Merger control European Business Law 2013/2014 University of Warsaw Faculty of Management Dariusz Aziewicz LL.M

Obligation to notify Concentrations with the EU dimension must be formally notified to the Commission Generally, they cannot be put into effect until the Commission has taken a formal clearance decision EU dimension: – Concept of concentration – EU thresholds One stop shop – exclusive jurisdiction of the Commission to investigate transactions (if EU dimension)

Definition of concentration Change of control on lasting basis – LEGAL MERGERS - the merger of two or more previously independent undertakings or parts of undertakings, (also de facto mergers) – AQUISITION OF CONTROL - the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings (sole/joint control) – FULL-FUNCTION JOINT VENTURES - the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity

Control Control shall be constituted by rights, contracts or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an undertaking in particular by: ownership of the right to use all or part of the assets of an undertaking rights or contracts which confer decisive infuence on the composition, voting or directions of the organs of an undertaking

Decisive influence The power to determine actions which bring about the strategic commercial behaviour of an undertaking acquisition of (majority) shares or assets minority shareholders if specific rights are attached to it (negative control trough a veto right) shareholders are widely dispersed contractual basis the contract must lead to a similar control of the management and the resources of the other undertaking as in the case of acquisition of shares or assets option rights other means Purely economic relationships may play a decisive role for the acquisition of control situation of economic dependence may lead to control on a de facto basis where, for example, very important long-term supply agreements or credits provided by suppliers or customers, coupled with structural links, confer decisive influence

Joint control Where two or more undertakings or persons have the ability to exercise decisive influence over another undertaking There is a possibility of a deadlock because two or more shareholders each have the power to veto strategic decisions e.g.: equality in voting rights, veto rights of the minority s/h, de facto joint control (acting together when having majority together - by way of transferring right to a holding company)

Community dimension I A concentration has a Community dimension where: – the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR million; and – the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million – unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State

Community dimension II Cumulatively: – the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR million; – in each of at least three Member States, the combined aggregat turnover of all the undertakings concerned is more than EUR 100 million – in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the undertakings concerned is more than EUR 25 million and – the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million – unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

Suspension Concentrations with a Community dimension shall be notified to the Commission prior to their implementation and following the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest

Referrals Parties seek investigation by Member States Parties seek investigation by the Commission Member states seek to investigate Member States request the Commission to investigate

Timetable for Merger Review Phase I 25 commission working days (extended to 35 working days when remedies are submitted) – make inquiries (“market test”) and consider submissions by interested third parties, decide whether the proposed concentration “raises serious doubts as to its compatibility with the Common Market” Phase II 90 working days starting from the issuance of a formal decision (extended to 105 working days if remedies are proposed) Possibility for the notifying party(ies) and the Commission to “stop the clock” for not more than 20 days, subject to certain conditions

Final Decision The Phase II decision clears the transaction (subject to remedies) or blocks the transaction

Formal clearance decision is issued if the merger does not raise “serious doubts as to its compatibility” with the Common Market Most merger operations are cleared by a Phase I decision with remedies, if any

Economic assessment

Types of mergers Horizontal mergers (mergers between competitors) Vertical mergers (between undertakings operating at different levels of the same relevant market) Conglomerate mergers (between undertaking operating in different product markets which are not horizontally or vertically related)

SIEC Test A concentration which would significantly impede effective competition in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared compatible with the common market shall be declared incompatible with the common market

Competition harm Transaction threatens—with a reasonable probability—to hurt an identifiable set of customers through: Increased prices Reduced product or service quality Reduced rate of technological innovation or product improvement (Maybe) reduced product diversity

Market shares Market shares and concentration levels provide useful first indications of the market structure and of the competitive importance of both the merging parties and their competitors

Herfindahl – Hirschman Index Squaring the market share of each firm competing in a market, and then summing the resulting numbers unlikely to identify horizontal competition concerns in if HHI below unlikely to identify horizontal competition concerns in a merger with a post-merger HHI between and and a delta below 250, or a merger with a post- merger HHI above and a delta below 150

Unilateral effects A merger may significantly impede effective competition in a market by removing important competitive constraints on one or more sellers, who consequently have increased market power. The most direct effect of the merger will be the loss of competition between the merging firms

Coordinated effects On some markets the structure may be such that firms would consider coordination possible, economically rational, and hence preferable, to adopt on a sustainable basis a course of action on the market aimed at selling at increased prices

Airtours case Product homogeneity Stable and symmetric market shares Stable demand High barriers to entry Economic analysis shows that the ability to ‘punish’ firms who deviate from an implicit agreement is an essential requirement for tacit co-ordination to be sustainable

Buyer power The competitive pressure on a supplier is not only exercised by competitors but can also come from its customers. Even firms with very high market shares may not be in a position, post-merger, to significantly impede effective competition, in particular by acting to an appreciable extent independently of their customers, if the latter possess countervailing buyer power

Bariers of Entry When entering a market is sufficiently easy, a merger is unlikely to pose any significant anti- competitive risk For entry to be considered a sufficient competitive constraint on the merging parties, it must be shown to be likely, timely and sufficient to deter or defeat any potential anti-competitive effects of the merger

Efficiencies Corporate reorganizations in the form of mergers may be in line with the requirements of dynamic competition and are capable of increasing the competitiveness of industry, thereby improving the conditions of growth and raising the standard of living in the Community. It is possible that efficiencies brought about by a merger counteract the effects on competition and in particular the potential harm to consumers that it might otherwise have Merger specificity/pass on to consumers

Efficiencies Menu of customer benefits Lower costs of production, distribution, or marketing make merged firm more competitive Elimination of redundant facilities and personnel Economies of scale or scope Complementary product lines Broader product offering desired by customers Better integration between merging products further enhances customer value Accelerated R&D and product improvement Greater combined R&D assets (researchers, patents, know-how) Complementaries in R&D assets Greater sales base over which to spread R&D costs Better service and product support More sales representatives More technical service support

Transaction costs due to merger control Delay/opportunity costs Possible delay in the closing of the transaction and the realization of the benefits of the closing to the acquiring and acquired parties Management distraction costs Possible diversion of management time and resources into the defense of the transaction and away from running the business Expense costs Possible increased financial outlays for the defense of the transaction

The purpose of merger antitrust law is to prevent the creation or facilitation of market power to the harm of customers in the market as a whole through: Increased prices Decreased product or service quality Decreased rate of technological innovation or product improvement [Maybe] decreased product variety

Critical substantive questions Are prices likely to increase postmerger? Are the merging companies strong and uniquely close competitors with one another? How many other effective competitors does each merging party have? Do customers play the merging parties off of one another to get better prices or other deal terms? How high are barriers to entry, expansion, and repositioning? What are the gross margins for the overlapping products of each of the merging parties? Is the rate of innovation or product improvement likely to decrease postmerger? Will the merged firm discontinue a product or product family? If so, how will this affect current and future customers in the space? If so, do the companies have a plan to support legacy products?

Defense menu in horizontal transactions (in decreasing order of strength) Parties do not compete with one another Parties compete only tangentially Parties compete but have significant other close and effective competitors Parties do compete, have few existing competitors, but movement into market is easy (no barriers to entry or repositioning), and would occur quickly if merged company acted anticompetitively Some other reason deal is not likely to harm customers

Vertical mergers: – Vertical foreclosure Input foreclosure Customer foreclosure Conglomerate mergers – Foreclosure – Portfolio effect

Remedies The concept of restoring competition Structural – Divestiture Behavioral – Application of specific behavior obligation