20 Combinations in US and EU

Vipul Puri

1. Introduction

1.1 In Unit II, we focussed on legal procedure prescribed under the Competition Act and the Regulations issued by the Competition Commissionof India relating to merger control in India. In this unit, we will supplement our knowledge by understanding the procedures followed in the more evolved jurisdictions of US and EU.

Learning outcome

2.1 The unit focuses on the procedural aspects and the assessment methodologies of combination transactions followed in EU and US. After the completion of this unit, the participants are expected to understand:

3. US Merger control: Evolution of Legislative framework

3.1 The United States has been dealing with the issue of combinations since 1890, by passing of the Sherman Act. Over a period of time, there has been a lot of evolution and subsequent laws passed in the US to make the regulation more apt and clear. This section will focus briefly on the various laws that affect the merger control regime in US.

3.1.1 The Sherman Act:The oldest legal instrument related to antitrust is The Sherman Act passed in 1890. The word „combinations‟ is mentioned in the section1 and 2 of the Act. While section 1 refers to the combinations in restraint of trade as illegal, section 2 refers to the combinations that intended to monopolize any part of trade or commerce as a felony.

3.1.2 The Clayton Act: The provisions of Sherman Act were broad based and a need was felt to introduce a law that provides further clarification and substance. For this purpose, the Clayton Act was passed in 1914, which apart from other issues made a clear reference to the mergers and acquisitions. Section 7 of the Clayton Act (as amended by Celler-Kefauver Antimerger Act 1950, prohibits not only the acquisitions of “stock” but also the acquisitions of “assets” where “the effect of such acquisition may be substantially to lessen competitionor to tend to create a monopoly”1.

3.1.3 The Hart-Scott-Rodino Antitrust Improvements Act (HSR Act): The Act passed in 1976 focussed on increasing the powers of the competition law agencies and to prescribe the procedures required to be followed. This Act amended the Clayton Act by requiring companies to file premerger notifications with the Federal Trade Commission and the Antitrust Division of the Justice Department 2 . The Act establishes waiting periods that must elapse before certain acquisitions or tender offers may be consummated and authorizes the enforcement agencies to stay those periods until the companies provide certain additional information about the proposed transaction3.

3.1.4 Horizontal merger guidelines: The aim of the horizontal merger guidelines is to standardize the analytical framework relating to mergers and acquisitions. These Guidelines describe the principal analytical techniques and the main types of evidence on which the Agencies usually rely to predict whether a horizontal merger may substantially lessen competition4.Further, the guidelines also lay down the principles for the relevant market definition, ascertainment of degree of concentration, the unilateral and coordinated effects framework and peculiar issues of failing firm and merger efficiencies.

3.2 Pre Filing Regulatory Procedures: Checking for thresholds and making the pre-merger filing

3.2.1 Parties to check whether the transaction meets the thresholds set for filing apre-merger notice: Under the HSR Act, parties to certain large mergers and acquisitions must file premerger notification and wait for government review5. The thresholds which are updated annually are applied in two steps; the size of transaction test and the size of person test. Under a size of transaction test, if the transaction is valued at more than US $ 303.5 million, the notification is required without any regard to the size of person test. However, if the transaction size exceeds US $ 75.9 million, the transaction may be reportable subject to meeting the size of person test thresholds. The size of person test thresholds presently are met if either the acquiring or the acquired person has at least US $15.2 million in assets or sales, and the other person has at least US $151.7 million in assets or sales. In no case, however, a transaction below US $ 75.9 million is to be filed. However, in some instances, a transaction may not be reportable even if the size of person and the size oftransaction tests have been satisfied. The Act and the Rules set forth a number of exemptions,describing particular transactions or classes of transactions that need not be reported despite meeting the threshold criteria6.

3.2.2 Form of notification: In case the thresholds are met, the parties have to file the Notification and Report Form detailing the information required to evaluate the proposed transaction is to be filed by the parties.

3.2.3 Amount of fee: The amount of fee to be paid for filing of combination notice in US follows the slab system. The fee presently is fixed at US $45,000 for transactions between US $ 75.9 million to 151.7 million, US $ 1, 25,000 for transaction exceeding US $ 151.7 million but less than 758.6 million and US $2, 80,000for transactions exceeding US $758.6 million.

3.3 Regulatory Procedures: To be followed after the filing of notification

3.3.1 Mandatory Wait Period: Once the filing is complete, the parties must wait 30 days (15 days in the case of a cash tender offer or a bankruptcy) or until the agencies grant early termination of the waiting period before they can consummate the deal7.

3.3.2 Clearance process: The US is a peculiar case as there are two agencies looking after the enforcement of merger control laws, namely the US FTC and DOJ.The parties file notifications with both the FTC and the DOJ and thereafter, the staff at FTC and DOJ consult and the matter is cleared to be looked into to one of the two agencies.

3.3.3 Preliminary review of the merger filing: In this stage of merger assessment, the agency cleared to look into the transaction considers the information filed in the form of notification and may also obtain additional information from the parties or the other industry participants. After the perusal of the information obtained in the process, the agency, if of the opinion that the transaction does not have any adverse effect, may simply allow the mandatory wait period to expire or terminate the waiting period i.e. grant early termination. In both the cases, an explicit order approving the combination is not required to be issued. On the other hand, if the agency has determined that further investigation is required, it would ask for more information, called as Second Request.

3.3.4 Second Request: Once a merger assessment reaches the stage of second request, it not only implies the agency seeking comprehensive information from the parties to the transaction, but also empowers the agency to interact with the company personnel or the industry experts. The agency has to decide on the merger in an additional period of 30 days (10 days for cash tender offer or bankruptcy) from the day the parties comply with the second request. However, the system is flexible to allow the period of 30 days to be extended by an agreement with the parties. The parties may allow the period to be extended because their non-agreement may lead the agency to challenge the merger in federal court and that would mean more litigation and uncertainty.

3.3.5 Final decision by the agency: After the investigations at this stage, the agency may decide to close the investigation or it may propose modifications to the transactions or impose other remedies as it may deem fit through a consent agreement. In case of a deadlock between the parties and the agency, the agency may file a preliminary injunction in a federal court seeking to stop the entire transaction.

4. US Regulation –comparison with the Indian Competition Act

4.1 The combination regulatory framework followed in UShas both the similarities and dissimilarities to the framework followed in India. Both the regimes prescribe the thresholds for identifying the notifiable combinations and adjust these periodically. The mandatory waiting period in US is 30 days and that is the time available to the agency preliminary review. The preliminary view is similar to some extent to the prima facie view in case of India. The Commission by Regulation 19 sub regulation1 has also prescribed a period of 30 days for the prima facie opinion. However, some procedures are very different in US. If the CCI is of the prima facie opinion that the transaction does not cause any adverse effect on competition, the Commission issues an Order approving the transaction, however, in US,the agency may just allow the mandatory waiting period to expire or grant early termination. The other major difference lies in final decision process in the case. If the agency in US determines that the merger may be cleared with some remedies, it may try to get into a consent agreement with parties; however, if the consent agreement is not reached or the agency determines that the transaction is to be stopped, it has to approach the Federal Court seeking a preliminary injunction. In India, the Act empowers the Commission to issue final orders with modification and if the modification is not agreed to by the parties, to issue final order blocking the transaction.

4.2 After understanding the regulatory process followed in US and comparing the same with India, it would now be opportune to examine the merger regulations in the European Union (EU).

Regulation of combinations in EU

4.1 EU Merger control: Legislative framework and notifiable concentrations

4.1.1 The main sources of law for merger decisions are the EC Merger Regulation, the Implementing Regulation and the notices and guidelines. The Merger Regulation contains the main rules for the assessment of concentrations, whereas the Implementing Regulation concerns procedural issues8 (notification, deadlines, right to be heard, etc.). Notices and guidelines are relevant for proper interpretation of the Merger Regulation.

4.1.2 EU – a special case of community dimension: The EU is an economic and political union of member states located in Europe. The existence of the political union of member states imply that a combination transaction may be looked into by the member state under their national competition law or the European Commission, the executive body of EU. Thus, the first question in regulation of combinations is how to decide the appropriate agency with which the filing has to be made? The answer is, it depends on whether the transaction has a community dimension or not? If the transaction has a community dimension, it is looked into by the EC and if otherwise, it is ordinarily looked into by the member state under the national competition law.

4.1.3 Community dimension of a combination transaction: It implies that a combination or concentration (as called in EU law) may affect a number of EU member states. The EC uses a variety of parameters to ascertain whether a combination has a community dimension such as the worldwide turnover of the parties to the combination, community wide turnover, and the breakup of the community wide turnover among the member states9 .The present thresholds conclude the community dimension or the notifiability of the transaction when any one or both of the two sets of conditions are fulfilled, subject to an exception applicable to both the condition sets. These conditions are represented as under:

Set 1 conditions:

Competition Law handbook available on URL

http://ec.europa.eu/competition/mergers/legislation/merger_compilation.pdf

Note: The second set targets those cases where the turnover may not be very large, but the effect of a merger transaction may be more widespread. This may be inferred from the Three Member State criterion introduced as a necessary condition.

Aggregate worldwide turnover of all the undertakings forming part of acquisition should be more than EUR 2,500 million; AND

Exception to both Set 1 and Set 2 conditions

A transaction does not have a community dimension if each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

The thresholds criteria followed in EC may be represented in the form of a flow chart10 as under:

4.1.4 Once it is determined that a transaction has a community dimension, it has to be filed with the EC. The following discussions on regulation of combinations presume transactions with the community dimension for discussion on regulations.

4.2 Regulatory process

4.2.1 Receipt of notification: The parties to the transaction are required to notify the transaction if it has the community dimension. The notification is required to be made either following the conclusion of an agreement in that respect or announcement of a public bid or following the acquisition of control or after manifestation of good faith intent on the part of the parties to enter into a transaction.

4.2.2 Initial examination or Phase I: The EC undertakes detailed examination of the transaction based on the information submitted by the parties at the time of notification, additional information sought from the parties, interviews, etc. The Commission has a time period of 25 working days for reaching the decision. At this stage, the Commission may decide that the concentration does not fall within the scope of merger regulation, or the Commission may approve the concentration if it does not raise doubts of adverse effects, or may decide to further investigate the transaction i.e. launch the Phase II investigation. It is also possible that the parties may approach the Commission with commitments and in that case, the period may be extended to 35 days.

4.2.3 Phase II investigation: The investigation under Phase II is more comprehensive and the Commission may ask for more information, carry out further interviews and inspections etc. If the Commission is of the opinion that the transaction may result in adverse effects on competition i.e. the transaction is not compatible with common market, the Commission has to issue Statement of Objections and give a chance to the parties to access the files and request for oral hearing. After this process is over, the Advisory Committee of Member States may meet and the final opinion may be delivered. The available time period for Phase II investigations and decision is 90 working days commencing from the date of decision of going into Phase II. The period may be extended to 105 working days in case the parties offered commitments after 55 working days from the date of initiation of proceedings. A further extension of 20 days is also permissible by way of reaching an agreement with the parties.

4.2.4 Finaldecision: After the detailed investigations into the impact of a concentration on the competition process, the EC has the powers to take decisions approving the transactions without any condition(s), or approving the transaction with conditions and obligations or completely stopping the transaction.

4.2.5 Appeal framework: The parties have two months‟ time to file an appeal with Court of First Instance (CFI) and if the parties are not satisfied with the CFI decision, they may subsequently and ultimately appeal to the European Court of Justice (ECJ).

5. EU Regulation –comparison with the Indian Competition Act

5.1 One feature of EU regulation that makes it completely distinct from any other jurisdiction is the community dimension. Other than the community dimension, it is observed that the EC also follows thresholds approach, but again it is unique of EC to consider the turnover for thresholds and not the size of the transaction or the value of assets. The Indian Competition Act‟2002 considers both the turnover and the value of assets thresholds and conclude notification requirement on the basis of either of those. The Phase I stage of merger assessment is similar to the prima facie view stage followed in India. The other similarity is in the Order framework. The EC also issues the order clearing with/without conditions or blocking the mergers and the decision is subject to the scrutiny of courts, as is the case in India where the decisions of the Commission can be appealed in COMPAT and subsequently to the Supreme Court.

6. Summary

6.1 Merger control is a very difficult area of regulation from the stage of prescribing thresholds to the regulatory procedure. If the thresholds are set too low, it would lead to a substantial increase in number of filings which may pose a challenge to most resourceful of the jurisdictions. Also, there would be an added cost to the parties to the transaction which may discourage the necessary and benign consolidation activity. On the other hand, if the thresholds are too high, the mergers having adverse effect on competition may escape notification. Thus, it may be observed that there is lot to learn from the different threshold approaches followed by evolved jurisdictions. If the regulatory procedures are not standardized, it leads to uncertainty among the market players which hurts the business sentiments and proves negative for the industry.

6.2 The evolved jurisdictions such as US and EU have worked on the thresholds to reduce their limitations to the minimum. Similarly, they have come up with detailed guidelines on every aspect of merger assessment to reduce the uncertainty surrounding the decisions. The study of these legal provisions and guidelines is of great help in gaining understanding of the merger control in proper perspective.

Web-links

• http://ec.europa.eu/competition/mergers/legislation/legislation.html Supporting Material
• http://www.justice.gov/atr/public/merger-enforcement.html
• http://europa.eu/legislation_summaries/competition/firms/l26107_en.htm
• http://www.internationalcompetitionnetwork.org/uploads/merger%20wg/non%20horizontal%20effects %20in%20merger%20control%20teleseminar%20slides.pdf
• http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:265:0006:0025:en:PDF
• http://globalcompetitionreview.com/reviews/59/sections/204/chapters/2317/southafricaroleeconomics-merger-control/