European Union merger law is a part of the law of the European Union. It is charged with regulating mergers between two or more entities in a corporate structure. This institution has jurisdiction over concentrations that might or might not impede competition. Although mergers must comply with policies and regulations set by the commission; certain mergers are exempt if they promote consumer welfare. Mergers that fail to comply with the common market may be blocked. It is part of competition law and is designed to ensure that firms do not acquire such a degree of market power on the free market so as to harm the interests of consumers, the economy and society as a whole. Specifically, the level of control may lead to higher prices, less innovation and production.
Mergers and acquisitions are regulated by competition laws because they may concentrate economic power in the hands of a smaller number of parties. Oversight by the European Union, the competition laws have been enacted under the Directive 2005/56/EC on Cross-border mergers and the Economic Concentration Regulation 139/2004, known as the "EUMR".The authority for the Commission to pass this regulation is found under Articles 3(1)(g), 308 and 83 of the Treaty establishing the European Community (TEC) The law requires that firms proposing to merge apply for prior approval from the Commission. The European Commission (EC) has exclusive competence over concentrations that meet certain thresholds. This is known as community dimension. A concentration with a turnover of the following will trigger commission jurisdiction. Mergers that transcend national borders and with an annual turnover of the combined business exceeds a worldwide turnover of over EUR 5000 million and Community-wide turnover of over EUR 250 million must notify and be examined by the European Commission. Merger regulation thus involves predicting potential market conditions which would pertain after the merger. The standard set by the law is whether a combination would "significantly impede effective competition... in particular as a result of the creation or strengthening of a dominant position..."Art. 2(3) Reg. 129/2005
One reason why businesses may be motivated to merge is in order to reduce the transaction costs of negotiating bilateral contracts. Another is to take advantage of increased economies of scale. However, increased market share and size may also increase market power, strengthening the negotiating position of the business. This is good for the firm, but can be bad for competitors and downstream entities (such as distributors or consumers). A monopoly is the most extreme case, where prices might be raised to the monopoly price instead of the lower competitive equilibrium price. An oligopoly is another potentially undesirable situation in which limited competition may allow higher prices than a market with more participants.
Concentration
Under EU law, a concentration exists when a...
"change of control on a lasting basis results from (a) the merger of two or more previously independent undertakings... (b) the acquisition... if direct or indirect control of the whole or parts of one or more other undertakings." Art. 3(1), Regulation 139/2004, the European Community Merger Regulation
This usually means that one firm buys out the shares of another. The reasons for oversight of economic concentrations by the state are the same as the reasons to restrict firms who abuse a position of dominance, only that regulation of mergers and acquisitions attempts to deal with the problem before it arises, ex ante prevention of creating dominant firms. In the case of [T-102/96] Gencor Ltd v. Commission ECR II-753 the concentration between the two companies were regarded as incompatible with the EU Merger Control regulations.
The EU Court of First Instance wrote that merger control is there "to avoid the establishment of market structures which may create or strengthen a dominant position and not need to control directly possible abuses of dominant positions." Based on the Court of First Instance (CFI) comment, the court ruled that it is within the commission's competence to block or accept mergers that exercise production outside Europe. In other words, the commission was able to annul the proposed merger because a concentration that transpires overseas may also be held to account. Beyond outright mergers and share acquisitions, the EUMR also catches the creation of full-function joint ventures, defined as joint ventures that perform on a lasting basis all the functions of an autonomous economic entity and operate independently in the relevant market. A joint venture that merely serves as a production or service vehicle for its parent companies does not constitute a concentration within the meaning of Article 3 EUMR and therefore does not require Commission notification. This distinction was clarified definitively by the Court of Justice in Case C-248/16 (Austria Asphalt, 2017), which held that a concentration exists only where a jointly controlled undertaking is full-function, regardless of whether it is a newly created entity or a pre-existing one.. Control under the EUMR can be held on a de facto basis without share ownership: a party may exercise joint control through contractual veto rights over the strategic decisions of a joint venture, as set out in the Commission's Notice on the concept of concentration. In Airtours v Commission, the CFI annulled the commission's decision and allowed the application to take effect on the grounds of insufficient claims. The commission was unable to prove coordination between the undertakings for collective dominance.
Significantly impeding effective competition Prior to the implementation of Regulation 139/2004OJ L 24/1 and the turn towards a more effects-based approach to EU competition law, EU merger control was governed by EEC Regulation 4064/89. Originally, there was no merger control in the 1957 Treaty of Rome. In 1973, the Commission proposed to adopt a merger regulation, which was eventually adopted in 1989 after a long battle between commissioner Leon Brittan, and two member-states which were the most reluctant (but for different reasons) Germany and Britain. Under EEC Regulation 4064/89OJ L 257/90 (the 'old' regulation), a merger or concentration was prohibited if it would"create or strengthen a dominant position as a result of which effective competition would significantly impeded".Article 2 (3) of Council Regulation (EEC) Regulation No. 4064/89The old substantive test is said to have encouraged two alternative interpretations of how to apply the test. The alternative interpretations suggest that, the presence of dominance alone is a sufficient condition to satisfy the dominance test and that as part of a two-tier test dominance is a necessary condition to satisfy before considering the dynamics of competition between the parties merging and the competitive characteristics of the market following the notification of a merger.Roller and de La Mano, 'The Impact of the New Substantive Test in European Merger Control' (2006) ECJ 9, 16 The commission's role in applying merger control in this area of law was limited. The limit has set out that the "creation or strengthen" of a dominance position may only trigger commission jurisdiction. The effective of the old "dominance test" increasingly began to be called into question with concerns regarding the issues of overenforcement and the false positives. The concern behind the dominance test was the narrow interpretation of the old law.
The case of Airtours v CommissionCase T-342/99 Airtours v Commission ECR II-2585 in 2002 served as the case that ultimately urged the Commission to recommend a change in EU merger regulation. The Commission prohibited the merger of Airtours and First Choice on the basis that it would create a collective dominant position in the market since there would be an incentive for the remaining firms in an oligopolistic market to restrict market capacity, leading to higher prices and increased profits as a result of subsequent market conditions following the merger. The oligopolists need not always "behave as if there were one or more explicit agreements between them." The Commission believed it was "sufficient that the merger makes it rational for the oligopolists...to act individually in ways which will substantially reduce competition between them."paragraph 54, Commission Decision L 93/1
In the case of Airtours v Commission, the Court of First Instance annulled the Commission's decision to prohibit the Airtours-First Choice merger on the grounds that the Commission's interpretation of collective dominance was not informed by the widely recognised indicator of anti-competitive behaviour in an oligopolistic market - tacit collusion. The Airtours legal action created a significant level of uncertainty in EU merger law as a perceived gap had arisen with the law at the time - the gap of the non-collusive oligopoly.
In response to the concerns raised regarding the "dominance test" and the non-collusive oligopoly gap in EU merger regulation, the European Council adopted Regulation 139/2004. Under Council (EC) Regulation 139/2004, a merger or concentration"which would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market".Article 2 (3) of Council Regulation (EC) No. 139/2004
Many commentators have commented on the need to create a new test. Legal academic Richard Whish described the EUMR of 2004 as "disarmingly simple",Richard Whish and David Bailey, Competition Law (7th edn, Oxford University Press 2012) p 866 in that the 'dominance test' remains but the question posed by test is reversed. The new test, most commonly known as the 'SIEC' (significant impediment to effective competition) test, was employed to tackle the inefficiencies of the "dominance test" that mainly stemmed from the wording of the test and the prerequisite of an undertaking assuming a dominant position or the strengthening a dominant position in the market. The fundamental change here is the broadened of the old test interpretation. The SIEC test was able to fulfill the void by extending the application of merger control to non-dominant undertakings.
The new 'SIEC' test is a reorganisation of the "dominance test" that eliminates "dominance" as a necessary requirement for SIEC and instead expresses SIEC as the single and sufficient condition for incompatibility with EU merger regulation.Roller and de La Mano, 'The Impact of the New Substantive Test in European Merger Control' (2006) ECJ 9, 16 The proposed change in the law was to ensure that activities that lead to a negative effect on the consumer's welfare would be held liable at law. The dominance element was avoided by asserting the SIEC test to ensure the competitive structure of the common market was held to a certain standard. What amounts to a substantial lessening of, or significant impediment to competition is usually answered through empirical study. The market shares of the merging companies can be assessed and added, although this kind of analysis only gives rise to presumptions, not conclusions.See, for instance, paragraph 17 of the Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, Official Journal 2004/C 31/03, published 5 February 2004, accessed 7 February 2022 The new test focuses on the subsequent changes to competition in a market following a merger, rather than whether the merged undertaking has acquired an excessive level of market power.