New Test Adopted For European Union Merger Review

By Stan Gorinson, Emmanuelle Rouchelle and Connie Robinson

Introduction

As part of a comprehensive reform package of its merger policy, the European Union Council of Ministers recently agreed to a new substantive test for mergers with a Community dimension. The new test is whether a merger constitutes "a significant impediment to effective competition." The attached legal alert discusses the background and implications of this dramatic change. As part of a comprehensive review of its merger policy, Council Regulation (EEC) No. 4064/89, the European Union Council of Ministers recently agreed to a new test for mergers with a Community dimension: That new test is whether a merger constitutes "a significant impediment to effective competition." The new test should be formally adopted by the Council by the end of the year. Primarilydesigned to catch a wider array of merger scenarios, this new test represents a compromise between the existing dominance test and the "substantial lessening of competition" ("SLC") test which is the test under Section 7 of the Clayton Act, the U.S. antitrust merger law.

The Merger Regulation was adopted on December 21, 1989 and sets out the rules applicable to mergers whose impact goes beyond any single Member State. The Regulation confers exclusive jurisdiction on the European Commission over "concentrations with a Community dimension."

In June 2000, the European Commission launched a review of the merger process. In December 2001, it issued a Green Paper which explored numerous possibilities for reform, eliciting comments from the business and legal communities as well as consumers and trade unions.

The review was motivated by the need to maintain the Regulation’s effectiveness in the face of macroeconomic changes, including:

• the globalization of companies and markets and the increasing number of global mergers;

• the need to cooperate with other jurisdictions;

• the prospect of an enlargement of the European Union as of 2004; and

• the completion of the monetary union and the introduction of the Euro.

At the same time, the reform had to respect and enhance the fundamental principles underlying the Merger Regulation, i.e. the need to ensure effective, efficient, fair and transparent control of merger at the most appropriate level.

The debate focused on the respective merits of the dominance test and the SLC test. Under Article 2 of the Merger Regulation, concentrations that create or strengthen market dominance of an undertaking should be declared incompatible with the common market (and therefore unlawful). Under the SLC test, mergers should not proceed if they result in a "substantial lessening of competition."

From a procedural point of view, if the SLC test were adopted, the European Union would be aligned with the United States, Canada and Australia. On the other hand, adopting the SLC test would introduce greater disparity within the European Community, as most EU Member States have adopted the dominance test at a national level (except for the United Kingdom and Ireland, which operate under the SLC test).

Moreover, the introduction of the SLC test would produce the effect of legal uncertainty, as the entire body of case law is based on the dominance test. From a substantive point of view, the debate is theoretical in many respects. In practice, the same analytical approach is used to evaluate mergers under both tests, typically leading to similar outcomes. However, the dominance test is not thought to apply in the case of a "non-collusive oligopoly," a scenario which typically involves (i) the merger of the second and third largest players in the market, (ii) where the two are the closest substitutes, and (iii) the merged entity would obtain market power and be able to raise prices unilaterally, i.e., what is known in the U.S. as a unilateral competitive effect. While the European Commission has yet to encounter a situation of this nature, only the SLC test would allow effective control in these circumstances.

Under the new test, a merger is prohibited if it constitutes "a significant impediment to effective competition, in particular as a result of the creation or strengthening of a dominant position" ("SIEC"). Dominance is only one factor in establishing the SIEC. By focusing on the anticompetitive effects of the merger, the legal "straightjacket" of having to prove dominance is effectively removed, thereby allowing non-collusive oligopolies to be caught. While this test is broader than the dominance test, the EU Council of Ministers indicated that this is the only circumstance where the SIEC would be applied more broadly.

The business community was generally not in favor of a wider substantive test, for fear that it would give the European Commission too much discretion, leading perhaps to an excessively interventionist policy. However, the SIEC test has been defined, so that this risk should be limited at least somewhat. It remains to be seen whether the SIEC test is the SLC test by another name.