Mergers more tricky after policy U-turn, say experts

Date: 06/09/01

By Peter Chapman

Changes to the way in which competition watchdogs vet mergers and joint ventures will cause legal headaches for firms and make complex deals even harder to pull off, lawyers warn.

The move, unveiled quietly by Competition Commissioner Mario Monti before the summer break, concerns the way officials vet restrictive agreements between companies that accompany a joint venture or merger of business units.

The changes mean that companies who win clearance for their deals from Brussels merger watchdogs would not automatically win a clean bill of health at the same time for other vital pieces in the jigsaw - known in the legal jargon as 'ancillary restraints'.

Alec Burnside, a senior Brussels-based partner with UK firm Linklaters and Alliance, claimed the move would lead to more legal uncertainty in the aftermath of the EU's controversial rejection of the huge GE-Honeywell deal. He said it was "disgraceful" that the changes would be imposed on industry without consultation.

Ancillary restraints are often seen as a side-show to the main event - the deal underpinning them - but their economic importance is often huge.

Examples include an accord that a company selling a business unit in a deal covered by the EU's merger rules would not compete with the buyer. This would allow the buyer to gain customer loyalty or to exploit the selling company's know-how. Without such a clause, the main deal may never have taken place.

Under the regime, the onus will now be on firms to check whether agreements breach the EU's tough anti-trust rules which operate separately from the Union's fast-track merger regulations.

Burnside said the system would leave companies open to legal challenges in national courts. While for the time being they can still apply to the Commission for exemption from the anti-trust regime for unharmful business agreements, Brussels wants to phase out this notification process to devolve running day-to-day competition issues to member states.

But Burnside warned that multi-billion-euro deals could be left on the scrapheap even when Union merger officials had given the go-ahead if the 'ancillaries' were subsequently deemed unlawful.

This was a real danger because the legality of agreements was a "matter of judgement" on which legal experts and judges could easily disagree.

Erik Berggren, competition advisor to EU business leaders' lobby UNICE, said it was "regrettable" that the decision to take ancillaries out of the merger process change "was never mentioned in the earlier 1999 draft that was published for consultation".

Changes to the way in which competition watchdogs vet mergers and joint ventures will cause legal headaches for firms and make complex deals even harder to pull off, lawyers warn.