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European Union

On April 2 1, the European Council of Industry Ministers reached agreement on important changes to the existing EU merger control regime under Council Regulation 4064/89 (the Merger Regulation). The principal amendments relate to:

  • The turnover thresholds under the Regulation. New thresholds are to be introduced, designed to bring within the scope of the Merger Regulation transactions having a significant cross-border effect, but which do not satisfy the existing turnover thresholds.
  • The treatment of joint ventures. At present, only 'concentrative' joint ventures are subject to the Merger Regulation. In future, all 'full function' joint ventures between undertakings satisfying the turnover thresholds will fall within the scope of the Regulation.
The following examples illustrate how the new rules may apply in practice:

Example 1
Company A, which has a worldwide turnover of Ecu2.2 billion, wishes to acquire company B, which has a worldwide turnover of Ecu500 million. Both are active in the Community, where their turnover is as follows:

Turnover (Ecu million) UKFranceGermanyItaly

Total EC

Company A

1000

90

65

65

1220

Company B

40

30

40

15

125

The existing Community dimension test is not satisfied because A and B do not generate combined worldwide turnover of Ecu5 billion; also, B does not generate turnover of Ecu250 million in the Community.

Under the amended Regulation, a Community dimension will exist for the following reasons:

  • part (a) of the new turnover test is satisfied because the combined worldwide turnover of the parties exceeds Ecu2.5 billion;
  • part (b) is satisfied because A and B together generate turnover exceeding Ecu100 million in three member states (the UK, France and Germany, but not in Italy);
  • part (c) is satisfied, because in those three member states A and B each generate turnover of more than Ecu25 million;
  • part (d) is satisfied, because they each generate turnover in the Community exceeding Ecu100 million.

The 'two thirds rule' is not satisfied, because both A and B do not each generate more than two thirds of their Community-wide turnover in one and the same member state.

Example 2
If the facts in Example 1 were modified in any one of the following ways, a Community dimension would not exist:

  • A only generates turnover of Ecu55 million in France: test (b) is not satisfied, because A and B generate a combined turnover of Ecu100 million in only two member states (the UK and Germany);
  • B only generates turnover of Ecu15 million in France: test (c) is not satisfied, because both undertakings do not generate turnover of Ecu25 million in the three member states which satisfy test (b);
  • B only generates turnover of Ecu10 million in Germany: test (d) is not satisfied because two undertakings do not each generate turnover of Ecu100 million in the Community;
  • B generates turnover of Ecu180 million in the UK; the two thirds rule is satisfied.

The effects of these and other modifications are summarized below. It is intended that these changes will be formally adopted by the European Council without further debate probably before the end of June this year. The text of the amended Regulation has not yet been finalized, and the comments below reflect our understanding of the Council's agreement. The date of entry into force of the amended Regulation has not yet been determined, but it is likely there will be a transitional period of several months, possibly until the beginning of 1998.

The new turnover thresholds

Under the amended Regulation, the existing Community dimension thresholds will remain. However, where those thresholds are not satisfied, the Commission's competence will be extended to concentrations which satisfy the following new thresholds:

(a) the combined aggregate worldwide turnover of all the undertakings is more than Ecu2.5 million (US$2.9 million);

(b) in each of at least three member states, the combined aggregate turnover of all the undertakings is more than Ecu100 million;

(c) in each of the three member states included for the purpose of (b), the aggregate turnover of each of at least two of the undertakings is more than Ecu25 million; and

(d) the aggregate Community-wide turnover of each of at least two of the undertakings is more than Ecu100 million;

unless each of the undertakings concerned achieves more than two thirds of its aggregate Community-wide turnover in one and the same member state.

The operation of the turnover thresholds under the amended Regulation is summarized in the flow chart. Under amendments to the Regulation proposed last year, the obligation to notify transactions falling below the existing thresholds and above new lower thresholds would have depended also on the transaction in question falling within the scope of at least three national merger control regimes. That proposal, which would have presented considerable practical difficulties, has been abandoned in favour of a purely turnover-based approach.

The introduction of the new turnover thresholds will mean that, in the case of a transaction involving a number of parties active in several member states or across the whole Community, it may be necessary to analyze many combinations of turnover. A detailed breakdown of the parties' Community turnover by member state, calculated in accordance with the provisions of the Regulation, will be required to enable a view to be reached on whether a transaction potentially falling within the new thresholds will be subject to notification under the Merger Regulation. For those companies which do not at present maintain turnover information on a country by country basis, it will be necessary to ensure that means exist of generating that information. As this will generally be confidential information, the new rules will create an added complication for a company mounting a hostile takeover bid.

Application of the Regulations to 'full function' joint ventures

The Regulation will apply in its amended form to 'full function' joint ventures, rather than, as at present, only to 'concentrative' ones. A major advantage of the new rules is, therefore, that the assessment of the 'cooperative' aspects of full function joint ventures satisfying the Community dimension thresholds will have to be completed within the strict time limits laid down by the Merger Regulation.

The distinction between concentrative and cooperative joint ventures (which has to date governed whether transactions are subject to Article 85 or to the Merger Regulation) has been one of the most problematic aspects of the present regime. Under the amended Regulation, the focus of attention will shift to whether or not a joint venture satisfies the requirements of "performing on a lasting basis all the functions of an autonomous economic entity" and is therefore to be regarded as a concentration.

While this test may be simpler to apply than the concentrative/cooperative distinction, that distinction may nevertheless survive. Under the amended Regulation, to the extent that a joint venture constituting a concentration "has as its object or effect the coordination of the competitive behaviour of undertakings that remain independent", such coordination is to be appraised in accordance with the criteria of Article 85(1) and (3) of the Treaty. How those criteria will be applied has not yet been determined; in particular, it remains unclear to what extent the cooperative aspects of full function joint ventures will be assessed by reference to the existing Merger Regulation test of creation or strengthening of dominance, and to what extent they will be assessed under Article 85.

Other changes

The amendments which have been agreed include a number of other welcome changes and clarifications. These include:

  • amendments to the method by which turnover of financial institutions is calculated, so that this is based on gross income rather than assets;
  • allowing modifications to concentration plans in the course of a first phase inquiry, and for the attachment of undertakings and conditions to first phase decisions;
  • extension of the suspension period after notification of a transaction from the present three weeks to the conclusion of the inquiry. This has been accompanied by a slight broadening of the scope of derogations.

Earlier proposals to introduce fees for the review of mergers under the Regulation were rejected.

Practical implications

The new turnover test and application of the Merger Regulation to the co-operative aspects of full function joint ventures will introduce additional complexity into the process of determining whether certain proposed transactions fall within the scope of the Merger Regulation. Both changes seem likely in practice to result in significantly more transactions falling within the scope of the Regulation. This should in general be welcome to merging parties to whom the benefits of the 'one stop shop' will be available, and who are able to avoid the complications of the multiple notifications. There are no indications yet as to whether the Merger Task Force will secure additional resources to handle the new volume of work. For notifying parties, completion of the Form CO will continue to require a considerable amount of work, necessitating preparation well in advance. Close liaison with the Merger Task Force before notification will be even more important than at present.

Michael Reynolds and David Harrison
Allen & Overy
Brussels

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