Imposing a broad remedy to address competition issues, the European Commission cleared Unilever's acquisition of Sara Lee's household and body care business on 17 November 2010. This merger decision is a reminder that the EC has the power to seek a remedy from merging parties that goes further than might appear strictly necessary and further than expected. In some cases, the imposition of broad remedies may materially undermine the rational and value of the deal and also delay the deal and impose additional costs.
Remedies in EU Merger Control
As in most merger control regimes, in the European Union
transactions are presumptively legal but subject to review by the
competition authority. For transactions involving parties with
significant turnover in the EU, the relevant authority is the
European Commission. If the EC finds that the merger creates
substantive problems in the structure of competition in the
relevant markets, it can prohibit the transaction from being
implemented. Such prohibition decisions are relatively rare. One
reason for this is that often the parties can offer a set of
remedies that allay the competitive concerns.
The EC has some discretion in assessing the acceptability of the
proposed remedies. The EC's Remedies Notice lays down a number of
criteria that the Commission will take into account in assessing a
proposed remedy. A remedy must be able to eliminate the competition
concern, should be a permanent solution, should be capable of ready
and effective implementation, and should not require onerous
monitoring by the Commission. Even if a remedy eliminates the
competition concern (such as by divesting business activities
accounting for the market share added by the transaction), the
Commission still must be convinced that the remedy is workable in
practice.
Crafting a remedy remains in the hands of the notifying party. The
Commission is not in a position to unilaterally impose conditions
to an authorization decision, but only on the basis of the
parties' proposed commitments. The limits of a remedies package
thus are only constrained by the parties' invention and
willingness to commit. A typical remedies package could include a
combination of solutions, such as business divestitures (with
potential for carve outs where divestiture is disproportionate or
impracticable), the divestiture of production capacity, and conduct
commitments.
Licensing and brand divestiture
Compared to a business divestiture, a more limited remedy for an
acquiring party may require that it grant a licence to a third
party to use a brand or even the divestiture of a brand. In sectors
in which brand name is important for competition, merging parties
have offered long term licences for key brands in order to obtain
clearance. Such arrangements can be attractive to merging parties,
as it offers a 'temporary' solution but ultimately the
brand will ultimately revert back to the owner.
The EC is wary of accepting licensing remedies, given the inherent
uncertainties involved and the ongoing ability of the licensor to
continue to influence the licensees' conduct. The EC therefore
will carefully test a proposed license commitment. In some cases
the Commission has demanded more than licensing, requiring the
complete divestiture of the brand to address competition concerns.
Further, a brand divestiture may involve products or geographies
that are not directly affected by the transaction.
The potential breadth of a licensing commitment is acutely
demonstrated in the remedy in the Unilever/Sara Lee
decision, in which the EC allowed the merger with a commitment to
divest Sara Lee's Sanex brand of deodorants. Despite the fact
that deodorant market competition concerns were found in only seven
Member States, the remedy ultimately offered and accepted covered
the whole EU. And the remedy required licensing the entire range of
Sanex brand products, including the unaffected product markets of
shower gels and hand soaps.
Consequences for business
There is no reason to believe that the broad remedy required in
Unilever/Sara Lee is an indicator of a new and more
aggressive approach by the EC. But this case is a useful reminder
that narrow licensing remedies limited to the affected product or
geographic markets will not always be sufficient. Merging parties
should evaluate whether a significant brand divestiture, covering a
range of products and geographies, may have to be sacrificed to
convince the EC that the remedy will replace the competition lost
by the transaction. This is a case-by-case exercise, depending on
the competitive conditions at the time of the review in the sector
in question. Remedies that what may have worked in one market or
for one business may not be easily transposed to another
transaction.
The scope of the merger remedy required can be critical to the
success of the transaction. A requirement to offer remedies that go
beyond the strict competitive concern may affect the rationale and
value of the deal. It may also have material consequences in terms
of process, delaying clearance and requiring extra cost, time, and
effort.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.