Simmons & Simmons responds to Commission's consultation on EU merger control regime

In October 2016 the European Commission launched a public consultation on the functioning of certain procedural and jurisdictional aspects of EU merger control. The consultation is part of its ongoing review of the EU merger control regime and builds further on the 2014 White Paper “Towards more effective EU merger control”. It focused in particular on (i) the effectiveness of purely turnover-based thresholds in the EU merger regulation, (ii) the treatment of cases that typically do not raise competition concerns and (iii) the referral mechanisms between Member States and the Commission.

Given the importance of the EU merger control regime for businesses and the impact that the contemplated reforms could have, Simmons & Simmons has voiced its ideas and concerns in response to the Commission’s questionnaire.

Functioning of the turnover-based merger control thresholds

Under the current EU merger control regime, concentrations have to be notified to the European Commission when the turnover of the undertakings concerned exceeds the relevant merger control thresholds. Consequently, concentrations concerning the acquisition of target companies that do not yet generate the required turnover but have a high market potential, do not have to be notified to the Commission.

According to the Commission, there could be a possible enforcement gap. In that context, the consultation solicited opinion from stakeholders about competitively significant cross-border transactions which were not captured by the EU merger control thresholds (in particular in the digital and the pharmaceutical sector). Further, it asked them for their views on the introduction of a complementary jurisdictional “deal size threshold” which would be based on the value of the transaction.

In our view, the current turnover thresholds complemented by the referral mechanisms work well and allow the Commission to capture competitively significant transactions with cross-border effects in the EEA.

The big advantage of the turnover thresholds is legal certainty. The current thresholds provide a bright-line test allowing the parties to define with certainty whether their transaction comes within the jurisdiction of the Commission or not. A threshold based on the value of the transaction would seriously jeopardize legal certainty. Contrary to turnover figures, the value of the transaction can be defined in many different ways. Furthermore, values can change significantly over short periods of time and are subject to market volatility. The exact deal value may also be the result of a post-transaction pricing mechanism and therefore, not be immediately apparent.

In addition, the concerns regarding the perceived enforcement gap are very different for each sector. The concerns in the digital sector clearly need to be distinguished from those in the pharmaceutical sector. Although in both sectors a high transaction value might be involved, this is not always representative of the impact the transaction may have on competition.

In case of the digital sector, the limited turnover of the target can be due to a particular business model. Nevertheless, given the number of users it might be an important player on the market. In such case, the target is already present on the market offering its services to a large customer base. Hence, with regard to the digital sector the perceived enforcement gap relates to companies who will typically already be active on the market and offering their services.

With regard to the pharmaceutical sector, the concerns are different and we understand that the Commission is more concerned about protecting innovation. The perceived enforcement gap relates to pipeline products, ie products that are still at the R&D stage or going through clinical trials. Contrary to the digital sector, the products are not yet on the market and it is not even certain that they will ever be marketed. A pharmaceutical company might have in its portfolio very promising pipeline products, which could be the subject of a transaction with a substantial consideration but this is not a guarantee that these pipeline products will in the end generate revenue. This will depend on the outcome of the clinical trials. Hence, even if a pipeline product is highly valued, this does not necessarily imply that eventually it will have an impact on the market and competition.

In our view, relative values also differ across industries. Therefore, the introduction of a “deal size” threshold might subject certain sectors to an additional burden, while allowing other sectors to escape the intended scrutiny.

Furthermore, there are a lot of practical issues in relation to a “deal size” threshold. The Commission should reconsider the division of competence with the Member States for cases caught by the “deal size” threshold (for example, how will the 2/3 rule be applied to such cases?).

Finally, in our view, the introduction of a “deal size” threshold would go against the Commission’s intent to reduce red tape for companies. It would bring legal uncertainty and risks imposing a disproportionate burden on companies to catch only a very limited number of potentially problematic cases.

Simplification

Certain categories of transactions that generally do not raise competition concerns benefit from a simplified procedure. In 2013, the Commission widened the scope of the simplified merger review procedure. In the 2014 White Paper, the Commission proposed additional amendments to the EU merger regulation in order to further streamline and simplify the EU merger control procedures. These included a further reduction of the notification requirements and the exclusion of certain non-problematic transactions from the scope of the Commission’s merger review.

The consultation looked for feedback on the functioning of the simplified procedure to see whether there is room for greater simplification of the treatment of certain categories of non-problematic cases beyond the proposals that were already made in the 2014 White Paper.

Although we have welcomed the further widening of the scope of application of the simplified procedure for non-problematic cases as well as the simplification of the notification forms by the 2013 Simplification Package, we consider that the burden for simplified procedures can definitively be further reduced.

Given the fact that most of the simplified cases have no or only a limited impact on competition in the EEA, we consider that they should be exempted from the obligation of prior notification to the Commission. In our view, this would in particular be appropriate for extra-EEA joint ventures, changes from joint to sole control in relation to a party which already has joint control and concentrations without any horizontal or vertical overlaps in the EEA. However, the exemption should only apply for clear categories of transactions defined on the basis of objective criteria which do not leave room for discussion. Parties must have legal certainty regarding the eligibility of their transaction for exemption on the basis of a straightforward test.

For those simplified cases which could not benefit from exemption from the notification obligation, the proposal of replacing the Short Form CO with a short information notice calls for support.

In addition, we believe that the Commission should consider curtailing the review period for cases under the simplified procedure. The 25 working day review period is disproportionate for some types of transactions. As these transactions have no or only limited effects on competition in the EEA, we believe that the review period for such cases could be curtailed to for example 10-15 working days. Further, we consider that such cases should all be exempted from pre-notification, unless the parties would consider it appropriate to engage in pre-notification with the Commission to discuss certain issues.

Functioning of the referral mechanisms

The EU merger regulation provides mechanisms for the referral of cases by the Member States to the Commission and vice versa. However, the current referral procedures can be quite cumbersome and time-consuming.

The 2014 White Paper included proposals aimed at simplifying the procedure for referring cases both before and after notification, especially when made by Member States to the Commission. Pre-notification referrals would no longer require two separate submissions, generating savings for companies both in terms of time and costs. In case of a post-notification referral, the Commission would have EEA-wide competence to review the transaction, thereby avoiding parallel reviews by the European Commission and the national competition authorities.

We believe that the proposals made by the White Paper would contribute a great deal to a better and more efficient allocation of merger cases between the European Commission and the national competition authorities of the Member States. They would reduce the overall administrative burden.

The potential enforcement gap in relation to highly valued transactions without an EU dimension also needs to be assessed in the context of the referral mechanisms. The referral mechanisms are a way for the Commission to obtain jurisdiction of highly valued transactions which do not have an EU dimension. This was for example the case in Facebook/WhatsApp. The proposals for more business-friendly and effective referral mechanisms might therefore also contribute to closing the perceived enforcement gap.