European Community merger law
Encyclopedia
European Union merger law is a part of the law of the European Union which regulates whether firms can merge with one another and under what conditions. It is part of competition law
and is designed to ensure that firms do not acquire such a degree of market power
on the free market
so as to harm the interests of consumers, the economy and society as a whole.
Mergers and acquisitions are regulated by competition laws because they may concentrate economic power in the hands of a smaller number of parties. Oversight by the European Union has been enacted under Merger Regulation 139/2004, known as the "ECMR". The law requires that firms proposing to merge apply for prior approval from the Commission, specifically mergers that transcend national borders and with an annual turnover of the combined business exceeds a worldwide turnover of over EUR 5000 million and Community-wide turnover of over EUR 250 million must notify and be examined by the European Commission. Merger regulation thus involves predicting potential market conditions which would pertain after the merger. The standard set by the law is whether a combination would "significantly impede effective competition... in particular as a result of the creation or strengthening of a dominant position..."
One reason why businesses may be motivated to merge is in order to reduce the transaction cost
s of negotiating bilateral contracts. Another is to take advantage of increased economies of scale
.
However, increased market share
and size may also increase market power
, strengthening the negotiating position of the business. This is good for the firm, but can be bad for competitors and downstream entities (such as distributors or consumers). A monopoly
is the most extreme case, where prices might be raised to the monopoly price instead of the lower equilibrium price. An oligopoly
is another potentially undesirable situation in which limited competition may allow higher prices than a market with more participants.
This usually means that one firm buys out the share
s of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the case of [T-102/96] Gencor Ltd v. Commission [1999] ECR II-753 the EU Court of First Instance wrote that merger control is there "to avoid the establishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions."
is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market. A further problem of collective dominance, or oligopoly
through "economic links" can arise, whereby the new market becomes more conducive to collusion
. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behaviour more easily, whether firms can deploy deterrents and whether firms are safe from a reaction by their competitors and consumers. The entry of new firms to the market, and any barriers that they might encounter should be considered.
required that a joint venture with a competitor Bertelsmann
be ceased beforehand. The EU authorities have also focussed lately on the effect of conglomerate merger
s, where companies acquire a large portfolio of related products, though without necessarily dominant shares in any individual market.
reasons rather than sound economic reasons. For example, the EU blocked a proposed merger of General Electric
and Honeywell
on grounds of the possibility of "leverage" in other markets and "portfolio effects", even though United States regulators found that the merger would improve competition and reduce prices. Assistant Attorney General Charles James
, along with a number of academics, called the EU's use of "portfolio effects" to protect competitors, rather than competition, "antithetical to the goals of antitrust law enforcement." United States Secretary of the Treasury
Paul O'Neill called the rejection of the GE-Honeywell merger "off the wall" and complained of European Union regulators "They are the closest thing you can find to an autocratic organization that can successfully impose their will on things that one would think are outside their scope of attention."
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
and is designed to ensure that firms do not acquire such a degree of market power
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
on the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
so as to harm the interests of consumers, the economy and society as a whole.
Mergers and acquisitions are regulated by competition laws because they may concentrate economic power in the hands of a smaller number of parties. Oversight by the European Union has been enacted under Merger Regulation 139/2004, known as the "ECMR". The law requires that firms proposing to merge apply for prior approval from the Commission, specifically mergers that transcend national borders and with an annual turnover of the combined business exceeds a worldwide turnover of over EUR 5000 million and Community-wide turnover of over EUR 250 million must notify and be examined by the European Commission. Merger regulation thus involves predicting potential market conditions which would pertain after the merger. The standard set by the law is whether a combination would "significantly impede effective competition... in particular as a result of the creation or strengthening of a dominant position..."
One reason why businesses may be motivated to merge is in order to reduce the transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s of negotiating bilateral contracts. Another is to take advantage of increased economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
.
However, increased market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
and size may also increase market power
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
, strengthening the negotiating position of the business. This is good for the firm, but can be bad for competitors and downstream entities (such as distributors or consumers). A monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
is the most extreme case, where prices might be raised to the monopoly price instead of the lower equilibrium price. An oligopoly
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
is another potentially undesirable situation in which limited competition may allow higher prices than a market with more participants.
Concentration
Under EC law, a concentration exists when a..."change of control on a lasting basis results from (a) the merger of two or more previously independent undertakings... (b) the acquisition... if direct or indirect control of the whole or parts of one or more other undertakings." Art. 3(1), Regulation 139/2004, the European Community Merger Regulation
This usually means that one firm buys out the share
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
s of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the case of [T-102/96] Gencor Ltd v. Commission [1999] ECR II-753 the EU Court of First Instance wrote that merger control is there "to avoid the establishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions."
Significantly impeding competition
What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions. The Herfindahl-Hirschman IndexHerfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
is used to calculate the "density" of the market, or what concentration exists. Aside from the maths, it is important to consider the product in question and the rate of technical innovation in the market. A further problem of collective dominance, or oligopoly
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
through "economic links" can arise, whereby the new market becomes more conducive to collusion
Collusion
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...
. It is relevant how transparent a market is, because a more concentrated structure could mean firms can coordinate their behaviour more easily, whether firms can deploy deterrents and whether firms are safe from a reaction by their competitors and consumers. The entry of new firms to the market, and any barriers that they might encounter should be considered.
Exceptions
Firms who are engaged in a prima facie uncompetitive concentration may be able to show that their action nevertheless results in "technical and economic progress" mentioned in Art. 2 of the ECMR. Another defence might be that a firm which is being taken over is about to fail or go insolvent, and taking it over leaves a no less competitive state than what would happen anyway. Mergers vertically in the market are rarely of concern, although in AOL/Time Warner the European CommissionEuropean Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
required that a joint venture with a competitor Bertelsmann
Bertelsmann
Bertelsmann AG is a multinational media corporation founded in 1835, based in Gütersloh, Germany. The company operates in 63 countries and employs 102,983 workers , which makes it the most international media corporation in the world. In 2008 the company reported a €16.118 billion consolidated...
be ceased beforehand. The EU authorities have also focussed lately on the effect of conglomerate merger
Conglomerate merger
A conglomerate merger is officially defined as being "any merger that is not horizontal or vertical; in general, it is the combination of firms in different industries or firms operating in different geographic areas". Conglomerate mergers can serve various purposes, including extending corporate...
s, where companies acquire a large portfolio of related products, though without necessarily dominant shares in any individual market.
Criticism
EU authorities' application of merger law in practice has been criticized for acting for protectionistProtectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
reasons rather than sound economic reasons. For example, the EU blocked a proposed merger of General Electric
General Electric
General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...
and Honeywell
Honeywell
Honeywell International, Inc. is a major conglomerate company that produces a variety of consumer products, engineering services, and aerospace systems for a wide variety of customers, from private consumers to major corporations and governments....
on grounds of the possibility of "leverage" in other markets and "portfolio effects", even though United States regulators found that the merger would improve competition and reduce prices. Assistant Attorney General Charles James
Charles James (attorney)
Charles A. James is the vice president and general counsel of Chevron-Texaco and was the Assistant Attorney General in charge of the Antitrust Division at the United States Department of Justice from 2001 to 2002....
, along with a number of academics, called the EU's use of "portfolio effects" to protect competitors, rather than competition, "antithetical to the goals of antitrust law enforcement." United States Secretary of the Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
Paul O'Neill called the rejection of the GE-Honeywell merger "off the wall" and complained of European Union regulators "They are the closest thing you can find to an autocratic organization that can successfully impose their will on things that one would think are outside their scope of attention."