Overview of Merger Control

Overview of merger control

• Merger control: What? Why? Where?

• Jurisdiction: Do we need to notify and where?

• Substance: What are the issues?

• Procedure: How do you notify?

• What might your role be?

What is merger control?
• Forward-looking approval process allowing
government authorities to detect (and potentially
remedy or block) proposed transactions which may
harm competition

“Consolidation and restructuring are a normal and essential part of

business activity”
Neelie Kroes, former EU Competition Commissioner

“Consolidation is welcome so long as it does not occur at the

expense of competition, or – and this amounts to the same – at
the expense of consumers.”
Joaquín Almunia, former EU Competition Commissioner
Why is merger control important?
• Competition authorities can:
• Require notification – timing/information burden
• Block deals
• Require undertakings to be given – e.g. unwind
deal, divestments
• Impose fines for:
• Failure to file or to reply to information requests
• Completion without clearance
It’s not just theoretical…
December 14, 2007
European Commission officers
raid Ineos and Norsk Hydro
Ineos, the chemicals business that is Britain’s
biggest private company, and the UK polymer
operations of Norsk Hydro have been raided by
European Commission inspectors in connection
with Ineos’s planned takeover of the Norwegian
group’s British operation.
The raids on several offices in the UK on
Tuesday came after concerns that a merger
was going ahead without official approval from
the Commission.
June 10, 2009
Electrabel Fined 20 Million Euros
for EU Rule Break
Electrabel SA, a Belgian unit of GDF Suez SA, was
fined 20 million euros by the European Union’s
antitrust regulator for taking over another
company more than four years before it sought
formal clearance for the deal.
The European Commission in Brussels said
Electrabel only notified the regulator in March
2008 even though it took control of French
electricity generator Compagnie Nationale du
Rhone in 2003.
Where in the world is filing required?
• 1995 – c.20 jurisdictions regulated mergers
• Today – c.100 jurisdictions regulate mergers
What is a notifiable merger?
• A broad range of transactions may be caught:
• Acquisition of a majority shareholding
• Acquisition of assets
• Acquisition of a minority shareholding
• Creation of a JV
• Change of ownership of a JV
• Long term supply agreements/licences
• Loans
What is a notifiable merger? – cont’d
• Filing thresholds vary across jurisdictions, but are
generally based on:
• Parties’ annual turnover
• Market shares or shares of supply
• Asset value
• Transaction value

• Filings may be needed for deals with low financial

value or in locations with little connection to the
deal based on parent companies’ wider activities
EU Merger Control
How many filings are made at EU level?
• Between 1990 and January 2015
• 5,742 merger notifications
• Only 24 prohibition decisions
• 313 notifications in 2014 (over 400 in 2007)

• 4 prohibitions since 2011

• Olympic/Aegean (Jan 2011)
• NYSE Euronext/Deutsche Börse (Feb 2012)

• UPS/TNT (Jan 2013)

• Ryanair/Aer Lingus (Feb 2013)

Which transactions are caught in the EU?

• Set out in the EU Merger Regulation (EUMR)

• Merger of more than one undertaking
• Acquisition by one undertaking of control of
another undertaking
• Acquisition by more than one undertaking of joint
control of another undertaking
• Creation of full-function joint venture

• Commission Consolidated Jurisdictional

Notice
Need for change of control
• For a transaction to be notifiable a change of control
MUST occur, for example:
• Initial acquisition of sole control
• Initial acquisition of joint control, such as:
• Shareholding split 50/50
• Minority shareholder with strategic veto rights
• Change from joint control to sole control or vice versa

• No change of control where:

• Non-controlling minority shareholding is acquired
• Distribution of shareholdings leads to no overall control
Sole control
• Legal control
• Majority of shareholder voting rights
• Control of board of directors

• De facto control by minority shareholder

• Dispersed remaining shareholders
• Historical voting patterns indicate majority at general
meetings
• Right to manage company and determine business policy
(positive control)
• Veto rights over key strategic business decisions
(negative control)
Joint control
• Equal share of voting rights, no casting vote

• Equal board representation, no casting vote

• Veto over strategic commercial decisions:

• Adoption of budget or business plan
• Appointment of senior management
• Major investments

• Will minority shareholders act together and thereby

exercise control?
• Shareholders agreement
• Strong common interest
Full-function joint venture
• To be full-function, JV must perform “on a lasting
basis all the functions of an autonomous economic
entity”
• Management dedicated to day-to-day operations
• Assets, staff and financial resources to operate
independently
• Ability to conduct own commercial policy
• No relationship with parents capable of undermining
autonomous nature
• Sufficiently long duration
 EU turnover thresholds
• Notification required to the Commission if certain turnover thresholds
are met
• “One-stop-shop” – if thresholds are met, notification not required at
Member State level
Primary Thresholds Secondary
Thresholds

Worldwide Combined €5b €2.5b

Community-wide Two-parties each €250m €100m

National Combined n/a €100m

Three Member States
with at least: Two parties each €25m

UNLESS
2/3 of each party turnover is achieved in the
same Member State
Turnover calculation
• You may well be involved in this!
• Identify the undertakings concerned
• Target - usually only that part being sold
• Exclude VAT and intra-group sales

• What currency is being used? Convert using ECB rates

• Geographic allocation: usually location of customer

• Last financial year: adjust for post-YE acquisitions/
disposals
• Check figures (millions/billions), totals and titles
So you have an EUMR filing: what next?
Is there actually a problem?

• The substantive test: SIEC

• Concentration problematic where:

• it would significantly impede effective
competitive 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
Substantive analysis – theory of harm
• Unilateral effects
• Merger of horizontal competitors
• Reduction of direct competition between merging firms
• Coordinated effects
• Merger of horizontal competitors
• Structural change in the market enabling/reinforcing tacit
coordination between competitors
• Vertical effects
• Merger of vertically-related firms
• Structural change in the market enabling merged firm to
foreclose/lock-out rivals
• Substantive analysis may involve economists
Key factors in the substantive analysis
• What is/are the relevant market(s)?

• Do the parties’ activities overlap?

• Are anticompetitive effects likely?

• Market shares
• Theories of harm (unilateral/coordinated/vertical/other effects)
• Countervailing buyer power
• Likelihood of market entry
• Efficiencies
• Failing firm

• Commission Guidelines on Horizontal and Non-

horizontal Mergers
What is the relevant market?
• Market definition:
• Not an exact science
• Vital tool in competitive assessment
• Used in various areas of competition law,
particularly mergers and dominance
• Commission Notice on market definition
What is the relevant product market?
• Demand-side substitutability - which products are
regarded by customers as effective substitutes?
• SSNIP test – how will customers respond to a small but
significant non-transitory increase (5-10%) in price?
• NB cellophane fallacy: market defined too widely where
monopolist already charges supra-competitive prices, wrongly
suggesting substitutability with other products
• NB banana fallacy: market defined too narrowly where only
some customers cannot easily switch to substitute products

• Supply-side substitutability – can other suppliers

easily switch to supplying that product?
What is the relevant geographic market?
• Geographic market may be:
• Local, e.g. a specific town
• National
• International, e.g. EEA-wide
• Worldwide

• Relevant factors include:

• Past evidence of diversion of orders to other areas
• National preferences
• Views of customers and competitors
• Trade flows, patterns of shipments/purchases
• Switching costs associated with diverting orders to other
areas
What is the relevant market? – other factors
• Temporal dimension of market, e.g.:
• Peak vs. off-peak rail tickets
• Summer fruits in season vs. out of season

• Herfindahl-Hirschman Index (HHI):

• Indicator of firm’s size in relation to overall market
• Demonstrates impact of merger on level of market
concentration

• In merger cases:
• Narrower markets = decreased likelihood of overlap 
increased likelihood of clearance
• Precise market definition frequently left open
Case study: market definition
• K-Food to acquire 100% of the shares in Chocoholic

• Transaction subject to review by the European

Commission
• Overlap in the area of chocolate confectionery

• Product market:
• How many different formats for chocolate confectionery can
you think of?
• Which do you think form separate product markets?

• Geographic market:
• How wide do you think the market(s) would be?
Case study: product market
• Commission defined separate markets for the three
formats in which K-Food and Chocoholic overlapped:
• Tablets
• Countlines
• Pralines
Case study: product market
• Why did the Commission define separate product
markets?
• Market investigation indicated that:
• Tablets, countlines and pralines fulfil different needs
• Customers tend not to switch between them
• Differences between tablets, countlines and pralines:
• Price per kg
• Frequency of purchases
• Annual spend per buyer
• Availability in stores
Case study: geographic market

• Markets defined as national

• Market investigation highlighted:

• Importance of national brands in Member States,
despite the growing importance of some
international brands
• Divergence in market shares in different Member
States
• National pricing
Clearance, remedy or prohibition?
• No competition issues  unconditional clearance

• Competition issues which can be remedied 

conditional clearance
• Divestment of “problematic” part of business or assets
• Behavioural remedies, e.g. merged company must grant
access to facilities to third parties
• In EU, submitted on Form RM
• Commission Merger Remedies Notice

• Competition issues which cannot be remedied 

prohibition (very rare)
Timing - notification and suspension
• Notification can be made when:
• Good faith intention to conclude agreement
• Signing of agreement
• Announcement of public bid
• Acquisition of controlling interest

• Cannot implement prior to clearance

• Derogation possible in rare cases
• “Gun-jumping” = implementation pre-clearance 
sanctions!
Timetable under EUMR
Phase I – basic rule 25 working days

Phase I – referral request 35 working days

by Member State

Phase I – remedies 35 working days

Phase II 90 working days

Phase II – remedies 105 working days, unless commitments offered

within 55 working days of opening Phase II

Phase II – other Up to 20 working days either

extension
(a) if parties request within 15 working days of
Phase II commencing; or
(b) on Commission initiative, if parties agree
“Nuts and bolts” of EU notification
• Notify on Form CO or Short Form CO
• “Front-loaded”, especially in complex cases
• Pre-notification contact with DG COMP
• Briefing paper
• Agree scope of notification
• Ensure no interruptions to timetable once clock ticking
• Pre-notification may take one year or longer

• Beware the priority rule

Real life example: Agilent/Varian
• Global merger of companies headquartered in the US

• Filings in the EU, US, Brazil, Australia and Japan

• Also considered filing in South Korea, Taiwan,

Ukraine, Turkey and Russia
• Clearance decision in Phase I with remedies – raised
early on with case team and set out in Form CO
• 4.5 months from briefing paper to clearance with
commitments
EUMR – judicial review
• Addressees of decision and third parties with
sufficient interest can appeal under Article 230
TFEU
• “Fast track” process now available

• Significant criticism of Commission in Airtours,

Schneider/Legrand, Tetra Laval/Sidel and Impala
• Damages awarded to Schneider (but refused to
MyTravel)
• Increasing use of the judicial review mechanism
EUMR - Recent and proposed reform
• December 2013 merger simplification package
• Designed to increase number of transactions
eligible for simplified procedure by c.10% by:
• Increasing market share threshold under which Short
Form CO may be used
• Introducing ‘super-simplified’ procedure for JVs active
only outside the EEA

• White Paper on extension of merger control to

minority shareholding acquisitions published July
2014
• Plans currently on hold
“One-stop-shop” principle
• General rule: “one-stop-shop” (Article 21(1) EUMR)

• Exceptions:
• Referral back to Member State(s) (Articles 4(4) and 9
EUMR)
• Referral up to Commission (Articles 4(5) and 22
EUMR)
• Protection of “legitimate interests” (Article 21(4)
EUMR)
• Protection of essential security interests (Article 346
TFEU)
Referral back to Member State
• Article 4(4) EUMR: pre-notification request by
parties
• Parties make Reasoned Submission on Form RS
• “Concentration may significantly affect competition
in a market within a Member State which presents
all the characteristics of a distinct market”
• Referral back may be in whole or in part

• Article 9 EUMR: post-notification request by

Member State(s)
Referral up from Member States
• Article 4(5) EUMR: pre-notification request by
parties
• Parties make Reasoned Submission on Form RS
• Concentration does not have a “Community
dimension” but is notifiable in 3+ Member States
• Any one Member State can veto

• Article 22 EUMR: post-notification request by

Member State(s)
Protection of legitimate interests
• Article 21(4) EUMR - examples cited:
• public security
• plurality of the media
• prudential rules

• Allowed only rarely

• Recent controversy: unlawful application

• e.g. E.ON/Endesa
UK Merger Control
UK merger control
• Enterprise Act 2002, amended by Enterprise and
Regulatory Reform Act 2013 (ERRA 2013)

• ERRA 2013 came into force 1 April 2014

• Dual thresholds

• “Substantial lessening of competition” test

• Two-stage review with single notification

• Voluntary, non-suspensory notification regime

 UK merger timetable from 1 April 2014

UIL (phase 1
remedies)

5 working days after decision to offer UILs

10 working days after decision for CMA to
decide if UILs might be acceptable
50 working days after decision for considering
and agreeing UILs (extendable by up to 40
working days for special reasons)

REFERENCE
Phase 2 Remedies
Phase 1 Commencement of investigation
phase 2 investigation
can be suspended by
up to 3 weeks

Extendable by 20 working days for 24 weeks Extendable by 12 weeks to Extendable by

40 working day
public interest mergers statutory limit to no more than 8 publish no more than 6
statutory time
publish final report weeks remedies weeks for
limit to publish Also extendable if request is made special reasons
decision to the European Commission
UK – jurisdictional thresholds
• A ‘relevant merger situation’ may be reviewed if:
• Target has UK sales of more than £70 million or
• Merger creates or enhances share of supply or
consumption in UK or a substantial part of UK of 25%
or more

• ‘Relevant merger situation’

• Two or more enterprises cease to be distinct
• Includes acquisition of material influence
• Minority shareholdings
UK – ‘substantial lessening of competition’ test

• Based on standard economic principles: Does merger

weaken rivalry to such an extent that customers
would be harmed?
• Emphasis on assessing the effects on competition
rather than a detailed examination of market
definition
• CMA must refer case to Phase 2 if “realistic prospect”
of SLC
• Account taken of efficiencies arising from merger
UK – to file or not to file?
• Jurisdictional threshold(s) is/are met?
• Are there substantive competition issues?
• Risk of enhanced interim measures?
• How high-profile is it?
• Merger Intelligence Unit
• Media reports
• Risk of third-party complaints?

• What is the nexus with the UK? – UK companies, plants,

assets, customers?
• What would it cost to ‘unscramble the eggs’?
• Should relevant agreement include competition CP?
Worked example – small UK target
• Company A owns and operates a series of private marinas
on the south coast between Weymouth and Bournemouth
• Company B is a significant national player and owns
private marinas all over the UK, including on the south
coast in the area where Company A operates
• Company A’s turnover last year was well below £70 million

• Company B buys Company A

• Is the deal notifiable in the UK?

• Is it worth notifying?

• Is it worth including a CP?

UK – filing process
• Pre-notification contact
• Filing contents:
• Parties
• Competitors
• Customers
• Market structure
• Market shares
• Substitutability
• Avoid defining “markets” where possible
• Fees: up to £160,000, depending on value of target
Multi-jurisdictional Merger Control
National merger control
• If no EU filing required, national merger control of
EEA Member States may apply
• US merger control and other foreign filings might
apply in any event
Multi-jurisdictional merger control
• Most regimes use jurisdictional threshold tests
• Turnover
• Asset values
• Market shares

• Notifiable types of deal

• Change of control is key
• Joint ventures
• Minority shareholding acquisitions
Multi-jurisdictional merger control cont’d
• Common for international deals to be notified in
multiple jurisdictions worldwide - we can advise on
when to file and when best not to file
• Failure to file can result in fines and deal uncertainty
locally
• Economic giants China and India have introduced
merger control
• Other countries amending their rules or increasing
their enforcement – e.g. Jersey fine for failure to
notify
What is the trainee’s role?
Jurisdictional analysis
• Deciding whether thresholds might be met – i.e.
analysing turnover, asset value or market share
thresholds
• Updating ‘multi-j’ charts:
• EU/EEA
• Rest of world (RoW)

• Resources:
• BLP multi-j charts
• www.gettingthedealthrough.com
• www.internationalcompetitionnetwork.org
• NCA websites and legislation
• Local counsel, especially preferred firms
Substantive analysis
• Product/geographic market research
• Are there any overlaps between the parties?
• Decisional precedents on market definition
• Understanding the products - be creative with research
• You might know the most about an area!

• Attending client meetings – notes are vital

• Preparing information request lists and liaising with

local counsel/clients to obtain information required
• Drafting the front end of the filing/using template to
draft entire form
Awareness of timetable and contract issues
• Consider merger control issues early
• Obtain data
• Design structure/timetable accordingly
• Most regimes are “suspensory” – cannot complete until
clearance
• Straightforward cases – c.4-6 weeks
• Complex cases – c.6 months or more
• Allow for pre-notification contact
• Condition precedent: no completion until clearance received
• Non-compete and non-solicitation provisions
• Due diligence, risk allocation (indemnities, reps/warranties)
• Liability does not always pass with legal entity
Overview of Merger Control
Sarah Ward
15 September 2015