House of Lords - European Union

Select Committee on European Union Fifteenth Report

CHAPTER 1: Introduction

An EU Competition Court

1. The Commission vets large cross-border mergers against criteria laid down by the EC Merger Regulation to ensure that they do not have a negative effect on competition in the EU. The vast majority of mergers are cleared quickly. Cases raising serious competition concerns may take several months for a Commission decision. Challenges to Commission decisions approving or prohibiting mergers are heard by the Community Courts, initially by the Court of First Instance (the CFI).

Unacceptable delay

2. The time taken by the CFI in merger cases has come under criticism.[1] Even where a fast-track procedure is used the proceedings may take 10-11 months. The time before the Court when added to that taken by the Commission in examining a proposed merger causes uncertainty for the merging parties, leading to the abandonment of the merger. Both industry and legal practitioners consider this unacceptable.

The CBI proposal—decisions within six months

3. The CBI has put forward a proposal[2] to speed up the review of merger cases. The aim is to have appeals[3] in merger cases resolved within 6 months.[4] The CBI, having considered the options, believe that this target could best be achieved by a new EU Competition Court, with specialist judges and tailor-made procedures.

4. The CBI proposal has attracted a substantial measure of publicity, particularly in the business and financial press. It raises a variety of legal, practical and political issues. While, as we seek to show in this Report, there is a substantial measure of agreement that there is a problem which needs to be addressed, we do not consider that creating a new Court is the way forward, certainly in the short or medium term. Other, equally pragmatic but less institutionally radical, approaches need to be considered.

The problem in context

(I) COMPETITION IN THE INTERNAL MARKET

5. Ensuring that competition in the internal market is not distorted is one of the key activities of the European Community (Articles 2 and 3 TEC). To that end the EC Treaty contains a number of provisions governing the behaviour of firms (principally the prohibitions on restrictive practices and abuse of dominant positions in Articles 81 and 82 TEC respectively) and of Member States (most notably the rules on State aids in Articles 87-9 TEC). A special regime applies to mergers under Regulation 139/2004 (the EC Merger Regulation).[5]

6. Mergers (or "concentrations" in the language of the Community legislation) play an important role in a market economy and can bring benefits to competition and in turn consumers.[6] However, unlike the earlier European Coal and Steel Treaty (ECSC), which dealt with the traditionally heavily concentrated markets of coal and steel, the EC Treaty itself contains no express provisions on mergers. This was almost certainly no accident—up to the early 1970s intra-Community mergers were generally welcomed as enabling firms to adapt their size to an enlarged economic area.[7] Nevertheless a merger may also produce harmful effects on competition; for example where it leads to a reduction in competition by the creation or strengthening of a dominant player. For this reason the Commission pressed for many years for a system of Community merger control.

(II) ABSENCE OF EC REGULATION UNTIL 1989

7. For over thirty years the Community[8] existed without any effective merger control except for that existing in a (then) small number of Member States. The EC competition rules in Articles 81 and 82 (then 85 and 86), and their implementing regulations (then Regulation 17), were hardly an appropriate means of control, notwithstanding landmark rulings of the Court of Justice in Continental Can,[9] and in Philip Morris[10] applying the competition rules to mergers. Although, following the latter case, the precise extent of the applicability of Article 81 remained uncertain and much disputed, the threats by the Commission to use Article 81 in merger cases brought the Member States to the negotiating table on a new draft of a merger control regulation first proposed in 1973.

8. In December 1989, Member States adopted Regulation 4064/89.[11] This placed the examination of large cross-border mergers in the hands of the Commission and introduced a new procedure for their speedy and efficient handling. Following a Green Paper and major review in 2002, Regulation 4064/89 was itself amended and replaced, in January 2004, by Regulation 139/2004, simplifying the procedure in the light of developments and experience. The new EC Merger Regulation entered into force on 1 May 2004.

(III) EC MERGER CONTROL

9. Large mergers with a Community dimension have to be cleared by the Commission. The EC Merger Regulation imposes a compulsory system of prior notification. Mergers generally must not be put into effect before notification or before declared compatible with the common market by Commission decision. The Commission must carry out an initial examination within 25 working days (Phase I) 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. If such doubts exist a further examination (up to a further 90 working days in length—Phase II) is set in motion to determine whether the concentration "would significantly impede effective competition, in the common market or a significant part of it, in particular by the creation or strengthening of a dominant position".[12]

10. Where the Commission finds that a concentration significantly impedes competition, it must declare it incompatible with the common market. The Commission has power, however, to accept "commitments" from the parties which would remove the risk of impeding competition to avoid prohibiting the merger. Before any decision on the concentration is reached the parties must be told the case against them and given the opportunity to respond. The Commission has powers to impose fines and penalties to back up its powers of enquiry[13] and powers to order suspension and remedial action (including divestiture).

European Merger Control Statistics—Phase I Decisions (to Dec 06)

Year Notified cases Approved Approved with conditions Phase II initiated

1990 11 5 0 0

1991 64 47 3 6

1992 59 43 4 4

1993 59 49 0 4

1994 95 78 2 6

1995 110 90 3 7

1996 131 109 0 6

1997 168 118 2 11

1998 224 196 12 11

1999 276 225 16 20

2000 330 278 26 18

2001 335 299 11 21

2002 277 238 10 7

2003 211 203 11 9

2004 247 220 12 8

2005 313 276 15 10

2006 356 323 13 13

TOTAL 3266 2797 140 161

European Merger Control Statistics—Phase II Decisions (to Dec 06)

Year Phase II cases Approved Approved with conditions Prohibited

1990 0 0 0 0

1991 6 1 3 1

1992 4 1 3 0

1993 4 1 2 0

1994 6 2 2 1

1995 7 2 3 2

1996 6 1 3 3

1997 11 1 7 1

1998 11 3 4 2

1999 20 0 7 1

2000 18 3 12 2

2001 21 5 9 5

2002 7 2 5 0

2003 9 2 6 0

2004 8 2 4 1

2005 10 2 3 0

2006 13 4 6 0

TOTAL 161 32 79 19

Source: Commission website

Scrutiny history—earlier Reports

11. The Committee has a long and continuing interest in EC merger control. The EC Merger Regulation was subject to a detailed inquiry by the Committee prior to its adoption in 1989.[14] The Commission carried out reviews of the working of the Regulation in 1993 and again in 1996: the Committee reported on both occasions.[15]

12. We last looked at the operation of the EC Merger Regulation in 2002 when we examined the Commission's Green Paper reviewing the operation of the original Regulation.[16] This was at a time when the Commission had been the subject of serious criticism, and shortcomings in the scheme and operation of the Regulation were causing serious concern.

13. The Green Paper raised a wide range of jurisdictional, substantive and procedural issues on which we commented in detail. In our 2002 Report we supported amendment of the criteria by which mergers should be assessed and clarification of the jurisdictional divide between the Commission and national competition authorities.[17] We also noted the pressure for reform of the judicial review process in merger cases and the then newly introduced "fast-track" procedure in the CFI. We thought it too soon to judge the effectiveness of that procedure but doubted whether greater speed could be achieved without injecting more resources, including additional judges.[18]

The consequences of delay

14. Business/industry would like to see a system that provides speedy decisions and timely reviews, and that at the same time combines both certainty and fairness. Otherwise the impact on any merger is potentially very negative, not just in immediate wasted time and costs. In the CBI's words, "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."[19]

15. The absence of a speedy review process produces what witnesses have called a chilling or freezing effect: parties will not bother to appeal if a decision from the CFI cannot be achieved in sufficient time to make it useful. Absence of speedy review process may also have a compromise-inducing effect: if parties know that an appeal will take such a long time so as to be relatively useless they may be required pragmatically to arrive at compromises and agree conditions that they would not otherwise agree. As the table of European Merger Control Statistics shows, there are remarkably few prohibition decisions, suggesting that in practice parties choose to settle with the Commission.

Effectiveness of judicial review

16. Delay strikes at the effectiveness of judicial review and draws attention to the power of the Commission as an investigating and decision taking body. Even with the existing fast-track procedure in the CFI, parties may need to adopt a regulatory strategy that takes account of the Commission's strong position. A satisfactory and speedy appellate process is therefore important in ensuring accountability and controls to maintain appropriate standards, and in maintaining fairness and encouraging confidence in the system.

A Competition Court

17. The CBI has considered a number of options to improve the situation and has concluded that the best solution is the establishment of a new Competition Court, which in Treaty terms would operate as a judicial panel attached to the Court of First Instance under Article 220 TEC. The new court would have nine full-time judges, who would hear cases in chambers of three.

18. The Competition Court's jurisdiction would not be limited to merger cases—there would not be enough business from merger cases alone to justify a new court. The CBI proposes that the new court would hear all competition cases (including challenges against Commission decisions applying Articles 81 and 82) referred to it by private parties and/or Member States, with the probable exception of State aid cases. The CBI also believes that with the increased emphasis on the private enforcement of competition law,[20] the new Court would also perform an important function in assisting this development in Member States.[21]

A problem but no agreed solution

19. Though the current debate has been prompted by the CBI the issue is not solely a preoccupation of UK firms and their advisers. It seems generally to be accepted by industry and legal practitioners across Europe that delay in hearing appeals in merger cases is a problem. But whether the creation of a new court is the best solution is contested. Indeed, many of those who share the CBI's perception that there is a serious problem do not agree that a new court is the way forward. The Commission for its part has listened attentively to industry and is concerned that EC merger procedure, both before the Commission and before the CFI, should be both efficient and fair. However, it does not accept that the CBI has made the case for a new court. Nor does the CFI see the need for a new court, at least at the present time.

Solutions—options and timeframe

20. Other solutions, including the creation of specialist chambers within the current CFI, appointing more judges, improving on the CFI's fast-track procedure and existing opportunities for better case management, and ensuring maximum flexibility in procedural rules, have been canvassed. The options are not mutually exclusive, though the time required for their introduction and formal preconditions and political sensitivity may differ widely. It soon became clear to the Committee that these options merited further consideration. Accordingly we included them within the spectrum of our inquiry and they are discussed in this Report. Chapters 2, 3 and 4 examine the case for a new court and what its constitution might be. Chapter 5 considers the other options.

Conduct of inquiry

21. The inquiry into the need for an EU Competition Court was undertaken by Sub-Committee E (Law and Institutions) under the Chairmanship of Lord Brown of Eaton-under-Heywood. The membership of the Sub-Committee is listed in Appendix 1. The witnesses are listed in Appendix 2. All the evidence, written and oral, is printed with this Report. We would like to thank all those who assisted in the inquiry.

22. We were particularly grateful for the assistance we received from the Commission and from the CFI. Judge Vesterdorf, the President of the CFI, emphasised that the views expressed did not represent any formal position of the CFI and that while the CFI judges had discussed the matter among themselves they had not discussed the matter with the European Court of Justice (Q 362).