Select Committee on European Union Thirty-Second Report


THIRTY-SECOND REPORT


23 JULY 2002

By the Select Committee appointed to consider European Union documents and other matters relating to the European Union.

ORDERED TO REPORT

THE REVIEW OF THE EC MERGER REGULATION

COM(2001) 745/6 Final:  Green Paper on the Review of Council Regulation (EEC) No 4064/89

PART 1: EXECUTIVE SUMMARY

1. The European Union's merger control regime is facing new challenges posed by global mergers, further market integration, the introduction of the euro and, perhaps most importantly, the enlargement of the Union. Furthermore, the European Commission has had to deal with an exponential increase in the number of cases it considers each year and has come under increasing criticism over its handling of cases and the perceived absence of checks and balances on its decisions. Some of these criticisms have been borne out by the recent judgment of the Court of First Instance in the Airtours/First Choice case. In this Report, we[1] examine ways in which the European Community's Merger Regulation (ECMR) can be amended to meet these challenges and consider how it is best for the Commission to address these criticisms.

2. Last December, the European Commission published a Green Paper reviewing the Merger Regulation. The Green Paper (COM(2001) 745/6 final) launched a debate on how the ECMR functions and proposed a wide range of possible reforms to Europe's merger control regime. This Report is a response to that Green Paper. We examine what the objectives of the ECMR should be and analyse the Commission's policy proposal.

3. The Green Paper identifies three areas for potential reform: jurisdictional issues; substantive issues; and procedural issues. Our greatest concern is with the procedural issues and the question of what the appropriate checks and balances should be to the work and decisions of the Commission.

4. The top priority for reform should be to ensure objectivity and fairness in the ECMR process. The many concerns about due process are best addressed by improving the procedural safeguards in the current system. Efforts must focus on improving the internal checks and balances in the ECMR regime. To achieve this, the Commission should take the following action:

· Responsibility for the consideration of cases in Phase I and Phase II should be divided between two separate teams of officials.

· The role of the Hearing Officer should be strengthened so that they take a prominent role in the negotiation of remedies.

· The Commission needs to strengthen its overall capacity for economic analysis in merger cases. In particular, DG Competition should appoint a Chief Economist.

5. Of great consequential importance is the issue of how the Commission should be staffed for its functions. The ECMR and its effective, equitable and transparent implementation is far too important to be jeopardised by resource constraints. The new posts required to carry out the necessary procedural changes should be provided to the Competition Commissioner.

6. We make two further key policy recommendations:

7. The criteria by which mergers are assessed should be changed. The European Union should adopt the substantial lessening of competition—the standard that is used in the other major jurisdictions around the world—as the substantive test in the ECMR.

8. To clarify the issue of who has jurisdiction over which mergers, we support the Commission's proposal to move to a simpler system whereby it would have jurisdiction over all mergers that are subject to three or more national filings. This would reduce the number of instances where companies are required to file for clearance with a multiplicity of National Competition Authorities. Such a change would give greater certainty for business.

PART 2:INTRODUCTION

Background

9. An effective competition policy is one of the cornerstones of the Single Market, bringing benefits to consumers across Europe. It is desirable, in order to protect competition in the EU market, that mergers are appraised, so far as possible, on objective criteria that reflect the interests of the Community as a whole.

THE COMPETITION RULES

10. One of the activities of the Community listed in Article 3(1)(g) of the EC Treaty is to promote "a system ensuring that competition in the internal market is not distorted". The removal of state-imposed barriers to the free movement of goods and services across national boundaries is accompanied by prohibitions on enterprises to stop them agreeing, for example, to divide and share national markets or to fix prices. Community competition policy has played an important role in the development of an integrated/single market and has ensured that competition acts as a dynamic force in the European economy. The competition rules applicable to undertakings are set out in Articles 81 and 82 (formerly 85 and 86). Article 81 contains a prohibition on restrictive agreements but allows exemptions where the agreement contains countervailing economic benefits in which consumers share. Prohibited agreements are automatically void. Article 82 prohibits the abuse of a dominant position. These two rules have played a key part "in establishing a common market" as provided for in Article 2 of the EC Treaty.

11. Enforcement of the Community's competition rules is undertaken primarily by the EC Commission on whom extensive powers of investigation, decision and fining have been conferred. Subject to review by the Community Courts, the Commission acts as investigator, prosecutor and judge.

HOW THE ECMR WORKS

12. The EC Treaty does not contain specific provisions for the control of mergers.[2] In 1966, the Commission published a memorandum on concentrations which considered the prospect of controlling those affecting competition at Community level through the use of the competition rules in Articles 81 and 82 (then 85 and 86). There was some doubt how far these rules applied to mergers and whether they were suitable for exercising prior control. Landmark decisions of the Court of Justice, notably the Continental Can and Philip Morris cases, showed that there could be circumstances where mergers fell within the scope of Articles 81 and 82. However, considerable legal uncertainty remained, a factor which the Commission exploited in order to persuade Member States back to the negotiating table to consider a draft Regulation.

13. In contrast to the procedure relating to the application of Articles 81 and 82, Council Regulation (EEC) No 4064/89 (the Merger Regulation (the ECMR)) introduced a compulsory system of prior notification for "concentrations" with a Community dimension, set out a so-called 'substantive test' for their appraisal and established a strict timetable for handling cases.[3] As a result, the control of a significant number of large mergers now lies with the Merger Task Force (MTF) in the Competition Directorate-General (formerly DG IV), currently under Commissioner Mario Monti. Companies risk fines and the invalidity of their transaction if they fail to notify the MTF of their proposed merger. Generally, mergers must not be put into effect before notification or before the merger has been declared compatible with the common market by Commission decision.

14. The Commission must carry out an initial examination of the proposed merger within one month of notification to ascertain whether the merger falls within the scope of the Regulation and, if so, whether serious doubts are raised as to its compatibility with the common market (this is referred to as Phase I). If it judges that such doubts exist, a further examination (which can last up to four months) is set in motion to determine whether the merger would create or strengthen a dominant position as a result of which competition would be significantly impeded in the common market or a substantial part of it (this is known as Phase II). Where the Commission concludes that a merger would create or strengthen a dominant position as a result of which competition would be significantly impeded, it must declare it incompatible with the common market. The Commission has the power, however, to accept undertakings from the parties to avoid prohibiting the merger. In practice, the vast majority of mergers notified under the ECMR (approximately 95 per cent)[4] have been considered to raise no serious competition issues and have been cleared at the end of Phase I.

15. The procedural rules governing the notification and appraisal of mergers are set out in the Merger Control Regulation and the Implementing Regulation.[5] To assist it in the performance of its task, the Commission has coercive powers of inquiry analogous to Articles 11 and 14 of Regulation 17 (the principal implementing Regulation for the competition rules in Articles 81 and 82). Before any final decision on the merger is reached (at the end of Phase II), the parties must be told the case against them and given the opportunity to respond. The Commission may order remedial action to be taken if it considers such action necessary. It has the ability to impose fines and penalties to back up its powers of inquiry and capacity to take suspensive and remedial action. During the procedure, the Commission may be assisted by the competent authorities of the Member States. As in cases under Articles 81 and 82, decisions of the Commission are subject to judicial review by the Community Courts.

Previous Reports of the Committee

16. The Select Committee has taken a long and sustained interest in the ECMR. We have reported to the House on the ECMR on several previous occasions. The ECMR was the subject of a detailed inquiry by the Committee prior to its adoption in 1989.[6] The Commission carried out a review of the working of the Regulation in 1993 and then again in 1996; the Committee reported on each occasion.[7] Most recently, we examined in detail the role of the Hearing Officer in Phase II of merger cases.[8]

The content of this Report

17. On 11 December 2001, the European Commission adopted a Green Paper reviewing the Merger Regulation.[9] The Green Paper aimed to launch a debate on how the ECMR functions and proposed a wide range of possible reforms to Europe's merger control regime.

18. This report is a response to that Green Paper and we welcome the opportunity to contribute once again to the debate. The scope of the Commission's Green Paper is, however, very broad. The issues raised in it range from technical modifications on procedural matters to the possibility of a fundamental change to the substantive test for judging whether a merger should be prohibited, as well as reconsideration of the important question of who—the Commission or Member States—should be responsible for examining large mergers having trans-national effects. Due to the limited amount of time available to the Committee, we could not examine all of these issues. The Committee therefore decided to focus on certain key questions. When analysing the Green Paper, the Committee defined the central issues as: which mergers should be assigned to Community control; by which criteria they should be assessed; what powers should rest with Member States; how the Commission should be staffed for its functions and what the appropriate checks and balances are to the work and decisions of the Commission.

19. The decision to focus on these five questions means that there are several issues with which we do not deal in this Report. These include: the concept of 'concentration';[10] suspension of concentrations; calculation of time limits; administrative efficiency; completeness of notification; Article 8(4), which deals with the situation when a merger has already been implemented; enforcement provisions; and filing fees. This does not mean that we judge these issues not to be worthy of consideration.

20. For the ease of the reader who wishes to read this report in conjunction with the Green Paper itself, we have followed its structure. That is, we deal first with jurisdictional questions, then move on to substantive issues and conclude with procedural matters. Where possible, cross references are provided to the paragraphs in the Green Paper.

The success of the ECMR and the need for further improvement

21. The Merger Regulation has become one of the cornerstones of EC competition law and many witnesses (from business to regulators) have spoken to us about how highly they regard the Regulation and what a success its operation has been. The Committee recognises the good work of the Commission in applying the ECMR. We endorse the Government's view that the Commission "has responded with great success to the huge challenge of enforcing the regulation rigorously, but fairly, despite an exponential increase in its caseload" (Q 411).[11]

22. Furthermore, we welcome the way in which the Commission has conducted the current review. The Green Paper has launched a wide-ranging debate to which we are pleased to be able to add our voice. Despite welcoming the review, witnesses were disappointed by the limited amount of attention given in the Green Paper to the important issues of due process and the checks and balances to the Commission's decision making process. These issues go beyond the rules set out in the ECMR itself and concern the Commission's internal administrative practices for handling cases and even the role of the Community Courts.

23. The Commission has been the subject of some serious criticism and witnesses have drawn our attention to shortcomings in the ECMR system which are causing increasing concern. Some of these criticisms have been borne out by the recent judgment of the Court of First Instance in the Airtours/First Choice case. The Committee therefore considers it important that the current Review should be taken as an opportunity to assess all of the ECMR procedures. We hope that our recommendations can help to achieve this aim. However, when considering ways in which the ECMR might be improved, we have been mindful of the need to safeguard its fundamental strengths.


1   Our membership is listed in Appendix 1. Our witnesses are listed in Appendix 2: we are grateful to all of them. Back

2   The ECSC Treaty, by contrast, made express provision in Article 66 for the control of mergers and acquisitions falling within the scope of the European Coal and Steel Community. Back

3   We analyse the substantive test in paragraphs 98-161 below. We examine some aspects of the timetable in paragraphs 188-214 below. Back

4   In 1999, 260 out of a total of 270 (or 96.3 per cent) cases referred under the ECMR were cleared at the end of Phase I. In 2000, the figure was 328 out of 345 cases (95.1 per cent). In 2001, 320 out of 340 cases (94.1 per cent) were cleared at the end of Phase I. Back

5   Regulation 447/98. Back

6   Merger Control, 6th Report, HL 31, Session 1988-99. Prior to this, the Committee also reported on two drafts of the Regulation: European Communities Committee, 8th Report, HL 62, Session 1974-75 Concentrations Between Undertakings; and Competition Practice, 8th Report, HL 91, Session 1981-82. Back

7   Enforcement of Community Competition Rules, 1st Report, HL 7-I, Session 1993-94; Review of the EC Merger Regulation, 4th Report, HL 30, Session 1996-97. Back

8   Strengthening the Role of the Hearing Officer in EC Competition Cases, 19th Report, HL 125, Session 1999-00. Back

9   Green Paper on the Review of Council Regulation (EEC) No 4064/89, COM (2001) 745/6, 11.12.2001. Back

10   The Regulation refers to the control of "concentrations" between undertakings, a term which includes not only full mergers but also other transactions (see the Commission Notice on the concept of concentration: http://europa.eu.int/comm/competition/mergers/legislation/co406489_en.pdf). However, for convenience, in this Report we use the more familiar expression "mergers". Back

11   The table below illustrates the great increase in the number of cases notified under the Merger Regulation:

Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Notifications
12
63
60
58
95
110
131
172
235
292
345
340

 Back


 
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