Effect-based Approach in Merger Control

Статья посвящена вопросам, связанным с контролем за слияниями и поглощениями корпораций со стороны антимонопольных органов. В частности, авторы выделяют два подхода к такого рода контролю в Украине: формальному и ориентированному на последствия, то есть эффекты, в сфере экономической конкуренции. Особое внимание уделяется практике контроля за слияниями и поглощениями в Европейском Союзе. Рассматривается теория, в соответствии с которой оценивается вред конкретного слияния или поглощения для конкурентной среды. В заключение авторы выражают надежду на успешную гармонизацию украинского и европейского антимонопольного права на основе более последовательного внедрения в украинское право подхода, ориентированного на экономический эффект слияний или поглощений.

In today’s dynamic world competition has become a basis for economic development which has so far been the best booster of economic growth. The last two decades have witnessed an impressive growth of fast developing sectors such as  IT, pharmaceuticals, energy, with markets facing a significant intensification of competition. The Antimonopoly Committee of Ukraine (the AMCU) plays an im­portant role in protecting effec­tive competition with a particular focus on merger control, which is evidenced by a notably large num­ber of merger reviews that grows year by year.

The expected harmoniza­tion with the EU legal standards provided under the Association Agreement1 entails harmonization of Ukrainian competition laws with the EU framework, including in the field of merger control. Initially the Ukrainian merger control sys­tem derived from the European one; however, the last decade has demonstrated appreciable differ­ences in assessment of mergers by the European Commission and the AMCU, especially in application of theories of harm. In view of active­ly debated harmonization with EU standards it is important to understand the key differences of the two models and how Ukrainian merger control could be changed following the alignment with the EU.

_____________________

[1] Association Agreement between the Euro­pean Union and the European Atomic Energy Community and their Member States, of the one part, and Ukraine, of the other part.

2 Under ‘monopolization’ the Competition Act provides for creation, maintenance or strength­ening of monopolistic or dominant position, which means that in Ukraine the concept of mo­nopolization is equivalent to that of dominance.

Initially the Ukrainian merger control system derived from the European one, however, the last decade has demonstrated appreciable differences in assessment of mergers by the European Commission and the AMCU, especially in application of the onesof harm

To find the answer to this ques­tion let us have a look at the ap­proaches currently used in Ukraine and in the EU for assessing mergers: the factors which served as a push for Europe to introduce new stan­dards of merger review and their practical implications on business.

How merger assessment works in Ukraine

Ukrainian merger control is based on two concepts — domi­nance standard (i.e. form-based approach) and significant im­pediment to economic competi­tion (i.e. effect-based approach).

In particular, Article 25 of the On Protection of Economic Competition Act of Ukraine (the Competition Act) stipulates that the AMCU “shall grant its approval for a concentration where it does not lead to monopolization2 or significant restriction of competi­tion in the entire market or in a substantial part of it”. In practice, however, the dominance standard is prevailing, which means, that if as a result of the concentration the applicants’ market share ex­ceeds 35% (presumption of domi­nance), it is practically impossible to have such concentration cleared within Phase I review — with al­most 100% certainty such transac­tion will raise serious competition concerns on the part of the AMCU and trigger a Phase II in-depth in­vestigation.

Even if the transaction is fur­ther cleared within Phase II, the in-depth investigation may, as such, be quite burdensome for the applicants due to considerable amounts of data to be provided with the authority and substantial human resources to be involved during the investigation, further­more, it may put at risk timely im­plementation of the transaction. In particular, the Phase II review period is limited to three months, however, in practice the investiga­tion may take much longer — if additional documents, informa­tion and/or expert analysis are re­quired, the term may be suspend­ed or even restarted, in which case a new three-month period com­mences from the date on which these documents, information and/ or expert analysis have been filed with the AMCU. This essentially means that the AMCU may extend the phase II review period for as long as it deems necessary.

Therefore, due to the prevail­ing dominance standard, even the parties to those concentrations which do not have any appreciable effects on competition automati­cally make a Phase II path as soon as the dominance threshold is triggered.

European reality

In the EU the merger con­trol system based on the “domi­nance test” similar to the current Ukrainian one existed under the Council Regulation 1989s until 2004. The European Commission first assessed possible dominance of an undertaking and only in the second place the probability of impediment of competition in the common market; thus there was a high likelihood for a merger to be blocked already at the stage of finding dominance without further analysis of the potential effects on competition. In the late 1990s it was becoming more and more evi­dent that such a system of merger

___________________

3 Council Regulation (EEC) No 4064/89 on the Control of Concentrations between Undertak­ings, OJ L 395. 30/12/1989.

4 Case T-342/99, Airtours Pic v Commission, (2002) E.C.R. II-01785

5 Case T-5/02, Tetra Laval B.V. v Commission, (2002) E.C.R. II-04381

6 Case T-310/01, Schneider Electric SA v Com­mission, [2002] E.C.R II-04071

control needs to be revised and put in line with business reality in order to avoid unjustified fault­finding in mergers that, although leading to dominance did not. in fact, create significant risks for impediment of competition.

The revision gained its momen­tum in connection with the events of 2002 when for the first time the Court of First Instance (the CFI) re­versed the Commission’s prohibi­tion decisions in three major cases (Airtours4, Tetra Laval[5], Schneider Electric (6)).

In Airtours v. Commission the CFI reversed the decision of the Commission, which had blocked acquisition of First Choice by Airtours assuming creation of a collective dominance which would significantly impede effec­tive competition. This was the first case where the CFI overturned the Commission’s decision to block a merger claiming that the Commission has failed to establish that post-merger the three remain­ing large tour operators would have an incentive to cease compet­ing with each other or the level of competition would have been any different. A similar decision on the reversal of the Commission’s blocking was reached by the CFI in Tetra Laval v. Commission where the Commission was heavily criticised on factual findings and analysis. The CFI concluded that the effect of most conglomerate mergers was neutral rather than anticompeti­tive: otherwise the Commission had to provide respective em­pirical evidence to the contrary. In the same manner the CFI upheld Schneider’s appeal in Schneider v. Commission and annulled both the Commission’s merger prohibition and its divestment order, once again underlining the Commission’s fail­ure to provide sufficiently clear theory of harm in its statement of objections which later led to a blocking decision.

The above cases marked impor­tant shortcomings in EU merger control and served as an accelera­tor for a comprehensive reform, which resulted in adoption of a new regulation in 2004 — Council Regulation (EC) No. 139/2004 (the Regulation 2004). The Regulation 2004 introduced, inter alia, a more economic approach to assessing mergers based on profound ef­fect analysis (the Theory of harm), meaning a move from “dominance test” to the “significant impediment to effective competition” test.

Theory of harm in merger control

The theory of harm was made a cornerstone of merger assess­ment which is based on harm prin­ciple. Harm principle itself derives from a theory of crime where an action can be banned only if it causes harm to someone. In terms of merger control the theory of harm is applied to verify whether a merger is likely to prevent, restrict or distort competition. A consistent theory of harm is built on a coun- terfactual analysis — what would have happened if the merger did not take place. Under Regulation 2004 the Commission should com­pare “the foreseeable impact of the merger”7 with the situation that would have occurred without the merger (i.e. counterfactual). It is impossible to prove a merger to be anti-competitive without know­ing what the alternative and its effects were, and how competition could be prevented, restricted, or distorted in each particular case. An appropriate counterfactual is a fundamental basis for a well- grounded theory of harm.

The EU case law underlines that a coherent theory of harm should ensure the following:

—   articulation as to how com­petition and, what is more impor­tant. consumers will be harmed with respect to an appropriate counterfactual:

—   internal logical consistency;

—   consistency with the incen­tives of the notifying parties to im­pede competition; and

—   consistency with available empirical evidence.

As a result of this switch, af­ter 2004 the Commission cleared a number of mergers which would be hard to imagine in 1990s be­fore the reform8. For example, in Lufthansa/Austrian Airlines case where post-merger combined mar­ket share would have amounted to 50-60%, the Commission con­cluded that in the absence of the acquisition by Lufthansa, Austrian Airlines could have been poten­tially acquired by Air France-KLM. Therefore, the effects of the given transaction were compared with those of the hypothetical merger with Air France-KLM.

The theory of harm may be particularly pertinent to review of mergers in the IT sector, which is currently one of the markets most prone to competition con­cerns. In Intel McAfee case(9), for instance, McAfee’s competitors — security solutions producers were concerned that post-merger Intel, with its own market share of around 70-80%, might give more advantages to McAfee, thereby impeding effective competition. Despite the Commission’s find­ings that Intel could potentially foreclose other software provid­ers, due to the expected merger- related efficiencies (e.g. synergies of combining soft/hardware for security technologies) the merger (even though conditionally) was cleared.

Importantly, the theory of harm also enabled the Commission to capture potentially anti-com­petitive mergers (Friesland Foods/ Campina10, Ryanair/Aer Lingus(11)) that did not fall within the market dominance thresholds.

Regulation 2004 proved to be a big step forward in the devel­opment of the EU merger con­trol. first aimed at equipping the Commission with better tools for assessment of potential impact on consumer welfare avoiding over­reliance on structural parameters, and secondly, providing merging companies with improved guid­ance to better anticipate and as­sess potential competition con­cerns in relation to the notified transactions. The most important is that it allowed the Commission to substantively weigh potential competitive risks without creating unreasonable pressure on merging companies.

______________________

7 Horizontal Merger Guidelines, op. cit. para. 13.

[8] Case COMP/M.4864, TomTom/Tele Atlas, 2008. Case COMP/M5335, Lufthansa/SN Atrholding, 2009. Case COMP/M 5440, Luf­thansa/Austrian Airlines, 2010.

9 Case COMP/M.5984 Intel/McAfee, 2011.

10 Case No C0MP/M.5046 Friesland Foods- Campina, 2008.

11 Case No COMP/M.4439 Ryanair Aer Lingus, 2007.

Prospects of switching to EU standards

In this context harmonization with the EU standards in Ukraine would be beneficial both for Ukrainian business and for foreign companies (in 2013 approx. 71% of the concentrations were notified on behalf of non-residents). Switching to a more economic approach would allow saving time and resources for the parties to non-problematic transactions and would provide for a higher predictability of the deci sion-making process.

However, it should be under­stood that if the EU path is to be taken in order to fully enjoy the said advantages a set of measures is required to be implemented, such as introducing amendments to the Competition Act, issuance of respective guidelines by the AMCU outlining requirements and recom­mendations for self-assessment by the notifying parties, public record of the AMCU’s decisions similar to that of the European Commission, possibility of informal consulta­tions with the AMCU.

It is worth noting that even without such regulatory changes one may already observe a posi­tive move in the AMCU’s practice in the direction towards alignment with the EU approach — within a number of merger cases the AMCU has accepted for its consideration references to EU case law on is­sues such as market definition, the economic rationale of a merger and its potential efficiencies, as well as the Commission’s prelimi­nary findings or clearance decision in relation to the merger under re­view by the AMCU. Furthermore, in its own conclusions the AMCU is making more and more references to the Commission’s decisions and rulings adopted by EU Courts.

In light of the above, we hope that the aforesaid steps already be­ing taken by the AMCU towards the European effect-based approach will ensure a smooth transition to more sustainable EU standards in merger control, thus creating a fer­tile ground for business to comply with competition law and for the AMCU to safeguard fair competi­tion in Ukrainian markets.

Авторы:

Iryna S. FOMINA, Anastasia A. USOVA

Источник:

The Ukrainian Journal of Business Law. – 2014. – № 7-8. – Р. 30 – 32.

Читайте также