European Union Merger Control - Dissertation Example

? Table of Contents Table of Contents 2 Introduction 3 European Union Merger Control Law 5 Aim 6 Highlights 7 Impact 8 Merger Control Law: Its policies and procedural rules 9 Critical Position to the Merger Control 15 Conclusion 16 Bibliography 19 Introduction The task of this paper is to examine the effects of the European Merger Control Law—whether its advent as a legal framework has served its primordial function to regulate mergers that impede effective competition1 (Council Regulation 2004/C 31/03), including its impact on the industries subject of control. This paper shall present the advantages and infirmities of the law and based on this dissection, this writer will make a conclusion on whether the Merger Law is good as it is or is it prejudicial warranting amendments to achieve the goals it set out at its inception. The European Merger Control Law is designed to protect European consumers against unnecessary price increases or fluctuations as by-product of monopolies or companies gaining total control of the free market. Theorist opines that total control of the market of a single company can lead to economic dislocation if not contribute heavily to the economy’s collapse. The Merger Control Law prevents monopolistic prices to reign and ensures that the market is always at its equilibrium prices2 (Navarro, Font, Folguera, & Briones, 2002). Companies with vast financial resources use mergers and acquisitions as a strategy to control a substantial portion of the market instead of using the product’s merit to gain a good hold of the market. By buying off the competition and then killing that competitor’s product ensures total control of the primary product by the purchasing company. This would enable them to dictate the price of their product in the market by regulating its supply. Another strategy is to make use of the production or manufacturing facility of the purchased company to produce its product, thereby killing the presence of the competitor’s product in the market3 (Serdareviaa & Teply, 2010). However, not all mergers and acquisitions are intended for these purposes as some mergers and acquisition are conducted to ensure the survival of a product line as a viable alternative to the main line or flagship line of the company. These refer to products that are basically the same but cater to different market demography. Normally, in these instances, brand names are different but the products are basically the same only leveraged and marketed for a specific market segment4 (Hawk & Huser, 1996). The creation of the European Union saw the emergence of more laws and restrictions to regulate mergers and acquisitions of companies within the same industry covering the whole European market. Recognizing the potential and actual possibility of larger corporations merging or acquiring smaller companies from developing nations within the European Union, more stringent laws were enacted to regulate, control and govern merger and acquisition. Symmetrical laws from member nations already existing were aligned or harmonized with the European Union Law on Competition. The rules of procedure for the determination of whether the merger or concentration falls within the allowable parameters was laid down, including modes upon which to ventilate any opposition or dispute to the merger, suspension or annulment thereof. The purpose of the merger law is laudable but nonetheless it has been criticized as anti-establishment and counter-productive. Critics have postulated that the law impedes the natural progress or evolution of the free market as its protectionist nature favours smaller companies or shields those companies that are hard-pressed from competing against larger corporations from take-over whether hostile or friendly. If this line of reasoning is followed however it is manifest that merger control is not necessarily advantageous as the options available for smaller companies to find other resources to enhance its market viability is similarly impeded or limited. There would be no other recourse for the smaller companies but to close shop due to lack of resources to finance its operations and to compete aggressively with the larger companies. Others who are likewise critical of the law maintain that instead of profitably selling the market share of companies to larger corporation who can maintain and sustain its demand, the Merger Law frustrates the aspirations of entrepreneurs who want to cash in their efforts in building the business. The onus therefore is to leave struggling companies to die a natural death and their owners losing a lot in terms of investment, time and effort. While some even allege that the law protects the competitor rather than competition. In its entirety, the Merger Control Law is good for the consuming public and it must be adopted by worldwide economies and governments. European Union Merger Control Law Concentration or monopoly is an economic condition that is anti-consumer since it does not permit the entry of competition or allow equilibrium prices to reign in the market. The lack of competition may not be the primary intent but the prevailing condition resulting from the monopoly prevents the entry of competition. Monopoly likewise puts the control of prices to company that owns the monopoly that is normally driven by profit. Even the supply of the product in the market is controlled by one if not rely on the monopoly. Supply which is also a component of pricing is not only dangerous to be left to a single entity but it is irresponsible for the governing body to allow such a condition to continue. This cannot be stressed more in cases of critical products that would include pharmaceutical products or medical services. At the heart of the European Union Merger Control is Council Regulation (EC) No. 139/2004 otherwise known as the European Commission Merger Regulation. The Regulation was enacted to promote competition in the open market to protect the rights of the European consumer. The Commission is mandated to oversee and regulate mergers or acquisitions that would lead to concentration. Concentration, according to Article 3 of Regulation No. 139/2004, exists if the long term effect of the change would result to: direct control over two or more entities or parts thereof. Control over the asset of the entities either by stocks or any other instrument of value as statutorily conferred by law. 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, involve or confer the possibility of exercising decisive influence on an undertaking. In addition, creation of joint ventures that perform a lasting basis of all the functions of an autonomous economic entity shall constitute concentration5. Aim As posited, the aim of the law is to ensure that healthy competition prevail to guarantee that prices do not heavily favour one party or allow any particular party to saturate the market of its product for its own benefit or profit. The law, from the consumers’ perspective, is beneficial as its long and protective arms extend to the prohibition of any merger which is detrimental to public interest and welfare. From the business standpoint, particularly the stakeholders, it is considered prejudicial to its interest and intrusive to its prerogative in the operation and management of its resources—merger not only ushers in dividends or profits for stakeholders but it is a measure implemented by management to streamline its operations as well as to minimize operational cost to promote efficiency which would ultimately redound to the benefit of the consumers. Merger control was conceived to prevent the concentration of wealth, power and resources to a select few thus no merger shall be allowed unless advantageous to the public and prior approval is secured from the Commission. The issue is—whether a mere suspicion that the merger would create undue concentration is sufficient justification to enjoin a merger? Conversely, if found to significantly impede competition, are there adequate remedies available to the proposing parties to correct any defects in the planned merger? Highlights The law provides for a prospective appreciation of the possible effect of the merger and rule accordingly based on that effect. The Commission is given the mandate to disallow any potential mergers that will threaten free market and competition and one that promotes price and supply machinations. It recognizes several types merger—a merger is characterized as horizontal when the products of the merging firms are relevant in the same market or significantly impedes competition. While a vertical merger affects firms, prior to merger, which are involved with the different phases of the distribution or product line but upon merger, the integration of the processes creates one entity which now consolidates all the processes under a single operation. On the other hand, conglomerate mergers involve complementary or unrelated products. Horizontal merger connotes two competing business organizations within the same market to merge as one. This business unification has two outcomes—it would either have an enormous effect on the market or have a tiny effect on the market. For smaller business organizations, the merger would be less significant as there would only be few changes within the business organization. An example would be two local town pharmaceuticals should merge into a single pharmaceutical entity for the town. On the other hand, the effect of merger between two giant business organizations would have a ripple effect not only on its operations, business, the market and the economy as a whole. The most opposed mergers are the horizontal mergers hence it shall be the main focus of this paper. Impact The impact of the law is a lot of savings not only for the consuming public but also to the market in general considering the alternative wherein litigation will only commence after a third party brings the case before the court that has jurisdiction over the three parties. The current system will enable the parties to present their cases or grievances before the commission with the issues threshed out without any substantial resources being expended by either party. The Merger Control law was conceived primarily to protect the interest of the consuming European citizen and despite the criticisms the Commission received at the onset and during the operation of the Law, the principle it espouses have been proven to be beneficial to the interest of the majority. The provisions of the law enjoins that corporations desiring to enter into an agreement or covenant that could be considered as inimical to the interest of the public is compelled by the operation of the law to submit to the collective will of the commission to determine whether or not to allow such agreement. A process as enunciated by Council Regulation (EC) No. 139/2004 even calls for both parties to start the process before it announces such mergers or acquisitions to prevent both parties from committing resources to the merger efforts. After ensuring that such merger will not be injurious or prejudicial to the interest of the public, the Commission will allow the proposed mergers. Merger Control Law: Its policies and procedural rules In 1957, the Treaty of European Community (EC Treaty or Treaty of Rome) was signed creating an economic cooperation and a singular market for all of Europe. Although a singular market was envisioned within the European Union, the formation of cartels and restrictive vertical agreements was frowned upon. Article 81 EC prohibits any/and “all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market..."6 (European Commission, 2004) The European Union’s policy against monopolies or corporations who not only have a dominant market share but is also considered as the only corporation dealing with such item is explicitly provided in Article 82 EC7. Under this provision, the European Commission tackles all forms of monopolies, cartels and other modes of business machinations however the jurisdiction of the Commission is not confined to merger of businesses or corporate entities but it similarly regulates the states’ role in the market as unequivocally declared in Articles 86 and 87 EC. Article 86(2) EC commands that under no circumstances should the member state’s right to deliver public service be impeded.8 The need for a law similar to the Merger Control Law can never be stressed enough. The fruition of the merger law in Europe is revealing as laws were continuously enacted to make it contemporary with the passage of time. The European Community’s experience with regards to monopolies or the effect of a single entity controlling particular commodities, goods or merchandise is a dangerous situation. Although not all transactions fall under the jurisdiction of the Merger Regulation and in order to curb any suspicion of unbridled control of regulatory powers or usurpation of business prerogatives, it was established that transactions involving concentration and community dimensions fall within its realm of power and authority which thus excludes transactions relating to acquisitions of financial institutions of securities for resale which are held temporarily and do not entail any voting powers to influence the undertaking’s competitiveness9 (Article 3(5)(a) EC); acquisition by liquidators10 (Article 3(5)(b) EC); acquisitions by financial holding companies provided that any voting rights which may have accrued shall be exercised only maintain the full value of the investments11 (Article 3(5)(c) EC); and such other analogous transactions. The litmus test or substantial assessment whether a notified concentration would be acceptable to the Commission and deemed compatible with the internal market and with the EEA Agreement, it must be determined if it would not significantly impede effective competition (SIEC) which doctrine incorporates the principle of dominance test. The dominance test presupposes that the concentration creates or strengthens a dominant position as a result of which effective competition is significantly impeded in the common market while dominant position has been declared by the European Court of Justice in Case 27/76 United Brands v. Commission [1978] ECR 207, as a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition from being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers, and ultimately its consumers. Thus, applying the aforementioned definition, a dominant position is applicable only to those who are the industry front-liners however it cannot be denied that mergers between competitors have been noticeably increased either to consolidate ownership or eliminate market competition. Is the Commission empowered to regulate or control horizontal mergers so as to protect the interest of the consumers? The answer is in the affirmative. The Commission is empowered to prevent mergers which would likely deprive customers of these benefits by significantly increasing the market power of firms which is characterized as the ability of one or more firms to profitably increase prices, reduce output, choice or quality of goods and services, diminish innovation, or otherwise influence parameters of competition. In this instance, the suppliers shall have complete dominance in the market while the buyers’ power is reduced to naught. The Commission shall therefore assess if the parties to the merger are actual or potential competitors taking into consideration product relevance and geographic markets and other circumstances including efficiency or profitability criteria which would ultimately redound to the benefit of the consumers. The process of assessment as indicated in Regulation (EC) No. 802/2004, otherwise known as the Implementing Regulation, is commenced with the notification of the proposed transaction. It likewise establishes, among others, the period upon which the action or decision should be rendered, the powers of the Commission and the rights of the parties.12 It should be noted however that transactions which do not raise any competition issues or are governed by Regulation (EC) No. 139/2004, otherwise Simplified Procedure for Treatment of Certain Concentrations while those transactions relating to competition matters shall refer to the Directorate General for Competition (DG Competition) Best Practice Guidelines on the Conduct of EC Merger Control Proceeding for the parameters, instructions or rulings. For purposes of expediency, it is a requirement that prior to the formal notification to the DG Competition, it is imperative that the parties undergo a pre-notification consultation where a draft notification standardized form (Form CO) shall be submitted including all documentations relevant to the transactions. The pre-notification consultation would afford the parties opportunity to complete the documentation should it be found lacking or rectify any deficiency however, any preliminary finding at this stage is not binding and the Commission is not precluded from conducting further in depth investigation. Thus, upon the filing of the formal notification, the Commission shall conduct its investigation within the specified period and in the meantime, the parties are proscribed from closing the transaction until the investigation is terminated and the transaction is declared compatible with the common market or the Commission has failed to render a decision within the prescribed period. The case of Blackstone Group L.P./Sofamen XXI, S.A.U. including Mivisa Envases S.A.U. (Case No COMP/M. 6128, Notification of 18.02.2011 pursuant to Article 4 of Council Regulation No 139/2004) is relevant as it was decided that the merger is proper and compatible with the internal market even though Mivisa is primarily active in tinplate food can manufacturing with centralized manufacturing facilities in Spain and local assembly plants in Spain, the Netherlands, Hungary and Morocco. Blackstone is a global alternative asset manager that operates as an investment management firm and acquired indirect sole control of Mivisa. The Commission found that Blackstone does not have any interest in any company which is active in the same market as Mivisa and further ruled that food can manufacturing is separate and distinct from beverage can manufacturing and definitely has different markets. It was likewise decided that Blackstone/Mivisa merger complied with the geographic market definition considering that Mivisa’s activities are focused in Spain and Portugal while Stolle activities in Iberia cannot be interpreted as a foreclose strategy as other manufacturers are able to provide similar tooling products. On the other hand, the activities of Graham in the manufacture of plastics cannot likewise be construed as anti-competition since its market share is negligible to affect the market in Portugal, Spain or its member states. In sum, the merger was allowed as the transactions involved separate and distinct markets which are not anathema to competition policies. In contrast, the Commission blocked the proposed merger between Aegean Airlines and Olympic Air over fears that it would have created a quasi-monopoly on the Greek air transport market.13 (Elias, 2011) The Commission stated that there is no “realistic prospect” that competition concerns would be addressed since no new airline of a sufficient size would enter the routes and restrain the merged entity’s pricing. The Commission posited that it would lead to “higher prices and lower quality of service for Greeks and tourists travelling between Athens and the islands.” Furthermore, it would create a quasi-monopoly as the alternative transport does not entail a strong competition as the ferry ride takes a longer travel time therefore cannot be a practical substitute for transport to warrant a competitive pricing behaviour post-merger.14 (Elias, 2011) Following the adverse decision of the Commission, may the aggrieved parties appeal the ruling? The answer is in the affirmative. The aggrieved or proper parties can file a petition for annulment with the Court of First Instance on the following grounds—lack of competence; infringement of an essential procedural requirement; infringement of the EC Treaty or related laws; and misuse of powers. Thereafter, any appeal undertaken before the European Courts of Justice shall be purely on questions of law. To prevent any concerns due to competition, the Remedies Notice was decreed by the Commission. In this stage, the merger proponents are encouraged to seek consultation for the Remedies Notice however this is discretionary upon the parties. Under the guidelines, there are six commitments that each party may avail of to prevent any competition issues and these are: share divestitures; license or brand arrangements; the termination of agreements; waivers; infrastructure commitments; and promises of future behavior. If the remedies proposed by the parties are acceptable then the merger shall be allowed. Critical Position to the Merger Control According to the critics of merger control the following, contrary to popular belief, are deemed to be pro consumer and should not be considered as acts inimical to the interest of the public. They have staunchly lobbied for the repeal if not change in the Merger Control Law to ensure that the European Society remain steadfastly at the forefront of critical and forward thinking. The critics of the Merger Control Law have opined that the advocates of free competition live in the past and are trying to force modern lives under the governance style reflective of the age of the Merger Control Law. Critics of the Merger Control Law have used the definition of “Merger” and the common rationale of why corporation merge with other businesses to defend their position. Merger in reality is a strategy employed by corporation to leverage on the collective strength of all parties concerned. Mergers normally take stock of the resources and strength of parties seeking to merge. Capitalizing on the collective strength of the parties seeking to merge would result to operational efficiency that could lead for prices of goods manufactured or produced by the entities seeking to be merged to fall. The rationale espoused by the critics of the Merger Control Law makes sense since lower prices never hurt anybody. As mentioned above, lower prices always benefit the consumer. Thus, in the case of predatory pricing most fear that is borne out of ignorance of the dynamics of corporate pricing of goods is baseless considering that any drop in prices not only drastically affects the company itself but its market positioning would cause untold losses. As far as the critics of the Merger Control Law are concerned the position taken by the government and the compliant company are correct. Conclusion It is maintained by this paper that the Merger Control Law not only protects the interest of the consumer in general but also protects the local and international market in particular15 (Davidson, 2005). Preventing, controlling or regulating a singular entity to dictate the prices of commodities even if done altruistically or for pure profit in case of opportunistic companies is a function of government. The protection of the interest of the consuming public as well as the country’s economy in general is an extant responsibility. The primary focus of the law are two folds; it not only prevents a situation that would lead for a single entity to dictate the prices of commodities due to their dominance of the market but more importantly, it prevents competition from gaining a foot hold or share in the market16 (Carletti, Hartmann, & Ongena, 2007). The underlying principle of course is that competition would allow for better quality of products as well as better service. Competition would also allow for the emergence of new pricing schemes that could help attain equilibrium prices instead of monopolistic or anti-competitive prices. These two principles not only protect the consuming public and the economy in general but similarly the industry that supports the product or the service in particular. The current economic landscape certainly allows for a particular service or product to be supported by other businesses or industry, thus the collapse of that product or any unrealistic fluctuation in the prices of the product could lead to the collapse of its support businesses as well. To illustrate: In the processed food industry, any product is supported by the farmers that produce the raw materials for the processed food product. The farmers are supported by the fertilizers and pesticide companies as well as the utility companies. The synergy does not stop here as there are also the distributors and the retailers. Each segment industry contributes to the progression that enables the processed food product to reach the dinner table. Any significant oscillation or instability in the prices of each of the services or materials that these support industry experiences radiates or ripples to the final price of the processed food at the dinner table. Or the ripple effect can also radiate backwards in other words from the processed food product and then down the line of the support industry. The impact to consumer of any price fluctuation is clear, however the impact to the product and its support industry is not only concentrated on the business aspect of the situation. The impact permeates to the workers of the affected companies and their families as well. Monopoly or dominance of the market in any of the product or segment as described above could lead to a situation where a single entity can hold hostage the livelihood of an entire economic system. Thus the importance and significance of the Merger Control Law cannot be over emphasized. The current economic reality is that businesses and corporations are often borderless and large corporations are not confined to a single country their operations as well as their product reach are not concentrated. Thus it was imperative for the World Trade Organization and the General Agreement on Tariffs and Trade to encourage competition but also mandated member states to legislate provisions that would protect the principle of competition. Merger Regulation 139/2004 or the European Community Merger Regulation mandates that companies desiring to merge should first seek the approval of the Commission, specifically those mergers that cross borders that could have a potential global worth of business exceeding five Billion Euros or a European business worth two hundred fifty million Euros. By predicting the possible result of any merger the prospective nature of this law has set the following standards in mergers and acquisition; Merger and acquisition applications should not “significantly impede effective competition… in particular as a result of the creation or strengthening of a dominant position” 17 (European Commission, 2010). The law is clear—any mergers and acquisition should not be motivated by profit that will be the result of dominating the market. It is also likewise clear that the primary goal of the law is to encourage the resurgence if not the birth of new businesses that can or will compete against existing players. However, if the acquisition of a failing company will not change the landscape or alter the existing landscape of the market it may be allowed since the imminent failure of the company about to be acquired could still result to a competition vacuum even if the company is purchased or not by the larger corporation. Despite the many criticisms thrown at the direction of the Merger Control Law, its provisions protect the interest of the public are commendable and appropriate in the oftentimes profit driven industry or business. It ensures that businesses while motivated by profit and revenue remain even keeled in their practices. It encourages businesses to abandon the cut-throat mentality of killing the competition to ensure market dominance but instead adopt a more balanced approach to competition to safeguard consumers as well as businesses from unnecessary takeover bids which may prove detrimental in the long run. Examining the focus of some of the criticism, it is not directed at the underlying principle that the law espouses. But rather it is in the implementation of the law most notable of which is the merger of General Electric and Honeywell18 (Christiansen, 2005). Some criticisms are directed towards the foundation or the economic principle that the law promotes, most laudable of which are the advocates of laissez faire. These theorists opined that when monopoly tries to capitalize on its dominance by increasing the prices, it creates an opportunity for competition to flourish by providing lower prices19 (McConnell & Brue, 2005). However, if there is no competition to speak-off or it takes time for competition to be created the damage would have been done. Bibliography Carletti, E., Hartmann, P., & Ongena, S. (2007). The Economic Impact of Merger Control Legislation. Christiansen, A. (2005). The "More Economic Approach" in EU Merger Control - A Critical Assessment. Frankfurt: Deutsche Bank Research. Davidson, L. M. (2005). The New EC Merger Control Regulation:Guaranteeing the Effectiveness of the Architecture of Separate Jurisdictional Zones. International Economics , 148-157. European Commission. (2004). 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