Publication of French Merger Control Guidelines
October 14, 2005
Almost three years after the publication of draft guidelines, the French Ministry of Economy has recently adopted finalised guidelines on merger control with the aim of synthesising and commenting on the French competition authorities’ method of analysing mergers. The object of this 164-page document is to assist users of the French system of merger control.
The French merger control regime was reformed by the Law of 15 May 2001, which introduced the current regulatory requirements. The control of concentrations is an instrument to regulate a priori the structure of markets. It aims to examine companies’ external growth operations in order to ensure they will not affect competition on a given market or create an imbalance in the normal functioning of such market. The purpose of merger control is not to prevent potential abuses of a dominant position of a company or to protect competitors. A concentration is positive if consumers take advantage of the merger, and if they have access to more goods and services at a better price, of better quality and with more innovative characteristics.
The main features of the French merger control regime are described below.
Scope of the Control—Notification
It is compulsory under French Law to file with the Minister of Economy prior notification of merger transactions involving undertakings which generate turnover exceeding specific thresholds. All economic sectors are subject to merger control, including media, insurance and banking services.
Transactions Concerned
A transaction falls within the scope of French merger control where there is:
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A merger of two or more previously independent firms;
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An acquisition of direct or indirect control of a company or part of a company; or
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The creation of a full-function joint venture performing all the functions of an autonomous entity on a lasting basis.
Control includes all legal and factual means that allow a person or a company, solely or jointly, to exercise a "determining influence" on the activity of another company.
Turnover Thresholds Triggering Notification Requirements
Notification of a merger is compulsory if all of the following cumulative conditions are met:
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Aggregate worldwide turnover of the undertakings involved in the transaction exceeds €150 million;
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Individual turnover generated in France by at least two undertakings involved in the transaction exceeds €50 million each (including turnover in French overseas departments and territories); and
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The transaction does not fulfil the criteria for notification to the European Commission under articles 1(2) and 1(3) of EC Merger Regulation 139/2004 (ECMR)
The turnover taken into consideration is that generated by the groups to which the parties to the transaction belong. However, when the transaction relates to the acquisition of one undertaking or part of an undertaking, the total turnover of the seller is not taken into consideration, but only that portion of the seller’s turnover relating to the undertaking of that portion being acquired. Special calculation rules are applicable to insurance companies and banks. Concentrations in overseas departments are subject to specific rules.
Referral Mechanism Between the European Commission and EU Member States
With the aim of reducing procedural costs for the notifying companies and to ensure an optimum distribution of competence between the EU Member States and the European Commission, companies and Member States can, in certain circumstances, use the referral mechanism in accordance with ECMR.
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Referral suggested by the parties: Before filing the notification, the notifying parties can ask the European Commission for (i) the partial or total referral of their case to an EU Member State, where an operation of Community dimension is likely to affect competition in a market within a Member State presenting all the characteristics of a distinct market (article 4.4 ECMR) or (ii) the referral of their case to the European Commission where the operation, which has no Community dimension, must be notified to at least three Member States (article 4.5 ECMR).
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Referral suggested by EU Member States or the European Commission: After the filing of a notification, a Member State can ask the Commission, at its own initiative or upon invitation by the Commission, to examine the case in whole or in part if (i) the concentration threatens to significantly affect competition in a market within that Member State which presents all the characteristics of a distinct market, or (ii) the concentration affects competition in a market within that Member State which does not constitute a substantial part of the common market (article 9 ECMR). Conversely, one or more Member States may request that a concentration without a Community dimension, which affects trade between Member States and threatens to significantly affect competition within the territory of the Member State(s), should be examined by the Commission (article 22 ECMR).
Procedure
Pre-Notifications and Notifications
Pre-notification contact with the Ministry of Economy Competition Directorate is highly recommended. Informal and confidential discussions during this phase are helpful to prepare the formal notification of the concentration to the Minister of Economy. There is no filing fee.
Law n°2004-1343 of 9 December 2004 introduced the possibility for undertakings to notify proposed concentrations that are "sufficiently concrete", in particular through signing a letter of intent or in the case of announcement of a public bid. This brought French law into line with ECMR, and means the notification must no longer be made solely when parties are irrevocably committed (eg, after the signature of instruments of incorporation, publication of the purchase offer or of the exchange offer, or acquisition of a controlling interest).
The acquiring party is responsible for notification. In the case of a merger or joint venture, all participating companies are supposed to notify. In practice, it is sufficient if one of these companies notifies on behalf of the others.
The obligation to notify a concentration applies to companies as long as they reach the turnover thresholds, regardless of their nationality or location, or whether the concentration is implemented outside France or whether the companies involved own any assets in France.
The transaction may not be completed prior to clearance unless the Minister of Economy grants an individual authorisation after the parties have put forward a reasoned justification for such prior completion. Such reasoned justification would be for example, that the operation involves private equity funds carrying out acquisitions in a sector where they do not hold any participation, or that the target is a failing company.
Procedural Schedule
An initial examination phase (phase I) of five weeks starts as soon as the Minister of Economy has recognised that the notification is complete. A three-week extension is allowed for the assessment of proposed remedies.
Phase I ends with a decision by the Minister of Economy who may clear the transaction, with or without conditions, or refer the matter to the Competition Council if the transaction may affect competition.
The Competition Council (phase II) has three months to deliver its advice and when appropriate, may request the opinion of independent bodies when the parties are active in the media, banking or insurance sectors. The Competition Council may advise clarance of the transaction with or without conditions (structural or behavioural commitments); or it may advise prohibition of the transaction and ask that the parties take appropriate measures to return to a sufficient level of competition (eg, status quo ante or divestment).
The Council’s advice is not binding on the Minister with respect to his final decision, which must be given within one month of the Council’s advice. A three-week extension is provided to allow for the assessment of proposed remedies.
Sanctions
Fines of up to five per cent of the turnover generated in France may be imposed by the Minister of Economy on the party or parties obliged to notify: (i) in the absence of notification, (ii) in the event of false or incomplete notification, (iii) implementation of the transaction prior to clearance, or (iv) violation of commitments or violation of the final decision of the Minister of Economy.
Publicity
A press release is posted on the Competition Directorate website within five working days of receipt of the notification. This contains the names of the parties concerned, the type of operation and the economic sectors involved. The press release invites interested third parties to submit their comments within a certain time limit. The Minister makes public decisions to refer a transaction to the Competition Council or clearing or prohibiting a transaction within five days of the decision.
Appeal
Appeals may be lodged before the French Administrative High Court (Conseil d’Etat) by the parties involved in the transaction within two months of notification of the Minister’s decision and/or by third parties which have a legitimate interest in doing so within two months of official publication of the Minister’s decision.
Competitive Assessment
Market Shares on the Relevant Markets
The decisional practices of both the French Minister of Economy and the European Commission illustrate a methodology to define the market(s) concerned. This is the first step of the analysis of a concentration. A relevant product market includes all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of their characteristics, price and intended use. A relevant geographical market is an area in which the undertakings concerned are involved in the supply and demand of products or services, in which the competition conditions are sufficiently homogeneous, and which can be distinguished from neighbouring areas because conditions of competition are appreciably different in those areas. This definition will allow, in particular, the identification of current operators likely to sustain competition on these markets, their respective weight before and after the concentration via the calculation of market shares, the degree of concentration in the market and the characteristics of offer and demand.
Competitive Analysis
Typology of Negative Competitive Effects
Competitive analysis aims to assess if the transaction, irrespective of the horizontal, conglomerate or vertical nature of the concentration, would impede competition, in particular as a result of the creation or strengthening of a dominant position. The following are descriptions of the types of negative competitive effects.
Horizontal Concentrations
Horizontal concentrations are mergers between companies which are active on the same relevant market(s) or potential competitors on such market(s) and where the merger gives rise to horizontal overlap of the activities of the parties. The case of non-coordinated or unilateral effects concerns a single firm which is able to increase its prices independently of any competitive pressure resulting from its remaining competitors and regardless of their response. The reaction of other actors on the market must be taken into account. In other words, the analysis must determine if a price decrease of the merged entity can be profitable and whether it is also profitable for other actors to match the merged entity’s prices. The ability of the merging firms to significantly impede competition by its unilateral effects, if need be by creating or strengthening a dominant position, is assessed through a number of factors relating to the competition conditions on the market(s) concerned.
In the case of coordinated effects, tacit collusion or collective dominance, the structure of certain markets can be such that, following a concentration, companies that were previously not coordinating are significantly more likely to coordinate their behaviour and raise their prices (or reduce quantities produced or quality of production). The Airtours case in the European Court of Justice identified three main features likely to lead to the creation or strengthening of coordinated effects following a concentration: a sufficient degree of market transparency which enables operators to know how other members are behaving, an incentive not to depart from the common policy on the market and the foreseeable reaction from current and future competitors, and consumers would not jeopardise the results expected from the common policy.
The analysis also considers the disappearance of a potential competitor. A concentration, although not creating any overlap on a market, can lead to a potential competitor’s disappearance on a given market. A company can be considered a potential competitor if it already has or could obtain within a limited period of time the necessary marketing and technical means to enter the market fairly quickly. If one of the undertakings concerned has significant presence on the market concerned, the disappearance of a potential competitor will be likely to affect competition.
If the merged entity creates buying power for itself, it may be considered to have a negative competitive effect. Any increase in the buying power of a company can limit competition insofar as it can place suppliers in a situation of economic dependence or impose vertical restraints on suppliers (such as the obligation to supply the merged entity exclusively).
Conglomerate Concentrations
Conglomerate concentrations are mergers between companies which are not in a direct horizontal or vertical relationship, either as direct competitors or as suppliers and customers. As a rule, conglomerate concentrations have positive effects since they enable companies to carry out synergies which can possibly benefit consumers. However, they can have anti-competitive consequences if the range effect (addition of different products or types of products) or portfolio effect (eg, addition of numerous trademarks) represents a decisive advantage for the merged entity.
Vertical Concentrations
Vertical concentrations are mergers between companies that operate at a different level of the production, transformation or distribution chain. Non-horizontal mergers are less likely to create competitive problems than horizontal mergers. Generally, vertical concentrations lead to efficiencies. However, they can raise competition concerns if competitors are either deprived of their supplies or prevented from marketing their goods and services. Lastly, if the undertakings’ market shares are high, either upstream or downstream, the foreclosure risk must not be neglected.
Compensation Effects of Market Power
In order to assess the effects of the concentration, the French competition authority takes into account internal factors in the functioning of the market which are likely to show the competitive pressure existing within the market(s) concerned. In particular, the weight of existing competitors, the quality of their product offering, their capacity to compete directly with the products offered by the merged entity, and suppliers and purchasers strength and power to negotiate are considered.
Market Entry Barriers
Legal, technical or other barriers to entry into the market may exist. Their assessment constitutes an essential stage of the competition analysis. The higher the barriers to entry, the more likely it is that a concentration could potentially restrict competition. Alternatively, preservation of effective competition can be guaranteed if it is shown that the entry of credible potential competitors is not limited by possible market entry barriers.
"Failing Firm" Defence
Under the "failing firm" doctrine, where the target is a failing firm, competition authorities can clear a concentration which would otherwise be considered as creating or strengthening a dominant position. The basic requirements are that the disappearance of the failing firm would be unavoidable if it was not taken over, that there is no less detrimental purchase alternative for competition and that the disappearance of the failing firm would not be less detrimental for consumers than its takeover.
Efficiencies Contributing to Economic or Social Progress
Parties are free to develop their arguments relating to efficiency gains contributing to economic and social progress resulting from the concentration, which could counterbalance potential negative effects. In order to take account of efficiencies in the assessment of a concentration, these efficiencies, which are particularly difficult to assess, must be quantifiable, verifiable and beneficial to consumers. It must also be shown that they could not be attained by any means other than the concentration.
Remedies
Where a proposed concentration threatens to significantly impede competition, the parties may seek, either at phase I or phase II, to resolve competition concerns by proposing commitments. These commitments generally aim to reduce the undertakings’ market power and to restore sufficient competition where the contribution to economic and social progress brought by the concentration is not sufficient. Commitments must be proportionate to the risks laid down by the operation and strictly necessary to maintain or restore effective competition. They can be of a structural nature (eg, transfer of assets) and/or behavioural (eg, guarantee of access to a network, patents or licences).
The French Minister of Economy will prohibit the transaction only when it is not possible to define commitments likely to restore competition on the affected markets.
