European Competition: European Court raises bar on the Commission’s use of novel theories in merger cases
February 22, 2005
On 15 February, the European Court of Justice ("ECJ") upheld the previous decision of the Court of First Instance ("CFI") annulling the decision of the European Commission ("Commission") to block the Tetra Laval/Sidel merger (see On the Subject…,"Court issues two key decisions signalling reform of European Merger Law", published 1 November 2002). The Commission concluded that the takeover would have encouraged Tetra to leverage its dominant position in carton packaging to persuade customers to choose Sidel’s products in the PET bottling market. The Commission relied on the often criticised "conglomerate effects" theory in prohibiting the merger. The CFI concluded that the Commission’s conclusions had been inaccurate, in that they were based on insufficient, incomplete, insignificant and inconsistent evidence.
The ECJ dismissed the Commission’s appeal and confirmed that the CFI had respected the standards of review to be applied by the European Courts. Although the ECJ recognised that the Commission has a margin of discretion with regard to the assessment of economic matters in merger cases, the ECJ confirmed that it is the duty of the European Courts not only to establish whether the evidence relied upon by the Commission is factually accurate, reliable and consistent but also whether that evidence contains all the information which must be taken into account in order to substantiate the Commission’s views. In relation to conglomerate mergers, where the parties are not existing competitors, suppliers or customers, the ECJ confirmed the need for the Commission to exercise great care in its application of novel theories.
The ECJ recognised that a prospective analysis was required, as the transaction did not require the examination of past events – for which many items of evidence may be available – or of current events, but rather a prediction of events which were more or less likely to occur in the future. In these circumstances, the Commission must consider a lengthy period of time in the future whereby any future anticompetitive effects were going to be "dimly discernable, uncertain and difficult to establish". As a result, the ECJ confirmed that convincing evidence of anticompetitive effects must be produced by the Commission before it can prohibit a merger.
In addition to the need for the Commission to produce convincing evidence of the likelihood that a transaction will result in a significant impediment to effective competition in the EU, the ECJ also confirmed that the Commission must take account, when examining the probability of future conduct, both of the incentives to adopt such conduct and the factors likely to reduce, or even eliminate, those incentives, including the possibility that the conduct is unlawful. However, it is not necessary for the Commission to examine the likelihood of detection of such conduct by the Commission or national competition authorities.
Finally, the ECJ confirmed that the Commission had a duty to consider the behavioural and structural remedies proposed by the parties in order to alleviate any competition concerns arising from the transaction. The Commission cannot refuse to accept commitments, as a matter of principle, but has a duty to take account of all commitments offered by the merging parties before reaching its decision.
The ECJ judgment confirms the need for the Commission to set out more accurately the basis of its economic analysis and to substantiate that analysis. The Commission must produce convincing evidence before prohibiting proposed mergers. Although the Commission has a margin of discretion in analysing complex economic evidence, the judgment confirms the level of evidence it requires in deciding to block a transaction. The Commission has appointed a Chief Economist and introduced a peer review procedure in order to strengthen its review process.
Merging parties can now expect the Commission to exercise great care in the examination of complex mergers. In cases where there is no straightforward overlap between the parties’ businesses, the Commission will need to rely on robust evidence before it can seek to block a transaction. The European Courts have clearly set out the requirements for the application of collective dominance and conglomerate effects theories. The Commission must produce the evidence before it can use these novel theories to prohibit mergers.
