On November 28, 2007, the European Commission adopted guidelines (“Guidelines”) that describe the general analytical framework used by the Commission to evaluate the competitive impact of “non-horizontal” mergers under the EC Merger Regulation. (Non-horizontal mergers include “vertical” mergers of firms at different levels of the supply chain and “conglomerate” mergers of companies active in closely related, but not directly competing, markets). The Guidelines describe the principal market conditions and scenarios under which the Commission believes competitive harm can result from these transactions, as well as the conditions that indicate such harm is unlikely to occur.
While most businesses are likely to welcome the Guidelines for providing greater transparency and insight into the Commission’s merger review standards, the principal theories of harm underlying the Guidelines remain controversial among antitrust economists, scholars, and courts. Indeed, the Guidelines have been adopted against a back-drop of criticism leveled at the Commission by the European Court of First Instance for the analysis of non-horizontal mergers in the Tetra Laval/Sidel and GE/Honeywell judgments.
In addition, while U.S. and European merger enforcement has converged in many ways in recent years, the U.S. agencies have not fully embraced some of the “foreclosure” theories of competitive harm endorsed in the Guidelines. These policy differences among enforcement agencies have occasionally resulted in different conclusions regarding the lawfulness of transactions (e.g., GE/Honeywell). Thus, despite the welcome transparency offered by the Guidelines, future enforcement efforts against non-horizontal mergers are likely to continue to generate significant debate and criticism given the lack of consensus in this area of law.
Summary of Guidelines
The Guidelines sets forth the Commission’s general analytical framework for evaluating non-horizontal mergers, including the efficiency benefits and potential harms from non-horizontal mergers. We briefly summarize the key provisions below:
1. Pro-Competitive Efficiencies. The Guidelines expressly acknowledge that (a) non-horizontal merger are less likely to result in harm than “horizontal” mergers between competing firms and (b) these transactions often generate pro-competitive efficiencies, such as the elimination of double mark-ups and lower transaction costs.
2. Safe Harbour Provision. Non-horizontal mergers with a post-merger market share not exceeding 30% in the relevant markets and an HHI below 2000 are unlikely to pose a competition concern. However, when one or more of the following “special” circumstances is present, the Commission may still decide to investigate further:
3. Non-Coordinated Effects. The Guidelines focus heavily on the market scenarios in which the Commission believes anticompetitive “foreclosure” of competitors may occur. These “non-coordinated” or “unilateral” effects primarily arise when the merged entity has the ability and incentive to foreclose competitors’ access to supplies (input foreclosure) or markets (customer foreclosure). According to the Guidelines, the foreclosure does not need to force competitors out of a market to be problematic; if competitors are able to compete less effectively and the merged entity (and possibly other third party competitors) can profitably increase prices, the foreclosure is sufficiently anticompetitive.
4. Coordinated Effects. The Guidelines also provide general scenarios in which “coordinated effects” may occur due to a non-horizontal merger, but do not significantly elaborate on the application of the tests set forth by the European Court of First Instance in the Airtours judgment. These effects can potentially arise if the merger enables competitors to more easily or effectively (i) coordinate and raise prices, (ii) monitor the terms of coordination, or (iii) punish rivals when they deviate from the terms of coordination. Likewise, if the merger could reduce the ability of other competitors to cheat or deviate from the terms of coordination, for instance, by eliminating a disruptive buyer in the market, then the transaction could increase the risk of anticompetitive coordinated effects.
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