European Union Adopts Merger Control Guidelines

By Stan Gorinson, Connie Robinson and Emmanuelle Rouchelle

Introduction

The European Commission recently announced the adoption of guidelines setting out, for the first time, the Commission's analytical approach in the assessment of horizontal mergers. The attached legal alert describes the consequences of this important new development, including circumstances in which mergers are likely to be challenged.

On December 16, 2003 the European Commission announced the adoption of guidelines to assess the legality of mergers between actual or potential competitors ("Horizontal Guidelines") to be published by the end of the year and to become effective on May 1, 2004. The Horizontal Guidelines are one of the cornerstones of a global reform package of merger enforcement in the European Union, which started with the recent overhaul of Council Regulation (EEC) No. 4064/89 ("Merger Regulation"} which sets out the rules applicable to mergers whose impact goes beyond any single Member State.

The Horizontal Guidelines describe, for the first time, the analytical approach to be followed by the European Commission in the appraisal of mergers. They should enhance the predictability of merger enforcement in Europe, to the benefit of the business and legal communities. In the United States, horizontal merger guidelines similar to these have been used by the enforcement agencies since 1992 (revised 1997).

The Horizontal Guidelines complement the new substantive test recently adopted by the European Union Council of Ministers in the new Merger Regulation. The new test is whether a merger constitutes "a significant impediment to effective competition" ("SIEC"). By focusing on the anticompetitive impact of mergers rather than on dominance, the SIEC test allows the capture of a wider array of harmful merger scenarios, in particular non-collusive oligopolies. Please read our Antitrust Legal Alert dated December 23, 2003 for further details on the new substantive test.

The Horizontal Guidelines clarify the analysis used to determine which mergers will be challenged by the European Commission. Consistent with the SIEC test, particular emphasis is placed on the harm to competition from mergers: the Commission will challenge mergers which enhance the market power of companies in a way likely to affect consumers adversely, whether in the form of higher prices, poorer product quality or reduced choice.

The Horizontal Guidelines further identify three main situations in which horizontal mergers may significantly impede competition:

• the merger may create or strengthen a dominant market position;

• the merger may reduce competitive pressure in an oligopolistic market by eliminating important competitive constraints on one or more suppliers; or

• the merger may change the nature of competition in an oligopolistic market in a way likely to facilitate the coordination of suppliers.

The Horizontal Guidelines also specify the circumstances in which mergers are likely to proceed without the Commission’s intervention. The Commission will likely not investigate cases where post-merger market concentration remains below certain thresholds. The Commission will rely on two measures of market concentration: the firms’ "market share" and the Herfindahl-Hirschman Index ("HHI"). The HHI is obtained by summing the squares of the market shares of all the companies in the market and measures the relative size of firms in a market. If the HHI remains below 1000 after the merger, the Commission is unlikely to become involved.

In addition, the Commission will take into account four countervailing factors in support of a finding that a merger is compatible with the common market:

• buyer power: where consumers can find credible alternatives to the merged entity within a reasonable time frame;

• low barriers to entry: where entry into the market can be easily accomplished within a reasonable time frame and is sufficient in magnitude and scope;

• efficiencies: where the parties can sufficiently substantiate that efficiencies (i) directly derive from the merger; (ii) benefit consumers; and (iii) outweigh the possible anti-competitive effects of the merger; and

• the "failing firm" defense: where the parties demonstrate that the acquired firm would be forced out of the market because of financial difficulties if the merger does not take place, with the same or worse anti-competitive effects.

The Horizontal Guidelines provide an analytical complement to the procedurally focused "Best Practices", which deal with the Commission’s day-to-day handling of merger cases and such concerns as due process. For the European Commission, often criticized for its opacity and procedural deficiencies, the forthcoming publication of the Horizontal Guidelines and of the Best Practices represents a ground-breaking step towards more transparency and legal certainty, and international convergence.

The information contained in this Legal Alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact the author(s) of this Legal Alert or your existing firm contact. The invitation to contact the author is not to be construed as a solicitation for legal work in any jurisdiction in which the author is not admitted to practice. There will be no charge for the initial contact. Any attorney/client relationship must be confirmed in writing. You may also contact us through our Web site at www.kilpatrickstockton.com