Recently, the European Commission (EC) published its
long-awaited new Remedies Notice, explaining its current policies
and procedures on merger remedies. The guidance contains no major
surprises for experienced EU merger practitioners, who will already
be familiar with the recent more rigorous approach adopted by the
EC, but it does signal publicly that the EC does not intend to be a
"soft touch" on remedies.
The EC's own Remedies Study in 2005 was salutary reading. Most
"access" remedies, for example, the release of airport
slots, the making available of infrastructure, or the grant of IP
licenses, justified on the basis of their effect in lowering entry
barriers, had proved generally ineffective in practice, while even
many business divestitures were found to have failed to recreate
effective competition for a number of reasons: delays in
implementation; the approval of inappropriate purchasers; and the
loss of essential ingredients to ensure a viable, competitive
business, such as key management or R+D support. In many cases, the
Study shows, effective competition and consumer welfare were not
being adequately protected. Indeed, in 18 years of EC merger
control, there have been only 20 outright prohibitions, and only
two of these have occurred since 2001. But admittedly the full
picture must take account of some 120 further transactions which
have been abandoned by the companies involved − usually a
sure sign that they are unwilling to pay the EC's price for a
clearance decision, or are facing an outright prohibition.
The Remedies Notice emphasizes the EC's strong preference for
clear-cut divestitures of a company or business to remedy
competition concerns. While the EC does not, and cannot reject
"access" remedies out of hand it has recognized that, in
the past, there has been a mismatch between the level of comfort
and certainty achieved by divestitures as compared with that
achieved by "access" remedies. In easyJet
v. Commission, the European Court of First
Instance (CFI) upheld the EC's clearance decision of the
Air France/KLM merger but pointed out the importance of
the EC having good evidence that airlines actually planned to enter
routes monopolized by merging airlines before accepting the release
of airport slots as a sufficient remedy. Remedies should eliminate
all competition concerns, not merely offer a chance of elimination.
The CFI's concern applies generally to "access"
remedies. Lowering barriers to entry in theory is not sufficient in
itself unless there is also a strong prospect of new entry in the
near future on a scale which is sufficient to guarantee effective
competition and which is viable in the longer term.
The Remedies Notice also continues the EC's crusade against
behavioral remedies, where its stance has not always been supported
by the Community Courts. The essential message is that behavioral
remedies are to be avoided, particularly because difficulties of
monitoring and enforcement reduce their effectiveness in resolving
structural issues. They may be more acceptable if ancillary to
structural remedies, but if stand-alone, at least need to be
self-policing and provide rapid, effective arbitration or mediation
mechanisms to safeguard the rival firms who rely on them. An
exception recognized by the EC is in relation to conglomerate
mergers: here, since the concern invariably arises from the
potential for the merged firm to indulge in anti-competitive tying
and bundling practices, the EC would be hard put to reject
commitments not to indulge in such behavior, particularly given the
judgments in Tetra Leval and GE v. Commission.
One has sympathy with the EC's position: the EC merger control
regime is directed at structural changes to markets which cause
permanent detriment to competition. Logically, therefore, remedies
should themselves be structural and permanent in effect, as is the
case with a business divestiture, provided it creates a properly
resourced competitor with sufficient market presence and
potential.
The Remedies Notice gives very clear messages to advisers and the
business community as to the EC's current expectations where
remedies are required. Failure to read those messages, whether in
the design of the remedy, the timing and manner of its
presentation, or in the process of implementation will expose a
proposed merger to an (avoidable) risk of being prohibited
outright, or having to be abandoned. The lessons are clear:
- Identify early any likely serious competition concern, on a
worst case scenario
- Design a clear-cut, preferably structural, remedy, with a
gold-plated backup, in case it fails on
"market-testing"
- Explain the proposal to the EC at the earliest opportunity
– even before notification (better the merging parties
outline its merits first than third party complainants its
weaknesses!)
- Select a monitoring trustee that is pragmatic, experienced in
the role and well-known to the EC, and does not regard its remit as
a license to print money – the EC will not accept fee
caps
- Adopt the EC's standard texts for the offer of commitments
– there is no sense in wasting valuable time on
unnecessary formalities
- Avoid horse trading – offering a remedy is not like a
commercial negotiation: the merging parties are already in the
"last chance" saloon.
The EC also makes clear that not every kind of purchaser will be
suitable for every divestiture. It is skeptical about the
incentives of financial investors (private equity houses,
investment funds and the like) to develop divested businesses as
competitive forces and detailed strategic plans may be needed to
overcome this prejudice.
The EC's recent merger case work demonstrates the efficiency
and pragmatism which can be achieved with the right approach. Most
remedies, some of them rather complex, are accepted in the Phase I
stage, despite its enormously tight deadlines, while many Phase II
inquiries do not today run their full course once the EC is
satisfied either its concerns are unfounded or are resolved
effectively by remedies. Nor does the EC accept a remedy just
because it is on offer: several decisions confirm this, and there
are other cases where the offer of a remedy has remained
confidential to the EC and the notifying parties. But, as the
Ryanair/Aer Lingus case demonstrates, ignore the EC's
requirements and processes at your peril – a prohibition
decision may be the result. And the CFI is very reluctant to
overturn the EC on the issue of the appropriate remedy.
The new Remedies Notice also shows that the EC too has learned the
lessons of experience: the test will be whether it maintains its
strict approach when another market-dominating merger comes before
it which contributes to achieving the Lisbon agenda and brings
significant benefits to the EU economy.
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