EU Merger Regulation: An Overview

• EU Merger Regulation (EUMR) (Reg (EC)) No 139/2004 is the EU legislation for merger control.
• Member states have their own national legislation for mergers.
• The UK's legislation for mergers is the Enterprise Act 2002, as amended.

EU Merger Regulation

• Requires compulsory notification to the commission for concentrations with a union dimension.
• Failure to notify a merger before implementation can result in fines of up to 10% of the undertaking's aggregate turnover.
• The concept of "concentration" encompasses mergers, acquisitions, and full-function joint ventures.

Procedure Considerations

• Which mergers need to be notified.
• Where they need to be notified.
• The phenomenon of multi-jurisdictional filings.

Substance Considerations

• Whether the notified merger leads to a substantial lessening of competition.
• What the theory of harm is.

Relevant Authorities in Europe

• EU: The European Commission in Brussels or the competition authorities of each member state.
• Third-party states: The Competition & Markets Authority (CMA) in the UK, plus the Department for Business, Energy and Industrial Strategy (BEIS) in public interest/national security cases.

System of Exclusive Jurisdiction

• Determine if there is a 'merger' ('concentration').
• Determine if the merger qualifies for investigation at the EU level (one-stop-shop) or at the national level (in one or more member states).

Definition of Merger ('Concentration' in EU)

• Mergers between companies involve a change in control.
• The test is whether there is 'decisive influence'.
• Decisive influence isn't set in stone whether buying a certain amount of shares e.g. 30% gives decisive influence potentially.
• There should be a change in control according to Art 3(1)(a) EUMR.

Types of Control Changes

• Sole to sole: One company controls another, and control remains with a single company.
• Sole to joint: A single owner sells part of their stake, so two or more companies now share control.
• Joint to joint: The number of joint owners changes, but control remains shared.
• Joint to sole: A joint venture becomes fully controlled by one company.

Full Function Joint Ventures

• Considered a merger under EU law.
• A joint venture is where two or more companies create and run a business together.
• Full-function means the JV operates independently, like a standalone business with its own management, marketing activity, and control over resources.
• A JV that is not full function, it may not count as a merger under EU rules and may fall under art 101 TFEU instead.

Criteria for Full Function JV

• The entity operates in its own right on a market.
• It has its own resources.
• It is a market player in its own right and not dependent on the parent company.
• It is intended to be long-lasting (over 5 years, generally).
• This concept is limited to the EU and most member states, notably not the UK or Germany.
• Non-full function JVs are assessed under Article 101.

Qualification for Investigation

• 'Big' mergers are notified to the European Commission as a 'one-stop shop'.
• 'Smaller' and 'local' mergers are handled by the competition authorities in the member states.

'Union' Dimension

• To consider national laws of different member states if a merger doesn't satisfy the EC turnover thresholds.
• In each member state, the rules will be different, and a merger can qualify for investigation in more than one member state.

Referrals Up

• If a merger does not meet the thresholds for investigation at the European level but is to be reviewed in at least 3 member states, it can be ‘referred up’ to the European Commission.
• Prior notification: Notifying parties request that the commission considers, and if the member states agree, there is a REFERRAL UP (Art 4(5) EUMR). If one member state disagrees, there is no referral.
• Post notification: The member states request that the commission carry out the investigation instead of them (Art 22 EUMR)

Referrals Down

• A merger technically meets the thresholds for investigation at the European level, but the concentration will likely 'affect competition' in one or more local markets.
• Prior notification: Notifying parties submit to the European Commission their case as to why the merger should be investigated at the national level instead; if the Commission agrees and the member states do not object (Art 4(4) EUMR), there is a referral.
• Post notification: One or more member states can, on their own initiative or on the Commission’s invitation, ask the Commission to refer the matter to them as the concentration affects competition at the local level (Art 9 EUMR).

Mergers Outside the EU

• Can still qualify for EU investigations.
• Nationality of parties is irrelevant.

Gencor Ltd v Commission of the European Communities (Case T-102/96) 1999

• Gencor Ltd, a South African mining company, and Lonrho Plc, a UK-based company, planned to merge their platinum mining operations.
• The European Commission intervened, arguing that the merger would significantly impede effective competition within the EU market for platinum group metals (PGMs).
• Gencor contended that the EU Merger Regulation (Regulation (EEC) No 4064/89) should not apply to a merger between non-EU companies operating outside the EU.
• The Commission found that the merger would create or strengthen a collective dominant position in the PGM market, reducing competition within the EU.
• The Court upheld the Commission's decision, affirming that the EU Merger Regulation could apply to mergers between non-EU companies if the merger would have significant effects within the EU market.
• It reinforced the concept that mergers leading to collective dominance, not just single-firm dominance, can be prohibited under EU competition law.

Key Considerations to Ask a Client Regarding a Potential Acquisition

• What information to ask for.
• What could be the outcome of the merger review.

Substance: Impact on Competition

• Mergers can be prohibited or cleared only after commitments.
• Analysis is usually ex-ante.

Problematic Mergers

• EU test: EUMR prohibits concentrations which would 'significantly impede effective competition, particularly as a result of the creation or strengthening of a dominant position' (the SEIC test).
• UK test: Whether a relevant merger situation would be expected to result in a substantial lessening of competition within any market(s) in the UK for goods and services (the SLC test).
• The test determines whether, as a result of the merger, some harm will occur compared to what would have happened in the absence of the merger (so-called 'counterfactual').

The Counterfactual

• In most cases, the counterfactual is the status quo before the merger.
• In situations where changes to the market structure or the merging firms are likely in any event, then this is taken into account.
• The counterfactual should show that in the absence of the merger, a market might have become more or less competitive.
• The policy goal of a merger control should be to ensure that markets work efficiently in accordance with economic theory, whatever the jurisdiction.
• Two key policy goals are to prevent the creation or increase of market power and an increase in the scope for collusion in a market which, following a merger, will be more oligopolistic/less competitive.
• Different grounds for review, from effects on employment to national security to public interest.

Assessing the Impact of a Merger

• Identify the theory of harm and seek to prove it.
• Main theories of harm include horizontal mergers – 'unilateral effects', horizontal mergers – 'coordinated effects', and vertical/conglomerate – 'foreclosure effects'.
• A merger could give rise to higher prices (unilateral) and increased risk of coordinated effects.

Market Definition

• A 'substantial lessening of competition' does not occur in a vacuum.
• There must be a substantial lessening of competition in a market as defined.
• The market is defined by applying the SSNIP test.

Herfindahl-Hirschman Index (HHI)

• Three-dimensional analysis of the concentration that takes into account the number and shares of other competitors using a standard formula.
• Useful for initial screening.

Coordinated Effects - General

• Because of a merger, the market exhibits conditions likely to enable tacit coordination.
• A merger can lead to coordinated effects if the market is transparent.
• Three conditions Airtours case collective dominance: Ability and incentives for competitors to align behavior without express communication.
• Deviation can be detected and punished and alignment in sustainable in the face of other constraints.

Remedies

Structural Remedies

• One-off remedy.
• Divestment of part of the business (including intellectual property).

Behavioral Remedies

• Ongoing remedy.
• Undertaking to comply with certain conditions (e.g., provision of services to third parties, reducing long-term contracts, licensing intellectual property).

Microsoft + Activision Blizzard (2022–2023)

• Microsoft (Xbox) wanted to acquire Activision Blizzard (Call of Duty, World of Warcraft, Candy Crush).
• Valued at $68.7 billion.
• Raised competition concerns.

Theories of Harm

• Vertical Foreclosure: Microsoft would own the games and the platforms.
• Authorities feared Microsoft might withhold popular games from rival platforms and disadvantage competitors in cloud gaming.
• Impact on Cloud Gaming: The UK CMA was especially concerned that Microsoft would dominate cloud gaming.
• Authorities feared By bundling games into Xbox’s cloud services, they could foreclose competition and harm innovation.

Regulator Decisions

• UK (CMA): Initially blocked the deal over cloud gaming concerns.
• EU (Commission): Approved after Microsoft offered remedies.