The European Community (EC) has come a long way since its initial attempts at merger control under provisions which were only tangentially applicable. Merger legislation of the 1980s enabled the European Commission to develop a test of market dominance for the assessment of transactions between undertakings. However, this test did not allow for the consideration of efficiencies in the assessment of mergers. New legislation introduced in early 2004 was meant to redress this situation. This article will evaluate whether this new approach truly marks a break with the past.
David Spigolon, , 2006
Certains droits réservés.
The EC was founded on the belief that economic integration would foster political unity among the nations of Europe. As the Community expanded, economic integration remained its fundamental, unifying precept. Consequently, a progressive coordination of Member States’ economies, and particularly their competition policies, have been at the forefront of the Community’s legislative thrust in recent years. Without coordination, undertakings to a merger could be investigated in all Member States concerned, with the distinct possibility that different national competition authorities would reach different conclusions.
EC Merger Rergulation 4064/89
The EC Merger Regulation 4064/89 became law on September 21, 1990. Its aim was to ensure that a system of undistorted competition was preserved within the Community. It was based on three main propositions, which reflected both the Community’s understanding of its development and laid out its plans for a future of European economic integration. As such, the EC’s Council recognized that the dismantling of economic boundaries within the Community would result in major corporate reorganizations particularly in the form of mergers. Secondly, it described mergers as being capable of increasing the competitiveness of European industry, improving economic growth and raising the standard of living. Thirdly, the Council cautioned the Commission that regardless of the benefits brought about by some mergers, the process of reorganization must not result in lasting damage to competition (1).
Merger Regulation 4064/89 made dominance the cornerstone of merger control. The Commission defined dominance as a position of economic strength, which posed a significant obstacle to effective competition on the market while acting largely independently of its competitors, clients and consumers. Article 2 (3) of the Merger Regulation 4064/89 stipulated that such a concentration “shall be declared incompatible with the common market.” From this provision a substantive two-pronged appraisal test was formulated, requiring a concentration to be prohibited if the Commission found firstly, that the merger created or strengthened a dominant position and secondly, if it caused a significant impediment to effective competition. In practice however, without the requirement of dominance being met, the question of impediment to competition would not be used to challenge a merger.
The Commission would oppose only those transactions that created or strengthened a dominant position, and where effective competition within the common market would be significantly impeded. However, the Commission had difficulty recognizing that mergers could entail significant increases in production efficiency, and thus be overall beneficial. This was one of the main critiques levied against Merger Regulation 4064/89. When raised, efficiency claims were dismissed by the Commission on grounds that no evidence indicated that substantial benefits would be passed on to consumers or that said benefits were not merger specific. Despite these claims, when the EC set out to reform its merger control legislation, it seemed to hint at the fact that efficiency considerations could be included in the amended regulation.
In its 2001 Green Paper on the Review of the Merger Regulation, the Commission suggested the replacement of the market dominance test with the Substantial Lessening of Competition (SLC) test applicable in numerous jurisdictions, such as the United States. This would allow for efficiencies to be considered in the overall assessment of mergers (2). Its supporters insisted on the desirability of fostering international cooperation and convergence in merger control, a trend espoused by the Community. The SLC test was seen by many as a more flexible, more economics-based alternative, enabling authorities to intervene in all possible scenarios posing a threat to competition on the market. It was also seen as superior to the market dominance test in dealing with efficiency arguments. The new merger regulation however would seemingly be a custom-designed alternative.
EC Merger Regulation 139/2004
The EC Merger Regulation 139/2004 became law on May 1, 2004. Most commentators agreed that the new legislation closely emulated the old Merger Regulation. The wording of article 2 (3) on the appraisal of concentrations was a mere rephrasing of its predecessor. Based upon it, a new substantive test was formulated. The Significant Impediment of Effective Competition test follows very closely the second branch of the market dominance test, hitherto ignored by the Commission. Under the SIEC test, the sole criterion of merger assessment was whether the transaction would create a significant impediment to effective competition. The old criterion of dominance was, in theory, reduced to one among many impediments to competition. However, it is believed that in practice most mergers will continue being assessed based on the concept of dominance, thus preserving the value of previous rulings of the European Court of Justice in merger disputes, a fact the Commission itself has strongly emphasized (3). This has caused some commentators to believe that the SIEC test follows the same approach as the market dominance test.
Nevertheless, Merger Regulation 139/2004 seems to mark a departure from the past. A finding of creation or strengthening of a dominant position no longer means that a merger will be automatically prohibited. The SIEC test recognizes that dominance does not necessarily lead to a significant impediment of competition. Moreover, the scope of applicability of other countervailing factors considered by the Commission is not limited; this flexibility may offset any perceived harm to competition. The new test enables the Commission to clear a merger creating or strengthening a dominant position within the market, if such a transaction does not significantly impede competition.
Unlike the market dominance test which put too much emphasis on the existing structure of the market, the SIEC seems to focus more on the competitive effects of mergers on competitors, customers and consumers. Furthermore, it seeks to address both the procedural uncertainties as well as the enforcement gaps plaguing the old Merger Regulation (4). The SIEC uses stricter standards than its predecessor. Although Merger Regulation 139/2004 does not refer explicitly to efficiencies, the Commission has stated that they would be taken into consideration under the new test. This means of course that the Community will have to put up with the usual pitfalls associated with efficiency considerations (5). The criteria for efficiencies are that they will have to benefit consumers, be merger-specific and verifiable: verifying and quantifying them will be extremely difficult.
However, the Commission’s insistence that “it is expected that most cases of incompatibility of a concentration with the common market will continue to be based on a finding of dominance” is indicative of the close relationship existing between the market dominance test and the SIEC test (6). In fact, some commentators have pointed out that the adoption of the new Merger Regulation resulted in only minimal changes and that the new test may not fundamentally alter the appraisal criteria of mergers within the EC. This is hardly surprising.
In the Draft Merger Regulation of 2002, the Commission elaborated on this matter, and stated, that the new Merger Regulation would be designed to “meet the challenges of a more integrated market and the enlargement of the European Union.(7)” Indeed, the old Merger Regulation had brought about changes in the European competition law landscape which furthered integration and, therefore, could not be easily dismissed. The introduction of merger control legislation at the Community level sparked the adoption of merger control legislation at the Member State level. Many of these national regulations were based on Community law and consequently contained a dominance test. Therefore, the adoption of the SLC test by the EC – though desirable from a global perspective – would lead to a paradoxical situation where better international alignment would lead to regional disparity. Understandably, the promotion of European economic integration prevailed over global integration in the area of merger control.
Conclusion
Mario Monti, the European Commissioner for Competition policy, has hailed the EC’s current Merger Regulation as a “modern, more flexible and efficient legislation to cater for the interests of 450 million consumers from May 1 of [2004]” onwards (8). It could not have been said better. Global convergence set aside, the EC is primarily concerned with furthering economic integration within the EC. By closely following its predecessor, Merger Regulation 139/2004 has upheld existing case law, and has ensured greater cohesion between the Commission and Member States, most of which have adopted a dominance oriented test to assess mergers. At the same time, a greater flexibility embodied in the SIEC test allows the Commission to meet new challenges as they come along. Competition policies are a reflection of the societies which generate them. Perhaps the importance accorded to efficiency considerations in some jurisdictions does simply not resonate with European consumers and lawmakers.
References
(1) Levy, Nicholas. “EU Merger Control: From Birth to Adolescence.” World Competition 26.2 (2003): 195. (2) Levy 210-1.
(3) Schmidt, Jessica. “The New ECMR: ‘Significant Impediment’ or ‘Significant Improvement’?” Common Market Law Review 41 (2004): 1567.
(4) A prime example was the turnover thresholds, which, only if exceeded by a merger, allowed for Commission intervention. This meant that mergers with lesser turnovers, but damaging to the market, were nevertheless cleared.
(5) Efficiency gains take various forms. These may include lower prices for goods and services, new and improved products etc.
(6) Hinds, Anna-Louise. “The New EC Merger Regulation – The More Things Change the More They Stay the Same?.” European Business Law Review 17.6 (2006): 1705.
(7) Levy 212.
(8) Schmidt 1555.