EU Merger Regulation: An Overview

Legislation

• EU Merger Regulation (EUMR), Regulation (EC) No 139/2004, governs mergers within the EU, but unlike Article 101/102, it was not created by the Treaty of Rome.
• National legislation in individual member states also regulates mergers.
• In the UK, the Enterprise Act 2002, as amended, is the relevant legislation.

EU Merger Regulation

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

Key Aspects of Merger Control

• Procedure: Which mergers must be notified and where, considering multi-jurisdictional filings.
• Substance: Whether the merger leads to a substantial lessening of competition and the theory of harm.

Procedure: Relevant Authorities

• EU: The European Commission in Brussels. A merger qualifying at this level results in a one-stop shop. If not, then it may qualify at the member state level.
• Third-party states (e.g., UK): The Competition & Markets Authority (CMA) and the Department for Business, Energy and Industrial Strategy (BEIS) for public interest/national security cases, such as those under the National Security and Investment Act 2021.

System of Exclusive Jurisdiction

• Determine if there's a 'merger' (a '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.

Defining a Merger ('Concentration' in EU)

• Mergers between companies involve a change in control, with the test being "decisive influence". Buying a certain amount of shares, such as 30%, can potentially give decisive influence.
• Change in control types: sole to sole, sole to joint, joint to joint, and joint to sole.
• Sole to Sole: One company controls another, and control remains with a single company, e.g., Company A owns Company B and sells it to Company C.
• Sole to Joint: A single owner sells part of their stake, so two or more companies now share control, e.g., Company A owns Company B, but now Company A and Company C jointly control it.
• Joint to Joint: The number of joint owners changes, but control remains shared, e.g., Company A and B control Company C, and then Company D joins.
• Joint to Sole: A joint venture becomes fully controlled by one company, e.g., Company A and B co-own Company C, but Company A buys out B to take full control.
• Full-function joint ventures are considered mergers under EU law.

Full-Function Joint Ventures

• A joint venture is where two or more companies create and operate a business together.
• Full-function JVs operate independently with their own resources, market presence, and long-lasting intent. Key is whether the entity operates in its own right on a market
• Own resources
• Is a market player in its own right (not dependent on parent company)
• Is intended to be long lasting (over 5 years generally)
• Only full function JVs fall under EUMR and is a merger. Key is whether the entity operates in its own right on a market.
• Concept limited to EU and most member states, notably not the UK or Germany, but included in some Asian regimes like China.
• Non-full function JVs assessed under art 101.

Qualifying for Investigation

• "Big" mergers are notified to the European Commission ("one-stop shop"), while "smaller" and "local" mergers go to member state competition authorities. Concentrations falling within the regulation thresholds need to notify the commission only.

Assessing the 'Union' Dimension

• If a merger doesn't meet the EC turnover thresholds, national laws of member states are considered.
• National laws vary, and a merger can qualify for investigation in multiple member states based on turnover thresholds. in most member states, national laws capture mergers between companies which meet specified turnover thresholds in that country, requiring information on turnover by country.

Referrals

• Referrals Up:
• If a merger doesn't meet EU thresholds but is reviewable in at least 3 member states, it can be "referred up" to the European Commission.
• Prior notification: Notifying parties request the commission to consider the merger (Art 4(5) EUMR). If the member states agree, referral happens, but it does not if one member state disagrees.
• Post notification: Member states request the commission to investigate instead (Art 22 EUMR).
• Referrals Down:
• If a merger meets EU thresholds but significantly affects competition in local markets, it can be "referred down" to a national level.
• Prior notification: Notifying parties submit to European commission their case as to why the merger should be investigated at national level instead – if the commission agrees and the member states do not object (Art 4(4) EUMR).
• 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).

Extraterritoriality

• Mergers outside the EU can still qualify for EU investigations; nationality of parties is irrelevant.
• Key cases: Gencor (1996), Boeing/McDonnell Douglas (1997), WorldCom/MCI (1998), General Electric/Honeywell (2001).
• Commission allowed acquisition in the Boeing/McDonnel Douglas case but prohibited acquisition of honeywell in the General electic/Honeywell case.

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

• Gencor, a South African mining company, planned to merge with Lonrho Plc, a UK-based company.
• The European Commission intervened due to concerns it would impede competition within the EU market for platinum group metals (PGMs).
• 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.
• Gencor contended that the EU Merger Regulation should not apply to an EU merger between non-EU companies operating outside the EU.
• The Court agreed that the merger would lead to a collective dominant position in the PGM market.
• The case confirmed the EU's authority to scrutinize mergers between non-EU companies and reinforced that mergers leading to collective dominance can be prohibited.
• Significance: Extraterritorial Reach and Collective Dominance was reinforced.

Substance: Assessing Lessened Competition

• Determine circumstances under which a merger would be prohibited or cleared only after commitments.
• Analysis is prospective, focusing on the effects of the merger. Analysis is usually ex ante.

When a Merger is Problematic

• EU test (EUMR): Prohibits concentrations that would "significantly impede effective competition," especially via creation or strengthening of a dominant position (the SEIC test).
• UK test: Assesses whether a merger would result in a "substantial lessening of competition" (the SLC test) in any market in the UK.

The Counterfactual

• Assess whether harm will occur as a result of the merger compared to what would have happened without the merger.
• The counterfactual is usually the status quo, but it may take into account likely changes to the market or merging firms. The counterfactual should show that in the absence of the merger, a market might have become more or less competitive
• effects of expected exits.

Policy Goals

• Merger control aims to ensure markets work efficiently.
• Prevent the creation/increase of market power and increased scope for collusion.
• There is an ascent of arguments in favor of 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: Horizontal mergers (unilateral/coordinated effects), vertical/conglomerate mergers (foreclosure effects). Not mutually exclusive concepts: a merger could give rise to higher prices (unilateral) and increased risk of coordinated effects.

Market Definition and Concentration

• A "substantial lessening of competition" occurs within a defined market.
• The market is defined by applying the SSNIP test.

Herfindahl-Hirschman Index (HHI)

• Three-dimensional analysis of concentration.
• UK/EU guidance includes thresholds at which increased concentration levels raise concerns.
• Rarely conclusive, but as with market shares, useful for initial screen.

Horizontal Mergers and Coordinated Effects

• As a result of a merger, market exhibits conditions likely to enable tacit coordination.
• Merger can lead to coordinated effects. Market is transparent.
• Three conditions from the Airtours case:
• Ability and incentives for competitors to align behavior.
• Deviation can be detected and punished.
• Alignment is sustainable.
• In Airtours, the court held that the commission failed to establish that a collective dominant position would be created.

Remedies

• Structural Remedies: (preference is structural remedies over behavioral)
• One-off remedy.
• Divestment of part of 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).
• Greater monitoring burden for the regulator.
• Monitoring trustee.

Microsoft + Activision Blizzard (2022–2023)

• Microsoft wanted to acquire Activision Blizzard for $68.7 billion.
• It raised competition concerns in the UK, EU, and US.
• Theories of harm: Vertical Foreclosure and Impact on Cloud Gaming.
• Vertical Foreclosure: Microsoft would own both the games (Activision titles) and the platforms (like Xbox and Windows) and might block competitors from accessing essential content.
• UK CMA concerned Microsoft would dominate cloud gaming.
• Foreclosure theory: Microsoft might block competitors from accessing essential content.
• UK (CMA): Initially blocked the deal but was later unblocked after concessions.
• EU (Commission): Approved after remedies, e.g. free licenses for cloud services.