The European General Court stresses the need for a comprehensive Market Analysis prior to any Merger being prohibited
(Denmark, July 2020) In May 2020, the General Court of the European Union (the “Court”) overturned the European Commission’s decision to prohibit the merger between CK Hutchison’s Three and Telefonica’s O2 UK in 2016.
The decision itself as well as the Court’s argumentation are significant reminders to the European Commission (the “Commission”) to act very carefully in the area of merger control, and the consequences of the decision – particularly how the competition authorities will assess future mergers in oligopolistic markets – are yet to be seen.
Decision by the Court 28 May 2020
Back in May 2016, the Commission prohibited CK Hutchison Holdings Ltd.’s (“Three”) acquisition of Telefónica Europe Plc (“O2”) because the Commission assessed that the acquisition would remove an important competitor on the mobile telephony market in the UK. The assessment of the Commission was that the merged entity would only compete with two other mobile network operators, namely Everything Everywhere and Vodafone.
According to the Commission, this reduction from four to three mobile network operators would likely result in increased prices for mobile telephone services and a restriction in choice for consumers in the UK.
The Commission had previously cleared several “4-to-3” telecom mergers across the Member States, but with reference to specific circumstances on the UK market, the Commission decided to block this merger.
In its decision to prohibit the merger, the Commission stated that the merger would result in a significant impediment on effective competition (“SIEC”). This was the first decision made by the Commission regarding the application of SIEC in cases that did not lead to one company’s dominance, or where there was no establishment of coordinated effects in oligopolistic markets.
Three appealed the prohibition made by the Commission, and four years later, on 28 May 2020, the Court has annulled the Commission’s decision to block the merger.
In the decision, the Court expressed serious criticism of the decision made by the Commission, including its application of the material criteria for the determining SIEC. According to the Court, the decision made by the Commission contained several errors in the application of the law and the assessments made by the Commission.
The Court outlined the following main reasons for annulling the Commission’s decision:
1. The Court found that the burden of proof for establishing the negative effects of the merger in terms of pricing and quality of services provided to consumers had not been lifted.
The Commission had defined Three as an “important competitive force” and 02 as holding a strong position in the market. The Commission had concluded that the merger would lead to the merged entity being a less aggressive competitor in the market, indirectly leading to increased pricing and lesser level of services for consumers.
The Court decided that the likely effect of reducing competitive pressure on EE and Vodaphone (the two other mobile network operators) was not sufficient to establish significant impediment to effective competition in the market. In addition, the Court stated that the decision of the Commission reflected confusion of three concepts: “elimination of an important competitive constraint”, “SIEC” and “elimination of an important competitive force”.
2. The competitors in the UK market were parties to two network-sharing agreements, which enabled competitors to share the costs of rolling out the networks without limiting competition on a retail level. Three and O2 were parties to two different network-sharing agreements. The Court did not find that the concentration in itself would impede any future development of the mobile network infrastructure in the UK, considering that the merged entity would have been party to two different network-sharing agreements with the two other competitors Vodafone and EE.
The Court stated that the Commission had failed to lift the burden of proof that possible changes to the network-sharing agreements would constitute a significant impediment on competition.
3. The Commission had found that Three was an “important competitive force” in the market and that elimination of one of the host mobile networks in the market would have a negative effect on the negotiation position of the competitors.
The Court stated that the burden of proof had not been lifted to determine that Three was an “important competitive force” in this market, especially because Three’s market share was small.
The Court concluded that the fact that Three might have more influence on the market than its market share would suggest was not itself sufficient to constitute a significant impediment on effective competition.
Based on these arguments, the prohibition was overruled. Although the original assessment was declared unjustified, this does not allow for the merger to now be completed, due to four years having passed and the market has moved on since the prohibition.
Recent Practice by the Danish Competition and Consumer Authority
The Danish Competition and Consumer Authority (“DCCA”) similarly continues to take a careful approach to mergers being notified on the Danish market. While most merger filings by far are cleared under the Danish regime, the DCCA continues to take measures in cases where the investigations and analyses made by the DCCA shows that competition on the market would be significantly impeded.
SEAS-NVE’s Acquisition of Parts of Ørsted’s Business
SEAS-NVE notified the DCCA about a merger between SEAS-NVEA and Radius Forsyningsnet A/S, Ørsted City Light A/S, Ørsted Privatsalg El & Gas A/S and Ørsted Varmeservice A/S. The merger would result in SEAS-NVE’s acquisition of 100% of the shares in Radius Forsyningsnet A/S, Ørsted City Light A/S, Ørsted Privatsalg El & Gas A/S and Ørsted Varmeservice A/S.
The DCCA assessed the effect which the merger would have in the different markets where the merged companies would be active. These markets included: distribution of electricity in each of the parties’ networks, retail supply of electricity to consumers (and small and medium-sized businesses) in Denmark, outdoor lighting in Denmark, retail supply of natural gas to consumers (and small and medium-sized businesses) in Denmark, and service on gas boilers in each of the former distribution areas.
Based on its market research and economic analysis, the DCCA assessed that the merger would lead to an increased risk of unilateral effects on the market for retail supply of natural gas to consumers, and thus the merger would impede the competition significantly within this market and lead to significant increases in prices for consumers. As for the other markets, the assessment was that the merger would not result in a significant impediment to effective competition.
To remedy the harmful effects of the merger, in June 2020 SEAS-NVE committed to divest 107,000 natural gas customers in Ørsted Privatsalg El & Gas A/S and Ørsted Varmeservice A/S and presented OK as a potential buyer of these customers. The divestment would ensure that the competition in the market for retail supply of natural gas was not significantly reduced. The Danish Competition Council assessed that the commitment would effectively eliminate the identified issue with the merger. Thus, the Danish Competition Council subsequently approved the merger on the condition that the SEAS-NVE divests the 107,000 natural gas customers to a third party.
Merger between HusCompagniet A/S and Eurodan-Huse A/S
In October 2019, the DCCA received a draft notification regarding the merger between HusCompagniet A/S (“HusCompagniet”) and eurodan-huse A/S (“eurodan-huse”). HusCompagniet would by way of the merger acquire 100% of the shares and voting rights in eurodan-huse. Both merging parties are building constructors that primarily design, build and sell prototype houses, including single-family and terraced houses, to private customers.
Based on market research and economic analyses, the DCCA expressed doubt regarding the merger to the parties.
In view of the preliminary doubt expressed by the DCCA, HusCompagniet and eurodan-huse chose to withdraw their draft merger notification in June 2020.
We expect that the decision from the Commission may be important for any future assessments of mergers in oligopolistic markets, not only for companies active within the mobile sector but for all oligopolistic markets.
The clear general takeaway is that the Court has made it harder for the Commission to prohibit transactions that do not clearly create or strengthen a dominant player, although the market is already concentrated.
Because of the decision by the Court, the Commission as well as the national competition authorities may need to recalibrate their current approaches as to when there is a “strong probability” of harm as a result of a transaction, and it is no longer sufficient to automatically define all operators as “important” ‒ in fact the decisive thing might be whether the operator leaving the market was specifically important to competition on the market.
In future, prohibition of mergers on oligopolistic markets may require clearer and firm documentation of the harm that will be caused due to any contemplated merger. Reaching this conclusion will require a comprehensive and robust analysis of the market and the operators from the competition authority to clearly evidence the negative effects from the merger.
The decision and argumentation from the Court sends a rather clear message to the Commission to “relax” its approach. This message will most likely be reflected by the national competition authorities.
Commissioner Margrethe Vestager has already stated that the Commission is “urgently analysing” the legal consequences of the decision. The implications and the consequences of the decision taken into account, the Commission will most likely choose to appeal this judgment with the Court of Justice.
In addition to possible consequences of the decision, the Danish cases referred to above also underline the importance of engaging in preliminary discussions with the relevant authorities when filing merger notifications, in order to identify any possible issues and also remedies to address any concerns the notification may cause.
If you have questions or require further information about the above, please contact Partner Pernille Nørkær