Much has been made about the European Commission’s proposals to extend the scope of the EU Merger Regulation1 to apply to the acquisition of non-controlling minority interests. As explained in previous articles in this publication, these proposals were motivated largely by the Commission’s frustration at not being able to regulate the minority shareholding that Ryanair retained in Aer Lingus even after the Commission had blocked its full acquisition of the company. As a result, the Commission is now consulting on whether, and if so how, to make the necessary changes to capture minority shareholdings without placing an undue burden on business. However, earlier this year, the Commission consulted on another set of proposed changes to the EU Merger Regulation which are similarly intended to reduce the burden on business of the European merger control process.
The proposed changes are two-fold. Firstly, the Commission is proposing changes to the ‘simplified procedure’, which currently allows parties to agreements which meet the jurisdictional thresholds of the European merger control regime, but which are not envisaged to raise significant concerns, to benefit from a less detailed filing (the ‘Short Form CO’) and a shorter review process. The second set of proposals relate to the requirements of the standard EU merger filing itself (the ‘Form CO’). In this article, we identify the most significant of the proposed changes and comment on the extent to which they are likely to achieve the stated objectives of reducing the regulatory burden on parties to transactions.
EXPANDING THE USE OF THE SIMPLIFIED PROCEDURE
The Commission estimates that currently approximately 60% of all notifications it receives benefit from the simplified procedure. They anticipate that the proposed changes will increase the percentage of transactions that can use the Short Form notification system to approximately 70%. To this end, the new rules envisage that it will be possible to use the Short Form where the combined market share of the parties is below 20%, an increase from the existing 15% threshold. In vertical transactions, the Short Form will be available as long as neither party has a share of 30% or more in any vertically related markets – an increase from the current 25% threshold.
Additionally, the Commission has introduced the concept of ‘small overlap cases’ to which the simplified procedure will apply. These are cases where the combined market shares of the parties may possibly be as high as 50% but where the increment in market share is low. The Commission specifies that a low increment will be measured by reference to a Herfindahl-Hirschman Index (HHI) delta of below 1502. Although this is to be welcomed as a matter of principle, it will only apply in practice to a few cases and is arguably less permissive than the current practice of the Commission. Currently it is not uncommon for Commission case teams to exempt parties from the submission of extensive information in a Form CO where the combined market shares is significantly above 50% but where the increment is no more than 3% (generally a much higher HHI delta than 150). Moreover, the proposals suggest that it would be important for parties hoping to rely on the small overlap provisions to consult with the Commission case team by way of pre-notification contact and that its use would be discretionary. The risk is that this new rule will create an incentive for case teams to be less flexible and it may lengthen the short form review process.
Disappointingly, the Commission has not proposed any changes for the treatment of extra-territorial joint ventures having no effect in the EU. Under current rules a joint venture may be notifiable to the Commission where both parents meet the applicable revenue thresholds, even if the joint venture is not intended to operate in the EU and will have no effect there. Although such joint ventures are eligible for the simplified procedure, practitioners have called for the disapplication of the EU Merger Regulation where there can clearly be no effect on competition within the jurisdiction and it is disappointing that the Commission has not seized this opportunity to exclude such transactions from the EU Merger Regulation (or at least reduce the informational burden from parties filing notifications in such cases).
CHANGES TO THE FORM CO
Although intended to improve the EU merger control process, it seems that with one exception, the changes to the Form CO have the potential to increase the burden on notifying parties rather than reduce it.
Reducing the scope of Form CO notifications
Under the current Form CO, it is necessary to provide extensive information on relevant markets where certain market share thresholds are met (‘Affected Markets’). The Commission proposes to increase those market thresholds thus reducing the number of markets for which full information is required. Full information will only be needed for horizontally Affected Markets where the combined shares of the parties is 20% or more (an increase from 15%). For vertically Affected Markets information will only be required where one of the parties has a share of 30% or more (an increase from 25%). Similarly market share levels have been increased in relation to Affected Markets where one party has important intellectual property rights or where the parties are present in neighbouring markets. In contrast, where transactions involve potential competitors, more detailed information will be required where one party has a share of 20%, which is down from the previous threshold of 25% and the other has plans to enter the market or has pursued such plans in the past three years (an increase from two years). This move to reduce the thresholds in such cases is somewhat surprising given the rarity with which transactions involving potential competitors have raised issues in the past.
Expanding the information requirements of the Form CO
As mentioned above, although the overall purpose of the changes is expressed to be to reduce the burden on notifying parties, the changes to the Form CO specifically envisage that, in certain circumstances, more information will be provided in future notifications. In particular, the amended Form CO will require information to be provided in relation to ‘all plausible relevant product and geographic markets’. While the Short Form filing has always required information to be provided on alternative market definitions, the rationale for that has been to allow the Commission to confirm that the use of the Short Form is justified. However, in the case of a full Form CO where detailed information will in any event be provided, this seems somewhat onerous.
Under the existing Form CO, it is necessary to provide the Commission with copies of certain categories of documents including, in particular, copies of documents presented to boards of management of the merging parties that consider the competitive effects of the proposed transaction. The proposed changes to the Form CO extend considerably the scope of documents that need to be submitted. Indeed they now include the minutes of meetings of the boards of management, directors or supervisory boards as well as shareholders’ meetings at which the transaction is discussed. This requirement is not limited by reference to whether the discussion included consideration of the competitive effect of the transaction and therefore, technically, this would require minutes to be submitted where any transaction-related matters are discussed, including personnel issues, tax and real estate. Additionally it will be necessary to provide information concerning different options for acquisitions including, but not limited to, the notified transactions. This information is likely to be highly confidential to the parties concerned and may disclose to the Commission transactions that have been contemplated in the past or in the future, that are entirely irrelevant to the assessment of the proposed transaction. Finally, while it is currently a requirement to submit any reports that are being prepared for the purposes of assessing the conditions of competition on the relevant markets, it is now specified that this requirement includes any such documents that have been considered over the last three years.
Other notable changes
Of note are two other changes proposed to the Form CO. The first one concerns the type of information suitable for waiver requests. It has traditionally been possible to use the pre-notification process to secure waivers from the case team from certain parts of the information requirements of the Form CO. The proposed changes to the Form CO include footnotes suggesting that specific parts of the Form CO are particularly suitable for waiver requests. The fear is that, in practice, these will be used to limit the scope of the information for which waivers can be given as case teams may be reluctant to grant waivers for other aspects of the Form CO not specifically mentioned. Finally, perhaps a reflection of the Commission’s frustration with parties who fail to provide fully reliable contact information for competitors and customers when submitting a Form CO, the Form CO now makes it clear that missing or incomplete contact details will be considered to be incomplete information and that incorrect contact details may be a ground for declaring a notification incomplete.
As mentioned in the introduction, these changes to the EU merger control regime have not attracted much attention by comparison with some of the other more drastic proposals being put forward by the Commission. Nevertheless, they may have a significant impact on parties undertaking notifications of transactions to the Commission and it is not clear that they will operate to significantly ease the burden on notifying parties. The EU merger regime is seen internationally to be one of the most burdensome both in terms of timing and information requirements and it is regrettable that these proposed changes do not appear to address those concerns in any significant way.
By Susan Hinchliffe, partner, Arnold & Porter (UK) LLP.
- Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings.
- HHI is a commonly accepted measure of market concentration calculated by reference to the sum of the squares of the market shares of the parties. The HHI delta is the difference between the HHI pre and post transaction.