Insights

Antitrust Alert: European Commission could seek more power to review "national" mergers

One of the original successful features of the EC Merger Regulation (ECMR) was the relative bright line jurisdictional thresholds. By fairly simple reference to the turnover of the relevant parties, an assessment could be made swiftly as to whether a merger filing was necessary and to which competition authority: the European Commission (Commission) or authorities of the Member States. This simple mechanism is threatened. Recent proposals may increase the complexity of assessing whether and where a merger filing is necessary and therefore hinder filing strategies and the practical implementation of transactions.

The original basic rule was that mergers involving entities with significant and cross border activities (determined by levels and geographic distribution of turnover) would be examined by the Commission and those anchored in one (or a few) Member States would be subject only to domestic Member State merger control rules.

The Commission now has proposed that its jurisdiction could be extended yet further, so that it can review cases where the turnover and activities of the parties ordinarily would leave the matter to Member State jurisdiction.  The Commission should approach any such amendments with care, as they may seriously weaken the original clarity and efficiency of the ECMR. 

ECMR jurisdiction – the original clarity

The ECMR is the EU's set of rules by which mergers are assessed by the Commission to ensure they do not ‘significantly impede effective competition' within the EU. It was originally intended that where mergers resulted in "significant structural changes the impact of which went beyond the national borders of any one Member State" the Commission would be the "most appropriate authority" to assume jurisdiction to review such arrangements. The only exception was that, even if the turnover thresholds were met, if two-thirds of parties' turnover was obtained in one and the same EU member state, it no longer qualified as having a Community dimension (the "two-thirds rule"). Therefore, mergers where the centre of gravity is in one particular Member State will be assessed, usually, by the competition authority of that Member State. 

It therefore was necessary to distinguish between cases that have EU relevance and those that are primarily national. For that purpose, under the current rules, when a merger has a "Community dimension," national authorities are prohibited from reviewing it and the Commission has exclusive jurisdiction. The determination of whether the intended merger has a Community dimension depends on a set of specified turnover thresholds.

Unlike jurisdictional analysis in other legal systems, such as the UK (which depends on a prior assessment on the definition of the relevant market), the ECMR turnover thresholds require no initial substantive analysis. That relatively blunt, but efficient, mechanism has meant that companies have been certain about when and where to file – and the authorities themselves have known the boundaries of their power to review mergers. 

Muddying the waters

 

Despite clarity in the division of jurisdiction, the original bright jurisdictional lines were blurred in a 2004 amendment to the ECMR. Where a merger failed to cross the Community-wide thresholds, and notification was required in three or more Member States, parties were given the right to request that the Commission seek (at the Member States' ultimate discretion) to review the arrangement, rather than a number of individual Member State authorities.

 

The need for reform?

Against a backdrop of alleged political involvement in merger transactions over recent years – such as the French government's ‘intervention' in the Aventis/Novartis and Suez/Gaz de France mergers – there has been growing concern that, as a result of the two-thirds rule, mergers involving supranational entities and ‘national champions' could nevertheless have a cross border effect and therefore should not be reviewed by Member States' authorities but passed to the European Commission. 

Notable examples in which the two-thirds rule arose are a series of French financial services mergers and the Gas Natural/Endesa merger. The takeover of Crédit Lyonnais by Crédit Agricole and of Paribas by BNP created significant European undertakings whose operations were perceived to have an impact on cross-border markets. But due to the application of the two-thirds rule, the Commission was unable to handle those mergers.

In 2005 when Spain's Gas Natural launched a hostile takeover bid for rival Spanish energy giant Endesa, the parties disputed whether the Commission or the Spanish competition authority should review the merger. Ultimately, under the two thirds rule, the Commission reluctantly ceded the review back to Madrid. The Spanish Competition Authority blocked the merger. However, amidst claims of political motivation for a ‘national champion' and the prospect of the German company E.On making a higher bid for Endesa, the Spanish Government overruled the Competition Authority and authorized the merger to proceed with conditions. 

The 2009 Report and outlook for future mergers

 

In its recent Report on the ECMR, the Commission raises concern with the application of the two-thirds rule in "a small number of cases" where Member States' authorities have reviewed cases that could be viewed as having "potential cross border effects." The Commission's Report suggests that the undesirable results of the two-thirds rules could be mitigated by more "efficient pre-notification referral mechanisms," suggesting new exceptions to the Member States' jurisdiction to review mergers. This would inevitably undermine the swift review of merger transactions. 

Clients and their advisers should be aware that any reforms that further blur the jurisdictional boundaries will increase the complexity of assessing where a merger filing is required to be made. This in turn has an impact on the timing of the filing, clearance and implementation of merger transactions – in addition to a potential increase in the number of filings. It also has a significant impact on merging parties' antitrust strategy: if it is unclear to which authority a filing should be made, it may necessary to craft one submission that will be attractive to multiple enforcers. 

Lawyer Contacts

 

For more information, please contact your principal Jones Day representative or the lawyer listed below.

 

Vincent Brophy
London/Brussels
+32 2 645 15 35

vbrophy@jonesday.com

 

 

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