Overview of Merger ControlSarah Ward15 September 2015

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 HydroIneos, 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

• 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

NationalThree Member States with at

least:

Combined n/a €100m

Two parties each €25m

UNLESS2/3 of each party turnover is achieved in

the same Member State

EU turnover thresholds

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 EUMRPhase I – basic rule 25 working daysPhase I – referral request by Member State

35 working days

Phase I – remedies 35 working daysPhase II 90 working daysPhase II – remedies 105 working days, unless commitments

offered within 55 working days of opening Phase II

Phase II – other extension

Up to 20 working days either(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)

Phase 1

40 working day statutory time limit to

publish decision

Phase 2 investigatio

nRemedies

12 weeks to publish

remedies

Commencement of phase 2

investigation can be suspended by up to

3 weeks

24 weeks statutory limit to

publish final report

Extendable by 20 working days for public interest mergers Also extendable if request is

made to the European Commission

Extendable by no more

than 8 weeks

REFERENCE

Extendable by no more

than 6 weeks for special reasons

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 ControlSarah Ward15 September 2015