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Mergers - introduction
• ”Merger”, ”acquisition”, ”concentration”
• The different effects of mergers
– Horizontal mergers
– Vertical mergers
– Conglomerate mergers
• Merger control
– MR regulates market structure
» When altered by mergers
– The SCP paradigm and merger control
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Why merge?
• Economies
– Economies of scale
– Economies of scope
• Other efficiencies
– In distribution
– In supply
• Buying market share
– Increasing market power
– Entering markets
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Article 81 and 82 applied to mergers
• Article 81
– Aquisition of minority shareholdings
» Two independent undertakings, but
» ”an aquisition may … serve as an instrument for
influencing the commercial conduct of the companies in
question so as to restrict or distort competition on the
market”
• Case 142/84 and 156/84 BAT v Commission,para 37
» The test: ”legal or de facto control of the commercial
conduct of the other company”
– Joint ventures
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• Article 82
– The ECJ established in Continental Can that Article 82 may be
applicable to concentrations
» Case 6/72
– If a dominant undertakings buys a competitor and this distorts
competition, this may constitute an abuse
– Can only be applied where the aquirerer is dominant
» Do not catch creation of dominance
• Today application of Article 81 and 82 to mergers
a theorethical question
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MR and Article 82
• ”while the elimination of the risk of future abuses may be a
legitimate concern of any competent competition authority,
the main objective in exercising control over concentrations
at Community level is to ensure that the restructuring of
undertakings does not result in the creation of positions of
economic power which may significantly impede effective
competition in the common market. Community jurisdiction
is therefore founded, first and foremost, on the need to
avoid the establishment of market structures which may
create or strengthen a dominant position, and not on the
need to control directly possible abuses of a dominant
position”.
– T-102/96, Gencor para 106.
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MR – key issues
• When does a merger fall under the scope of MR?
– ”One stop shop”
– What is a ”concentration”, Article 3
– Community dimension, Article 1
• Compulsory notification
– Phase I and phase II investigations
• Substantive appraisal of concentrations
– which would/would not ” significantly impede effective
competition in the common market or in a substantial part of it,
in particular as a result of the creation or strengthening of a
dominant position” shall be declared compatible/incompatible
with the common market, Article 2(3), cfr Article 2(2)
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One stop merger control
• Only the Commission may take decisions
regarding concentrations falling under the MR
– Article 21(1)
• Member States prohibited to assess such
concentrations under national laws
– Article 22(2)
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Article 3(1): Definition of ”concentration”
• MR applies to ”concentrations”
• Article 3(1) – the basic definition:
”A concentration shall be deemd to arise where a change of
control on a lasting basis results from:
(a) a merger of two or more previously independent
undertakings, or
(b) the aquisition, by one or more persons already
controlling at least one undertaking, by one or more
undertakings, whether by purchase of securities or assets,
by contract or by any other means, of direct or indirect
control of the whole or parts of one or more other
undertakings.”
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Article 3(1) - explanation
• Article 3(1)(a) applies to cases where there is a
complete concentration
– Ex: Two previously separate undertakings merge into one
• Article 3(1)(b) deals with a change in control in an
undertaking falling short of a full concentration
– The most common type of concentrations
– The concept of ”control” explained in article 3(2)
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Article 3(2) - control
• ”Control shall be constituted by rights, contracts or any other
means which, either separately or in combination and
having regard to the considerations of fact or law involved,
confer the possibility of exercising decisive influence on and
undertaking, in particular by:
(a) ownership or the right to use all or part of the assets
of an undertaking:
(b) rights or contracts which confer decisive influence on
the composition, voting or decisions of the organs of an
undertaking”
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• A wide definition of control
– Decisive influence
• The exercise of decisive influence may arise by
operation of law or fact
• Not necessary that it is the intention of the parties
to confer decisive influence
• A shareholding less than 25% may amount to
control
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Sole control
• One undertaking is able to determine the strategic decisions
of another
– If one undertaking acquires more than 50% of the voting capital of
another this will normally give rise to sole control
• Acquisition of a minority shareholding may give rise to de
facto sole control
– The minority share carries the majority of the voting rigths
– When the share is so large that it will likely give majority on the
shareholders meeting
» The Commission will look at the historical participation
• An option to buy the majority of the shares does not give
control
– But when the shares are bought control will be established
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Joint control
• Where two or more undertakings must reach agreement in
determining the commercial conduct of the entity in question
– ”the shareholders … must reach agreement on major decisions
concerning the controlled undertakings”
» Commission’s Notice on the concept of a concentration
• Examples
– 50/50 owned JVs
– Different shareholders with unequal rights, but a minority shareholder
has the right to veto decisions essential to the commercial strategy
– Shareholders agreements on the common excercise of voting rights
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Full function joint ventures
• Article 3(4): ”The creation of a joint venture
performing on a lasting basis all the functions of
an autonomous economic entity shall constitute a
concentration”
• Full function joint ventures scrutinized under MR
– The parent companies will pool all their activity in the JV
• Co operative joint ventures scrutinized under
Article 81(1)
– The JV have a spill over effect on the conduct of the parent
companies
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• When will a JV be full function?
– Essentially this means that a joint venture must operate on a
market, performing the functions normally carried out by
undertakings operating on the same market. In order to do so
the joint venture must have a management dedicated to its
day-to-day operations and access to sufficient resources
including finance, staff, and assets (tangible and intangible) in
order to conduct on a lasting basis its business activities within
the area provided for in the joint venture agreement.
» Commissions Notice on the concept of full function joint
ventures, paragraph 12
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”Community dimension”
• For the MR to apply a concentration must have a
”community dimension”
– Article 1
• According to Article 1(2) a concentration has a Community
dimension where:
(a) the combined aggregate worldwide turnover of all the undertakings
concerned is more than EUR 5,000 million; and
(b) the aggregate Community-wide turnover of each of at least two of
the undertakings concerned is more than EUR 250 million,
unless each of the undertakings concerned achives more than twothirds of its aggregate Community-wide turnover within one and the
same Member State
• Article 1(3)
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• ”Community dimension” focuses solely on size
– The market power of the undertakings not relevant
• ”Undertakings concerned”
– The turnover of the ”undertakings concerned” relevant
– The acquiring company/companies as an economic
entity/entities plus the target company
• World wide turnover
• Community wide turnover
• Turnover in on member State
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Notification
• Concentrations with community dimension are required to
be notified
– Article 4
» Must be notified not more than one week after the conclusion of
the agreement
» Failures to notify may be fined
– Form CO
• Suspension of concentrations
– Article 7: A concentration automaticly suspended until it has been
declared compatibel with the common market
• Phase I and phase II investigations
– Phase I: Article 6 decsisions
– Phase II: Article 8 decisions
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Substantive analysis
• Article 2(2): “A concentration which would not significantly
impede effective competition in the common market or in a
substantial part of it, in particular as a result of the creation
or strengthening of a dominant position shall be declared
compatible with the common market”
• Article 2(3): “A concentration which would significantly
impede effective competition in the common market or in a
substantial part of it, in particular as a result of the creation
or strengthening of a dominant position shall be declared
incompatible with the common market”
• Article 2(1) sets out the criteria the Commission must take
into account when making the appraisal
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• A two step test
– Do the concentration create or strengthen a dominant
position?
– Would the concentration hinder competition significantly?
• But close links between the two steps
– If a dominant position only is strengthen insignificantly, the
competition would normally not be restricted significantly
• Article 2(1) sets out a list of appraisal criteria for
the substantive test set out in Article 2(2) and 2(3)
– Checklist
» Do not themselves determine the outcome
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Creation and strengthening of dominance
• There must be a casual link between the
concentration and the creation or strengthening
of dominance
– Failing firm
• The concept of dominance the same as in article
82
– But MR used to control the creation of dominance
• Collective dominance also caught
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Harm to competition
•
•
•
•
Horizontal effects
Vertical effects
Conglomerate effects
Article 2(3) does not make a distinction between
different effects
• Dynamic analysis
– “this dominant position is not merely temporary and will
therefore significantly impede effective competition”
» Commission, Aerospatile-Alenia/de Havilland
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Horisontal effects
•
•
•
•
The “unilateral” effects of a merger
The 25% threshold in MR recital 15
The increase in the combined entity’s market share
“Indirect effects”
– On potential entrants
• Buyer power
• Concentration indexes
– HHI (Herfindale-Hirschman-index)
– C1, C2, C3…
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Vertical effects
• Effects in upstream or downstream markets
• Foreclosure
• Vertical mergers that facilitate tacit coordination
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Conglomerate effects
• “Portofolio power”
– Financial
– In the product markets
» Tying
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An efficiency defence under MR?
• Article 2(1) indicate that efficiencies are not
relevant if competition is harmed
– “provided that it [the technical and economic progress] is to
consumers’ advantage and does not form an obstacle to
competition”
• The Commission has never cleared a
concentration because of efficiency gains
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Failing firm
• Lack of causality
• Three conditions
– The acquired undertaking would in the near future be forced
out of the market if not taken over
– The acquirer would gain the market share of the acquired
undertaking if the latter was forced out of the market
– No possible less anti-competitive alternative purchaser
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