It needs to be stated here that adoption of the SLC test has been a rather critical shift for the UK which had earlier relied on a rather loose “public interest” test (though John Vickers in his speech at Oxford maintains that this criteria had been broadly interpreted to encompass only competition considerations, of the sort caught by the SLC test. In his words, despite the adoption of this test, “substantive policy” will largely remain unchanged”).
Treatment of Efficiencies:
At the level of substantive analysis of a merger, another major distinction is in the regimes’ treatment of an “Efficiency Defence”. The EC merger proposals reiterate the earlier position that there would not be a separate efficiency defence, but that considerations of efficiency would be analysed within the broad framework of whether a merger would lead to the strengthening or creation of a dominant position that would appreciably impede competition in the market. This has historical reasons, as the ECMR was geared towards addressing competition problems and not meant to cater to larger social or industrial concerns. As the DG of DG Comp, Mr Phillip Lowe has opined, these concerns are better addressed through specific and targeted legislations.
In much the same way as the ECMR, the EB has also sought to address efficiency considerations within the broader merger analysis. However the distinction lies in the fact that over and beyond this, there is scope for a separate efficiency defence i.e. even after it is found that a merger would result in the substantial lessening of competition, it could still be argued that this merger creates efficiencies. However, as pointed by John Vickers, this defence would be permitted in very few circumstances. The burden of proof is very high and the party arguing would have to prove that such efficiencies will increase rivalries or will nonetheless be passed on to customers in the form of customer benefits and are demonstrable, merger specific and likely to be passed on to customers. In the words of John Vickers, “very compelling evidence would be needed to invoke this”. Upon the demonstration of such customer benefits, the OFT need not refer the case to the Competition Commission (CC).
This difference in approach between the EC and the UK may perhaps be traced back to the earlier “public interest” test for merger control in the UK-the term “public interest” is a broad enough one to admit of “efficiency considerations”.
Failing firm defence:
While both the EU and the UK regimes had accepted the possibility of a failing firm defence (see France vs Commission in the context of the EU and Air Canada/Canadian Airlines in the context of the UK), the proposed EU reforms and the EB have attempted to articulate the precise boundaries of this defence. It seems that the EB criterion is a more stringent one-with one having to prove that the failing firm has to be in a “parlous” financial position-a mere plea that bankruptcy is likely is not enough to succeed.
Jurisdiction:
In terms of procedural distinctions, the main difference lies in the ‘jurisdiction” assessment. The fact that this is an important distinction can be gleaned from the very purpose of these two regimes-while the ECMR is basically concerned with mergers with a community dimension, the UK regime seeks to restrict itself to mergers having a UK dimension.
While earlier, the UK had relied on a worldwide aggregate test (i.e. a relevant merger situation would arise when the combined worldwide assets of the merged undertakings would exceed 70 million pounds), this asset based test under the Enterprise Bill is now confined to assets within the UK. The “share of supply test” under the old regime would continue i.e. where the merged entity would be responsible for supplying 25% of relevant goods/services within the UK or a substantial portion of it. The Enterprise Bill seeks to ensure that in order to be fall within a relevant merger situation for the purpose of the UK regime, the merger has a very close association with the UK. The draft guidance notes in fact explain, that although 25% of the goods/services could be within the UK, one could still argue that the merger hasn’t created a relevant merger situation as the entities are not “actively providing such goods/services” but are doing it via their agents and therefore their association with the UK is not strong enough to bring them within this net.
The EC’s test on “community dimension” is almost a mathematically precise one, guaranteed to ensure that while the transaction is large enough (worldwide turnover of 5 billion), it still has an important EC dimension (turnover of 250 million euros by at least two of the undertakings within the EU).
Another important difference at the jurisdictional level is that while the ECMR speaks of a “decisive influence” as constituting the test for determining as to whether one undertaking controls another, the UK uses a more liberal test of “material influence”-a test likely to catch more transactions within its fold. This is best illustrated in the P&O/European Ferries case, where the competition commission concluded that a shareholding of even 16.1% of the voting rights of European Ferries was sufficient to put P&O in a position to have a material influence over policy. The reforms, at both the EC and the UK level reiterate this difference.
The “allocation” factor has an important bearing on the jurisdiction issue and needs to be discussed here. The ECMR reforms have important implications for the allocation of cases between the EC and the National Competition Authorities (NCA’s). The main concern while devising an allocation mechanism is the ECMR’s founding philosophy of acting as a “one-stop shop” mechanism for merger clearances-i.e. ensuring that any merger having a community dimension is dealt with at the EC level and not subjected to the varying decisions of national authorities. The ECMR therefore clearly provided for exclusive jurisdiction in so far as mergers with a community dimension were concerned. However, it still left open the option for member states to evaluate mergers that had close connections with the country concerned (“distinct national market”), or in which the member state had a ‘legitimate interest’ or a security concern (the so called “German clause”-recently and for the first time, the OFT made such a request for reviewing part of a deal that impacted on UK’s diary market). Similarly, the ECMR also provided for member states to refer a non-community dimension matter to the EC if the matter cut across several member states.
This “allocation” process is sought to be simplified and made clearer in the reforms. While the Green paper sought to introduce the 3+ rule, wherein a merger notification in more than three states would automatically fall within the exclusive jurisdiction of the EC, the final reform package omits this and provides that if more than 3 states refer the matter to the EC, then it will have exclusive jurisdiction. The main reason for omitting the 3+ rule stems from a fear of forum shopping that might be undertaken by the notifying parties, as also the concern that the burden on the EC would be considerable increased.
One has also to remember in this context that the deference to national interests (the German clause), should not be so frequent that it erodes the “one stop shop” principle of EC exclusivity-this concern was recently highlighted by the CFI in the SEB/Moulinex decision, wherein they struck down the decision of the EC to permit France to have a look at the matter under Article 9, on the basis that it involved a distinct French market.
The Merger Authorities:
Another critical distinction between these regimes is in the two-tiered approach that the UK follows. The UK merger regime is a two legged process, the first of which is a cursory investigation by the OFT to determine if a merger is likely to create anticompetitive effects-if so, it is then referred to the competition commission (CC) for a full investigation, based on which the CC is to propose remedies. The earlier UK regime called for involvement by the Secretary of State (SOS) at both the level of referral to the CC as well at the stage of remedy (i.e. the CC would propose remedies to be adopted to the SOS). The Enterprise Bill (EB) now removes this interference by the SOS, unless the situation has certain defined “public interest” considerations, such as “national security”.
However, the situation is not an entirely happy one even today, as evidenced by the fact that the merger guidelines of the CC may sometimes conflict with that of the OFT. In fact, recently, the OFT made a deliberate attempt to crease out these differences, stating that any differences that remained were merely reflective of the differences in the nature of these two competition bodies.
The ECMR, on the other hand, vests entire control of the merger review process with the Commission such that the Commission is the investigator, prosecutor and the judge. This excessive power is now sought to be subjected to certain checks and balances under the reforms. One such proposal is the introduction of a peer review panel that would review conclusions of the case team (looking into a merger) from time to time-look at it with a “fresh pair of eyes”. The reforms also propose the reorganization of the EC’s merger review teams by scrapping the merger task force (MTF) and integrating its staff into industry specific antitrust teams.
Other Procedural Reforms:
The other technical distinction between the two regimes is in terms of “notification” of a merger. While the ECMR mandates the notification of a merger to the concerned authorities, the UK regime still leaves this as an option. Of course, in most cases in the UK as well, the mergers are notified (“voluntary notification”). Therefore, in practice, the distinction may not be a significant one.
It is important to note in this connection that the ECMR reforms include the possibility of notifying the concentration even before a legally binding agreement is signed. On the flip side, the mandate to notify within a week of signing has been knocked off, provided the parties haven’t acted on the agreement as yet. These changes reflect the importance of giving the commission enough time to assess mergers and the parties more time to propose remedies, offer commitments etc. As one would appreciate, in view of the strict time lines in the ECMR, this addition of time would play a very significant role in the quality of merger decisions.
In terms of time commitments, the ECMR reforms introduce “stop the clock provisions” in order to grant more time to the parties concerned to propose remedies and the EC to evaluate the proposals. The strict time limits of one month and four months during the Phase 1 and Phase 2 stages would now be considerably relaxed whilst remedies are being proposed. In fact, the EC can even extend an investigation of a merger by four months at the Phase 2 stage, if it is of the opinion that this is a complicated matter meriting extensive analysis. In view of the CFI’s recent overturning of three EC decisions (Airtours, Schneider and Tetra Laval) on the grounds of inadequate evidence and reasoning, these time relaxations would go a long way in boosting the EC’s economic analysis of merger situations.
As regards time commitments within the UK regime, both the FTA and now the EB mandate time limits for the CC to have finished its investigation. The EB does not make any substantial changes in this time frame. The only difference is that while under the FTA, the SOS had some say in imposing the time limit, the EB does away with the SOS’s involvement altogether. Under the EB, it is the CC who has the discretion to decide as to whether it ought to increase the time frame for investigation-however such extension shall not exceed 8 weeks.
Conclusion:
On the whole, the reforms in both cases will go a long way towards making for a clearer and more predictable merger processes. This comes at an important time, as the EC faces the prospects of expansion by the addition of 10 new member states. Also, the fact that the number of merger cases before the EC has almost quadrupled in 10 years (from a mere 60 merger cases annually in the 1990’s to around to 200-300 today), makes evident the crying need for reforms today.
The most significant step in these reforms is the acknowledgement by both the EU and the UK regimes of the importance of the economic underpinnings of competition law. This is perhaps best illustrated by the fact that the ECMR reforms now propose the induction of a chief competition economist, who would oversee the economic analysis underlying merger decisions. The closing of the Airtours gap is a very big step in the EU reform process. However, it is important to realise that notwithstanding the fantastic economic theories that may underlie commission decisions, the commission still needs to do a rigorous factual analysis and fit in these theories within the factual matrix. As the CFI’s overruling of the three important merger EC decisions this year would have revealed, the Commission has a long way to go before it achieves this. (See Ridyard and Bishops analysis (Brief 02) of these cases on their website)
On the negative side, the extent of judicial review permissible has become contentious after the Tetra Laval decision (the EC in fact plans to appeal the CFI ruling in this regard to the ECJ) and the reforms, both at the EU and the UK level, have done nothing to address this fine issue.
The difference in the substantive tests employed by the UK and EU regimes is likely to yield fairly congruent views in practice. Quite apart from this, it is interesting to note that while the EC has provided for more checks and balances, one of which is the introduction of peer review panels, the UK has made a deliberate effort at minimizing the influence of the SOS.
