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Lord Sainsbury of Turville: Amendments Nos. 109 and 117 seek to give the OFT a discretion, rather than a duty, to refer completed and anticipated mergers that meet the reference criteria. Perhaps it would be helpful to set out the Government's thinking on the reference test to be applied by the OFT. The OFT's duty in relation to referring mergers has been crafted to reflect the two key principles underlying our reform of the merger regime, that is, taking Ministers out of decision-making and focusing the regime on a clear, competition-based test. We think that those two principles should be closely linked. When handing over decision-making powers to an independent expert body such as the OFT, we think it is sensible to define closely the test that that body will apply. In this case, we wanted to ensure that the OFT would refer only on competition grounds; that is, where a merger may result in a substantial lessening of competition.

The amendments seek to leave the OFT with a discretion to refer such cases. They mean that the OFT would have the power not to refer a case that would result in a substantial lessening of competition. The amendments leave the decision as to what would be a reasonable exercise of the power to the courts to determine.

However, the Government's intention is to set out clearly what cases should be referred by the OFT. Broadly, we think that a merger that could create

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competition problems should be considered further by the Competition Commission. However, we believe that there are three circumstances that would justify no reference even where there may be a substantial lessening of competition. They include those pointed out by my noble friend Lord Borrie—first, where the market or markets concerned are not important enough to justify a reference; secondly, where customer benefits flowing from the merger would outweigh any substantial lessening of competition; and, thirdly, in the case of an anticipated merger, where the merger is not, or not yet, likely to go ahead.

For those circumstances we have given the OFT discretion over whether to refer the merger. We do not think that there are any other circumstances that would justify the clearance of a merger that may result in a substantial lessening of competition. We think it is important for Parliament to set out the parameters of the powers to be exercised by independent bodies. In this case, we are proposing a sensible test that focuses on the OFT's area of expertise, grants flexibility where it will be sensible for the OFT to exercise discretion, but does not—as the amendments would—leave the scope of the new regime to be determined by a body independent of Parliament and government. In view of those arguments, I invite the noble Lord to withdraw his amendment.

Lord Kingsland: I am most grateful to the Minister for his reply. Is it reasonable to assume that in practice there will be no change; that although there is a different test, and the relationship between the Minister and the OFT is changed, nevertheless the historic track record—to use the expression in a slightly different context from that in my opening speech—is a good guide to conduct in future? Is that what the Minister is in effect saying?

Lord Sainsbury of Turville: The OFT does not consider that the change to a competition-based test will result in a different number of merger references given the situation in recent years.

Lord Kingsland: So the new test is not really a change in policy.

Lord Sainsbury of Turville: No. Given that it has been accepted that the competition test is by and large the one that Ministers have said they will base their judgments on, that is likely to mean a continuity of policy.

Lord Kingsland: I am most grateful to the Minister. I shall reflect on these exchanges over the summer adjournment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Kingsland moved Amendment No. 110:

    Page 10, line 38, leave out from "resulted" to end of line 40 and insert "in the creation or strengthening of a dominant position, as a result of which competition is likely to be significantly reduced within any market or markets in the United Kingdom for goods or services"

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The noble Lord said: As we have just heard, the Government propose to introduce a new competition-based test to determine whether the OFT should refer a merger to the Competition Commission. It replaces the public interest test in the Fair Trading Act 1973. We accept that a competition test has been applied for some time; nevertheless it makes sense to enshrine the change in the statute. The test the Government propose is the substantial lessening of competition, which is the test applied in the United States, Canada and Australia.

However, we urge the Government to reconsider their position and instead to adopt the dominance test, which is the test applied in the European Community. It is the standard for assessing mergers under the EC Merger Regulation. The new test would impose a different standard for assessing the potential effect of mergers from that at EU level. The recent judgment of the court of first instance in the Airtours case has shown that there is a significant difference between the dominance test and the SLC test, given the requirements now established for proving collective dominance.

Businesses operating in the United Kingdom should not be faced with a different merger test in this country simply because the transaction in question does not fall within the ECMR. In addition, as there is no established case law in Europe applying a statutory SLC test, the outcome of merger references will be less clear and predictable for UK businesses.

Most member states, to say nothing of the applicant states, have aligned their merger control provisions to the current dominance test. It would be more helpful for United Kingdom companies doing business across Europe to operate under a common standard.

The new test is one of the big surprises for me. When we debated the Competition Bill in 1998, the Government's clear underlying philosophy was to align our domestic law and its competition tests with European Community law and its competition tests. More times than I care to remember, Ministers said, "We want to simplify things for the British businessman. He is currently faced with a myriad tests. We want him to look at what he is doing in the context of one test". Yet four years later, when the Competition Act is only just beginning to bite in many respects, the Government have completely changed their approach on mergers.

Certainty in the law is important. If the Minister believes, as he said on the previous amendment, that the new test will not make much difference to the policy of the OFT and the authorities, that is a fortiori a reason for not introducing it. I beg to move.

Lord Borrie: Superficially there is a great deal in what the noble Lord, Lord Kingsland, says about European countries and the European Union itself having a dominance test, while we are proposing a different test of substantial lessening of competition. However, the noble Lord gave the impression that the test is new. As I said on the previous amendment, while it is new in legal terms because it has not been

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established in statute, it has in practice been operated for a couple of decades by successive Ministers under different colours of government, as well as by the Office of Fair Trading.

Secondly, in its Green Paper the European Union explained its thinking that a substantial lessening of competition test might be better from an economic point of view than the dominance test embodied in the 1989 regulation that governs mergers with a Community dimension. There have been consultation papers and government papers raising the possibility of that. Responses are available to government. The test that is now embodied in the Bill has not come out of thin air.

More than anything else I am concerned that we adopt the best test in economic terms. It is not clear to me whether a dominance test would deal with the possibility of a merger strengthening a non-collusive oligopolistic market. When a merger involving two companies in the same market comes before the Competition Commission, we want it to consider not just whether the merger may result in one dominant or monopoly company, but whether it will leave a number of companies in the market, but all refraining from any real competition. Markets that are characterised by the presence of only a small number of firms with significant market shares may operate just as uncompetitively—and therefore badly from the customer's point of view—as a market dominated by a single undertaking. It has not been clear how far European law, in relation to the European merger regulation, can prevent collective dominance in oligopolistic markets. If a merger merely strengthens an existing oligopoly, it is doubtful whether European law applies to prevent it.

The dominance test is more legalistic than the test proposed in the Bill. The test proposed in the Bill has more economic significance and a closer relationship to the way in which the Office of Fair Trading, the Department of Trade and Industry and the Competition Commission have been dealing with and considering the adverse effects or otherwise of a merger over the past 10 or 20 years. The test that has been tried out through consultation papers on relevant associations and companies in this country is more likely to achieve what we want, which is that mergers should not be allowed if they create a significant adverse consequence on competition, unless there are significant customer benefits that outweigh that.

6.15 p.m.

Lord Sainsbury of Turville: The noble Lord, Lord Kingsland, takes slightly too simple an approach to harmonising our mergers competition test with that in Brussels. The amendments would replace the mergers substantial lessening of competition test with a European-style dominance test.

I stress again that the Government's choice of test for the new regime has been the subject of careful and extensive consultation. The question was first raised in the Government's consultation document on the

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reform of the merger regime, published in August 1999. There was further consultation in October 2000 and again following the publication of the White Paper on competition last year. In addition, my officials have met with lawyers, economists and other experts about the new regime and about the most appropriate competition test to employ. A large majority of those who responded favoured a substantial lessening of competition test. They believe that it represents a better economic test than the dominance test currently used in the European Community merger regulation.

The response from the City of London Law Society, which is expert in the competition field, sums up the issues effectively. It said:

    "The Group does not favour the adoption of a dominance test due to its inflexibility in dealing with a range of situations including oligopolistic dominance and highly leveraged acquisitions. It does not see any benefits from having the same substantive test at a national level as in the ECMR. Additionally, it should be noted that other established merger control regimes within the EC have not found it necessary to adopt the ECMR test".

The substantial lessening of competition test is, in effect, currently applied by the UK authorities in their competition analysis.

The noble Lord, Lord Kingsland, wants continuity. The substantial lessening of competition test provides a high degree of continuity between the new and old regimes in terms of substantive analysis. The so-called substantial lessening of competition test has the key advantage of allowing the authorities to concentrate on the overall effect of a merger on competition, rather than on structures. It will allow the authorities to act whenever there is an increase of sole, joint or collective market power resulting from a merger.

The key concern with a dominance test is uncertainty as to when the authorities can take action in circumstances in which a merger will not lead to one firm having a substantial market share but where the merger nevertheless increases the likelihood of the firms remaining in the market acting in an anti-competitive way. To use economic terms, there is considerable uncertainty about whether a dominance test is effective for dealing with the creation of non-collusive, oligopolistic markets. European law has developed a concept of "collective dominance" that partly bridges the gap but the concept's application in the context of mergers is not ideal.

The substantial lessening of competition test is preferable in alluding to the impact of a merger on the whole market rather than concentrating on the position of a particular market participant. Because of concerns that a dominance test did not satisfactorily cover collective dominance cases, Australia in 1993 and New Zealand last year switched from a dominance to a substantial lessening of competition test. Among our European Union colleagues, the Irish Government recently enacted a new competition law that adopts a substantial lessening of competition test in preference to dominance. Spain has a similar test of whether a transaction may prevent the maintenance of effective competition in the market.

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The Green Paper on reforms to EU merger regulations raises a substantial lessening of competition test as a possible option to replace dominance. Decisions about that have not been taken. In a recent speech, Commissioner Monti said that he personally had an open mind about the choice of test:

    "We are not wedded to the current wording and have no prejudice in favour of one formulation or another. What matters is the effectiveness of the legal instrument".

Some people claim that a dominance test is a more certain test of business by providing a more predictable outcome. I do not agree. The concept of a substantial lessening of competition test is an economic one that is used and well understood in a number of other major jurisdictions—including the United States, Japan, Canada, Australia and New Zealand. It is best understood by reference to the question of whether a merger would increase or facilitate the exercise of power in a market—leading to reduced output, higher prices, less innovation and lower quality or choice. Any additional certainty will be provided by information and advice, which the authorities will be required to produce under Clause 103—explaining how they will consider references and how the relevant provisions will operate.

The US regime has operated successfully on the basis of a substantial lessening of competition test, backed by joint guidelines issued by the Department of Justice and the Federal Trade Commission. I have every confidence that the UK system can operate with the same degree of certainty and predictability. The arguments for harmonising our merger tests with that used in Brussels are not compelling. The one-stop- shop system for merger regulation within Europe means that cases—other than those concerned with security and other exceptions—fall either within the ECMR or UK regime but not both. Clear thresholds govern which jurisdiction will apply.

The Bill provides the freedom and opportunity to adopt the better test—that which will best preserve competitive intensity in our domestic market. We should take that opportunity rather than pursue harmonisation for its own sake. The substantial lessening of competition test is used in a number of other major international jurisdictions that are major trading partners of the UK. It is the strong preference of the Office of Fair Trading and the chairman of the Competition Commission. The majority of respondents to our consultation exercise agreed with that choice of test. I urge the noble Lord to withdraw the amendment.

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