Opinion on the review of the Community Merger Regulation

(96/C 18/06)

On 22 June 1995 the Commission decided to consult the Economic and Social Committee, under Article 198a of the Treaty establishing the European Community, on the review of the Community Merger Regulation.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 22 September 1995. The Rapporteur was Mr Petersen.

At its 329th Plenary Session (meeting of 25 October 1995), the Economic and Social Committee adopted the following Opinion unanimously.

1. Introduction

1.1. The European Merger Regulation once again comes up for review in 1996. In preparation for this, the Commission has sent out varying forms of questionnaire to undertakings, associations and lawyers enquiring about their experiences with the merger control regulation. The Commissioner responsible for competition, Karel van Miert, has now asked the Committee for an Opinion. The (second) questionnaire survey was necessary because two years ago (1993) the Commission did not feel that it was in a position to recommend lower thresholds. The reason for this was that, at the time, an informal Commission proposal for lower thresholds failed to win a majority in the Council. Particularly the large EU Member States were unwilling to confer greater powers on the Commission. This fully confirmed the Committee's fears, expressed as long ago as 1990 (), that individual Member States would seek to extend indefinitely the political compromise that was reached for the initial phase of merger control.

1.2. The Commission had already evaluated the effectiveness of European merger control in a 'White Paper'. In a report to the Council, the Commission examined specific aspects of the functioning and effectiveness of the Merger Regulation (). In its Opinion on the subject, the Committee urged lower thresholds (). In concrete terms, the Committee recommended a phased reduction of the main threshold (worldwide turnover) from ECU 5 bn. to ECU 2 bn. It also suggested lowering the threshold for Community turnover from ECU 250 million to ECU 100 million and dropping the two-thirds criterion (Article 1(2) of the Regulation). In its response the Commission welcomed the Committee's firm stance and gave assurances that the Committee's recommendations would be incorporated in the official review of the Regulation thresholds to be conducted by the end of 1996 ().

2. Extending the scope of European merger control

2.1. Basically, the Committee holds to what it said in last year's Opinion. Various factors continue to bear out the Committee's views. It would therefore also make reference to the statements and reasoning given in that Opinion.

2.2. Advantages of the 'one-stop shop' principle

2.2.1. The Committee would once again emphasize the great advantage of the one-stop principle, by which a single authority - in this case, the Commission - assesses planned mergers uniformly over a short period of time and has exclusive Community-wide competence. As it is, almost every EU Member State has its own merger control arrangements with different rules, procedures and appraisal times. Any proposed cross-border merger within the Community which falls below the current - high - threshold involves an excessive amount of bureaucracy as well as unnecessary costs for the undertakings involved. This has a detrimental effect on cooperation and integration. As far as the Commission is concerned, the need for a one-stop system and for uniform rules and conditions is more pressing than ever. Once again, it is small and medium-sized enterprises (SMEs) who bear the brunt of the current regulations. Thus, a planned regional merger, a joint venture between SMEs for instance, may have to be reported to two, three or even more competition authorities in separate states.

2.2.2. These highly bureaucratic procedures will become even more complex in future, firstly, because of the proposed enlargement of the EU and, secondly, because of the increasing liberalization of worldwide trade and international financial services, leading to more cross-border mergers between firms domiciled in the EU, the USA and Japan and between firms domiciled in other markets (South-East Asia). The inevitable result will be differing procedures and decisions, with all the difficulties, risks and contradictions mentioned above, especially as alignment of competition rules at international level, although desirable, still appears a long way off.

2.3. Subsidiarity and merger control

2.3.1. Subsidiarity is usually cited as an argument against extending the scope of European merger control and against lower thresholds. The Committee emphasizes the relevance of the subsidiarity principle to mergers within a single EU Member State. It makes sense for such cases to remain within the competence of the Member State in question.

2.3.2. However, the two-thirds criterion (Article 1(2) of the Regulation) used for this purpose is unsatisfactory from the point of view of integration and competition policy (). Under this criterion, whole sectors fall outside the Commission's merger control remit in certain cases. The two-thirds criterion allows even large companies (distribution) to merge within one EU Member State without the Commission having any say. The service sector generally falls outside the Commission's competence as well because most companies make two-thirds of their Community turnover in one Member State. Clearly, such mergers may well constitute a significant obstacle to effective competition in the internal market, or in a substantial part of it.

2.4. Should the turnover criterion continue to determine which is the competent authority?

2.4.1. The Committee is aware that the existing rules, whereby the Community-wide significance of a proposed merger is measured solely by reference to the total turnover of the undertakings involved, result in an approximate and rather crude method for the division of powers between state and Community authorities. The chosen criteria may also have different implications for different sectors, as indicated above. In addition, the current rules mean that numerous Community undertakings with little or no impact on the common market come under European merger control.

2.4.2. There are problems with credit and other financial institutions (Art. 5(3)(a) of the Regulation). In its report the European Commission argues that the turnover criterion estimated on the basis of balance-sheet assets should be replaced by the 'concept of banking income' as defined in Directive 86/635. The Committee can see definite advantages in this suggestion. The use of banking income would appear more conclusive and logical than the current legal situation. The technicalities of calculating banking income require detailed study however ().

2.4.3. Even so, the Committee feels that the turnover criterion has proved its worth as a means of allocating jurisdiction between Member States and the Commission. The legal certainty argument is the most compelling in favour of maintaining the turnover criterion. By looking at their turnover, the undertakings concerned can quickly and reliably determine who is responsible for the appraisal procedure. This avoids duplication of the procedure. In any case, other criteria, such as the size of the company (e.g. number of employees), have already proven to be impracticable.

2.4.4. Keeping to the 'crude' turnover criterion does not rule out the development of more refined arrangements for allocating jurisdiction. Such fine-tuning will presumably be essential once thresholds are appreciably lowered. The Committee feels that, in this case, the future 'division of labour' between the Commission and the EU Member States should hinge first and foremost on which markets the proposed merger will mainly affect.

3. The Committee's proposed improvements

3.1. Lowering the thresholds in European merger control, as recommended by the Committee, must be accompanied by some structural improvements in procedures. In the following sections the Committee outlines some concrete proposals in this regard.

3.2. Improved cooperation between the Commission and EU Member States

3.2.1. First of all, the Committee recommends closer cooperation and better coordination between the Commission and competition authorities in the Member States. Only when this is firmly in place will it be possible to establish detailed and comprehensive arrangements for allocating jurisdiction which can successfully be applied in practice. These arrangements (which are still to be developed) should be based on the following considerations: the national competition authorities have considerable expertise with regard to their 'own' markets. Notified mergers which demonstrably affect only local and regional markets should in future be decided on solely by the competition authority of that Member State. Proposed mergers with a Community-wide impact should be assessed and decided on by the Commission alone. This leaves those cases which, while territorially confined to one Member State, nevertheless have implications for the internal market. Clearly, it is this last type of merger which necessitates closer cooperation between the Commission and Member States. The authorities of individual states must provide the Commission with all their specialist information on these markets. Only then will the Commission be in a position to make an informed decision, within the short time allowed, as to whether or not the notified merger poses problems for the common market.

3.3. Referral of a planned merger to another competition authority

3.3.1. Under present rules (Article 9 of the Regulation) the Commission may refer a planned merger to the competent authority of the relevant Member State, but only under strict conditions.

3.3.2. In its Opinion concerning the White Paper on Community merger control law, the Committee called on the Commission to retain the narrow interpretation of the referral provision. In the Committee's view, Article 9 of the Regulation constitutes an exception to exclusive Community competence and, as such, should be interpreted narrowly. In its response, the Commission pointed out that it could not provide 'an absolute guarantee' that Article 9 of the Regulation would continue to be interpreted restrictively in the long term. According to the Commission, this depended to a large extent on the level of future thresholds. However, the Committee maintains that any relaxation of Article 9 could mark a trend towards renationalizing European competition policy. Even if the thresholds are lowered to the level urged by the Committee, relaxation of Article 9 should only be permissible under two conditions: i) the merger should affect only local or regional markets in a single Member State; and ii) the Member State concerned should assess the merger in accordance with Community merger control rules and not with its own competition rules. In this way undertakings would not be forced to resubmit a merger application - possibly in another language.

3.3.3. Referral of notified mergers should of course be a two-way street. The Committee feels that, in cases where the merger has actual or potential implications for the common market, the Member States should be obliged to submit notified mergers to the Commission for appraisal. This could happen at the request of an undertaking concerned or of a Member State, or automatically, and would apply to mergers which must be referred to more than one competition authority or where there is a risk that competition will be seriously impeded in a substantial portion of the single market.

3.4. The need to simplify procedures

3.4.1. Lower thresholds will certainly increase the Commission's workload. The Committee is convinced that the Commission will rise to the challenge, given its impressive record with the Merger Task Force. In addition, the Committee has repeatedly stressed - for example, in its Opinion on the Commission's XXIInd Report on Competition Policy - that allotment of more staff to the Directorate-General for Competition is in any case both desirable and feasible. 'Even in a period of budget austerity' this could be achieved 'by making better use of [the Commission's] existing resources' ().

3.4.2. Greater prioritization is also needed. The Committee urges considerable simplification of the procedure for all mergers which have no appreciable bearing on the common market. This will lead to less red tape for undertakings and greater economy of operation at the Commission. The Committee sees this as particularly appropriate in two types of case, namely 'de minimis' joint ventures and mergers outside Community territory. In line with Recital 15 of the Regulation, the Committee recommends a simplified notification and appraisal procedure for smaller-scale mergers.

3.5. Correct competition controls essential

3.5.1. A well run appraisal procedure is crucial for the credibility of competition control. The criteria for the Commission's decision must always be clear from the outset. The Committee therefore urges the Commission to continue exercising consistent control over competition. The ESC reiterates its view that merger-control appraisal must be based primarily on market structure, the criteria being the current market situation and whether the merger creates or strengthens a dominant position, as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it (Article 2(2) of the Regulation).

3.5.2. The Committee also points out once again that markets - both in the EU and worldwide - are not static. The ESC has repeatedly asked the Commission not to demarcate the market (too) narrowly, either in business or geographic terms. The ESC is somewhat puzzled by the response to its July 1994 Opinion, in which the Commission claims that market delimitation in merger control is based on Articles 85 and 86 of the EC Treaty and has been confirmed by the rulings of the Court of Justice. Unlike Treaty Articles 85 and 86, which refer to past events, a planned merger requires the Commission to assess, i.e. predict, the future impact on market structure. For the ESC, it is this crucial difference which justifies wide market delimitation.

3.5.3. The Commission should therefore take greater account of the international competition situation than hitherto. The Committee points out with regret that the Commission has recently become increasingly restrictive in this respect, e.g. with regard to the delineation of the relevant markets. This is true not only for European merger control, but also for the anti-trust ban. The Committee therefore calls on the Commission in applying the competition rules, to take greater account than hitherto of the actual competitive situation on non-Community markets. In other words what is required is an economic analysis worthy of the name.

3.5.4. Article 2(1)(a) of the Regulation also calls for account to be taken of international competition in the appraisal process, stating: 'In making this appraisal, the Commission shall take into account: (a) the need to maintain and develop effective competition within the common market in view of, among other things, the structure of all the markets concerned and the actual or potential competition from undertakings located either within or without the Community' (). This goes for all stages of the procedure, including demarcation of the relevant market. The Commission's argument that a prudent, narrower approach to market delimitation 'does not necessarily lead to incorrect conclusions' (point 2.3 of the Commission's response) is less than convincing given the clear wording of the Regulation. The Commission also knows that, in a globalized economy, many markets are in a state of flux and constantly changing. For this reason, the Commission's 'prudent' market delimitation will often lead to incorrect conclusions which it will only be possible to correct at a later stage in the procedure, when assessing market dominance. The unfortunate consequences for the undertakings concerned are a longer appraisal period and higher costs.

3.6. Improving the definition of concentrative joint ventures

3.6.1. Lastly, the ESC points out that, despite a Commission Notice on the subject, the definition of a concentrative joint venture is still causing problems in practice. In its report on the implementation of the Merger Regulation () the Commission rightly comments that 'the distinction between concentrative and cooperative () JVs has proved to be, in practice, one of the most difficult problems in applying the Merger Regulation'. The Committee feels that any joint venture with structural implications for the undertakings involved (e.g. combining previously separate activities) should be regarded as a merger. The Commission's administrative practice is already moving in this direction, but it should go further and do away altogether with, say, the assessment of the spill-over effects, i.e. the repercussions on the parent companies' own conduct.

Done at Brussels, 25 October 1995.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ No C 225, 10. 9. 1990, p. 60.

() COM(93) 385 final.

() OJ No C 388, 31. 12. 1994, p. 41.

() Action on Opinions adopted by the Economic and Social Committee at its Plenary Sessions in July and September 1994. Brussels, 10. 4. 1995, p. 12.

() OJ No C 388, 31. 12. 1994, p. 41.

() OJ No C 388, 31. 12. 1994, points 2.13.1 and 2.13.2.

() OJ No C 34, 2. 2. 1994, p. 83.

() OJ No L 395, 30. 12. 1989, p. 1.

() COM(93) 385 final, point 21, first sentence.

() To clarify: Specific problems connected with national cooperatives are not included in this. The Committee assumes that, in applying the Regulation, due regard is given to the legal framework specifically dealing with cooperatives.