UK: More Money, More Staff And More Time: Mario Monti’s Speech on Reforming Merger Control in the European Union

In recent months the EU Merger Control and in particular the work of the Commission’s Merger Task Force (MTF) has taken something of a battering in the courts. The Commission’s decisions in the cases of Sahneider/Legrand, Tetra Laval/Sidel and Airtours/First Choice were all overturned on appeal to the Court of First Instance. The judgment in the Airtours/First Choice case was particularly significant: for the first time in the twelve-year history of EU merger control a Commission decision to prohibit a merger was overturned by the courts.

It was against this background of judicial criticism of merger policy, that Mario Monti, European Commissioner for Competition, on 7^th November 2002 outlined the Commission’s plans for reform. Speaking at the International Bar Association Conference, Monti described the Commission’s proposals as the ‘most far-reaching reform of European merger control since the adoption of the EC Merger Regulation’. The proposals, which are based on last year’s Green Paper, will revise both the Merger Regulation (‘the Regulation’) itself and the way in which the MTF handles proposed mergers.

The Commissioner began his speech by outlining the successes of the current merger regime. In particular he noted that -

• The "one-stop shop" approach to European mergers made it unnecessary for companies involved in cross-border mergers to approach each national regulatory authority - only the Commission required notification.
• The current tight time periods for MTF investigations of proposed mergers contained in Article 10(1) and (3) of the Regulation prevented long delays.
• The merger control system had ensured a ‘remarkable’ degree of transparency throughout the decision-making process.
• The Commission had supplied a reasoned decision for every merger that it had considered.
• The merger system ensured that the independence of the decision-maker was safeguarded.

Taking these successes as guiding principles, Monti outlined the Commission’s proposals dividing them into issues of substantive law and procedure.

1. Substantive Issues

Regulation 4064/89, brings all ‘concentrations with a Community dimension’ under EU merger control. Article 3 of the Regulation defines a ‘concentration’ to include both a standard merger between two or more companies (A3(1)(a)) and where one company acquires ‘control’ of another (A3(1)(b)). Article 1 details the market share tests that are applied in deciding whether or not such a concentration will have a Community dimension.

If a merger is classed as a ‘concentration with a Community dimension’, then the Commission must, under Article 2, determine whether or not it is ‘compatible with the common market’. In making this appraisal the Commission has to decide if the concentration ‘creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the Common Market or in a substantial part of it’.

The wording of this ‘substantive’ test reflects its origins in Article 82 (86) of the EC Treaty. It is designed to anticipate the situation where a large company merges or gains control of a competitor resulting in it achieving a new or greatly enhanced position of dominance in the market. Indeed, the Commission determines dominance using similar market share tests to those applied under A82.

While this test works well in situations of single firm dominance, its application is less clear in situations involving oligopolies. What if, as in the Airtours case, four companies dominate the market and two of those companies decide to merge, leaving just three companies? The concentration could create or strengthen a dominant position between the parties to the concentration as well as strengthening or creating a dominant position for the other two parties in the market.

In Nestle v Perrier [1993], the Commission argued successfully that such mergers could lead to the oligopoly companies together enjoying ‘collective dominance’ and so fell within the ambit of the Merger Regulation. Evidence of collective dominance might be ‘tacit collusion’ between the firms so that, for example, each firm is aware of the others’ prices and therefore keeps its prices at the same level. However, as the Airtours case demonstrated, in practice it can be difficult to show tacit collusion and therefore ‘collective dominance’ in these situations. This has led a number of commentators to suggest that the Regulation’s ‘dominance’ test should be substituted for the ‘substantial lessening of competition’ test used in US anti-trust law.

The Commissioner, though, rejected the US approach in his speech, stressing that in cases such as Airtours the same decision would have been reached regardless of which test was applied. Instead he proposed that an extra paragraph should be added to Article 2 so that it covers the ‘unilateral effects’ of a merger in oligopolies. The Regulation will now apply the existence of ‘collective dominance’ as part of the test of whether or not a merger is compatible with the common market.

Many of the decisions that have gone against the Commission have turned on the MTF’s economic analysis of relevant market shares. In response to this, Monti proposes a new Notice on Horizontal Mergers to give guidance to the MTF. The Notice will set out the economic framework for assessing concentrations and give guidance on how to analyse concepts such as collective dominance. It will also deal with assessing those factors that may mitigate the harmful effects of a merger such as ease of market entry and consumer choice. In particular the guidelines will contain an explicit recognition that mergers can lead to ‘merger-specific efficiencies’ that need to be weighed up against their anti-competitive consequences. However where a merger will lead to monopoly or quasi-monopoly the guidelines will advise that any such efficiencies should be discounted.

The aim of the guidelines is to make the Commission’s decisions more predictable and provide greater transparency overall in decision-making. Notices on vertical mergers and conglomerates are also planned.

2. Procedural Issues

As it was the way in which the MTF carried out its investigations, rather than the merger regulations themselves, that drew the courts’ criticism, Monti devoted much of his speech to outlining reforms to the investigation process.

The Commission proposes a number of changes to the current investigation process. Firstly, a new position of Chief Competition Economist is proposed. This person will be an eminent economist specialising in industrial economics. Their role will be to strengthen the economic analysis underlying the econometric studies of market shares used in merger investigations.

Secondly, a new independent Panel is proposed to review and scrutinize the conclusions of each MTF Phase Two investigation. Phase Two is the stage in the investigation process during which the MTF has just 4 months to investigate and determine whether or not the merger is compatible with the common market. The Commission hopes that this panel will provide ‘a real and effective check on the soundness of the investigators’ preliminary conclusions’ and so prevent the MTF from making errors when determining the relevant market conditions, as has happened in the past.

Thirdly, in response to frequent complaints by the parties to a merger that the current system allows critics of the merger to dominate the investigation process, the merger parties will be given greater opportunity to contribute during the Phase Two investigation. They will be allowed access to the MTF file, given an opportunity to see their opponents’ arguments and even a chance to meet their opponents and thrash out their differences. They could also attend ‘state of play’ meetings with the Commission at decisive points in the process.

Finally, as consumer protection and choice is an important factor in the decision-making process on mergers, consumer bodies will be invited to contribute more during the investigation process.

In short, the proposals aim to ensure that MTF decisions are made after the fullest investigation, using the best possible economic analysis and with strengthened guarantees of due process in place. Best practice guidelines will also be drafted to give guidance to the MTF on investigating mergers.

The Commissioner feels that the current short time limits can sometimes hinder a thorough investigation of a merger. He therefore suggests that the MTF should be able to request, with the permission of the merger parties, an extra 4 weeks for the investigation of a very complex case. The parties themselves would also be able to request an extra 3 weeks for the Commission and Member State representatives to consider any remedy offer put forward by the parties.

Currently the parties to a ‘concentration with a Community dimension’ under Article 4(1) must notify the Commission within one week:

• after the conclusion of the agreement; or
• the announcement of the public bid; or
• the acquisition of a controlling interest.

The Commission proposes removing this one-week rule so that a party could give notification at any time before steps are taken to implement the agreement. Thus a party will be able to notify the Commission prior to the conclusion of the binding agreement. This will allow companies greater flexibility in planning and organising their transactions.

Monti also discussed a number of other important reforms to merger control in outline:

• stronger fact-finding powers for the Commission (though not home searches)
• special judicial panels to speed up delivery of judicial review decisions
• a ‘right of initiative’ for the Commission to request cases handled by the national authorities to be transferred to the Commission
• greater staffing and resources for the MTF and Competition Directorate

The timetable for the reforms that Monti set out in his speech is as yet uncertain. Unfortunately it looks as if merger reform will have to wait its turn until Monti’s other great project, the overhaul of European anti-trust law (under Article 81 of the EC Treaty), has been finalised. However the Commission clearly sees the need for reform in this area and we should expect change sooner rather than later.

Mario Monti’s reforms represent a practical and direct response to recent criticisms of EU merger control. By sidestepping the academic arguments over the substantive law test, the Commission’s proposals seem designed to put in place lasting reform of merger control without major changes to its legal basis. The only danger is that by increasing the reviews, checks and balances in the system and allowing for the extension of investigation time limits, the reforms risk leaving parties to mergers waiting for longer to receive a decision from the reinvigorated Competition Directorate.