The Future of the EU Merger Control Regime: The Review of the Merger Regulation
M. Fevzi TOKSOY

 

Introduction
 

After eleven years of application of the Merger Regulation The European Commission has now initiated a new discussion on the efficiency of the European Union merger control law . For this purpose, a Green Paper has been published to sum up the views of the Commission on a possible amendment of the Regulation 4069/89 since the modification in June 1997 with the Council Regulation (EC) No 1310/97 . 



Undoubtedly, during its application, the Regulation provided effective merger control across the EU with its short, strict legal deadlines . However, with the changing economic situations in global terms, the expected growth in the number of notifications due to the coming enlargement of the EU, the introduction of the Euro and, above all, the experience gathered during the application of the Regulation made it necessary to undertake such a reform. Accordingly, this reform is expected to lead to the amendment of the Regulation in a way to meet the challenges posed by global competition, monetary union, market integration, enlargement and the need to cooperate with other jurisdictions. 



In this perspective, it is worth having a look at the analysis of the Commission in its Green Paper. This will lead us to a better understanding of the Commission's perception of reform and the points of stress which are estimated as candidates for future radical modifications.



The Green Paper, analyses the operative structure of the current Regulation while attempting to launch a broad debate connected with the potential developments in jurisdictional issues, substantive issues and the procedural issues.





Jurisdictional issues



Community Dimension



It is obvious that concentrations with a community dimension are falling within the reach of the Merger Regulation. Whether or not a concentration has a Community dimension depends on the turnovers of the undertakings concerned, which are normally the acquiring and acquired undertakings or the merging parties or the parents of a joint venture, as well as the joint venture itself. To better assess the concept of "community interest" we first have to analyze the first article of the Regulation. 



The first paragraph of the article states that without prejudice to Article 22 , the Regulation applies to all concentrations with a Community dimension as defined in paragraphs 2 and 3 of the same article.



According to paragraph 2, a concentration has a Community dimension where the combined aggregate worldwide turnover of all the undertakings concerned is more than Euro 5 billion , and the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than ECU 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 .



Based on the available figures gathered by the Commission during the application of the Regulation, it has been assessed that the threshold levels in Article 1(2) as well as the "two-thirds rule" have functioned without problem.



When it comes to Article 1(3), which has been introduced in March 1998 to cover more transactions, it brings a second raid of thresholds. The system laid down in the article was planned to reduce the number of multiple-filings by way of giving the transactions that fall within Article 1(3) the possibility of being assessed under the "one-stop-shop" principle. However, experiences have shown that it did not serve much to solve the multiple filing problems. As a consequence, "cases of Community interest still remain subject to notification and scrutiny in a number of EU jurisdictions. Of particular concern is the trend indicating an increase in multiple filings to three or more Member States, and the fact that enlargement of the Community must be expected to exacerbate this trend" . Based on the risk of multiplying number of notifications, it is clear that the Commission will insists on an amendment of Article 1 (3), which should be operational before the enlargement.



As a reminder, the paragraph 3 requires that concentration that does not meet the thresholds laid down in paragraph 2 will be accepted as having a Community dimension where:



(a) the combined aggregate worldwide turnover of all the undertakings concerned is more than Euro 2,5 billion;

(b) in each of at least three Member States, the combined aggregate turnover of all the undertakings concerned is more than Euro 100 million;

(c) 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 Euro 25 million; and

(d) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than Euro 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.



In such a complex set of thresholds the Commission emphasizes three different scenarios for the amendment of Article 1(3). 



The first scenario is based on the intention to modify the five constituting criteria of Article 1(3). This can be achieved first, by adjusting the various threshold levels; second, by switching from a three-country to a two-country requirement; or third, by de-linking of criteria in sub-paragraphs (b) and (c) of Article 1(3).



Adjusting the various threshold levels seems unable to create a solution to the multiple-filing problem since "there is no clear-cut answer to the question of the level at which the Article 1(3) thresholds would catch all Community interest cases. Moreover, it should be stressed that Article 1(3) presents what could be described as a matrix of provisions, which could be modified in an endless number of combinations" . 



The same argument can also be stated for the option of switching from a three-country to a two-country requirement and de-linking of criteria in sub-paragraphs (b) and (c) of Article 1(3) since "it would have more than a relatively limited effect in terms of reducing the number of cases subject to filing requirements in three or more Member States" . 



Based on the conclusions of the Commission it is evident that modifications to the five constituting criteria of Article 1(3) are unlikely to provide any significant progress.



The second scenario is based on the use of Article 22. The Commission analyses the possibility of making use of the joint referrals in Article 22 in dealing with multiple notifications. However, this option creates much more complications than anticipated since there are "technical differences in national merger control procedures, notably concerning the event triggering the notification and the rules concerning timing of notifications" . 



The last scenario is referred to as the Automatic Community Competence over Cases Subject to Multiple Filing Requirements and was previously proposed by the Commission in the Green Paper of 1996. It was simply based on the intention of "extending the Commission's competence to those concentrations below the thresholds that come within the jurisdiction of more than one national system" . Although there exist less disparities between the Member State merger rules with regard to the obligatory or voluntary nature of the notification procedures, the establishment of a system in which a transaction shall be deemed as being subject to mandatory notification to the Commission in cases where the same transaction is caught by at least in three jurisdictions, seems to be difficult. However, "having analyzed various numerical modifications to the combination of thresholds and other requirements of Article 1 (3), the Commission invites comments on the possibility of introducing an automatic Community competence over cases subject to multiple filing requirements to three or more Member States" . There is no question that the Commission is the best-placed authority to deal with transactions having effects in at least three Member States, and it seems to have a tendency to amend Article 1(3) in such a way to introduce automatic Community competence over cases subject to multiple filing requirements in three or more Member States as described in the third scenario above.

 

Evaluation of Article 9 and Article 22 (3)



Also known as the "German Clause" , Article 9 is based on a system in which "the Commission may at the request of one or more Member States, refer a notified concentration, in whole or in part, to the relevant authority of the Member State concerned" . Also related to the subsidiarity principle, the main purpose of this article is to help locate the right authority and jurisdiction for certain notifications made to the Commission even they fulfill the threshold requirements in Article 1. 



The Article 22(3), which is also known as the Dutch Clause , is the mirror image to Article 9, which establishes the referral procedure to the Commission by the Member States. 



The Commission proposes that the provisions in Article 22 should be modified along the same lines as Article 9 either by simplifying the requirements for referral or by shortening the requirements based on time. An amendment which will serve best to simplify the referral requirements has to concern Article 9(2). The proposal in the Green Paper is to remove the obligation to show that a transaction will lead to a threat that a dominant position in a distinct market in the Member State will be created or strengthened. Instead it will be sufficient for the Member State to show that the transaction would affect competition in such a distinct market. Moreover, it is envisaged that the Member State would no longer be required to establish whether such a distinct market constitutes a substantial part of the common market. However, the Commission still invites all the interested parties to comment on the way of amending Article 9 and Article 22 (3) in order to use the referral mechanisms more efficiently.



The Concept of Concentration



The Commission also comments on the possible amendments in Article 3 of the Merger Regulation, which describes the concept of concentration. According to the experience gained, the Commission highlights the need to re-evaluate the coverage of the Regulation with respect to minority shareholdings and strategic alliances. 



The Commission draws also the attention on full-function cooperative JVs that are incorporated as Article 2 (4) with the amendment in June 1997 by the Council Regulation (EC) No 1310/97. However, it concludes that, for the time being, the degree of experience is not sufficient to make an amendment to Article 2 (4). 



Another issue is whether to extend the Merger Regulation to partial function production JVs. According to the Commission's view, there is no need for such an amendment due to the fact that there is no convincing argument to show such a necessity.



Another proposal from the Green Paper is to amend current provisions on multiple transactions to increase the effectiveness of the application of the merger control rules to such transactions. The Green Paper focuses on the following three types of multiple transactions, namely: (i) Operations involving the acquisition of joint control of one part of an undertaking and sole control of another part. This is the case when the direct acquisition concerns the parent company of a group; (ii) The exchange of assets (swaps) between two companies. In this case, two separate entities will remain on the market with modified asset constellations; (iii) "Creeping" take-over via the stock exchange.



"The Commission is of the view that the above-mentioned types of transactions could be brought within the scope of the Merger Regulation through adjustments to Article 5(2) (2). In order not to over-extend the application of the principle of Article 5(2) (2), it however appears appropriate to limit the scope of this provision to transactions relating to the same economic sector" . The proposed new text of the Article 5(2) would then read as follows :







"2. By way of derogation from paragraph 1, where the concentration consists in the acquisition of parts, whether or not constituted as legal entities, of one or more undertakings, only the turnover relating to the parts which are the subject of the transaction shall be taken into account with regard to the seller or sellers.

However, two or more transactions between the same persons or undertakings which take place within a two-year period shall, unless they concern unrelated industrial sectors, and regardless of the type of control involved, be treated as one and the same concentration arising on the date of the last transaction.



The principle set out in the second subparagraph shall apply mutatis mutandis to exchanges of assets (swaps) and to multiple acquisitions of the securities, as defined in Article 7(5), second subparagraph, of an undertaking."



Another issue raised by the Commission is to what extend the venture capital investments are covered by the Regulation. In a typical form of a venture capital investment, the entrepreneur operates the company and the investors usually hold shares in the business, as well as veto rights in certain critical decisions concerning the budget of the company and the business plan itself. On the other hand, such investments may be caught by the Regulation based on the nature of the investment and based on the way in which the investor is involved in the business. Such cases emerge where the investment is syndicated (meaning that the business is invested by two or more investors), or where the investment is part of the business of the investor itself. 



Although, the Commission is of the view that venture capital investments are usually undertaken by small or middle sized companies and that in most of the cases the transaction should be subject to notification under the simplified procedure, it still underlines that it is very difficult to categorize the venture capitals in order to create a certain type which may be exempted from the application of the Regulation .



Finally, the Commission seeks an answer to the question of whether the group concept of Article 5 (4) should be harmonized with the concept of control in Article 3 (3). Correspondingly, it draws the attention to the uncertainties that may be created in the interpretation of concept of control and the concept of group of undertakings based on the definitions in the Regulation. The reason for such an uncertainty may be that the criteria specified in the related articles are not compatible with regard to their qualitative or quantitative nature.



The concept of control is defined in Article 3(3) and "the test applied is qualitative rather than quantitative, and can be established on the basis of both law and fact" .



On the other hand, the concept of group of undertakings is defined in Article 5(4) and four basic criteria are listed in paragraph (b). While three of those criteria are quantitative , the last one which is "having the right to manage the undertakings' affairs" is "of a more effects-based nature and is therefore more similar to the qualitative test in Article 3(3)" .

 

Substantive issues



The Commission evaluates the notified mergers according to the provisions of Article 2 of the Merger Regulation that consist of the substantive test, which also contains the dominance test. The Commission is of the view that the dominance test has to be subject to a re-evaluation for a better alignment with other jurisdictions worldwide, such as the United States, Canada and Australia, which use the significant lessening of competition test. 



Such a harmonization would definitely lead to a better assessment of the large transactions requiring multiple notifications in different jurisdictions. However, it has to be taken into account that this alignment would also cause uncertainties in the EU, due to the fact that the majority of the Member States aligned their merger control regimes based on the dominance test. 



It is suggested that following the successful application of the simplified procedure practice to some 40 % of the notifications in a period of eight months from the entry into force of the Notice , further progress has to be achieved in order to facilitate the clearance of transactions with relatively less weight. For this purpose, a simpler Form CO may be introduced or the simplified procedure "might be consolidated into a block exemption regulation, with the advantage of further removing regulatory burden from transactions that are harmless to competition and of focusing available regulatory resources on those cases that require more thorough attention" .







Procedural issues



The Green Paper first discusses possible amendments concerning the notification triggering event which is described in Article 4(1) of the Regulation. The Article requires that concentrations with a Community dimension have to be notified to the Commission not more than one week after the conclusion of the agreement, or the announcement of the public bid, or the acquisition of a controlling interest. The article also makes it clear that the one-week period begins when the first of those events occurs.



The Paper also discusses (without any specific proposal; while inviting those who are interested for making their view) whether there is a need for amendment in the "stand-still obligation" described in Article 7. According to the Article, a concentration can not be put into effect either before its notification or until it has been declared compatible with the common market pursuant to a decision under Article 6(1)(b) or Article 8(2) or on the basis of a presumption according to Article 10(6) of the Regulation.



When it comes to the possible amendments in relation to the notification procedures, the paper gives signs of electronic filing and submission of notification copies directly to Member States by the parties themselves. 



The time limits and deadlines contained in the Regulation are also discussed in the Green Paper. Given the importance of compliance with all these deadlines for the merger control procedure and in order to increase transparency in their calculation, it seems appropriate to consider the introduction of a more simple method of calculation. Such a simplification could be achieved by consistently using a concept of working days in all relevant parts of the Regulation .



Another major proposal in the field of procedure is the reconstruction of the time schedule for the submission and discussion of commitments in the first and second phases of investigation. The reason behind this modification is to allow more time for all involved to make contemplated contributions. Precisely, the Green Paper proposes a "stop-the-clock provision" which is planned to operate at the parties' request in order to provide more time for all involved to consider remedies to the transaction suggested by the parties.





Conclusion



Finally, as also stated by the Commission itself, all of the above factors point to the desirability of revising the overall system of European merger control, so that the Commission and each national authority, individually and together, can make use of their resources in the optimal way for protecting competition in the Community, while at the same time reducing any unnecessary burden on industry, in terms of compliance costs and increasing legal certainty. This is particularly true for medium-sized companies which, owing to their limited size, fail to meet the current thresholds of the Merger Regulation, but who still remain subject to the burden of multiple national filings . 



For this purpose, the Green Paper analyses the possibilities of a reform of the merger Regulation in order to simplify issues of jurisdiction, substance and procedure contained therein. However, it can clearly be observed that despite the strong belief for a comprehensive change in the merger legislation, the prevailing studies are far from putting forward straight solutions. Accordingly, in order to come with much concrete proposals, the Green Paper simply outlines the issues and welcomes contributions. On the other hand, it can also be argued that, to come up with a proposal for revision which will satisfy all the interested parties at a maximum degree it is necessary to have such a consultation period and receive comments. 



This second thought seems to be much more practical when taking into account the ultimate goal of the review: finding the appropriate jurisdiction for the maximum of the local, European and worldwide transactions. This of course should be accompanied with much simpler procedures at Member State level and at the Union level.