Draft EC Notice On Non-Horizontal Mergers

On 13 February 2007, the European Commission published its eagerly awaited draft guidelines to govern non-horizontal mergers falling within the scope of the EC Merger Regulation.

Non-horizontal mergers occur where the merging companies’ activities do not directly overlap but instead where the companies operate at different levels of the supply chain (“vertical mergers”) or are active in closely related markets (“conglomerate mergers”). The Commission had been strongly criticized for not applying transparent and proportionate rules in these cases. Furthermore, there were calls that such mergers, which do not directly eliminate a competitive constraint, should be viewed positively in general. The EC court decisions notably in GE/Honeywell and Tetra Laval/Sidel confirmed however that competitive concerns could arise under EC law. Consequently, while some guiding principles had been laid down by the EC courts, there was a clear benefit in setting out the Commission’s view on how it would apply the rules in these situations.

In the draft guidelines, the Commission conditions its evaluation of non-horizontal mergers on the basis of market power in at least one of the markets concerned. Post-merger, a market share below 30% and a concentration of less than 2000 (reached by summing the squares of the market shares of all the firms in the market) would be used as initial indicators of the absence of competition concerns. The Commission does not go as far as to say that mergers below these levels are presumed to be pro-competitive; rather it states that, in the absence of special circumstances (e.g., one of the merging firms was to expand significantly in the near future), it would not extensively investigate such a merger [para 25]. Mergers which meet or are above these levels would not necessarily give rise to concerns but would merit further investigation.

The Commission identifies two ways in which a non-horizontal merger could significantly impede competition. First, there may be what it calls “anticompetitive foreclosure,” with the result that the merging companies (and possibly some of its competitors) could profitably increase prices to consumers [paras 28 et seq. and 92 et seq.]. Second, there may be “coordinated effects” according to which firms would be more likely to coordinate their conduct and raise prices or otherwise harm competition on the market once the merger had taken place [paras 78 et seq. and 117 et seq.].

The anti-competitive foreclosure sections concerns bear some resemblance to the framework adopted in the Article 82 staff discussion paper on exclusionary abuses. The Commission sets out three steps in the analysis:

(a) the ability to foreclose rivals;

(b) the incentive to foreclose; and

(c) the overall likely impact of the merger on effective competition.

The Commission indicates the circumstances it would take into account that is based on these three steps. In relation to vertical mergers, there is detailed guidance as to how it would assess input foreclosure (i.e., restricting rivals’ access to an important input) and customer foreclosure (i.e., restricting rivals’ access to an important customer base). In all cases, efficiencies identified and substantiated by the parties would be taken into account. There is some limited guidance as to which efficiencies would be taken into account, although one could still criticize the fact that efficiencies are given insufficient emphasis. As regards the coordinated effects, the Commission’s analysis takes into account the criteria adopted by the EC Court in the Airtours decision (which set out the principles for mergers in concentrated markets).

The Commission is requesting comments on the draft guidelines by 12 May 2007. The final version of these guidelines are likely to be adopted at the end of this year.