Examination of Witnesses (Questions 1-19)
Mr Rufus Ogilvie Smals, Mr Alex Nourry, Mr Tim Cowen
and Mr James Flynn QC
22 NOVEMBER 2006
Q1Chairman: Good afternoon and welcome. Thank
you for coming. I know that two of you have given evidence to
a sister committee before, so you know the form. The evidence
will go on the web in its uncorrected form, but you will have
an opportunity to correct your evidence. You have all had copies
of the questions around which we shall be inviting your assistance
this afternoon. I understand that you have also all been given
copies of the written evidence that the committee has already
received, I think from 16 bodies so far, yourselves apart. Obviously
we have well in mind your brief of 15 June on this proposal which
we thought sufficiently important for us to embark on this inquiry.
Mr Ogilvie Smals, you are, so to speak the leader of this team.
Would you care to introduce yourselves as you wish?
Mr Ogilvie Smals: I am Rufus Ogilvie Smals.
I am Chairman of the CBI Competition Panel and Head of the Legal
Department of GKN plc.
Mr Cowen: I am Tim Cowen, General Counsel and
Commercial Director of BT's Global Services Ltd.
Mr Nourry: I am Alex Nourry, a partner in the
law firm Clifford Chance.
Mr Flynn: I am James Flynn, barrister in private
practice.
Q2 Chairman: Perhaps we can start
with an overview of the problem, as matters stand, and what it
is that you are hoping to achieve. The majority of proposed mergers
are, as we know, cleared by the Commission. What proportion is
not and how many mergers have actually failed because of the length
of proceedings thereafter before the CFI?
Mr Ogilvie Smals: My Lord Chairman, would it
be in order if we were to make a very short opening statement,
just to put the whole subject in context, and then I think a lot
of the detailed questions will follow?
Q3 Chairman: Yes, please do that.
Mr Ogilvie Smals: First, I would like to thank
you, on behalf of the CBI, for this opportunity to address the
committee and indeed to thank the committee for deciding to conduct
this inquiry into what is a key area of concern for business.
The CBI Competition Panel identified this topic as a priority
area for reform in late 2004, following the Court of First Instance
decisions in a series of merger cases, notably Airtours
and First Choice, overturning in each case the European
Commission's decisions to block them. Unfortunately, none of these
mergers could be saved, and indeed no merger blocked by the European
Commission has ever been revived, notwithstanding successful appeal
to the CFI. Why is this? The brief answer is the time currently
taken by the appeal process before the CFI. There was a lot of
undisputed data about this, but the experience to date is that
10 months is to be expected as the minimum review period, even
under the fast-track procedure, which has been operated by the
CFI since 2002. We understand from the CFI itself that no reduction
of this period can be expected under existing arrangements. Our
members believe that no merger is likely to survive an appeal
period in excess of six months, and that three to four months
should be aimed at as being the norm. There are a number of reasons
for this, not least there is the time value of money. It is just
arithmetic to point out that the cost of €1 billion is over
€100,000 a day and more than €20 million over six months.
This represents a very significant loss for the vendor, and delay
also equates of course to increased risk for the purchaser. In
the case of large mergers, speed of execution is essential in
order to maximise synergies and efficiencies, to maintain customer
credibility and to capture market opportunities. Equally, it is
essential to minimise the damage caused by uncertainty, such as
loss of key executives and contracts, and thus significant losses
of corporate value. For all these reasons, mergers only have a
limited shelf life. In looking at the responses which the committee
has received, there is some variation in views as to the root
causes of the timing problem, but we have seen no comment from
anyone that the current system is satisfactory. Unusually, there
appears to be universal consensus that something needs to be done.
The real issue here is what. As this session proceeds, I am sure
we will get immersed in the detail of what can be done, but, as
a preliminary comment, the view of CBI members is that the reform
of the EU court system is unfinished business, long overdue, and
it needs to be tackled as a high priority in response not just
to this issue but also to other dynamics which are looming. These
include: the large number of pending cartel investigations triggered
by the Commission's leniency programme, which will find their
way through to the CFI in due course; the effect of the Sony/Bertelsmann
case, which can be expected to result in an increased number of
third party challenges to the European Commission decisions; the
expected increase in private remedies cases, which could trigger
a significantly higher level of references; and, not least, the
significant enlargement of the EU, which can also trigger more
work for the EU court system. For all these reasons, this is the
right time for the organisation of the EU court system to be reviewed
and its resources reconfigured so as to be more responsive to
the increasingly important role they are likely to play in the
years ahead. The CBI has consulted widely over the last two years,
and has looked at various possible solutions. What the business
community is looking for, however, is an effective solution to
the current situation in which the time involved deprives the
appeal system of any transactional value. The CBI is not wedded
to any particular solution, though it does seem to us, from all
the consultations that we have participated in, that the creation
of a new judicial panel of the CFI offers the only fully effective
means of achieving the necessary changes. That is our opening
statement.
Q4 Chairman: That is a very helpful
statement and a good framework within which to unpack some of
it. Roughly what proportion of mergers, and presumably we are
talking about mergers that have to be notified under regulations,
are actually cleared by the Commission?
Mr Ogilvie Smals: The number of actual mergers
cleared in the first phase and second phase is the vast majority.
What we have obviously focused on in our consultation exercise
is the number of mergers which have been prohibited which, since
1995, I believe is a figure of 19, of which 10 have been the subject
of appeals, and of which four have been successful; the mergers
did not take place.
Q5 Chairman: All were aborted. I
suppose we are only talking about the four because the others
failed either at first instance or on appeal.
Mr Ogilvie Smals: Yes, or they were not appealed.
Q6 Lord Lucas: Looking back at those
four mergers, have not the companies done better since separately
than they would have together?
Mr Ogilvie Smals: We have no particular brief
for those companies. The short answer is that I do not know, but
I suspect that if Mr Airtours was here, I do not think they would
agree with that. I think they were nearly ruined.
Q7 Chairman: The statistics you have
given us are Europe-wide. They are not just ones involving UK
companies.
Mr Ogilvie Smals: They are not just UK companies,
no. Of the four, I think two were French, one was British and
one was American.
Lord Borrie: May I ask Mr Ogilvie Smals,
given the statistics which are Europe-wide, as you have explained,
we are dealing with cases where ex hypothesi the Commission
has said that the merger ought not to take place because of significant
adverse consequence to competition. We are talking about those
cases where the Commission has, as it were, condemned the merger
as undesirable. You are saying, perfectly properly, that despite
that decision, some of them might be desirable, highly desirable,
for the economy of Europe and there is a need for appeal/review,
whatever it is, so that the matter could be looked at again. The
time factor is the key concern that you have, even if it is a
very small number of cases. This is still a question. I am sorry
to be lengthy but I am trying to get at what you have been saying
in your opening statement. We are dealing with a very small number
of cases and you are suggesting a huge, if I may put it that way,
solution, which is not improvements in existing procedures but
the setting up of a completely new court, a judicial panel, a
new composition and all the rest of it. Is that not rather an
extreme solution to the smallness, year by year, of the issues
you raise?
Lord Clinton-Davis: And will that not
lead to further delay?
Q8 Chairman: These are very big questions.
Mr Ogilvie Smals: How much time have I got?
I put it this way. I do not think it would be right to assume
that it is a very small problem because there are only four cases
which were overturned on judicial review. The system we have is
more like a judicial inquest than a judicial appeal. The business
community knows this and so I am afraid that the actual position
is that because it is generally perceived that there is an ineffective
and unhelpful judicial review process, people are not actually
using it. I think that does raise wider issues of whether that
is a desirable position to be in. On the question of making it
worse, I take it that the idea that Lord Clinton-Davis had in
mind was that there would be a new level of appeal—is that
correct—and that instead of having an appeal to the Court
of First Instance and then, in exceptional cases, to the European
Court of Justice, there would be a hearing before this new competition
court and then an appeal to the Court of First Instance, we would
suggest on matters of law only, and then, in exceptional cases,
to the European Court of Justice as now occurs. We believe that
in most cases the prospects of appeal, and it would be presumably
by the European Commission, are not great. Certainly, I think
the nature of mergers proceedings is that people want to get to
a result and then, if that result goes a certain way, the timing
factor again comes into play and it is highly unlikely that people
are going to pursue endless appeals, given the values involved.
Mr Flynn: From a practitioner's point of view,
there are two points. It may be that you will want to come back
in more detail to the system of possible appeals. It seems to
us that because it is very difficult for parties to bring appeals
and to know that they will get a result in a useful time, there
is a sort of suppression of appeals, which in turn feeds back
into possibly poorer decision making. There is a value to speedy
review and the possibility that it should be there to encourage
the Commission to come to more balanced decisions. We are talking
not only of prohibition decisions but actually also clearance
decisions. Mr Ogilvie Smals has mentioned the Sony case,
which is actually a challenge to an unconditional clearance by
the Commission brought by a third party. I think a more effective
judicial review system leads to better decisions in the first
place. You will have seen some figures from the ICC in the evidence
as to possible future levels of appeal if the system were improved.
I think our general feel is that it is hard to be cut and dried
about that, but those figures seem accurate.
Q9 Lord Mance: I think my question
has really been covered. You are saying that the chilling effect
of an ineffective appeals system is not just surmise; there is
some evidence of what is said by the ICC?
Mr Ogilvie Smals: Yes. I think they said that
they would anticipate the figure of 27[1]
cases, or of that order.
Mr Flynn: It was of that order. They exclude
from their calculations certain types of decisions, including
those under which the Commission decides whether or not to refer
a merger to another national authority, which is a type of decision
which is increasingly coming up for appeal.
Q10 Lord Lester of Herne Hill: Obviously
later we will come to consider various ways of tackling this problem,
including whether there should be a special court. I wonder what
you would say about the evidence given by Sir David Edward when
he points out that competition lies at the heart of the European
Union and that there is no very clear subject just called competition
which does not overlap with constitutional and wider issues. If
that is right, is there not a problem about creating a new court
with a defined jurisdiction, which immediately gets into problems
about overlap and conflicts with other parts of the European Court
of Justice, and therefore more wasting of time while jurisdictional
disputes and conflicts have to be dealt with because of the overlap?
Mr Nourry: We do not believe there will be a
difficulty in untangling competition cases from mixed cases. I
think Sir David Edward does acknowledge that in his paper, in
fact. He does say on references, for example, from national courts,
that those are fairly clear cut. We think that in cases of mergers
or other competition cases which have been decided upon by the
Commission, those cases will be even more clear cut in terms of
the subject matter. We do not really see that as a fundamental
issue.
Q11 Lord Lucas: I am finding myself
confused by the figures. I thought I understood you to say that
there were 19 refusals by the Commission, of which 10 were appealed.
That seems to me a pretty good rate of appeal and there does not
seem to me to be any evidence there that appeals are being put
off. To have a greater rate of appeal would sound like a system
which was being abused.
Mr Ogilvie Smals: We have to be careful about
the statistics because there are various categories. I think that
19 were mergers that have been blocked. There are also other decisions.
There are obviously thousands of cases but we were just talking
there about mergers actually blocked. There are other mergers
which are subject to approval with conditions and all sorts of
things.
Mr Nourry: I do not have the figures to hand.
There have been about 215 mergers which have been approved conditionally.
Some of those have been the subject of appeals. As we said earlier,
it is not just the parties themselves to the merger that may be
concerned but, as we have seen in Sony/Bertelsmann, you
also have third parties bringing actions. We do see the incidence
of appeal to be potentially greater than the statistics would
suggest. Also, we are looking back over a period since 1990, so
it is quite a considerable period, and over that time the incidence
has actually been increasing, coinciding I think to some extent
with a recognition that the Court of First Instance has shown
itself prepared to strike down Commission decisions.
Q12 Chairman: Have any of the proposed
mergers or acquisitions in fact aborted during the process of
the Commission's inquiries and decision as a result of imposing
conditions and so forth?
Mr Nourry: It is very difficult to get statistics
on those because those cases are not necessarily counted, but
anecdotally we know that cases do get abandoned at the end of
phase two. The MCI WorldComSprint is one case in particular.
That still was appealed on a point of principle.
Q13 Chairman: Of the ten overruled
which appealed, are they mostly at the end of phase one or phase
two?
Mr Nourry: They are all phase two cases.
Q14 Chairman: How long does it take
to get to the end of phase two?
Mr Nourry: It would take five to six months
if everything goes according to the clock. Sometimes the clock
gets stopped. You have the Oracle/PeopleSoft case, for
example, which went on for considerably longer than that.
Q15 Lord Jay of Ewelme: Mr Ogilvie
Smals, you said in your introductory remarks, for which many thanks,
that you were not wedded to any one particular solution but you
thought that a judicial panel was the best. I wondered why you
had chosen the heaviest mechanism rather than a lighter one, such
as possibly the creation of specialist merger chambers within
the Court of First Instance, or indeed streamlining or speeding
up the operation of the Court of First Instance itself?
Mr Ogilvie Smals: I would predicate my comments
by saying that we did not really see our role as being the guys
who would come along with an expert solution to the problems.
We are coming here really from a business perspective to try and
persuade you that there is a very serious problem here. Having
said that, we do have a certain amount of expertise on our team.
We have consulted widely. I think the short answer to the question
is that, in looking at the various options, we did look at three
main solutions here to this problem. The first solution that we
considered was some form of improvement to the existing fast-track
procedure. We do not set out to change the world unless we have
to. We thought that the easiest thing to do is to look at the
existing fast-track procedure and see if we can slice some time
out of that. We did have an informal meeting with the President
of the Court of First Instance. His view to us was most categoric,
and I think he subsequently made public statements to the effect,
that he could see no scope for any significant reduction in timings
under the existing fast-track procedure. Mr Flynn may want to
add something as a practitioner.
Mr Flynn: I think that is right. A strong support
for this is the fact that the President of the Court of First
Instance himself believes the setting up of a Competition Court
is going to be the best solution. He has tried very hard, I know
from my own experience, to reduce the time available. The record
is an appeal seen through in just under[2]
seven months, I believe. He has said that he does not think that
can be improved. In particular cases, one can chip away.
Mr Ogilvie Smals: It nearly killed them.
Mr Flynn: Yes. You can chip away at length of
pleadings and persuading the parties to narrow the issues but
ultimately you are going to take six months.[3]
On the chamber issues, having a specialist chamber seems to cause
immense organisational difficulties. You probably in fact have
to have two chambers, and it is quite difficult with their case
loads to dedicate those chambers to competition work.
Mr Ogilvie Smals: That is the second option.
The terminology is slightly confusing here. People generally refer
to creating a chamber of the CFI which would be dedicated to competition
matters. That is the second option that we did look at very closely.
It seems to us that the drawback, and I know that you have had
a wide range of comments on this, with that solution is that you
would still be dealing with the CFI and the CFI's procedural rules.
We believe that the root cause of the problem is the CFI's procedural
rules. We cannot see how that solution actually offers an answer
to the problems we already have. It is just seems to be moving
the deckchairs on the deck of the sinking ship.
Q16 Chairman: You could change the
procedural rules.
Mr Ogilvie Smals: There are difficulties about
changing the procedural rules, which are almost as great as the
third solution, which is the one we do think seems to offer the
most effective solution, which is setting up a judicial panel
under Article 225a, of the provisions of the Nice Treaty, which
gives everybody the opportunity to make a fresh start with tailor-made
procedures that address the urgency of competition cases.
Mr Nourry: May I add the point that the additional
advantage of the panel is that you would also be able to bring
in additional resources to the court to deal with the burden of
the caseload, which would also contribute to the speeding up of
dealing with the cases.
Q17 Lord Norton of Louth: I come
back to the issue of costs where you mention there is a serious
problem. That might derive not simply from the number of cases
but the actual cost of not being allowed to merge. You mentioned
a figure earlier, which I think was related to the estimate of
the cost resulting from delay. I wonder if there is any wider
estimate of the failure of firms not being able to merge because
they have had to abort because of the process?
Mr Cowen: One of the points that people tend
to dwell on is that this is about mergers, which looks like companies
getting bigger. Things that are caught by the merger regime also
involve companies being able to restructure and reorganise themselves.
If there is a system, as we have at the moment, where that is
being done in some ways imperfectly, that is going to affect how
the organisation of the economy is actually taking place. The
wider consequences to the economy are very difficult to identify,
obviously. In one case that we were involved in, we looked at
the synergies on the transaction that would have provided efficiency
benefits and from an economic point of view that is something
which would naturally be passed through in the process of competition
to consumers. The synergies on major transactions can be tens,
if not hundred, of millions. You would see that in the form of
efficiency gains, in the form of quality improvements, and also
in price reductions. Quantifying that is a devilishly difficult
task but it's one of those things that is quite clearly the case.
I would like to pick up on another point which is also about the
consequences. I think your point is really about the consequences
of delay. It is not simply the case that you have delay within
the system on appeal. Obviously the merger regime, particularly
as a consequence of globalisation, is one of a number of merger
regimes that may be applicable to the transaction, if you span
a number of different jurisdictions. Delays in getting to a decision
are obviously an issue in the first place. If there is a delay
in being able to take an appeal, and on average I think the statistics
show something like 33 months, it is little wonder that there
are not many appeals. The issue is to keep the transaction and
the restructuring and the efficiency benefits, the sorts of things
that may well go through, going.
Mr Ogilvie Smals: I do have some statistics
which we have managed to get hold of from our supporters, which
may be of interest in answering the question as well. In the Airtours
case, they have lodged an application for compensation for damage
caused to it by the Commission's decision. We are only relying
on press reports, I am afraid.
Q18 Chairman: Did they win and then
not go ahead?
Mr Ogilvie Smals: Yes. We believe they are suing
for compensation and they are claiming three years' lost profits
from First Choice and abortive bid costs of £10 million.
The claim also includes £35 million of annual synergy benefits
and interest at 8 per cent. In the Schneider/Legrand case,
they have lodged an application for compensation of the staggering
figure of €1.6 billion. That is on account to it being forced
to unwind its €5.4 billion acquisition of Legrand. The figures
are staggering.
Q19 Chairman: These are very large
claims. We are not going to decide them, happily. Mr Cowen, your
figure of 33 months I think goes way back until before the fast-track
procedure. It seemed to me amongst the great deal of evidence
we have that one useful thing was the table prepared by Mr Roth,
Queens Counsel, of the fast-track procedure cases. This is in
fact the 12th item of our evidence. Under the fast track, there
is a span of between 7 and 12 months for the last seven cases.
Presumably that table would not be disputed. I have seen figures
that vary by a month or so, but then these are round figures and
you can compute it to different periods, obviously. Is that about
fair?
Mr Cowen: I think that is entirely fair.
1 Note by witness: Correction to `23', on reading
the transcript. Back
2
Note by witness: Correction to `over', on reading the
transcript. Back
3
Note by witness: Correction to `over six months', on reading
the transcript. Back
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