European Union: EU merger remedies

Author: | Published: 1 Oct 2009
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Under the EC Merger Regulation, if the Commission takes the view that a merger raises serious competition concerns, the merging parties may propose commitments so as to render the notified concentration compatible with the common market. Merger remedies constitute a key instrument in the hands of the Commission. The vast majority of mergers raising material competition issues are cleared by the Commission on the basis of remedies following either a preliminary phase I review or an in-depth phase II investigation, rather than being abandoned by the parties or prohibited.

Key reforms of the revised remedies Notice

The Notice (Commission Notice on remedies acceptable under Council Regulations (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004, OJ C 267/1, 22.10.2008, pages 1-27) was intended to take account of the findings of the Commission's 2005 Merger Remedies Study, and incorporates significant jurisprudence of the European courts in the area including General Electric v Commission, EDP v Commission and Cementbouw as well as additional experience gained by the Commission in the design and implementation of remedies in recent years. The Notice does not however present a radical change of direction. Rather, the revision is designed to further refine the Commission's approach and to reduce existing uncertainties.

General principles

The Notice clarifies at the outset the allocation of responsibilities between the Commission and the merging parties throughout the process of submitting remedies. Taking account of recent jurisprudence (see the judgements in General Electric v Commission and EDP v Commission), it is reiterated that it is up to the notifying parties to put forward commitments. The Commission is not in a position to unilaterally impose any conditions to an authorisation decision, and must therefore prohibit any concentration for which insufficient remedies have been proposed.

At the same time, following the judgment in EDP v Commission the Notice makes clear that the Commission, rather than the merging parties, bears the burden of proof for establishing whether or not a modified transaction leads, despite the proposed commitments, to a significant impediment of effective competition. The burden of proof for a prohibition or authorisation of a modified transaction is thus the same as for unmodified transactions.

The Notice also contains a revised formulation of the standard for acceptable remedies. Whereas the Previous Notice (Commission Notice on remedies acceptable under Council Regulation (EEC) 4064/89 and under Commission Regulation (EC) 447/98, OJ C 68, 2.3.2001, pages 3-11) specified only that acceptable remedies would need to restore conditions of effective competition in the common market on a permanent basis, the revised Notice attempts to be more precise, stating that the remedies need to "eliminate the competition concerns entirely and have to be comprehensive and effective from all points of view". In addition, acceptable remedies must be "capable of being implemented effectively within a short period of time".

The Notice further reiterates the Commission's clear preference for structural remedies. Structural remedies, the most common types of which are divestitures of businesses or assets of the merging parties, are designed to modify the allocation of property rights on a permanent basis. They may be contrasted with behavioural remedies, such as undertakings to grant access to key infrastructure or inputs, to continue supply relationships, not to raise prices or to reduce product ranges, by which the merging parties merely modify their commercial behaviour (It should be noted that the Commission

classifies undertakings to grant access to key infrastructure or inputs on non-discriminatory terms as "other structural remedies" whereas these are commonly classified as behavioural.

In the new text, the Commission declares that it regards divestitures – the prototype structural remedy – as "the benchmark for other remedies in terms of effectiveness and efficiency". Consequently, it will accept behavioural remedies, including in particular access obligations, only in circumstances where they are "at least equivalent in [their] effects to a divestiture". Thus, the Notice maintains the Commission's scepticism towards transitional non-structural remedies.

Designing divestiture remedies

Among the different divestiture options, the Commission puts even more emphasis than previously on the sale of an existing viable stand-alone business as its preferred divestiture route.

Other divestiture options are divestitures of businesses which have existing strong links or are partially integrated with businesses retained by the merging parties (carve-outs), combinations of assets which did not form a uniform and viable business in the past (mix-and-match remedies), or divestitures of only brands and supporting assets. In addition, in the context of intellectual property rights the grant of long-term licences or re-branding commitments is considered as equivalent to divestitures.

Circumstances and modalities of these alternative types of divestiture are elaborated in the Notice. However, given the outcome of the Remedies Study that other divestiture types raise implementation risks and have often not been effective in practice, the Notice considers them as second best compared to the sale of an existing viable stand-alone business. While the Commission concedes that the principle of proportionality may in certain instances require that a less intrusive solution than the divestiture of an existing viable stand-alone business be found, such cases will remain exceptional.

As concerns the scope of existing viable stand-alone businesses, the reform clarifies that those have to include all assets contributing to its operation prior to the divestment, or necessary to ensure its viability and competitiveness, including all such personnel. The business itself has to be viable as such, that is independently from any resources of the possible or presumed future purchaser.

In light of divestments that failed due to unforeseen vertical links between the merging parties and the divestiture business as uncovered by the Remedies Study, the Notice further requires the parties to detail any supply relationships between them and the divestiture business.

Identifying a suitable purchaser

The Notice stresses the close link between the intended effect of the divestiture and a transfer of the divestiture business to a suitable purchaser. So-called standard purchaser requirements, including independence of the purchaser from the parties, possession of financial resources, proven relevant expertise and the incentive and ability to maintain and develop the divested business as a viable and active competitive force, could already be found in the Previous Notice. The revised Notice makes clear that the standard purchaser requirements may have to be supplemented on a case-by-case basis.

Uncertainty of implementation

In the majority of cases the Commission accepts commitments whereby the divestiture business must be transferred within a fixed time limit after the adoption of the decision to a purchaser to be approved by the Commission on the basis of the purchaser requirements. However, in cases of uncertainty as to whether the divestiture business will effectively be transferred to a suitable purchaser the Commission may require certain safeguards on which more detailed guidance is provided in the Notice. Thus, the new text codifies previous Commission decisions concerning scenarios necessitating crown jewel, up-front-buyer or fix-it-first solutions.

A crown jewel is a second alternative divestiture that the merging parties will be obliged to implement if they are not able to implement the first divestiture within a given time frame. Alternatively, the merging parties may on occasion be required not to complete the notified transaction until they have entered into a binding agreement with a purchaser for the divestiture business (up-front-buyer) Or, the merging parties sometimes identify and enter into a binding agreement with the purchaser during the Commission procedure (fix-it-first).

According to the Notice, "[t]he choice of category depends on the risks involved in the case and therefore on the measures which enable the Commission to conclude with the requisite degree of certainty that the commitment will be implemented". Given that all three structures address the same concerns, the parties are generally free to choose between them.

That being said, fix-it-first remedies may be particularly appropriate in cases where the identity of the purchaser is crucial. Up-front-buyer solutions may be suitable where there are considerable obstacles to a divestiture such as third party rights, a potential lack of purchasers or poor preservation of the divestiture business in the interim period.

Likewise, crown jewels are demanded if there are uncertainties regarding the implementation of the parties' preferred divestiture option. According to the Commission's definition, a crown jewel must be "at least as good as the first proposed divestiture in terms of creating a viable competitor", although the regulator's initial concerns over the feasibility of the parties' preferred divestiture option will often result in demands that the crown jewel constitute a more comprehensive asset package.

Non-structural remedies

Provided they are equivalent in their effects to a divestiture, the Commission may on occasion be prepared to accept behavioural remedies. The Notice elucidates in which circumstances remedies such as the granting of access to competitors to key infrastructure, networks, key technology, intellectual property rights or essential inputs may be suitable to resolve the competition problems identified.

This includes situations in which the access obligation is designed to facilitate a reduction of entry barriers or to prevent foreclosure effects, provided inter alia that the Commission can be certain that the proposed remedy will be effective and that adequate provision for monitoring is made by the merging parties in their commitments proposal.

Concerning other types of behavioural remedies such as promises to abstain from certain commercial behaviour, the Commission appears to take an even more cautious stance than in the past. Pointing out that these will, at least for horizontal overlaps, generally not eliminate the competition concerns arising and will often be devoid of effective monitoring mechanisms, the Commission concludes that it "may examine other types of non-divestiture remedies, such as behavioural promises, only exceptionally in specific circumstances".

Procedural novelties

The Notice also introduces certain procedural novelties, including more extensive information requirements imposed on the parties that have to complete a new Form RM describing in detail the content of the commitments, the conditions for their implementation and their suitability to remove the Commission's competition concerns.

Provision is also made for increased powers for the Monitoring Trustee, which acts as the Commission's eyes and ears in overseeing the merging parties' implementation of the commitments, and revised phase I and II deadlines for submitting commitments.

Recent trends

Structural versus behavioural remedies

Since the beginning of 2007 cases in which the Commission has accepted behavioural remedies have remained exceedingly rare, examples being limited to access obligations to key infrastructure or technology (for example English, Welsh & Scottish Railway Holdings; Newscorp/Premiere) and other types of vertical foreclosure scenarios (for example Evraz/Highveld; Friesland Foods/Campina; Pernod Ricard/V&S Vin & Spirit).

It is worth noting that, despite its general resistance against behavioural remedies, the Commission increasingly appears to demand transitional behavioural remedies in relation to permanent structural remedies. Thus, in 2008 and the first half of 2009 this type of mixed remedy outnumbered purely structural remedies, and since the entry into force of the Notice the vast majority of conditional clearances were subject to such a mix of structural and behavioural remedies.

Typically, the aim of the behavioural element in these cases is to ensure the effective implementation of a divestiture commitment by maintaining, during a transitional period, certain upstream or downstream links between the divestiture business and the merging parties, which are essential for the former's short or long-term viability. The increased focus on upstream and downstream dependence and resulting behavioural commitments may be explained by the outcome of the Remedies Study, which showed that insufficient consideration of such relationships has previously led to serious problems with the implementation of remedies.

Crown Jewels, fix-it-first and up-front buyer solutions

In line with the policy of the Notice that divestitures within a fixed period of time should be acceptable in the majority of cases, fix-it-first and up-front buyer solutions remain rare in Commission decisions. The same generally applies to crown jewels. In fact, since the entry into force of the Notice, an up-front buyer obligation was only imposed in BASF / Ciba, obliging the parties to divest a part of Ciba's light stabilisers business prior to completion. As of June 30 2009, there were no instances of fix-it-first divestitures or crown jewels under the Notice.

Divestments of existing viable stand-alone businesses

Clearly, over the past two and a half years the most common divestiture route has remained the sale of existing viable stand-alone businesses. Recent decisions prove the Commission's increased focus on the viability of the divestiture business. For example, in line with the principles set out in the Notice, the Commission pays close attention to the suitability of potential purchasers, sometimes imposing additional suitability criteria as contemplated in the Notice. Thus, in Posten AB / Post Danmark A/S the Commission asked for an improved commitment to divest only to a company with "proven expertise in the field of parcels delivery, a recognised brand as well as an international presence in parcels delivery".

In Sanofi-Aventis / Zentiva a provision had to be added that purchasers should have "the capacity to take over production of the products concerned"; and in Teva / Barr the parties had to modify the commitments to ensure that the divestiture business would only be sold to a purchaser "with an existing oncology presence in the EEA".

Other divestiture remedies such as carve-outs, mix and match remedies, divestments of brands and intellectual property (IP) rights or commitments to exit from a joint venture occur less frequently. Regarding the divestment of brands and IP rights, this may be explained by the fact that such remedies are appropriate only in specific industries, such as the pharmaceutical and consumer foods sectors. Commitments to exit from a joint venture are mostly used to resolve vertical competition problems.

With respect to carve-outs and mix and match remedies, which can in principle be implemented in any industry in lieu of the divestiture of a stand-alone business to address horizontal or vertical competition issues, their limited use in practice is likely to be at least partly due to the Commission's concerns over effective implementation and risks of failure.

Impact of the financial crisis

As a result of the crisis, it was expected that divestiture remedies could become more difficult to implement, due to there being fewer possible purchasers and scarce acquisition finance. In turn, it was suggested this could lead to more fix-it-first deals and demands by the Commission for upfront buyers because of doubts over the parties' ability to find a purchaser for the divestiture business. However, to date no increase in such type of remedies is discernible.

From August 2008 through to July 2009 there have been no instances of fix-it-first solutions in the Commission's decisional practice, whereas an upfront buyer was imposed only in BASF/CIBA. It remains to be seen if this will change with the increase in consolidating merger activity expected by the Commission in the financial sector and other areas of the economy.

Unresolved issues

Behavioural remedies a better solution?

In the Notice, the Commission makes an essential distinction between structural and behavioural remedies, expressing its strong preference for structural remedies. However, the relevance of such a distinction seems questionable in practice and it is interesting to note that in the Remedies Study the Commission did not rely on this distinction but used a classification based on the intended effect of the remedy.

As noted by the CFI in Gencor v Commission, "the categorisation of a proposed commitment as behavioural or structural is immaterial". The decisive factor is whether the remedy is capable of eliminating the competition concerns at stake and, in this regard, if it satisfies the criteria set out in the Notice.

The behavioural to structural dichotomy does not add value in answering this question. Indeed, the distinction may create confusion, as the dividing line between behavioural and structural remedies is much less clear-cut in practice than the Commission may suggest in the Notice. The classification of a remedy as behavioural or structural may be a matter of circumstance. For example, an exclusive, perpetual, royalty-free licence is effectively structural whereas a licensing arrangement under which the licensor provides ongoing support, updates or supplies has behavioural elements.

More importantly, there are cases in which behavioural remedies are likely to be more adequate than structural remedies. The Remedies Study indicated for example that two out of five remedies involving access to technology were considered unnecessary with hindsight. This suggests that in dynamic markets behavioural remedies would be more appropriate than divestitures, since they allow for a review and early termination if the remedy turns out to be unnecessary. An outright preference for structural remedies is therefore misguided.

Commitments that are structural in nature may be preferable in as much as divestitures present a clear-cut one-off solution to the competition concerns identified by the Commission and, moreover, do not require monitoring measures. However, these perceived advantages should not be overstated either. Firstly, the Remedies Study revealed serious implementation risks in relation to the scope of the divestiture business, the suitability of the purchaser and the preservation of the competitiveness and marketability of the business to be divested, with the result that divestitures were fully effective in only 56% of cases. Structural remedies are therefore not necessarily efficient.

Secondly, be it structural or behavioural remedies, monitoring tasks are delegated at the merging parties' expense to professional Monitoring Trustees with ample experience in the field. The administrative burden imposed on the Commission by behavioural remedies should therefore remain acceptable. It is worth noting that regulators in other jurisdictions, including the US, the UK and France, do not perceive monitoring of behavioural commitments as posing significant difficulties and do not therefore display the same hostility towards behavioural remedies.

Proportionality of remedies

Proportionality, which is enshrined in Article 5(3) EC, requires as one of the general principles of Community law that "measures adopted by Community institutions [do] not to exceed the limits of what is appropriate and necessary in order to attain the objectives pursued". As a result, "when there is a choice between several appropriate measures recourse must be had to the least onerous". (Compare with National Farmers' Union and Others, paragraph 60; Tideland Signal v Commission, paragraph 39; and Verein für Konsumenteninformation v Commission, paragraph 99.)

Contrary to the Merger Regulation itself, the criteria for acceptable remedies set out by the Commission in the Notice do not mention proportionality, nor is the concept of proportionality of remedies developed elsewhere in the Notice. The Commission's overriding concern is the remedy's comprehensiveness and effectiveness in eliminating the competition problems at stake, proportionality being considered on an occasional basis, not however in a systematic way.

In contrast, the CFI has stressed on several occasions (in particular easyjet v Commission paragraph 133; BaByliss SA v Commission paragraph 173) that the Commission must comply with the proportionality principle also in the context of merger remedies. Specifically in BaByliss SA v Commission, the court held that requiring a divestiture in circumstances in which a less onerous remedy was available would be contrary to the principle of proportionality.

Proportionality considerations are particularly important for the merging parties where the appropriate scope of the remedy is at stake. While potentially as effective in remedying the competition problems concerned, behavioural remedies are in certain cases less onerous than structural remedies and, therefore, more proportionate. Likewise, divestitures short of an existing viable stand-alone business such as carve-outs, mix-and-match remedies or a sale of assets are likely to be less burdensome for the merging parties, but maybe equally effective to resolve the competition issues.

For example, if the size and scope of the divestiture required to address the competition concerns at stake would have commercial implications that stretch beyond the product or geographic markets concerned, a behavioural remedy may be more appropriate. Similarly, a divestment of assets or a carve-out could be more proportionate than divesting an existing viable stand-alone business where the divestiture business operates in several national markets.

Then, in dynamic markets behavioural remedies may be more proportionate given that it is unclear for how long the remedy will be needed. As acknowledged by the CFI, in these types of situations the Commission may not in its quest for effectiveness override all proportionality concerns. Indeed, it is questionable whether the Commission's upfront hostility towards any remedy other than the divestiture of an existing viable stand-alone business is reconcilable with the requirements set out in the jurisprudence.

Market testing

An important factor in the Commission's assessment of the proposed remedy is the market investigation by which the regulator seeks the views of customers, competitors and suppliers of the merging parties on the proposed commitments. However, placing too much reliance on the outcome of the market test can be problematic as third parties often have an interest in manipulating the process.

This issue is particularly pertinent in situations where the main addressees of the test are competitors of the merging parties. This is typically the case where the demand for the relevant products (e.g. consumer products) is so fragmented that customers of the parties cannot be interrogated by the Commission. Clearly, competitors are prone to bias since their strategic interest will lie in weakening the new entity and/or in obtaining assets from the merging parties.

The result may be what has been referred to by some practitioners as complaisance remedies. Thus, it has been pointed out that in situations where competitors play an active role in the procedure there appears to be a tendency on the part of the merging parties as well as the Commission to settle for remedies in order to appease and minimise the risk of subsequent challenges of the clearance decision before the CFI.

So remedies are offered by the parties and accepted by the Commission that are not really necessary to address actual competition issues, but do not represent a significant sacrifice for the parties whilst appeasing competitors, therefore excluding any risk of appeal against the decision by the merging parties or by third parties. From a competition-policy perspective, this situation seems difficult to reconcile with the overriding objective of preserving effective competition in the common market.

Reference Period
2007 2008 2009 (30 June) New Notice1
Total number of decisions 22 24 92 133
Phase I 18 19 7 10
Phase II 4 5 2 3
Type of Remedy Purely structural (divestiture) 14 9 2 2
Behavioural (incl. access obligations) 4 3 0 1
Mixed (divestiture with supporting behavioural commitments) 9 14 4 8
Implementation safeguards Crown jewels4 5 4 0 0
Fix-it-first 1 1 0 0
Up-front buyer 1 2 1 1
Scope (divestiture) Existing stand-alone business 14 14 0 3
Carve-out 4 5 1 2
Mix-and-match 1 2 1 1
IP & Brands (with or without supporting assets) 5 4 2 4
Sale of shares in JV 3 4 1 1
  1. Remedies proposed from October 23 2008, date of entry into force of new Notice, to June 30 2009
  2. 3 decisions unpublished
  3. 3 decisions unpublished
  4. Including alternative divestiture obligations after expiry of the deadline for the initial divestiture and simultaneous alternatives, where the merging parties agree to divest either one of two asset packages at the option of the purchaser

About the author

Sergio Sorinas is a competition partner at Herbert Smith in Paris. He advises on all aspects of EU and French competition law, including merger control, cartels, restrictive practices, competition litigation and state aid.

Sergio assists French and international corporate clients before the EU and French competition authorities. He also has extensive experience in representing clients before the Court of First Instance and the European Court of Justice. Sergio’s expertise covers a broad range of industry sectors including media, food and beverages, pharmaceuticals, chemicals, automotive and construction.

Sergio is the author of the chapter Remedies and Fines in the book Cartel Law, edited by Mario Siragusa and Cesare Rizza. He speaks fluent French, English and Spanish.
Contact information

Sergio Sorinas
Herbert Smith LLP

66, avenue Marceau
75008 Paris
France
Tel: +33 1 53 57 7677 sergio.sorinas@herbertsmith.com
www.herbertsmith.com

About the author

Christine Jorns is an associate in the Paris competition group at Herbert Smith. She is a solicitor admitted in England and Wales (2008) and a graduate of King’s College London and BPP Law School. Christine holds a PhD in EU competition law from the University of Heidelberg, Germany.

Before relocating to Paris, Christine worked at the firm’s London office and served as a stagiaire at DG Competition in Brussels. Her practice focuses on all aspects of EU and UK competition law, including merger control, anti-competitive agreements and abuse of dominant position, as well as general EU law.

Christine is bilingual in German and English and speaks fluent French. She has published a monograph on the relationship between Article 82 EC and intellectual property rights, and co-edits Leniency Regimes, a jurisdictional comparison of leniency regimes worldwide.
Contact information

Christine Jorns
Herbert Smith LLP

66, avenue Marceau
75008 Paris
France
Tel: +33 1 53 57 70 70
Fax: +33 1 53 57 70 80
christine.jorns@herbertsmith.com
www.herbertsmith.com