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GT Alert

New EU Merger Regulation and Reform of EC Antitrust Enforcement

EC Treaty, Articles 81 and 82

June 2004
By Anniek van Zutven and Hans Urlus, Greenberg Traurig, Amsterdam Office

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On May 1, 2004, a revised merger review law1 (“New Merger Regulation”) and a new Regulation on the implementation of the rules on competition laid down in Articles 81 and 82 of the EC Treaty (“Regulation 1/2003”)2 took effect in the EU. These new regulations will not change the substance of EC Competition rules, but will profoundly change the way in which they are enforced.

Regulation 1/2003

Anniek van Zutven
"Articles 81 and 82 of the EC Treaty will not change the substance of EC Competition rules, but will profoundly change the way in which they are enforced."

Regulation 1/2003 introduces three major changes to the enforcement of the Competition rules of the EC Treaty. In addition, Regulation 1/2003 introduces broader investigatory powers for the European Commission.

Abolition of the Notification System in Favor of Self-Assessment

Regulation 1/2003 establishes a “directly applicable exception” system whereby agreements, decisions and concerted practices will be lawful or void depending on whether the fall outside the scope of article 81(1), satisfy the conditions of article 81(3), or whether they in fact breach article 82. The European Commission has abandoned its monopoly on applying Article 81(3) and with it, the notification system. Article 81(3) will become directly applicable by National Competition Authorities and national courts, in the same way as the rest of Articles 81 and 823.

The new system places a burden of complete self reliance upon companies and their legal advisors to determine whether their arrangements satisfy the criteria for exemption. With a view to further assist this self-assessment by undertakings, the Commission already published so-called Commission notices and guidelines on the block exemption regulations on vertical restraints in 2000 and on horizontal co-operation agreements in 2001. Furthermore, the Commission has published guidelines and notices. These documents should allow companies in most cases to reliably assess their agreements with regard to Article 81. However, the new system brings huge uncertainties which will lead to increased care for the way agreements and behavior are arranged.

Where cases give rise to genuine uncertainty because they present novel or unresolved questions for the application of Articles 81 and 82, individual companies may seek informal guidance from the Commission. The Commission may provide guidance on novel questions on the interpretation of Articles 81 and 82 in a written statement (“guidance letter”). However, these guidance letters are not a substitute for a judgment on a particular case and in the particular economic context of a case. Furthermore, it is important to emphasize that the Commission will only take up a request for guidance when it believes that the Community interest will be furthered.

Decentralization of Enforcement

Regulation 1/2003 requires the application of EC Competition law by all national competition authorities and national courts. National Competition Authorities may make the following decisions under regulation 1/2003;

  • order an infringement to be brought to an end,
  • order interim measures,
  • accept commitments from the infringing parties,
  • impose fines or other penalties provided for in their national laws.

However, the Commission keeps an important role in the enforcement of EC Competition law. In particular, it may take up cases on its own initiative, respond to complaints and has a key consultative role in national competition authorities proceedings, which will be discussed below.

The national competition authority conducting the case will use its own national procedural rules, in its own language and embedded within the culture of that particular authority.

Application of EC Law Over National Law

One of the aims of the modernization of EU Competition law was to make the competition law uniformly applicable to the competition law regime in all Member States. In all cases that have an effect on trade between member states EC Competition law will have to be applied. Where a case falls in the scope of application of Articles 81 and 82, Member States courts and competition authorities will not be able to base their decision solely on national law. As a result of Regulation 1/2003, it is expected that Member States will further harmonize their owns laws with EC law.

  • Co-operation between member states and the Commission

National competition authorities of Member States will have to inform the Commission about new cases opened and envisaged decisions. If necessary, the Commission can step in by opening proceedings itself. This will end the competence of Member States competition authorities to deal with a case. The Commission and the national competition authorities have set up the European Competition Network (ECN) which is intended to be a forum to agree on case allocation, exchange information and assist each other in their investigations. Any national filing of some interest will be shared with the other competition authorities, without any information to the involved or interested parties.

The Commission’s New Enforcement Powers

Regulation 1/2003 reinforces the powers of the Commission in several important respects:

  • In addition to the powers set out in Regulation 17/1962, Regulation 1/2003 establishes that the Commission is authorized to seal any business premises, books, or records for a period necessary to conduct the inspection. If seals are broken, companies may be fined up to one percent of their total turnover in the preceding year.
  • Regulation 1/2003 the Commission may impose a fine of one percent of the previous annual group turnover in the event of non-compliance with procedural obligation.
  • Commission officials will be allowed to ask any employee of the undertaking or association of undertakings for explanations of facts or documents relating to the matter and purpose of the inspection and to record the answers during a dawn raid (on-the spot questioning). The potential fines for failure to respond to the requests and for supplying incorrect or misleading answers have been increased to a maximum of one percent of the companies’ turnover in the preceding year.

The Commission can request formal witness statements independent of a dawn raid.

The New Merger Regulation

The main objective of the New Merger Regulation is to ensure uniform and effective application of EC competition law throughout the Community. The new regulation, which replaces Regulation 4064/89, significantly increases the powers of the Commission to review and, if necessary, block transactions having a Community dimension.

The core features of the New Merger Regulation are:

  1. revision of the substantive standard to determine whether proposed mergers pass examination;
  2. allocation of merger review jurisdiction/one-stop-shopping;
  3. higher degree of flexibility in the review process; and
  4. the enhancement of the Commission’s powers of investigation and increased fines for undertakings.

Ad (i) The New Substantive Test

Regulation 139/2004 introduces a new substantive test, according to which the Commission may block a transaction which: “would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.”

This “Significant Impediment Test” replaces the dominance test laid down in Regulation 4064/894. The new standard incorporates, but is not limited to the dominance test. The new substantive test will specifically allow the Commission to take into account so-called unilateral effects, that is, price increases arising because the transaction eliminates some existing competitive constraint that had been holding back the price level in the market.

Adoption of the Significant Impediment Test will bring EC competition law more in line with standard applied in the United States and Canada. The former regulation was unable to reach non-collusive oligopolies in which none of the members in the oligopoly was dominant, due to its dependence on dominance.

Furthermore, as a result of the modification of the substantive test, the Commission no longer needs to stretch the boundaries of the collective dominance test in order to block transactions resulting in price increases without creating a single dominant position.

Ad (ii) Allocation of Merger Review Jurisdiction / One-Stop-Shopping

The New Merger Regulation also modifies the system for referral of cases between the Commission and the national competition authorities. The New Merger Regulation will not change the thresholds set by the current merger regulation to determine whether a transaction falls within the merger review jurisdiction of the Commission (and thereby falling out of the scope of the jurisdiction of member states)5.

From May 1, 2004, companies may request the Commission to review transactions which do not have a Community dimension, but which are capable of being reviewed under the national merger control regimes of at least three Member States. Provided no competent Member State objects to the referral request, the transaction will be deemed to have a Community dimension, and the Commission will have exclusive jurisdiction to review such transaction at the exclusion of the Member States.

The possibility to opt for one-stop-shopping is a major step forward from the current system, in which sizeable transactions short of the Community dimension test are often reviewed by four or five different Member State competition authorities. It is expected that following the enlargement of the EU and the accession of the new Member States, most of which have relatively low pre-merger filing thresholds, it will be easy to meet the three country test in many multi-jurisdictional transactions, which will significantly lower the burden for companies involved in this type of transaction.

Ad (iii) Flexibility of the Review Process

A higher degree of flexibility will be introduced into the review process. While retaining the relatively short review periods introduced by Regulation 4064/896, the New Merger Regulation abolishes the one-week rule and does not impose any specific deadline for parties to file their notification (Form CO) with the Commission. Subject to complying with the waiting period/suspensory obligations imposed under the new merger regulation, merging parties will be free to determine when to file their Form CO.

Under the New Merger Regulation, it will also become possible to notify a transaction based upon a letter of intent: it suffices to show that the companies have a “good faith intention to conclude an agreement.” A binding agreement is not longer required. The current merger regulation requires the filing of the form CO within one week of the execution of binding agreements to bring about the transaction, or in the case of public bids, within one week of announcement of the bid7.

The new merger regulation also offers the notifying parties the possibility to ask for an extension of the phase II review period with 20 working days. The phase II period can also be extended by 20 working days by the Commission with the agreement of the notifying parties. By introducing these modifications, the Commission hopes to be able to avoid timing problems which have often occurred in complicated phase II investigations as a result of the time limit provided for in Regulation 4064/898.

Ad (iv) Enhancement of the Investigative Powers

The fact-finding powers of the Commission in the context of merger proceedings have been substantially strengthened, and the potential fines - for failure to respond to information requests (so-called Article 11 letters), and for supplying incorrect or misleading information in the notification or in response to an Article 11 letter - have been increased to a maximum of one percent of the companies’ turnover in the preceding year. This is significantly higher than the limits prescribed under the current merger regulation for these types of non-compliance, currently being between EUR 1,000 and EUR 50,000.

In addition to the above, the new merger regulation will increase the level of daily penalties that may be imposed by the Commission9. The new limit of these penalties will amount to five percent of the average daily group-wide turnover of the delinquent undertakings. This is significantly higher than the equivalent limits in the current merger regulation that, depending on the type of non-compliance, range from EUR 25,000 per day to EUR 100,000 per day.

The Commission can impose fines and daily penalties not only on the merging parties that fail to comply with their obligations under the new merger regulation, but also on third parties, such as customers, suppliers or competitors of merging parties that fail to submit timely, accurate and complete responses to requests for information sent by the Commission.

The new merger regulation maintains the current merger regulation’s upper limit of ten percent of the turnover in the previous year for lump sum fines to punish the most serious non-compliance, such as failure to notify transactions or to comply with the waiting period obligations or conditions subject to which the Commission has granted its approval of a transaction.

 


Footnotes

1 Council Regulation (EC) No 139/2004 of January 20, 2004 on the control of concentrations between undertakings.

2 Council Regulation (EC) No 1/2003 of December 16, 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, replacing Regulation 17/1962.

3 Article 81(1) and 82 of the EC Treaty have direct applicability by virtue of case-law of the Court of Justice of the European Communities.

4 The current merger regulation embodies a “dominance test,” which only allows the Commission to prohibit transactions that “create or strengthen a dominant position as a result of which effective competition would significantly impeded in all or a substantial part of the European Union.”

5 A merger has a community dimension where:

  1. the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5 billion; and
  2. the aggregate EC-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million.

A concentration that does not meet the thresholds laid down above has a community dimension if:

  1. the combined aggregate world wide turnover of all the undertakings concerned is more than EUR 2.5 billion;
  2. in each of at least three member states, the combined aggregate turnover of all undertakings concerned is more than EUR 100 million;
  3. in each of at least three EC member states included for the purpose of point; (b) the aggregate turnover of each of at least two of the undertakings concerned is more than EUR 25 million; and
  4. the aggregate EC-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million.

unless each of the undertakings concerned achieves more than two thirds of its aggregate EC-wide turnover within one and the same EC member state.

6 The one month review period of Phase I will be replaced by a 25 working days review period, and the four month review period of Phase II will become 90 working days instead.

7 In practice, the Commission has often waived the requirement to file within one week and has allowed merging parties longer time (sometimes several months) to file their Form CO.

8 A transaction that is not approved within the fixed time frames will be deemed to be approved by the Commission.

9 Daily penalties may be imposed, among other reasons, to punish the types of non-compliance punishable by lump sum fines. In such cases, the daily penalties apply in addition to any lump sum fines imposed by the Commission.

 

© 2004 Greenberg Traurig


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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.