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Reforming control

30 October 2016 by Robert Bell

Competition law: Reforming control - read more

Digital and pharma merger cases raise concerns of enforcement gap in EU merger control

On 7 October 2016, the European Commission (EC)launched a public consultation on the functioning of certain procedural and jurisdictional aspects of EU merger control as set out in Council Regulation No. 139/2004 (EU Merger Regulation).

The EU Merger Regulation is one of the main instruments of EU competition law and it grants the EC exclusive competence to vet certain large scale mergers defined by a number of turnover-based jurisdictional thresholds. Its principal objective is to ensure that competition in the internal market is not distorted or restricted by companies engaging in mergers, or ‘concentrations’ as the legislation refers to them.

The consultation builds on the feedback received from the EC 2014 White Paper, entitled ‘Towards more effective EU merger control’ (COM (2014) 449 Final). It also highlights recent worries that the acquisition of fledgling technology and pharmaceutical companies with significant potential may be escaping appropriate EU merger control scrutiny.

The EC has invited comments from businesses, trade associations, public authorities and other stakeholders on the issues covered by the consultation by 13 January 2017. The consultation documents can be found on the EC’s website.

Controversial reforms

The EU Merger Regulation, which was originally adopted in 1989 and came into force in 1990, has been the subject of regular reviews (notably those in 2003 and from 2013 onwards) to assess its functioning and identify possible areas for refinement, improvement and simplification of its provisions.

In the 2014 White Paper, the EC put forward a cocktail of controversial reforms. On the one hand, the proposed regulation of minority non-controlling shareholdings and on the other, highly technical and procedural refinements, such the simplification of the notification process for certain categories of merger that normally do not raise competition concerns.

Following the results of the feedback on the 2014 White Paper, the introduction of proposals to review minority non-controlling shareholdings were shelved (at least for the time being). However, they considered that proposals to take certain transactions that are not a threat to competition outside the EC’s merger scrutiny should be taken forward.

Yet it generally concluded that the EU merger control system worked well and that no fundamental overhaul of the system was needed.
However, following on from the above exercise, recent experience in enforcing the EU merger control rules showed that the effectiveness of current solely turnover-based jurisdictional thresholds should also be a subject of further consultation.

The consultation

The consultation principally covers the following areas:

  • Review of turnover thresholds: whether it is appropriate to amend the solely turnover-based jurisdictional threshold to catch highly valued acquirers of target companies, principally in the digital and pharma sectors, that have not yet generated substantial turnover and are at the moment slipping EU merger scrutiny. 
  • Simplification of the merger control process: whether certain categories of cases that do not generally raise competition concerns can be removed altogether from the EU merger control net.

In addition, the consultation covers a number of other more detailed technical and procedural reforms primarily relating to the referral of cases between the EU commission and the member states, and the other workings of the EU Merger Regulation. In the interests of space these more technical proposals are not covered in this article.

Review of turnover thresholds

Currently the EU merger control regime only applies if the turnover-based jurisdictional thresholds apply, as set out in Article 1 of the EU Merger Regulation. However, a debate has emerged on the effectiveness of these thresholds. The issues turn on whether these thresholds allow the capture of all transactions which could potentially have an impact on competition in the internal market.

Recent experience under the EU Merger Regulation has shown that transactions in certain crucial sectors of the economy could be slipping the net. The sector most affected is the digital economy where new services/product offerings are able to build up a significant user base before the business concerned is able to earn a substantial turnover. Businesses such as these can have a significant impact on the relevant market’s competitive landscape.

Certain technology business models may also involve collecting and analysing large amounts of data. In most cases, these initial gathering phase does not generate significant turnover. Data gatherers can also have a similar marked effect on competition within their sector.

Therefore the EC has concluded that players in the digital economy may have considerable actual or potential market impact. This impact is usually reflected in high acquisition values. Because they have no substantial turnover, acquisitions of such companies are unlikely to be captured under the current thresholds. This is despite the fact that the acquired company may already play a competitive role, hold commercially valuable data and/or have considerable market potential for the future.

As part of the consultation the EC is seeking views as to whether it should complement the existing turnover-based jurisdictional thresholds of the EU Merger Regulation with additional notification requirements based on additional criteria, such as transaction value.

It is not just in the digital economy where an enforcement gap may exist. Other sectors also bear consideration, such as the pharmaceutical industry. The EC cites a number of instances where major pharmaceutical companies have entered into high value acquisitions of small bio-tech companies.

These small companies predominantly concentrate their activities on researching and developing new treatments, which may have significant impact on the market but do not yet generate substantial turnover.

Simplification process

In December 2013, the EC adopted a package of measures (the Simplification Package) aimed at simplifying merger control procedures to the greatest possible extent without having to amend the provisions of the EU Merger Regulation.

The simplified procedure allows companies to submit less market share and other information than the full merger notification and helps reduce the burden on business.

The Simplification Package resulted in a widening of the scope of the application of the simplified procedure for non-problematic cases as well as streamlining and simplifying the forms for notifying mergers to the EC.

Since that package entered into force on 1 January 2014, the number of cases dealt with under the simplified procedure has increased between January 2014 and September 2016 to around 69% of all cases.

The Commission Notice on the Simplified Procedure applies to each of the following categories of concentration):

  1. Non-EEA joint ventures: these are transactions where two or more undertakings acquire joint control of a joint venture, provided that the joint venture has no or negligible actual or foreseen activities in the EEA; where the turnover of the contributed assets is less than €100 million in the EEA and the total value of the assets transferred to the joint venture is less than €100 million at the time of notification.
  2. No overlapping activities: these cases are where two or more undertakings merge or where one or more undertakings acquire sole or joint control of another undertaking. This is provided that none of the parties to the concentration are engaged in business activities in the same product and geographic market or in a product market which is upstream or downstream from the product market in which any other party to the concentration is engaged.
  3. Overlapping activities below certain market share thresholds: transactions where two or more undertakings merge and the combined market share of all the parties to the transaction, in the context of horizontal relationships, is less than 20% − or in the case of vertical relationships, 30%.
  4. Acquiring sole control: transactions where a party is to acquire sole control of an undertaking over which is already has joint control.
  5. Low concentration: transactions where two or more undertakings merge and both of the following conditions are fulfilled: whereby the combined horizontal market share of all parties concerned is less than 50% and the increment of the HHI index resulting from the transaction is below 150.

The EC is now seeking views as to whether any or all of the above transactions currently subject to the simplified procedure, such as the creation of non-EEA joint ventures, should be excluded from the scope of the EC’s merger review altogether. This would require amendments to the EU Merger Regulation. The EC hopes that by making the procedure simpler it could further cut costs and reduce the administrative burden on business.

Cutting costs

The EC’s current initiative to cut the costs of notifications and reduce the administrative burden on businesses in non-problematic cases is to be widely welcomed, as are making other procedural aspects of the EU Merger Regulation process more efficient.

The unknown quantity in this consultation will be third-party reaction to the extension of the EC’s jurisdiction to transactions of high value. Although the high level case for those extra controls is argued well in the consultation paper, the way, and importantly the level at which, they are introduced is important because it could impose upon certain sectors of the economy more, not less, administrative burden and cost.

Robert Bell is a Partner at Bryan Cave LLP

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