replicating the empirical assessments undertaken.

It remains to be seen the extent to which the Commission, and other national authorities, utilise such techniques and concepts in future cases, and how much weight is given to such evidence. Important questions remain, such as what level of predicted price rise will be regarded as a significant impediment to, or substantial lessening of, competition, and how judicial scrutiny of merger decisions will evolve to assess decisions based on such analyses. While it is unlikely that there will be any wholescale move away from traditional market definition and market share assessments in future, the trend for increasing use of alternative economic tools looks to continue.

Non-horizontal mergers

An economic effects-based approach can be seen in the Commission’s decisional practice in relation to non-horizontal mergers.

Following successful challenges to a number of its previous decisions [83], and the subsequent publication of the Commission’s guidance in non-horizontal mergers in 2007 [84], the Commission applied its new guidance to a major transaction in an evolving market in Google/Double Click [85]. The Commission concluded that the transaction was unlikely to have any harmful effects on competition, including foreclosure effects. The same conclusion was reached by the US FTC following a similar analysis.

The US agencies have traditionally been less concerned with the effects of vertical mergers than the Commission, as reflected in their lack of detailed guidelines on this issue. However, the US agencies have recently become more active in this area of enforcement having reviewed a number of transactions where vertical concerns were raised (as evidenced for example by the decision in relation to the NBC Universal Inc/Comcast joint venture [86] in which commitments were required to remedy concerns). The traditionally more permissive stance of the US agencies in vertical mergers can, nonetheless, be seen from the rapid DOJ clearance in TomTom/Tele Atlas [87] which contrasted with the phase II review conducted by the Commission [88], even though this also resulted in an unconditional clearance. The Commission applied the approach set out in its guidance and concluded that the merged entity would not have the ability and incentive to increase the costs of navigable digital maps for other manufacturers of portable navigation devices, or to limit their access to these maps.

The Commission has also applied the approach set out in its non-horizontal guidelines in a number of other recent cases (for example Nokia/Navteq [89], Mars/Wrigley [90]), largely concluding that the transactions in question raised no competition concerns, but in some cases identify vertical foreclosure effects requiring remedies (see for example RWE/Essent [91] and Man/Ferrostahl [92]).

On a national level, in the UK, in contrast to the US guidelines, the recently published joint OFT and CC Merger Assessment Guidelines include a detailed description of the UK agencies’ approach to the assessment of vertical and conglomerate mergers (similar to that taken by the Commission), and have considered a number of non-horizontal mergers in recent years.

For example, first the OFT and then the CC assessed (twice) a vertical merger in the Ticketmaster/Live Nation, transaction [93], considering, inter alia, whether the merger would be expected to give rise to vertical foreclosure of rival ticket agents or live music promoters, conducting an economic analysis to assess whether the merging parties would have both the ability and the incentive to foreclose rivals. The CC concluded that there would be no such ability in relation to foreclosing Ticketmaster’s rivals in ticketing, and that there would be the ability but not sufficient incentive in relation to the foreclosure of Live Nation’s rivals in live music promotion.

The German FCO has also adopted an effects-based approach of assessing the ability and incentive to foreclose in previous decisions. For example, in Stihl/Zama [94] the FCO was concerned that the vertical integration of Stihl (a manufacturer of motorized hand-held equipment, including tools) with a major supplier of diaphragm carburettors for power tools might lead to vertical foreclosure. These concerns were remedied by divestment of a business unit to create an independent competitor in the market for diaphragm carburettors. The FCO has also recently (in July 2011) consulted on its Draft Guidance on Substantive Merger Control, which includes a discussion of non-horizontal mergers.

Remedies

Finally, we turn to the question of remedies, the outcome of the vast majority of merger cases which raise competition concerns (in particular at the Commission level, where, as noted above, outright prohibitions are very rare).

The possibility of remedies forms a crucial part of deal planning for companies and their advisers, as being prepared to offer a suitable remedy package at the appropriate stage of an investigation can often avoid a lengthy and burdensome phase II assessment (or an unwelcome referral from the Commission to a Member State authority – see above [95]), not just a prohibition decision.

In the UK, for example, it is notable for example that the number of referrals to a phase II CC review has been relatively low over the last few years, whereas the OFT has accepted remedies ("undertakings in lieu" in UK parlance) in a number of cases (see for example recently Unilever/Alberto Culver [96] and Acergy/Subsea7 [97]).

However, the parties will need to consider carefully the impact of remedies on the value and the rationale of the transaction, in particular given that remedies often in practice need to extend to products or markets where there is no anti-competitive overlap, for example in order to satisfy the competition authority of the viability of the divested business. See for example the Unilever/Sara Lee [98] case where the divestment agreed with the Commission was EU-wide, although concerns were found on only certain national markets (as was also the case in Syngenta/Monsanto [99]).

Type of remedy – structural or behavioural?

As set out in its 2008 Remedies Notice [100], the Commission takes the position that structural remedies, and in particular divestitures (of a subsidiary, business, or other assets, such as a production plant), are the "benchmark…in terms of effectiveness and efficiency", and maintains its reluctance to accept behavioural remedies. Its preference is for the divestment of existing viable stand-alone businesses.

Divestment remedies of one form or another were for example agreed in recent years in Deutsche Bahn/Arriva [101] (of Arriva’s rail and bus business in Germany) and BASF/Ineos/ Styrene JV [102] (of part of INEOS’ ABS production business) (in phase I), and Unilever/Sara Lee [103] (of Sara Lee’s Sanex deodorant brand) and Arsenal/DSP [104] (of an Arsenal production plant) (in phase II).

Given that in some circumstances behavioural remedies can clearly be sufficient to eliminate competition concerns (and have, in a material number of cases, been recognised as such by national competition authorities – see below), and can be more proportionate [105], it is far from clear that the Commission should adopt an institutional preference for structural remedies in all cases [106]. What is important is whether a proposed remedy will be effective to remove the competition concerns identified. In light of the General Court’s judgment in EDP v Commission [107], it is for the Commission to demonstrate that a transaction, as modified by commitments (which could include behavioural commitments), is incompatible with the common market in order to prohibit a transaction.

However, in some cases the Commission has been prepared to accept at least a form of behavioural remedy. For example in Intel/McAfee [108], where the Commission had concerns about bundling of Intel’s central processing units ("CPUs") and chipsets with McAfee’s security solutions, including concerns about a lack of interoperability between CPUs and chipsets and security solutions. The Commission accepted commitments to ensure the interoperability of the merged entity’s products with those of competitors, including as to the provision of information and a commitment not to actively impede competitors’ security solutions from running on Intel CPUs or chipsets (and vice versa).

Interoperability-type remedies were also accepted by the Commission in Cisco/Tandberg [109], and access and other behavioural remedies were accepted in Deutsche Bahn/EWS [110], where Deutsche Bahn agreed to fulfil EWS’ expansion plans in France in the next five years through investments in key assets and personnel, as set out in the EWS Business Plan, and to provide fair and non-discriminatory access to EWS facilities in France for third party rail operators. The Commission has also been willing, in relation to vertical foreclosure concerns, to accept behavioural remedies in relation to the supply of key inputs, in many cases alongside more traditional structural remedies, for example in Evraz/Highveld [111] as to the supply of ore and slag residue and in Friesland Foods/Campina [112] as to the supply of raw milk.

Moreover in Oracle/Sun Microsystems [113] the Commission was willing to rely on a public announcement by Oracle of pledges to customers, users and developers of the MySQL database product in order to grant unconditional clearance. It remains to be seen what the outcome of the appeal of this decision will be [114].

Aside from such examples, in broad terms, national competition authorities are generally more willing than the Commission to consider and accept in appropriate cases behavioural remedies as well as structural divestment remedies.

Examples include the decision of the Dutch competition authority in Reggefiber [115] to clear a joint venture in the optical fiber field on the basis of behavioural remedies, including a price ceiling for access to the JV’s network (to deal with concerns about the potential for a price squeeze of service providers seeking access to the JV’s fiber-optic network) and non-discriminatory access obligations, and the decision of the Danish Competition Council in TV2 / MTG / TV2 Sport JV [116] to approve a joint venture subject to numerous behavioural remedies designed to counter-act the risk of co-ordinated effects (for example restrictions on voting and information ring-fencing, and provisions as to the joint venture’s tendering and advertising processes). Similarly, the Hungarian competition authority in MédiaLog/Fiege [117] accepted non-discriminatory access and confidentiality commitments in order to remedy vertical concerns.

National decisions include relatively novel remedies in some cases. For example, in Transdev/Veolia [118], following a reference by the Commission and a phase II investigation, the French competition authority cleared a public passenger transport merger on the basis of commitments, including in particular that the parties create a fund of Euro 6.54 M to support tenders submitted by rivals in urban transport markets over a four year period.

Finally we note that the US authorities have also sought behavioural remedies where appropriate, for example the DOJ in Ticketmaster/Live Nation [119] accepted remedies including a prohibition on retaliation and an obligation to notify future acquisitions involving ticketing companies. The recent guidance by the DOJ on merger remedies contains a specific discussion of remedies suitable in vertical cases. [120]

Who will buy…?

In the many cases where divestment rather than behavioural remedies are the price for clearance, there is a growing trend of authorities’ insisting on up-front buyers for the divestment business, particularly marked in the UK, where the OFT Chief Executive John Fingleton has been quoted as saying that the OFT is "cracking down on its previous practice of allowing some deals to close before buyers have been secured for the required disposals”. [121] This stems from uncertainties as to whether suitable purchasers can be found for the businesses to be spun off, in particular in light of the financial climate.

The OFT has insisted on an up-front buyer in numerous cases before it agreed to commitments to avoid a phase II investigation (undertakings in lieu) in numerous recent cases, for example in Unilever/Alberto Culver [122], Carlyle Group and Palamon Capital Partners LP/Integrated Dental Holdings Group and Associated Dental Practices [123], Asda/Netto [124], GB Oils Limited/Brogan Holdings Limited [125] and GB Oils Limited/Pace Fuel Care Limited [126].

Whilst this creates certainty for the OFT, avoiding a repeat of the situation in General Healthcare Group Holding Partnership LLP/Covenant Healthcare -Abbey Carrick Glen Hospital [127] (in which it ultimately released General Healthcare from its undertaking to divest a hospital on the basis that there was no realistic prospect that either General Healthcare or an independent trustee would be able to sell the hospital) [128], it may result in increased timescales and lack of flexibility for the parties.

Other national competition authorities have also insisted on up-front buyers in recent times, requiring approval of the purchaser by the authority before the transaction can be completed. For example the FCO required such a divestment in relation to Nordzucker’s acquisition of Danisco’s sugar related activities [129], and in relation to the merger of Edeka and Tengelmann [130].

The Commission has in some cases insisted on an up-front buyer remedy, for example in Inco/Falconbridge [131], T-mobile Austria/Tele.Ring [132] and Bosch/Rexroth [133], and also in some cases on the parties refraining from closing the transaction until they have implemented another form of remedy (see RCA/MAV Cargo [134]). However, it has not done so routinely, but only in cases where there is a clear and obvious risk of a failure to find a buyer, for example where the divestment business involves a complex carve-out from existing operations and the identity of the purchaser is fundamental to the viability of the business, or where simply the number of potential buyers is extremely limited.

It remains to be seen whether the Commission’s approach will alter in future and whether it will increasingly insist on up-front buyers (rather than just purchaser suitability and approval requirements), in particular if it is increasingly faced with instances, as has the OFT, where following clearance and completion of the transaction the parties struggle to find a purchaser within the agreed time period.

From a practical perspective, it is worth bearing in mind that in a multi-jurisdictional deal scenario, even if an up-front buyer is required by one authority alone, this will have an impact on the timing of the transaction, even if other authorities are prepared to take a more relaxed approach.

Enforcement

Finally, as with breach of the notification and suspension requirements, parties need to ensure that commitments are complied with, as competition authorities are also vigilant in ensuring that companies are not breaching their commitments. The consequences of doing so could be financial, for example the French competition authority [135] has imposed fines for breach of commitments in recent years, and such a breach also may make it more difficult for parties when seeking to negotiate remedies packages in future.

Conclusion

It is clear from this brief survey of only a selected set of issues and cases that the merger control area provides fertile ground for a comparative assessment and investigation of the approaches taken in the EU, and in the ever-increasing number of national jurisdictions, to common issues. The e-Competitions bulletins and case bank are very useful tools when doing so. The approach in one jurisdiction can affect other jurisdiction and in international deals which require a number of filings around the world a coherent and co-ordinated international merger control strategy is of paramount importance.

This is an area where developments are ongoing. Undoubtedly, when the next such special issue of e-Competitions is collated, further issues will have arisen in respect of the analysis of mergers and joint ventures (from procedural/jurisdictional and substantive perspectives) by both practitioners and their clients, and by regulators, which developments will be tracked on the pages of e-Competitions.

This survey includes developments up until 25 October 2011

Views expressed are personal to the authors. This foreword does not constitute legal advice and should not be relied on as such.