What is the substantive test applied by the relevant authority to assess whether or not to clear the merger, or to clear it subject to remedies?
The substantive test is conducted by MOFCOM to assess whether the concentration transaction will or may have the effect of eliminating or restricting competition in the relevant market.
The Interim Provisions on Evaluating the Impact of Concentration of Business Operators on Competition, promulgated by MOFCOM on 29 August 2011, expressly cites numerous factors that MOFCOM will consider when applying the substantive test, and the methodology for applying each factor in a merger review process. Among these factors, market share and the degree of concentration by reference to the Herfindahl-Hirschman Index are deemed to be the most important factors that MOFCOM will consider. In addition, according to the relevant provisions in this regulation, when assessing whether to clear or prohibit a concentration transaction, MOFCOM will evaluate whether the concentration transaction will give rise to any anti-competitive effects, such as unilateral effects, co-ordinated effects, vertical concerns and conglomerate effects. Meanwhile, MOFCOM will also consider whether there exist any defences, such as public interests, economic efficiency, business operators on the verge of bankruptcy, etc.
In essence, the substantive test applied by the DCCA to assess whether or not to clear a merger is whether the merger will significantly impede effective competition, in particular due to the creation or strengthening of a dominant position. When carrying out merger control, the DCCA will in general apply the same tests as the Commission. Thus, the Commission’s merger practice and relevant case law from the EU Courts will apply. The Commission’s guidelines on the assessment of horizontal mergers as well as non-horizontal mergers will also provide an important contribution to the interpretation of the DCCA’s merger assessments.
Historically, the Council and the DCCA seemed to apply a more static, market-share based approach to findings of dominance and unilateral effects compared to the Com-mission. Over the last few years, however, there has been a change towards a more economic approach, and recent merger decisions thus show an increasing use of economic evidence such as diversion ratios and upward pricing pressure (UPP) calculations.
Furthermore, public statements from the DCCA indicate that the use of diversion ratios and UPP calculations is becoming the new standard in cases concerning consumer-related markets, and that diversion ratios and UPP calculations may also be used for the purpose of defining the relevant markets. Nonetheless, during the initial assessment of a merger, the classic approach of defining markets and calculating market shares is still applied. The initial test may then be supplemented with a more economic assessment in case the DCCA finds that the merger could potentially give rise to concerns.
Under the Competition Act, the CCPC is required to examine whether the notified merger or acquisition will lead to a substantial lessening of competition (“SLC”) in the supply of goods or services in the State. The CCPC has stated that the SLC test must be applied in terms of the effect that the proposed merger or acquisition would have on consumer welfare which, in its view, refers to a range of variables including price, output, quality, variety and innovation.
The CCPC’s approach in applying the SLC test is based heavily on economic analysis and, in practical terms, mirrors closely the approach of the European Commission in applying the significant impediment to effective competition test under the EU Merger Regulation. In analysing whether an SLC arises, the CCPC will first typically look to define relevant product and geographic markets by reference to demand-side and supply-side substitutability. It will then examine the impact of the transaction in relation to unilateral effects at the horizontal and vertical level, as well as the possibility of coordinated effects arising on relevant markets. The assessment will focus on the competitive constraints on the merged entity, including those exerted by competitors, customers and the threat of new entry or expansion. The CCPC will consider efficiency arguments, if presented. It will also consider the failing firm defence, although the criteria required for establishing this defence are difficult to meet. Only one transaction to date has been approved on this basis (Baxter/Fannin).
Unlike the position under the EU Merger Regulation, in which the European Commission must proceed to an in-depth Phase II investigation only where it has "serious doubts" regarding the compatibility of a proposed transaction with the internal market, there is no specific test under the Competition Act that must be satisfied in order for the CCPC to open a Phase II investigation. The CCPC will move to Phase II if it is unable on the basis of the information before it to form a view that the result of the merger or acquisition will not be to substantially lessen competition during the Phase I period of 30 working days.
In practice, however, the majority of cases reviewed by the CCPC are cleared at Phase I. The CCPC’s latest Annual Report notes that, between 31 October 2014 and 31 December 2015, just 6 of the 88 cases reviewed by the CCPC were subject to an extended Phase I review, while only 2 received a full Phase II investigation (Topaz/Esso and Baxter/Fannin).
The substantive test, as set out in the Israeli Antitrust Law, is "reasonable concern for significant harm to competition or public" in relation to prices, quality, quantity or regularity of supply of a product or service.
The Antitrust Commissioner issued Opinion 1/11 – Guidelines for The Competitive Analysis of Horizontal Mergers (the "Horizontal Merger Guidelines"). According to the Horizontal Merger Guidelines, the merger review will begin by using a demand-based definition of product and geographic market. The Israeli Antitrust Authority will estimate possible unilateral effects and coordinated effects as well as defences such as merger efficiencies and the failing firm doctrine.
The guidelines indicate that a horizontal merger may raise the Israeli Antitrust Authority's concerns and merit further examination when post-merger market shares are high, the merging companies are the closest substitutes, or entry barriers are high. It should be noted that when evaluating horizontal mergers, the Israeli Antitrust Authority has been known to reach very narrow market definitions.
The substantive test set by the Israeli Antitrust Law for vertical mergers is no different than for horizontal mergers: "reasonable concern for significant harm to competition or public". According to Antitrust Tribunal precedent, vertical mergers are usually beneficial, although they may raise concerns regarding foreclosure. Only on rare occasions has the Antitrust Commissioner rejected a merger based on vertical concerns, but these may result in stipulating conditions.
The substantive test under the Antimonopoly Act is whether a proposed merger may substantially restrain competition in any relevant market. In applying the substantive test to an actual case, the JFTC will consider both horizontal and vertical effects potentially caused by unilateral and coordinated conduct.
In the substantive analysis, the JFTC will consider every relevant factor, such as the market shares of the parties, the number of competitors in the market, the extent of import trade barriers and entry barriers, the likelihood of entry from adjacent markets, market power that customers possess, and efficiency that the transaction will bring about. Market shares and HHI basically take an important position in the JFTC’s analysis. The JFTC usually does not put significant weight on efficiency. The JFTC provides a “safe harbour” that applies to both horizontal and vertical effects analysis on the basis of the HHI.
The DG will determine if the concentration might lead to a substantial lessening of competition in Malta by taking into account, inter alia:
- the need to maintain and develop effective competition in Malta in view of, among other things, the structure of the markets concerned and the actual or potential competition from undertakings located either within or outside Malta;
- whether the business of a party to the concentration has failed or is likely to fail;
- the nature and extent of development and innovation in a relevant market;
- the market position of the undertakings concerned and their economic power, the alternatives available to suppliers and users, their access to markets, any legal or other barriers to entry;
- supply and demand trends for the relevant goods and services, the interests of the intermediate and ultimate consumers, and the development of technical and economic progress.
Concentrations that bring about or are likely to bring about gains in efficiency that will be greater than and will offset the effects of any lessening of competition resulting from or likely to result from the concentration shall not be prohibited if the undertakings concerned prove that such efficiency gains cannot otherwise be attained, are verifiable and likely to be passed on to consumers in the form of lower prices, or greater innovation, choice or quality of products or services.
The substantive test is a typical dominance test. As a matter of Article 7 of Competition Law and Article 13 of the Communiqué, mergers and acquisitions which do not create or strengthen a dominant position and do not significantly impede effective competition in a relevant product market within the whole or part of Turkey, shall be cleared by the Board.
Article 3 of Competition Law defines a dominant position as “any position enjoyed in a certain market by one or more undertakings by virtue of which, those undertakings have the power to act independently from their competitors and purchasers in determining economic parameters such as the amount of production, distribution, price and supply”. However, the substantive test is a two-prong test and a merger or acquisition can only be blocked when the concentration not only creates or strengthens a dominant position but also significantly impedes the competition in the whole territory of Turkey or in a substantial part of it.
As a matter of practice, the AMC clears a predominant majority of transactions.
If the AMC reveals that the proposed transaction may result in the monopolisation or substantial restriction of the competition in any Ukrainian market, it may apply divestment/behavioural remedies to the concentration participants, such as:
- divestment of undertakings (assets, integral property complexes);
- prohibition to increase prices without reasonable grounds;
- prohibition to reduce the volume of production;
- prohibition to create barriers for new competitors;
- request to provide the AMC with certain data on the volume of production/supply during a specified time period, etc.
If the AMC considers that the proposed transaction may severely negatively affect the domestic competition environment, it may refuse to grant the merger control clearance. In that event, the Ukrainian central government (the Cabinet of Ministers of Ukraine) may approve the transaction, if its positive effects and results for the public interest outweigh the negative impact of the restriction of the competition caused by the implementation of the transaction.
Therewith, the Cabinet of Ministers cannot approve the transaction, if the restrictions provided by the transaction:
- are unnecessary for reaching the aim of the concentration; or
- constitute a threat for the domestic market economy system.
Section 7 of the Clayton Act prohibits any merger or acquisition where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” In 2010, the FTC and DOJ jointly issued the latest version of the Horizontal Merger Guidelines (Guidelines), which lay out the agencies’ enforcement priorities and describe their general approach to merger review. According to the Guidelines, the agencies focus their attention on transactions that would tend to “create, enhance, or entrench market power or to facilitate its exercise.” The Guidelines note that the agencies will consider whether a transaction would facilitate increased prices, reduced output, or diminished innovation, or would otherwise harm consumers as a result of a reduction in competition. The agencies have placed far more emphasis on horizontal mergers than vertical transactions. They consider both unilateral and coordinated effects theories, as appropriate.
While considering a deal, the FAS is obliged to proceed with a formal market analysis in order to get actual information on the current situation on the market and also the shares of the parties to the deal on such market.
If the authority comes to the conclusion that the deal may lead to restriction of competition, it might decide to reject the deal (if the negative consequences of the deal are quite substantial) or to clear the deal and also issue an order with a certain obligation that would protect competition on the market.
In particular, the FAS may reject the deal if it leads to creation of a dominant company with a substantial share (such risk exists for deals resulting in acquisition of more than 50% market share). In practice, however, the FAS may prefer to clear the deal and issue an accompanying order containing certain divestment and behavioural obligations (e.g., to sell certain assets, to adopt a public trade policy or to establish and clear with the FAS a selective distribution system).
Please note that the parties to the deal may help the FAS analysis by providing the relevant information on the market to the FAS. We always recommend including such information with the initial application since, in practice, the FAS does not have enough time to analyse the market, so, in most cases, it is happy to review the information provided by the parties (in certain cases, it requests such information from the parties if it was not provided in the initial package of documents, so, in order to avoid any extension of the review period, we recommend including it in the initial package).
The CMA has a duty to open a detailed second-phase investigation (known as 'referring' or 'making a reference' of the merger) if it has a reasonable belief, objectively justified by the relevant facts, that there is a realistic prospect that the merger will or may be expected to result in a substantial lessening of competition (SLC) in any market. By 'realistic prospect' is meant not only a prospect that has a more than 50% chance of occurring, but also a prospect that has a less than 50% chance of occurring, but is more than fanciful, though within this latter range the CMA can exercise its judgement.
If a second-phase investigation is opened, the CMA must decide whether a relevant merger situation has been created and, if so, whether that situation is likely – on the balance of probabilities – to result, or to have resulted, in an SLC in any market.
The substantive test applied by the Belgian Competition Authority, when reviewing notifications, is whether the concentration will result in a significant obstacle to effective competition in the Belgian market, in particular by creating or strengthening a dominant position.
In applying this test, the Authority will have reference to the market share of the merged entity as well as other factors relevant to the structure of competition, such as: the existence of potential new entrants to the market; barriers to entry and exit; the availability of alternative products; the existence of vertical links to upstream or downstream markets; the creation or strengthening of a strong position in neighbouring markets; the possible impact on emerging or future markets; any risk of foreclosing the market through ties with customers and/or suppliers; conglomerate or portfolio effects, etc.
Different to the EUMR which uses the SIEC-Test (Significant Impediment of Effective Competition Test), Austrian merger control still employs the dominance test. Hence, the authorities examine whether or not the notified transaction creates or strengthens a dominant position.
Pursuant to jurisprudence, a dominant position is given if an undertaking can prevent the maintaining of effective competition on the relevant market by being able to behave independently with regard to its competitors, customers and/or consumers to a notable extent.
In applying the substantive test, the Cartel Court (the BWB does not issue any binding decision but may simply refrain from or waive its right to ask for an in-depth examination of a merger case) evaluates the effects of the concentration on the market structure in a predictive approach. Competition conditions before and (hypothetically) post implementation of the concentration are compared. All circumstances may be taken into account, with market shares being a major factor. Strong buyer power, for example, is also considered.
In many cases, the Cartel Court relies on (economic) expert opinions.
Besides, when a merger concerns sectors subject to specific regulation (e.g. electricity and gas, broadcasting and telecommunication), the competition authorities collaborate closely with experts from the sector specific regulators.
In evaluating a merger, the Commission first considers whether the merger is likely to substantially prevent or lessen competition. Factors considered by the Commission include:
- the level of actual and potential import competition in the market;
- the ease of entry into the market, including tariff and regulatory barriers;
- the level and trends of concentration, and history of collusion, in the market;
- the degree of countervailing power in the market;
- the dynamic characteristics of the market, including growth, innovation, and product differentiation;
- the nature and extent of vertical integration in the market;
- whether the business or part of the business of a party to the merger or proposed merger has failed or is likely to fail; and
- whether the merger will result in the removal of an effective competitor.
More generally, the Commission considers the potential horizontal, vertical, unilateral and coordinated effects of the merger. It is worth noting that, given a relatively concentrated economy, vertical mergers have typically received a more conservative reception than in larger economies such as the EU and US.
If the Commission finds that a merger is likely to have an anti-competitive effect, it may still find the merger to be justifiable on the basis of efficiency, technology or other pro-competitive gains that are shown to outweigh any anti-competitive effect.
The substantive test for clearance focuses on whether the concentration will significantly lessen competition, in particular by creating or reinforcing a dominant position or by creating or reinforcing buyer power that places suppliers in a situation of economic dependence (Article L.430-6 of the FCC).
The FCA will determine the relevant markets for assessing the possible anticompetitive effects of the concentration. It will then analyse the possible non-coordinated effects whether horizontal, vertical or conglomerate. The FCA also assesses the operation’s coordinated effects. In particular, in the case of a joint venture, it examines the risk of coordination between the parent companies. The FCA takes into account the efficiency gains generated by the transaction to determine whether they are sufficient to compensate its restrictive effect. Notably, three cumulative conditions should be met: (a) the gains must be quantifiable and verifiable; (b) they must be specific to the transaction; and (c) a part of these gains must be passed on to consumers (para. 491 of the Merger Control Guidelines).
At the end of this analysis, if the competitive assessment remains negative, the FCA examines the remedies proposed by the parties.
Applicable substantive test on Mexican merger control review has been improved considerably on the last years. Mexican enforcement agencies have been trying to adopt best international practices and experience from major antitrust jurisdictions.
Nowadays, competition agencies focus on several aspects regarding the impact the transaction might have over the competition process including both, unilateral and coordinated effects, including horizontal and vertical overlaps and portfolio effects.
For such purposes, the authority first focuses on combined market shares and whether the acquirer, as a result of the transaction, may result in market power or increase such power with which it may diminish or damage the competition process. Likewise, competition agencies also analyse whether the transaction may have an exclusionary purpose or effect, establish barriers to entry or to the competition, impede access to related markets or to essential facilities. To this end, the authority also analyses the relevant and related markets, the market power other players might have and the level of concentration.
In addition, the authority would also analyse whether the transaction may have as its purpose or effect to substantially facilitate the commission of a monopolistic practice (i.e. horizontal cartels or vertical restraints) and whether there is the need to impose certain conditions that will contrast the power in case the transaction was approved.
The authority´s review also includes other aspects such as potential efficiencies and rationale behind the transaction, potential entrants to the market or other conditions that could be considered as pro-competitive. Likewise, in regard of cross border transactions, Mexican competition authorities will also relay on the review of other relevant jurisdictions and will aim for consistency if the merits if the case permits it.
Since 2013, German law applies the “significant impediment to effective competition” (SIEC) test that is also applied in the EU. Market dominance remains the primary example of SIEC.
When analysing a merger the FCO looks in particular at the parties’ combined market shares, their economic and financial strength, access to suppliers and markets, links with other companies, legal or factual barriers to entry for competitors, and the ability of suppliers or customers to switch to alternative suppliers.
The ARC contains two rebuttable legal presumptions for market dominance: a company is presumed to dominate a market if its share exceeds 40%. Collective dominance is presumed where three or fewer companies together hold more than 50% market share, or if five or fewer companies hold a market share of more than two-thirds.
The FCO considers horizontal, vertical, unilateral, coordinated and conglomerate effects consistent with the approach in the EU and the US.
An important exception exists where a relevant market has been in existence for at least five years with a total annual size in Germany of less than EUR 15 million in the last calendar year (minor market clause). In this case, the FCO cannot prohibit the transaction based solely on such de minimis market.
Under Italian merger control rules, a concentration is prohibited if it creates or strengthen a dominant position thus eliminating or reducing the competition on a lasting basis in the Italian market. In its assessment, the ICA takes into account: (i) the market position of the companies concerned and their economic and financial power; (ii) the alternatives available to suppliers and users, their access to supplies or markets; (iii) any legal or other barriers to entry; (iv) supply and demand trends for the relevant goods and services.
The scope of the prohibition or substantive test is set out above.
The typical approach under Australian law to assessing whether a transaction raises material competition concerns involves two limbs. First, each relevant market(s) in which the parties to the transaction compete is defined. Secondly, the potential impact on competition in that market(s) in the foreseeable future is assessed 'with' and 'without' the proposed transaction.
The CCA prohibition applies to both horizontal and vertical concentrations, and the ACCC will consider both unilateral and coordinated effects that may weaken or remove competitive pressure in the relevant market.
Certain factors, listed in the CCA and the ACCC's Merger Guidelines, are considered when assessing the potential impact on competition, including:
- the actual and potential level of import competition;
- the height of barriers to entry (considered particularly important);
- the level of concentration;
- the degree of countervailing power; and
- the nature and extent of vertical integration.
Australian courts, in contemplating the meaning of a 'substantial lessening of competition', in both merger and non-merger cases, have drawn on US and European anti-trust precedents.
The substantive test the Bureau applies when reviewing transactions is whether the transaction is likely to prevent or lessen competition substantially in a market. Bureau guidance suggests that a substantial prevention or lessening of competition results only from mergers that are likely to create, maintain or enhance the ability of the merged entity, unilaterally or in coordination with other firms, to exercise market power.
Unlike the US or EU merger review paradigms, the Canadian regime includes an express efficiency defence to otherwise anti-competitive mergers, which applies to cases where the efficiencies brought about by the merger are likely to be greater than, and offset any effects of, the prevention or lessening of competition that results from the merger.
The substantive test for compatibility of a concentration with competition in the market is that such concentration not significantly impede effective competition in Cyprus or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.
In assessing the compatibility of a concentration, the CPC takes into consideration the following criteria:
- the need to maintain and develop conditions of effective competition in the relevant markets, taking into account, inter alia, the structure of the affected markets, other markets upon which the concentration may have significant effects and the potential competition on behalf of undertakings within or outside Cyprus;
- the position in the market of the undertakings concerned and undertakings connected to them;
- the financial power of such undertakings;
- the alternative sources of supply of products or services in the affected markets and/or other markets upon which the concentration may have significant effects;
- any barriers of entry to the affected markets and/or other markets upon which the concentration may have significant effects;
- the interests of the intermediate and end consumers of the relevant products and services;
- the contribution to technical and economic progress and the possibility of such contribution being in the interest of consumers and not obstructing competition; and
- the supply and demand trends for the relevant markets.
To the extent a joint venture that constitutes a concentration has as its object or effect the coordination of competitive conduct of undertakings that remain independent, the Service shall particularly take into account:
- whether two or more parent companies retain, to a significant extent, activities in the same market as the joint venture or in a market which is downstream or upstream from that of the joint venture or in a neighbouring market closely related to this market; and
- whether the coordination that directly emanates from the creation of the joint venture provides the undertakings concerned the ability to eliminate competition for a substantial part of the relevant products or services.
While the Law is silent in this regard, the CPC’s approach and analysis of harm is substantially aligned with the respective approach of the European Commission. Besides high market shares, the assessment usually takes into account the anti-competitive effects that could potentially arise out of a concentration, such as coordinated effects as well as unilateral effects.