From „One Stop“ To „Full Stop“? Far-reaching changes in EU merger control announced
On September 11 2020, Margrethe Vestager, Commissioner for Digital, Competition and Executive Vice President of the EU Commission, expressed some thoughts on the future of EU merger control in a speech at the Annual Competition Conference of the International Bar Association. If implemented, these would have a significant impact on merger control practice in Europe – including that of Member States.
While she indicated some relief in the regulatory burdens associated with M&A transactions, the Commissioner has at the same time announced a supposedly minor change in the administrative practice of the Directorate General for Competition. However, this change would actually have far reaching implications. In future, every national competition authority would be able to initiate a merger control review in Brussels – even for transactions which do not meet the review thresholds under either national or EU law. This would further increase the complexity of the examination of merger control obligations – with negative effects on transaction schedules and transaction security.
The current Status
The Commission has been considering changes to the European merger control regime, the EU Merger Regulation („EUMR“), for some time and had already started a consultation process on this issue during Ms. Vestager’s last term of office. The aim is, in particular, to adapt to the economic changes brought about by digitization and to ensure that materially critical cases are caught more systematically and reviewed more thoroughly. The Commission intends to publish the full report on the results of this evaluation next spring. In her speech, however, the Commissioner already outlined her Directorate-General’s preliminary „takeaways“ from this process. There are essentially three points at issue.
Evaluation of substantive Merger Control Assessment
In terms of the substantive assessment of transactions, Ms. Vestager unsurprisingly spoke out in favor of a continued strict merger control regime which is particularly geared to maintaining incentives for innovation – including in „Corona times“. The Directorate-General for Competition therefore now intends to undergo an internal review process in which recent merger control decisions will be evaluated and the results examined for their subsequent market impact – particularly with regard to their effect on prices, quality and innovation. At the same time, the Commission intends to examine – also in the light of the ongoing review of its „Notice on the definition of relevant market“ under competition law – to what extent digitization in particular, but also the increasing concentration of markets in Europe, necessitates adjustments to the substantive considerations under the EUMR. The Commission is endeavoring to focus its resources as specifically as possible to reviewing potentially problematic mergers.
The result of its deliberations will probably be set out in new (horizontal and/or vertical) Merger Guidelines. However, the Commission will first await the ruling of the Court of Justice in the „Three/O2“ case (where the Commission has appealed against the annulment of its prohibition decision by the General Court – C-376/20 P – Commission v CK Telecoms UK Investments).
Simplification of the Filing Process
The Commissioner also mentioned the goal of simplifying the merger control filing process for unproblematic cases, which is good news for parties to future transactions. The Commission proposes to facilitate this without legal exemptions in the EUMR. Instead, it is considering targeted adjustments to its „soft law“, such as the „Notice on a simplified procedure„, which allows the parties to a transaction to submit a „pared-down“ notification („Short Form CO“) under certain conditions – e.g. in the case of low small market shares or the establishment of a joint venture without significant EU sales.
Currently about 75% of all merger control filings in Brussels are submitted and cleared under this simplified procedure. However, the Commission intends to examine whether the number of these cases can be increased even further – without losing sight of cases that might cause competition issues. The changes currently under consideration include, in particular, a further reduction in the number of mandatory disclosures – i.e. a trimming-down of the amount of information and documents that must be submitted in a filing, and a shorter pre-notification phase (which is, in practice, a de facto mandatory process preceding any formal merger control filing in Brussels). Depending on seasonal peculiarities and the workload of the Commission, experience shows that even in palpably uncritical cases, several weeks can pass before a notification can actually be submitted – even though there is, to quote Commissioner Vestager, „not much to discuss“. This proposal should be unreservedly welcomed both with regards to the Commission’s targeted goals and from the perspective of transaction parties.
Merger Control Review of non-notifiable Cases (!)
The situation is different, however, with a rather inconspicuous and supposedly technical change, which the Commissioner has also announced. The Commission – like its counterparts at the Member State level – has for some time been driven by the concern that potentially critical transactions (i.e. transactions that raise competition concerns) could escape its scrutiny. The cases repeatedly referred to as evidence for this perceived enforcement gap concern (rightly or not) in particular the digital economy. However, many also see the pharmaceutical industry as an area in which potentially far-reaching structural changes might fly „under the radar“ of official scrutiny. Ultimately, however, the concerns outlined above apply across all industries. Antitrust authorities all over the world want to examine so-called „killer acquisitions“.
The problem is that these transactions often concern companies that have no or only very small sales or market shares at the time they are acquired. On this basis, the acquisitions do not exceed the merger control thresholds usually applied in most jurisdictions around the world. Such thresholds are traditionally linked to formal, objective criteria such as the turnover of a company. Germany and Austria have sought to tackle this problem by introducing a transaction value threshold. In addition to the „traditional“ turnover thresholds, a merger may also be notifiable there if – in addition to further requirements – the consideration paid by the acquirer for the sale (purchase price, assumption of debt, earn-out, etc.) exceeds a certain value (in Germany: EUR 400 million). The authorities have also published guidelines on this.
However, Commissioner Vestager has now rejected such solutions at the EU level, arguing it is too difficult to determine such threshold correctly in order to find a solution to the perceived problem – i.e. assuring proper scrutiny of potentially critical cases without at the same time forcing companies to notify „irrelevant“ transactions. According to the Commission, the better solution is „hiding in plain sight“: a change to its merger referral practice under the EUMR.
Even though the Commissioner made her speech „paragraph-free“, it is clear what she was alluding to: the interpretation of Article 22 of the EUMR. This provision allows Member States to submit a request to the Commission within 15 working days for a case to be examined not at national level but in Brussels. To date, this instrument has been used in over 40 cases, with the particularity that applications from several Member States are often submitted simultaneously. This is because the law allows each Member State to join the initial application of another State. The Commission then examines the case for each market area located in the territory of any Member State making the application or joining it.
Until now, however, the administrative practice of the Commission has provided for a clear limitation on this process. As noted by Commissioner Vestager, he Commission currently does not accept initial requests submitted by Member States that do not have merger control jurisdiction themselves where their national notification thresholds are not exceeded.
The Commission now wants to abandon this practice. The result would be a profound change in European merger control. Unlike in the past, merger control thresholds, which are generally straight-forward to interpret and apply, would no longer provide certainty. Even if all the relevant (turnover) thresholds in the EU are not met, a transaction could still be reviewed in Brussels – as long as it is seen as potentially problematic from a competition point of view by any Member State. When such review would occur would, as things stand now, be very difficult to say. Without a prior notification on file, the 15-day period for referrals under Article 22 EUMR can hardly be determined. According to the wording of the provision, the only event triggering that time limit would be the point at which a transaction is „otherwise made known to the Member State concerned“. The Member States or the Commission might take the view that the first press coverage of a transaction is insufficient in that regard as, arguably, such coverage will often not allow the authorities to form a view of the transaction and to examine the four conditions required by Article 22 EUMR – i.e. whether (i) there is a concentration within the meaning of European merger control law which (ii) does not meet the turnover thresholds for initial review in Brussels but nevertheless (iii) affects trade between Member States and (iv) threatens to „significantly affect“ competition within the territory of the applicant Member State(s).
Embedded in the supposedly inconspicuous „soft law“ of the Commission, Commissioner Vestager has announced substantial changes to European merger control practice. While the Commission’s evaluation of its substantive assessment of merger control cases is as welcome as its plan to reduce red tape in straightforward cases, the planned change to the referral system threatens to thwart these efforts. For currently non-notifiable transactions, this would entail both considerable preliminary examinations and risk assessments by transaction parties as well as corresponding efforts at the national and EU level.
Moreover, as things stand at present, this would happen virtually without any confines – something potentially detrimental to legal and transactional security. Notably, Commissioner Vestager has promised: „This won’t happen overnight – we need time for everyone to adjust to the change, and time to put guidance in place about how and when we’ll accept these referrals“. At the same time, however, she has announced the issuing of guidelines and, in turn, to adjust current practice by as early as mid-2021. Not much time considering the proposal raises numerous fundamental questions, in particular:
- How does a „referral request“ fit with a merger control system seeking to foster an efficient „one-stop shop“ when such „referral“ triggers a review despite the fact that there was initially no „stop“ at all (since neither the Commission nor the Member States had jurisdiction to review)?
- How is the impending risk of a „rush to judgment“ to be dealt with when the launch of merger control reviews is triggered by concerns that a transaction will „significantly affect competition“ (instead of first undertaking a review of objective criteria such as sales)?
- How is the proposed new practice compatible with the „best-place authority doctrine“ which currently governs referrals? If a transaction is minor in terms of economic figures but still triggers potential competition concerns in a Member State, one would expect the respective national authority to be best placed for a review (since the concerns then probably hinge on peculiarities of the national market structure).
- How should the deadline for the application be determined with legal certainty? When can sufficient „knowledge“ of national authorities be assumed? How should national authorities obtain the relevant information? For example, Section 59 of the German Act on Restraints of Competition would not give a legal basis for information requests to merger parties as this provision only supports the fulfilment of tasks assigned to the competition authority by German competition law (which does not concern the preliminary examination of referral possibilities under the EUMR).
- How would the new practice relate to provisions and precedents regarding the pre-clearance ’standstill‘ obligations of merging parties? „Gun jumping“ cases have seen a considerable uptick in recent years. While there can be no standstill obligation without an obligation to notify, it is, however, to be expected that competition authorities would want to prevent enforcement in these „new cases“ to preserve the market structure while they consider their options. How exactly is this to be done? And if it is not done in time, under what circumstances would companies expect sanctions and/or interim measures to prevent integration (or even the reversal of a transaction)?
- Finally: How should the new practice be linked to the numerous other EU competition law reforms currently being considered by the Commission, in particular the possibility of market-wide interventions even absent specific transactions or cartel infringements („New Competition Tool„) and the examination of State aid in the context of transactions („White Paper on Third Country Subsidies„)? The implementation of these instruments is also planned by mid-2021 at the latest (in the case of the New Competition Tool even earlier) and it is conceivable that they may be both the cause (and the result) of the new „referral cases“ – with implications for companies which are as yet unclear.
„We plan to start…“ was the phrase used by the Commissioner. So nothing is certain yet. As things stand, however, it is more likely than not that the proposed policy changes regarding Article 22 EUMR will become reality. Transaction preparations, implementation planning and risk assessments for strategic investments would then (to the extent they lead to an acquisition or change of control) become significantly more complex. In this case, companies will be well advised to assess the risk of such referrals in all Member States and to prepare for all eventualities that may arise. In view of the open wording of Article 22 EUMR and relevant precedents, these considerations would have to cover all 27 EU Member States and, to the extent they may join a referral, also the EFTA Member States Liechtenstein, Iceland and Norway.
At the same time, the Commission will, in the interest of all stakeholders involved, do well to produce precise and pragmatic guidelines. As set out above, there are numerous open questions at the moment which have rather fundamental implications for transactional practice. If they are left unanswered, the European merger control system, often praised for its efficiency orientation, would run the risk of undermining the consistent and reliable „one-stop-shop“ approach – with clearly defined jurisdiction and referral rules. Instead it risks becoming, if not a „full stop“, at least a pothole for many transactions.