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Motta, M., "E. C. Merger Policy and The Airtours Case"
Motta, M., "E. C. Merger Policy and The Airtours Case"
Abstract: The ECMR upon its enactment in 1990 filled a lacuna in European Merger
Regulation. Prior to the Regulation, Articles 81 and 82 had been employed as instruments
of merger control with varying success. One of the key objectives behind the ECMR is
the prevention of a concentration leading to the creation or strengthening of a dominant
posit ion which may lead to the prohibition in Article 2 (3). The reference by Article 2 (3)
to a single undertaking has raised some debate as to the applicability of the concept of
collective dominance under the Regulation. Even where it is conceded that the concept is
applicable, uncertainties remain as to the extent of applicability. Therein lies the concern
of this paper. The paper attempts a discharge of this burden by adopting an analytical
approach. The concept and pre ECMR regulation of mergers are reviewed to provide a
workable background. The scheme of the Regulation is considered next with particular
emphasis on the appraisal of concentrations. The paper then analyses the concept of
collective law under European competition law and the ECMR. It concludes with an
outline of its findings and appropriate recommendations.
List of Abbreviations
CFI
CMLR
EC
EEC
ECJ
ECLR
ECMR
ECR
EU
GWB
SSNIP
1.
INTRODUCTION
prohibition
of
anti-competitive
agreements
between
independent
Adopted 21 December 1989. Came into force 21 September 1990 Hereinafter referred to as ECMR and
the Regulation
2
EEC Treaty of Rome 1957
competition and merger regulation. Finally, the paper concludes with an outline of the
position of the law on the issues presented.
2.
2.1.
CONCEPT
A merger described in basic terms, refers to the unison of two or more previously
independent entities. Quite a number of transactions give rise to mergers and these may
vary from one jurisdiction to another. For this reason, legislation often includes a
definition of merger. 3 Under current EC regulation the term concentration has been
preferred to merger. A concentration represents an extension of the merger concept in
that it may include full function joint ventures 4 and even share acquisitions provided that
there has been a change in control of the concerned undertaking. 5
2.2.
POLICY CONSIDERATIONS
The economic and socio-political importance of mergers has given rise to a number of
policy considerations within the European Union (EU). The post World War 2 period saw
the emergence of mergers as the tool for the revitalisation of battered European
economies. The large economies of scale brought about by mergers saw an increase in
productive efficiency with the resultant boom to European post war economies6 . The
emergence of national champions resulted in huge gains in employment and national
pride. Upon the inception of the EU, mergers were encouraged as a vehicle for European
integration and the single market.
Jones, A., and Suffrin, B., EC Competition Law: Text, Cases and Materials 699 (Oxford, Oxford
University Press, 2001)
4
Commission Notice on the concept of concentration under Council Regulation (EEC) No 4064/89 on the
control of concentration between undertakings [1998] OJ C66/5 [1998} 4 CMLR 586, para. 21-34.
5
See Art 3(1) ECMR.
6
Lane, R, EC Competition Law 256-7 (Harlow, Pearson Educational Limited, 2000).
2.3
Article 81
Jacquemin A. P., and H. W. de Jong, European Industrial Organisation 198-9 (London: Macmillan Press,
1977).
8
Jones, A., and Suffrin, B., supra note 3, p. 706.
See the Memorandum on the Concentration of Enterprises in the Common Market, EEC Competition
Series Study No 3 (published in 1966), para. 58.
10
Cases 142 and 156/84 [1987] ECR 4487: [1988] 4 CMLR 24.
obtains legal or de facto control of the commercial conduct of the other company or
where the agreement provides for commercial co-operation between the companies or
creates a structure likely to be used for such co-operation11 Article 81 is also
applicable where the agreement gives the company an option to take acquire majority
shares at a latter stage. 12
The decision in the BAT case notwithstanding, a number of problems arise as to the
applicability of Article 81 to mergers. Firstly, the exclusive applicability Article 81 to
agreements between independent undertakings leaves a gap with regard to the actions of
the undertaking upon the conclusion of the merger due to the application of the single
entity concept. Again, the provision fails to address the question of the creation,
strengthening or abuse of dominance. Finally the application of Article 82 (2) on the
issue of enforcement is unclear. 13
2.1.1. Article 82
Article 82 provides as follows:
Any abuse by one or more undertakings of a dominant position within the common
market or in a substantial part of it shall be prohibited as incompatible with the common
market in so far as it may affect trade between Member States.
Such abuse may, In particular, consist in:
a. directly or indirectly imposing unfair purchase or selling prices or other unfair
trading conditions;
b. limiting production, markets or technical development to the prejudice of
consumers;
c. limiting production, markets or technical development to the prejudice of
consumers;
11
3.
3.1
PRELIMINARY ISSUES
Concept of a Concentration
14
15
Europemballage and Continental Can v. Commission Case 6/72 [1973] ECR 215: CMLR 199.
para. 26.
Control
Evidently, the definition of a concentration hinges largely on the issue of control. Article
3 (1) (b) provides as follows:
For the purposes of this Regulation, control shall be constituted by rights, contracts or
any other means which, either separately or in combination and having regard to the
considerations of fact or law involved, confer the possibility of exercising decisive
influence on an undertaking, in particular by:
(a) ownership or the right to use all or part of the assets of an undertaking;
(b) rights or contracts which confer decisive influence on the composition, voting or
decisions of the organs of an undertaking.
Control therefore arises where an undertaking attains decisive influence over another.
Decisive influence may be manifested in factors such as the acquisition of property
rights, shareholders agreements and economic dependence. 19 Control may be solely or
jointly held. Sole control is usually achieved on attainment of more than 50% of the
shareholding of the acquired undertaking. Control may however result even where
16
shareholding falls below this threshold. An example is where all other shares are widely
dispersed between other shareholders.20
Joint control may arise where 2 or more parties, between themselves hold sufficient
power to exercise decisive influence on an undertaking. This form of control is usually
expressed in the form of veto power and is may exist even where the parties are
minorities. The test for control lies in the existence of the power to control and not
necessarily in its exercise. 21
20
each of the concerned undertakings achieves more than two-thirds of its aggregate
turnover within one and the same member state.23
Mergers that fail to meet the above thresholds fall under the jurisdiction of the national
authorities. There is no concurrent jurisdiction between the Commission and national
authorities. This is in line with the one stop shop principle. This is to the effect that all
mergers fall under the jurisdiction of the Commission or both. There are two exceptions
to the one stop shop principle. The first is the Dutch clause24, which is to the effect that
a national competition authority may refer a merger within its jurisdiction to the
Commission. The second exception is found in the German Clause which is to the
effect that the Commission may, on the request of a national competition authority, refer
a merger with a community wise dimension to that authority where the merger is likely to
impede competition in a distinct geographical market. 25
Enforcement
The Regulation provides that concentrations sha ll be notified to the Commission not
more than one week after the conclusion of the agreement. The responsibility for
notification lies in the parties to the agreement in the case of a merger, or the parties
acquiring joint control in the case of an acquisition. Where the concentration involves an
acquisition of sole control the acquirer is responsible for notification. 26 A concentration
does not come into effect until the Commission in response to a notification declares it
compatible with the common market. 27
Where the Commission receives a notification, its initial action is to examine the
concentration with regard to the applicability of the Regulation28 . A decision on this
assessment is to be delivered within one month of the notification29 . Where the
23
Art. 1 (3).
Art. 22 (3).
25
Art. 9 (2)
26
Art. 4.
27
Art. 7.
28
Art 6 (1) (a).
29
Art 10 (1).
24
APPRAISAL OF CONCENTRATIONS
United Brands Co and United Brands Continental BV v Commission Case 27/76 [1978] ECR 207: 1
CMLR 429; see also, Hoffman-La Roche Case 85/76 [1979] ECR 461; 3 CMLR 211.
admits of the following dimensions- the product market, the geographical market and the
temporal market.
The relevant product market comprises all the products and/or services which are
regarded as interchangeable or substitutable by the consumer, by reason of the products
characteristics, their prices and their intended use. 34 A number of factors are used to
determine the relevant product market. These include an examination of the physical
characteristics of the products, evidence of past practices and substitutability on the
demand 35 and supply 36 side. The Small but Significant Non-Transitory Increase in Price
(SSNIP) test has also been developed to determine the product market by measuring the
reaction of consumers to a slight increase in price.
A number of factors are considered in the determination of the relevant geographical
market. A preliminary considerations include the the distribution of market shares as well
as pricing and pricing differences at national and Community or EEC level. 37 The reasons
behind the pricing structure are explored at the next stage of determination38 . Finally, an
examination of supply factors such as conditions of access to distribution channels and
regulatory bar riers is carried out.39
The temporal market is applicable to those goods and services where demand and supply
are experience seasonal fluctuation. Examples of this market include gas and electricity
where demand and supply fluctuates through the seasons.
Upon the delimitation of the market, a number of criteria are employed to determine
whether a dominant position has been created or strengthened. Market share is the major
determinant of the existence of a dominant position. 40 A very high market share will
34
Commission Notice on the definition of the relevant market for the purposes of Community competition
law [1997] OJ l7/13.
35
ibid, paras. 15-19.
36
See Continental Can, supra note.14.
37
Commission Notice on the definition of the relevant market for the purposes of Community competition
law, supra note 34, para. 28.
38
Para. 29
39
Para 30.
40
See Hoffman/La Roche, supra note 33.
41
4.
4.1
Competition law has always sought to prevent dominance or its effects. Along this line
much emphasis has been placed on the existence or effects of a dominant position held by
a single undertaking. The purposes of competition policy may, however, also be defeated
by collective dominance. This arises where two or more undertakings are linked in such a
manner as to hold a dominant position in the market. This is usually the case in
oligopolistic markets. These markets are characterised by a small number of players, low
barriers to entry and fairly homogenous products. These qualities give rise to high market
transparency. 48
Needless to say, oligopolistic markets present a considerable challenge for competition
regulation. The nature of the market gives rise to a high level of predictability of the
actions of the various players. This may in turn allow each market player to adapt his
strategy to that of the other players. Such parallel conduct unwittingly reduces the
incentive to compete on price. This has the effect of constraining competition in the same
manner as a monopoly or near monopoly situation.
In its bid to tackle the problem posed by oligopolistic markets, the Commission has had a
resort to the provision of Articles 81 and 82. Article 81 prohibits agreements or concerted
practices between or among undertakings, which prevent, restrict or distort competition.
On paper this would appear to be a potent weapon against anti-competitive oligopolistic
practices. In practice it has proved rather difficult to apply Article 81 to oligopolistic
markets. Undertakings are not exactly in the habit of entering into ascertainable
agreements to thwart competition. Again, difficulties arise in the application of the
concerted practices principle to oligopolistic practices. This is because the test of parallel
48
49
there must be close links between the entities and secondly, those links must be such as to
lead the parties to adopt the same conduct and policy in the market. 55
5.
Under the Regulation the first issue that arises with respect to the concept of collective
dominance borders on applicability. Article 2 (3) which prohibits the creation or
strengthening of a dominant position, appears prima facie, from its use of the words, a
concentration to suggest that the Regulation app lies to single and not collective
dominance. 56 Based on this it has been suggested that if the Regulation had been intended
to apply to collective dominance it would have had similar wording to the corresponding
position in Article 82. 57 It is, however the submission of this paper that policy
considerations behind the enactment of the Regulation showed a clear intent to prevent
the creation and strengthening of all forms of dominance. The exclusion of collective
dominance would therefore serve to defeat the purpose of promoting competition, as it is
potentially as detrimental as single dominance. Moreover, German merger law, which has
exerted a strong influence on the development of the Regulation, has in place clear
provisions for collective dominance. 58
The argument for the application of the Regulation to collective dominance has found
support in the decisions of the Commission. The Commission first raised the issue of
collective dominance with respect to a merger in Alcatel/AEG-KABEL. 59 It was not,
however, until Nestle/Perrier, 60 a decision on the French mineral bottled water market,
that the doctrine was utilised successfully to block a merger. The facts are that Nestle
sought to acquire Perrier, an acquisition that would have increased their market share to
60%. The market also consisted of BSN with 22% of the market and a host of other
55
at 2993.
See Motta, M., EC Merger Policy and the Airtours Case [2000] E.C.L.R. 199-207 at 203; Recent
Airtours / First Choice Eu Merger Decision, available at
http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/2C230D4E-E013-4A37-97974A6E83568DD7.cfm (last visited 20 May 2004)
57
ibid
58
S 19 II (2) and 35 GWB; see also Lane R., supra note 6, p. 268.
59
Case IV/M165 [1992] OJ C6/23:4 CMLR 73.
60
supra note 47.
56
smaller companies with less access to the source of the product. In order not to create a
dominant position Nestle sought to give up its Volvic brand to BSN. The Commission in
its decision found the arrangement to be in breach of the Regulation on the basis that the
transparency of the market and interdependency of the players would result in a
collectively dominant position. 61 The solution adopted was a divestiture of the Volvic
brand, but not to BSN.62 The application of the concept of collective dominance to the
Regulation was acknowledged by the ECJ in France v Commission 63 despite the
annulment of the Commissions decision on the facts. The Court in its judgement stated
thus:
the applicants submission, to the effect that the choice of legal bases in itself
militates in favour of the argument that the Regulation does not apply to collective
dominant positions cannot be acceptedArticles [84] and [308] can be used as the legal
bases of a regulation permitting preventive action with respect to concentrations which
create or strengthen a dominant position liable to have a significant effect on
competition.64
The next relevant issue with regard to the application of the collective dominance is
expressed in the question- what is the test for ascertaining collective dominance? The
ECJ in France v Commission 65 provided a high standard of proof for the ascertainment of
collective dominance by insisting on the existence of definite links between the parties.
According to the Court,
Effective competition in the relevant market is significantly impeded by the undertakings
involved in the concentration and one or more other undertakings which together, in
particular because of correlative factors which exist between them, are able to adopt a
61
para 120-123.
See also Decision 91/619 (Aerospatiale-Alenia/De Havilland) OJ 1991 L334/42.
63
Cases C68/94 and 30/95 [1998] 4 CMLR 829.
64
para 165.
65
ibid.
62
common policy on the market and act to a considerable extent independently of their
competitors, their customers, and also of consumers. 66 (Emphasis mine)
The above is a restatement of the position in Irish Sugar 67 with respect to the existence of
some form of economic links. The CFI however took a radically different stand in the
case of Gencor Limited v Commission. 68 In that case involving the platinum group metal
market, Gencor, a South African company, entered into a merger agreement with Lornho,
a UK company. The Commission prohibited the merger on the grounds that the merger
would result in the creation of a collective dominant position with the other major player
in the market, Amplats, a subsidiary of Anglo -American South Limited. On appeal it was
submitted, relying on Flat Glass and France v Commission, that collective dominance
was not proved, as the companies had no economic links with Anglo- American.
Rejecting this contention, the Court stated as follows,
there is no reason whatsoever in legal or economic terms to exclude from the notion
of economic links the relationship of interdependence existing between the parties to a
tight oligopoly within which, in a market with the appropriate characteristics, in
particular in terms of market concentration, transparency and product homogeneity,
those parties are in a position to anticipate one anothers behaviour and are therefore
strongly encouraged to align their conduct in the market, in particular in such a way as
to maximise their joint profits by restricting production with a view to increasing prices.
In such a context, each trader is aware that highly competitive action on its part designed
to increase its market share (for example) a price cut would provoke identical action by
the others so that it would derive no benefit from its initiative. All the traders would thus
be affected by the reduction in price levels. 69
The Court went on to add that there was a likelihood that the transaction would in future
lead to the creation of a collective dominant position. 70
66
ibid
supra note 54.
68
Case T-102/96, [1999] ECR II-753, [1999] 4 CMLR 971
69
para 276.
70
para 279.
67
It has been contended 71 that the decision in Gencor represents a correct interpretation of
the Regulation with regard to the test of collective dominance. This paper disagrees with
this contention on the ground that the structural test proposed by the Court is
misconceived as it places the burden of proof on the undertakings to prove the absence of
collective dominance. This is against the rules of natural law to the effect that a party
alleging a wrong is entitled to furnish proof Moreover, the prohibition of a merger on the
ground that it may lead to a position of collective dominance with a previously
unconnected party in the future is plagued with uncertainty as to what constitutes the
future.
The most recent decision on the issue of the criteria for proving collective dominance
under the Regulation is Airtours v Commission. 72 The facts are that Airtours, the second
largest tours and travelling company sought to acquire First Choice, the fo urth largest, an
acquisition which would have given the top three companies (Airtours, Thompson and
Thomas Cook) 79% of the market. The Commission in prohibiting the merger, held,
relying on Gencor, that the merger would have created a position of collective dominance
amongst the three operators. In annulling the decision of the Commission, the CFI laid
down a new evidentiary standard for the appraisal of collective dominance with respect to
mergers. According to the Court, the transaction must have a direct and immediate
impact on with the result that the merging parties and their competitors adopt a common
policy, which is detrimental to competition. In this vein therefore, three factors must be
satisfied for a merger to be prohibited on the ground of collective dominance:
sufficient market transparency to enable the each player interpret the business
strategies of the other players and to be able to adapt their its own strategies
accordingly;
clear retaliatory measures to be directed against a player that deviates from the
common policy; and that
71
72
It is submitted that the above decision, which is on all fours with US Antitrust law73 ,
represents the correct position of the law as it rightly places the burden of proof of
collective squarely on the shoulders of the Commission. Again it eliminates uncertainty
raised by Gencor as to future oligopolistic conduct by its provisio n for an immediate and
direct effect. Finally it establishes a clear evidentiary trail for the determination of
collective dominance.
6.
CONCLUSION
From the above analysis the paper reaches the following conclusions with regard to the
applicability of the concept of collective dominance within ECMR
The position in Gencor, with its reference to structural links between parties to a
merger and their as the sole determinant of a collect ive dominant position is
flawed as it gives places the evidentiary burden of proof on the undertaking rather
tan the Commission. This is against the principles of fair hearing to the effect that
he who alleges must prove. The principle laid down in the decision is also
ambiguous with regard to its definition of future links.
73
BIBLIOGRAPHY
PRIMARY SOURCES
Treaties
European Community Treaty, 1957 (as amended by the Treaty of Amsterdam, 1 May
1999).
Statutes
European Community Merger Control Regulation-Council Regulation (EEC) 4064/89
Gesetz gegen Wettbewerbsbeschrankungen (German Act Against Restraints of
Competition) of 1973 (as amended by the Sixth Amendment Act of 1999)
Subsidiary Legislation and Notices
Commission Notice on the concept of concentration under Council Regulation (EEC)
No 4064/89 on the control of concentration between undertakings [1998] OJ C66/5.
Commission Notice on the Definition of the Relevant Market for the Purposes of
Community Competition Law [1997] OJ l7/13
Notice on Market Definition [1997] OJ C372/5.
Cases
Airtours v Commission Case T-342/99.
Aerospatiale-Alenia/De Havilland (Decision 91/619) OJ 1991 L334/42.
AKZO v Commission [1991] ECR 1-3359
Alcatel/AEG-KABEL Case IV/M165 [1992] OJ C6/23:4 CMLR 73
BAT and Reynolds v Commission and Phillip Morris Cases 142 and 156/84 [1987]
ECR 4487: [1988] 4 CMLR 24.
British Midland-Aer Lingus [1992] OJ L/96/34, [1993] 4 CMLR 596.
CEWAL [1993] OJ L34/20; [1995] 5 CMLR 198
Europemballage and Continental Can v. Commission Case 6/72 [1973] ECR 215:
CMLR 199.
SECONDARY SOURCES
Books
Faull, J., and Nikpay, A., EC Law of Competition, (Oxford: Oxford University
Press,1999).
Goyder, D. G., EC Competition Law 384 (Oxford: Oxford University,1998)
Jacquemin A. P. and de Jong, H. W. European Industrial Organisation (London:
Macmillan Press, 1977)
Jones, A., and Sufrin, B: EC Competition Law Text, Cases and Materials (Oxford:
Oxford University Press, 2001).
Korah, V., An Introductory Guide to EC Competition Law and Practice (Oxford &
Portland: Hart Publishing, 1997).
Lane, E., EC Competition Law (Harlow: Pearson Educational Limited, 2000)
Whish, R., Competition Law (London: Butterworths, 2001).
Articles
Motta, M., EC Merger Policy and the Airtours Case [2000] E.C.L.R. 199-207.
Ridyard, D., Economic analysis of single firm and oligopolistic dominance under the
European Merger Regulation. (1994) E. C. L. R., 255-262.
Internet
Airtours
/First
Choice
Eu
Merger
Decision,
available
at
http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/2C230D4
E-E013-4A37-9797-4A6E83568DD7.cfm (last visited 2 May 2004)