United States: Parties Challenge The European Commission's Decision To Open A Phase II Investigation

Last Updated: January 23 2017
Article by Antitrust Watch

In an unprecedented move, the parties to a planned merger transaction have brought an action for annulment against the European Commission's decision to initiate proceedings even before the proceedings are closed.

Under the EU Merger Regulation ("EUMR"), the Commission's review procedure is divided into two phases: "Phase I", which is normally limited to 25 working days, serves to separate unproblematic cases from cases that require a deeper analysis. At the end of phase I, the Commission must either clear a transaction (if it does not find significant competition concerns or if it concludes that it has no jurisdiction) or it must initiate "phase II" (if it has serious doubts as to the transaction's compatibility with the EU law). While a decision to open phase II does not prejudice the final outcome – the Commission may still clear the transaction – it significantly increases the burden in terms of cost and inconvenience for the merging parties. The opening of phase II normally entails a significant delay of several months, and during that time and until the Commission issues a clearance decision, the parties may not close the transaction.

Recently, HeidelbergCement and Schwenk Zement have been affected by such a decision to open phase II. The two cement manufacturers have been planning to acquire a company in Croatia via a joint subsidiary. In October 2016, the Commission opened phase II, based on preliminary concerns about a significant competitor being removed from an "already concentrated regional market." As has now become known, HeidelbergCement and Schwenk Zement have challenged this decision before the EU's General Court.

The parties' decision to challenge the phase II opening decision is unprecedented. It is – as far as we know – the first time that merging parties have attacked the Commission's authority to extend an EUMR investigation while the investigation is still ongoing. If the parties' action were successful, this would presumably entail a finding by the Court that the Commission missed the statutory deadline for a decision in phase I. Consequently, the transaction would be deemed compatible with the internal market without the need for a further decision by the Commission. It could no longer be reviewed by the Commission or be challenged by third parties.

However, the action of HeidelbergCement and Schwenk Zement will need to overcome two principles of EU law. First, it is generally accepted that only binding acts may be challenged before the courts. Where a procedure involves several stages, a decision is a challengeable act only if it is final, i.e., if it "definitively lays down the position of the institution on the conclusion of that procedure", as opposed to a mere provisional measure that is "intended to pave the way for the final decision" (case 60/81 IBM v Commission). Second, the applicant must establish an interest in the annulment of the contested act. Thus, a decision must be "of itself capable of having legal consequences" to be susceptible to a challenge (case 53/85 AKZO Chemie v Commission). A decision to open phase II, which is by definition not designed to close the procedure and does not appear in itself to create legal consequences for the merging parties, might not fulfill these requirements.

Moreover, the legal hurdles that HeidelbergCement and Schwenk Zement need to overcome seem even higher in the light of EU case law dealing specifically with procedural decisions under the EUMR: In Schneider Electric v Commission (T-48/03), the Court of First Instance established that the decision to re-open phase II (after the original decision to prohibit the concentration had been annulled by the court) was not open to a court challenge. The court found that a decision to open phase II was "simply a preparatory step whose sole aim is to undertake enquiries intended to identify the matters which will allow the Commission to rule, by means of a final decision at the end of that procedure, on the compatibility of the transaction with the common market." This decision was upheld on appeal (C-188/06 P) and re-confirmed by the General Court in 2010 (T-279/04).

In the light of these precedents, HeidelbergCement and Schwenk Zement may find it difficult to have their actions found admissible and convince the EU judges to discuss the merits of their cases. Their strongest argument may be the procedural guarantees enshrined in the EU Charter of Fundamental Rights, which is in force since 2009. Since the Commission must specify on the basis of which "serious doubts" it decides to initiate phase II, the applicants may argue that they would be deprived of their legal right to an effective remedy if they were not allowed under any circumstances to challenge the Commission's identification of such "serious doubts."

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