Monti overhaul of merger regime may not come up smelling of roses

By Peter Chapman

Date: 20/11/03

JAMES Rill, America's former deputy attorney-general for anti-trust, said Mario Monti's blueprint for a new EU merger control regime was as close as the competition commissioner could get to a US-style regime without copying the whole caboodle.

In a Shakespearean flourish, Rill, now a partner with US law firm Howrey Simon in Washington, said the proposals, unveiled last year, were "a rose by another name" and that "it is much ado about nothing to worry about labels".

Since then, member states have been doing just that. But after months of wrangling, competitiveness ministers are expected next week to adopt a messy compromise for the merger regulation that will push the Union even further down the American route.

The key issue has been the wording of the so-called "substantive test". This boils down to a short definition which sets out the types of deals which will be subject to scrutiny by DG Competition, and if need be, the European courts in Luxembourg.

The European Commission has always sought as free a hand as possible to block any deleterious effects from mergers.

However nagging doubts remain over the extent to which, under Monti's original plan, the European courts would let the EU executive cite so-called "unilateral effects" to block mergers.

Unilateral effects are the ability to raise prices for a long period, and thus harm consumers - even if merging firms have a very small market share and are not colluding with rivals, intentionally or otherwise.

Such effects are a risk in markets with very high barriers to entry, such as investment costs, which could stop companies wishing to enter the market to compete on price. Low levels of price transparency are also a factor.

America's anti-trust authorities target deals that would lead to a "substantial lessening of competition" - a phrase which is thought to be a catch-all for all cases including those involving unilateral effects.

The UK, Ireland and Sweden like this definition so much, they adopted "SLC" for their national competition authorities.

But Monti chose not to ditch the Commission's original "dominance test", probably because he knew member states, such as the Netherlands, Italy and, crucially, Germany, which pioneered EU merger rules, would not accept the change.

Instead, Monti's advisors believed, like Rill, that the old system, together with suitable guidance notes, could be reinterpreted to end up with the same results and that there would be no "gap" in the EU's enforcement regime.

Next week's ministerial compromise is an attempt to make sure that the gap, if it exists at all, is well and truly plugged.

The proposal, backed by the Commission and all member states except Germany, takes the current dominance test and turns it around.

The old test states that "a concentration which creates or strengthens a dominant position, as result of which effective competition would be significantly impeded in the common market or in a substantial part of it, shall be declared incompatible with the common market".

The new one states: "A concentration which would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market."

Giving the words "significantly impede" more emphasis is a subtle difference - even for the lawyers. But experts believe the effect of the change could give the EU executive more leeway to vet the anti-competitive effects of mergers, regardless of how dominance is defined.

In other words, it takes the existing system, with its reliance on dominance, and bolts on unilateral effects.

However, critics fear that the new test could lead to even more headaches.

Johan Ysewyn, a partner with law firm Linklaters in Brussels, says the new definition threatens legal certainty.

"The Commission is simply toying with concepts. As they feel the dominance test doesn't cover all the competition issues that could result from mergers, they actually want an SLC-like test.

"But because some of the member states disagree [on moving to the SLC test], there is a political hurdle which is simply too high. Hence the need for compromise, and the idea of having a hybrid test of "significant impediment to effective competition".

The discussions may appear "nerdy", he admits. But, he warns, "there is a big risk that we are doing away with all the learning on the dominance test which has been developed over the last few years to replace it by complete legal uncertainty".

"In addition, it gives the Commission the possibility to move away from the constraints imposed by the interpretation of the European courts. It would become extremely difficult to predict the outcome in very complex merger investigations."

Commission lawyers told European Voice they believed the existing legal precedents in merger cases would still be valid if the new test is adopted. And they insist the Commission would not seek to use its wider powers to block more mergers.

The proposed regime may be a rose by another name. But will this compromise smell as sweet?