European Community merger law

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European Community merger law is a part of the law of the European Union which regulates which firms can merge with one another. It is part of competition law which is designed to ensure that firms do not acquire dominant holdings on the free market so as to harm the interests of consumers, the economy and society as a whole.

Mergers and acquisitions are regulated by competition laws because they concentrate economic power in the hands of a smaller number of parties. Oversight by the European Union has been enacted under Merger Regulation 139/2004, known as the "ECMR".[1] The law requires that firms proposing to merge either get pre-approval from the relevant government authority, or face demerger if they proceed anyway and the merger is later found to lessen competition. Merger regulation thus often involves predicting potential market conditions rather than measuring the effects of a combination after the fact. The standard set by the law is whether a combination would "significantly impede effective competition... in particular as a result of the creation or strengthening of a dominant position..."[2]

Businesses are motivated to merge in order to reduce the transaction costs of negotiating bilateral contracts, [3] and to take advantage of increased economies of scale.

Increased market share and size also increases market power, strengthening the negotiating position of the business. This is good for the firm, but can be bad for competitors and downstream entities (such as distributors or consumers). A monopoly is the most extreme cases, where prices might be raised to the monopoly price instead of the lower equilibrium price. An oligopoly is another potentially undesirable situation in which limited competition may allow higher prices than a market with more participants.

Contents

[edit] Concentration

Under EC law, a concentration exists when a...

"change of control on a lasting basis results from (a) the merger of two or more previously independent undertakings... (b) the acquisition... if direct or indirect control of the whole or parts of one or more other undertakings." Art. 3(1), Regulation 139/2004, the European Community Merger Regulation

This usually means that one firm buys out the shares of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the case of [T-102/96] Gencor Ltd v. Commission [1999] ECR II-753 the EU Court of First Instance wrote merger control is there "to avoid the etablishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions."

[edit] Significantly impeding competition

What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions.[4] Something called the Herfindahl-Hirschman Index is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market.[5] A further problem of collective dominance, or oligopoly through "economic links"[6] can arise, whereby the new market becomes more conducive to collusion. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behaviour more easily, whether firms can deploy deterrants and whether firms are safe from a reaction by their competitors and consumers.[7] The entry of new firms to the market, and any barriers that they might encounter should be considered.[8]

[edit] Exceptions

Firms who are engaged in a prima facie uncompetitive concentration may be able to show that their action nevertheless results in "technical and economic progress" mentioned in Art. 2 of the ECMR.[9] Another defence might be that a firm which is being taken over is about to fail or go insolvent, and taking it over leaves a no less competitive state than what would happen anyway.[10] Mergers vertically in the market are rarely of concern, although in AOL/Time Warner[11] the European Commission required that a joint venture with a competitor Bertelsmann be ceased beforehand. The EU authorities have also focussed lately on the effect of conglomerate mergers, where companies acquire a large portfolio of related products, though without necessarily dominant shares in any individual market.[12]

[edit] Criticism

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EU authorities' application of merger law in practice has been criticized for acting for protectionist reasons, rather than sound economic reasons.[citation needed] For example, the EU blocked a proposed merger of General Electric and Honeywell on grounds of the possibility of "leverage" in other markets and "portfolio effects", though that economic theory is viewed as discredited in the United States,[neutrality disputed] and United States regulators found that the merger would improve competition and reduce prices.[citation needed] Republican government appointee, Assistant Attorney General Charles James, along with a number of academics, called the EU's use of "portfolio effects" to protect competitors, rather than competition, "antithetical to the goals of antitrust law enforcement."[13][14] United States Secretary of the Treasury Paul O'Neill (cabinet member) called the rejection of the GE-Honeywell merger "off the wall" and complained of European Union regulators "They are the closest thing you can find to an autocratic organization that can successfully impose their will on things that one would think are outside their scope of attention."[15]

[edit] Notes

  1. ^ The authority for the Commission to pass this regulation is found under Articles 3(1)(g), 308 and 83 of the Treaty establishing the European Community (TEC)
  2. ^ Art. 2(3) Reg. 129/2005
  3. ^ Coase, Ronald H. (November 1937). "The Nature of the Firm". Economica 4 (16): 386–405. doi:10.1111/j.1468-0335.1937.tb00002.x. 
  4. ^ see, for instance para 17, Guidelines on the assessment of horizontal mergers (2004/C 31/03)
  5. ^ C-68/94 France v. Commission [1998] ECR I-1375, para. 219
  6. ^ Italian Flat Glass [1992] ECR ii-1403
  7. ^ T-342/99 Airtours plc v. Commission [2002] ECR II-2585, para 62
  8. ^ Mannesmann, Vallourec and Ilva [1994] CMLR 529, OJ L102 21 April 1994
  9. ^ see the argument put forth in Hovenkamp H (1999) Federal Antitrust Policy: The Law of Competition and Its Practice, 2nd Ed, West Group, St. Paul, Minnesota. Unlike the authorities however, the courts take a dim view of the efficiencies defence.
  10. ^ Kali und Salz AG v. Commission [1975] ECR 499
  11. ^ Time Warner/AOL [2002] 4 CMLR 454, OJ L268
  12. ^ e.g. Guinness/Grand Metropolitan [1997] 5 CMLR 760, OJ L288; Many in the US are scathing of this approach, see W. J. Kolasky, ‘Conglomerate Mergers and Range Effects: It’s a long way from Chicago to Brussels’ 9 Nov. 2001, Address before George Mason University Symposium Washington, DC.
  13. ^ Charles James, "International Antitrust in the Bush Administration", 2001-09-21
  14. ^ George L. Priest, The GE/Honeywell Precedent and Franco Romani, Wall Street Journal, 2001-06-20, at A1; Hal Varian, "Economic Scene; In Europe, GE and Honeywell ran afoul of 19th century thinking", New York Times, 2001-06-28
  15. ^ BBC News, 2001-06-28

[edit] References

  • Jones, Alison and Sufrin, Brenda (2005) EC Competition Law: Text, Cases and Materials, Oxford University Press, 2nd Ed. ISBN-10: 0199269971
  • Monti, Giorgio (2007) EC Competition Law, Cambridge University Press, ISBN-10: 0521700752
  • Wilberforce, Richard (1966) The Law of Restrictive Practices and Monopolies, Sweet and Maxwell
  • Whish, Richard (2003) Competition Law, 5th Ed. Lexis Nexis Butterworths, ISBN-10: 0406959501