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Home > Publications > 2011 Mid-Year Merger Enforcement Update

2011 Mid-Year Merger Enforcement Update

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As was the case in 2010, antitrust enforcers in the United States and Europe have continued to make headlines by intervening in major merger cases and launching new policy initiatives.   While M&A activity on both sides of the Atlantic continues to recover from the global financial crisis, it appears that antitrust enforcers are placing a higher priority on merger enforcement, a pattern that is likely to continue for the foreseeable future.

This Update covers notable merger enforcement trends and cases in the United States, European Union, and the rest of the world.     

THE UNITED STATES

It has been an eventful year in U.S. merger enforcement.  As was the case in 2010, so far this year the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ) continue to pursue initiatives and enforcement actions that will have a significant impact on mergers and acquisitions for years to come. 

Early this year, the DOJ sought and obtained remedies in a number of high-profile merger cases that raised alleged vertical concerns, including the Comcast/NBCU media and broadcasting joint venture and Google's acquisition of travel software provider ITA.  The DOJ also challenged a number of mergers that were subsequently abandoned by the merging parties without litigation, most notably NASDAQ/ICE's $11.3 billion proposed acquisition of NYSE Euronext, a transaction that would have combined the major U.S. stock exchanges.  The DOJ is currently reviewing AT&T's proposed $39 billion acquisition of T-Mobile, a transaction that would create the largest wireless communications carrier in the U.S.

Shortly before Assistant Attorney General Christine Varney announced her departure for private practice in June, the DOJ issued a revised Policy Guide to Merger Remedies which, as explained below, brings DOJ's written remedy policies into closer alignment with its actual practice and signals tougher enforcement of "vertical" mergers.  And as discussed in a recent Gibson Dunn Client Alert, in early July the FTC and DOJ announced significant changes to the Hart-Scott-Rodino (HSR) form and instructions, which will require transacting parties to provide additional information and documentation regarding future transactions reported under HSR. 

The FTC remains active on the merger litigation front, particularly in the health care sector.  As explained below, two FTC health care cases are currently being reviewed by federal appellate courts and the FTC recently abandoned efforts to appeal a loss in a third health care case. 

By the Numbers: As HSR-Reportable M&A Activity Recovers, Transactions Are Subject to Second Requests and Enforcement at Higher Rates

Based on HSR data the antitrust agencies recently provided to Congress,[1] the volume of M&A transactions subject to HSR continue to recover from the depths of the financial crisis.  The number of transactions reported under HSR increased 63% between FY 2009 and FY 2010.  Based on public comments from agency officials, it appears that the number of reportable transactions will increase again in FY 2011.  Nonetheless, the number of transactions reported under HSR remains considerably lower than in the years leading up to the 2008 financial crisis.     

HSRMergerTransReported-01-10

Despite relatively lower levels of merger activity, the FTC and DOJ under the Obama Administration are issuing "second requests" (i.e., subjecting transactions to a formal investigation) at a substantially higher rate than under the previous Administration.  The percentage of HSR-reportable transactions subject to a second request was 4.5% in FY 2009, the highest rate in a decade, and was a robust 4.1% in FY 2010.  In addition, although firm numbers are not yet available, there appears to have been a significant uptick in investigations of "below the radar" transactions that are not subject to HSR reporting. 

PerctTransSecondRequest-01-10

The rate at which mergers are subject to enforcement action has also increased substantially over the past two years.  Of the 1,166 merger transactions reported under HSR in FY 2010, the FTC and DOJ ultimately sought enforcement action in 41 transactions, or 3.5% of the time.  Of those 41 FTC and DOJ challenges, 29 were resolved through consent decrees, 11 were abandoned by the parties, and one has not yet been resolved.  Of the 716 merger transactions reported in FY 2009, the FTC and DOJ ultimately sought enforcement in 30 transactions,[2] or 4.1% of the time.  Of those 30 transactions, 16 resulted in consent decrees and the remaining 14 were abandoned (or restructured) by the parties.

These enforcement rates (3.5% and 4.1% in FY 2009-2010, respectively) were significantly higher than in the last two years of the Bush Administration.  In FY 2008, of the 1,726 transactions subject to HSR, the DOJ and FTC took enforcement action in 37 transactions, or 2.1% of the time.  The FTC/DOJ enforcement rate in FY 2007 was only 1.5%. 

In short, HSR-reportable transactions over the past two years have been subject to second requests and enforcement action at significantly higher rates than in prior years.  These trends, taken together with comments from agency officials, strongly suggest that the current administration is giving enforcement actions against mergers and acquisitions a higher priority.  Going forward, at least under the Obama Administration, transactions raising competitive concerns might therefore be expected to receive greater scrutiny than in past years.  However, as always, whether a particular transaction will result in a second request or enforcement action is a question whose answer depends on the facts surrounding the transaction, the merging parties, the number of remaining competitors and their vigor, and the parties' respective businesses and industries.      

DOJ Releases New Merger Remedy Policy Guide

On June 17, 2011, the DOJ released a new revised Policy Guide to Merger Remedies.  The DOJ's new Policy Guide brings the DOJ's merger remedy policy into closer alignment with recent DOJ enforcement practices and the FTC's existing policy on merger remedies

In particular, the new Policy Guide reflects the DOJ's recent focus on perceived "vertical" concerns raised by mergers and the remedies designed to address them.  Generally speaking, merging parties are in a "vertical" relationship if their respective businesses operate upstream or downstream from each other (e.g., one merging party is a supplier of the other merging party), but can also arise if the parties' respective businesses are closely related or otherwise interdependent.  According to the DOJ's new Policy Guide, "vertical mergers can create changed incentives and enhance the ability of the merged firm to impair the competitive process," and "a remedy that counteracts these changed incentives or eliminates the merged firm's ability to act on them may be appropriate."  More broadly, just as the revised 2010 Horizontal Merger Guidelines coincided with more aggressive enforcement of horizontal mergers, the new Policy Guide signals enhanced DOJ scrutiny of the vertical aspects of proposed transactions. 

Renewed Emphasis on Conduct Remedies

The previous version of the DOJ's Policy Guide, issued in 2004, reflected the DOJ's traditional aversion to conduct (behavioral) remedies and its strong preference for "structural" remedies, principally the divestiture of ongoing businesses or assets.  In contrast, the new Policy Guide recognizes that the DOJ is willing to consider and accept conduct remedies to address competitive concerns raised in the context of vertical mergers.

"Conduct" remedies, according to the DOJ's new Policy Guide, include restrictions on the merged firm's post-merger behavior.  As the Policy Guide acknowledges, there are a wide range of conduct remedies that have been used in past DOJ consent decrees, especially in vertical cases, the most common of which include firewalls that prohibit disclosure of information to specified personnel, provisions that prohibit the merged firm from discriminating or retaliating against certain customers or suppliers, mandatory IP licensing provisions, provisions that provide for transparency, and provisions that restrict certain exclusive contracting practices.

According to the DOJ, adding a range of conduct remedies to the list of available options will allow the agency to be more comprehensive and flexible in resolving competitive concerns with vertical mergers. 

While the DOJ may view conduct remedies as increasingly useful in vertical mergers that raise competitive concerns, structural remedies will continue to be the favored remedy in mergers that raise horizontal concerns.  The new Policy Guide also states that conduct and structural remedies may be used in combination to address concerns raised by mergers involving multiple markets or products, single-market mergers, or mergers where conduct relief is necessary to complete structural relief.   As in the past, however, the remedy must clearly drafted and tailored to address the specific competitive harm posed by the merger. 

As discussed below, a number of recent consent decrees reflect the DOJ's efforts to address mergers that raise alleged "vertical" concerns by imposing conduct remedies, most notably Ticketmaster-Live Nation,[3] Comcast-NBCU, and Google-ITA

Changes Related to Structural Remedies

The revised guidelines also make a few changes to the DOJ's policy towards structural remedies, including the following:

  • "Fix-it-First" Remedies:  Generally speaking, a fix-it-first remedy is a structural solution implemented by the parties (with the DOJ's agreement) before the merger is closed and without a formal consent decree.  Both the 2004 and the 2011 versions of the Policy Guide emphasize that a fix-it-first remedy may be acceptable, but the new Policy Guide provides that the DOJ will not approve a fix-it-first remedy if it would require monitoring or involve entanglement between the buyer and seller post-merger.  In such cases, the DOJ will agree to the structural remedy only with a consent decree in place.                     
  • Divestiture of Assets: The new Policy Guide also reflects changes to the DOJ's prior policy on divestitures involving assets that constitute less than an ongoing business entity.  Under the new Policy Guide, the DOJ may mandate that the parties identify an up-front buyer, a caveat that was not made explicit by the 2004 Policy Guide.
  • "Crown Jewel" Provisions: The DOJ also reversed its prior policy under which it "strongly disfavored" the use of "crown jewel" provisions--i.e., provisions in a consent decree that require the divestiture of additional valuable assets in the event a buyer cannot be found for the agreed-upon divestiture package.  Under the new Policy Guide, consistent with traditional FTC policy, the DOJ may insist on "crown jewel" provisions in circumstances in which there is some uncertainty as to whether a divestiture package will be attractive to third-party buyers. 

Other Procedural Changes

The DOJ's traditional policy disfavoring conduct (as opposed to structural) remedies was based, in part, on the view that such remedies are difficult to enforce and require ongoing entanglements between the agency and the merged party, in some cases for years after the merger is consummated.  The new Policy Guide introduces a number of procedural provisions that attempt to address these concerns.  In an attempt to reduce the need for ongoing DOJ involvement, the new Policy Guide states that some consent decrees may provide for private arbitration to address controversies over the implementation of conduct remedies as they arise.  Where ongoing DOJ oversight is needed, the DOJ announced that it has created a new Office of the General Counsel, which will be charged with consent decree enforcement.  

The New Policy Guide Reflects Existing DOJ Practice and Enforcement Priorities

As noted above, the DOJ's new Policy Guide brings stated policy into closer alignment with actual practices and enforcement priorities.  Over the past two years, the DOJ has aggressively taken enforcement action in mergers that raise vertical issues, regularly using conduct remedies to address alleged threats to competition.  In addition to the conduct remedies imposed in the 2010 Ticketmaster/Live Nation consent decree, in 2011 the DOJ agreed to conduct remedies to address alleged vertical concerns raised in Comcast/NBC, GrafTech/Seadrift Coke, and Google/ITA

Comcast/NBC Joint Venture

In January, the DOJ announced that it had reached a settlement with the parties in connection with the proposed Comcast/NBC joint venture.  The DOJ alleged that the transaction would, if allowed to proceed without a remedy, give Comcast the ability and incentive to disadvantage other multichannel video programming distributors (MVPDs) by increasing the price or withholding the availability of NBC programming.  The DOJ also alleged that Comcast would use its control of programming and its position as an Internet service provider (ISP) to disadvantage online video distributors (OVDs), again by denying them access to or raising the price for programming content acquired from NBC.

The DOJ's consent decree reflects several conduct remedies designed to address these perceived concerns. To ensure the ongoing viability of OVDs, the consent decree mandated that the joint venture license programming content to OVDs on terms "economically equivalent" to those given to MVPDs and other OVDs.  The consent decree also prohibited Comcast from engaging in discriminatory or retaliatory behavior against OVDs and MVPDs, and from exclusive or restrictive licensing practices.   Comcast, as an ISP, was also prohibited from discriminating against OVD-related Internet traffic. 

In addition to these conduct remedies, the order also acknowledged that the Federal Communications Commission had established a forum and process to arbitrate disputes between MVPDs.  In the DOJ's view, this arbitration would reduce the DOJ's ongoing involvement in enforcing the consent decree by providing a mechanism through which the MVPDs could police the joint venture's conduct.[4] 

GrafTech/Seadrift Coke

The DOJ also applied conduct remedies to GrafTech International's acquisition of Seadrift Coke.  GrafTech is the largest manufacturer of graphite electrodes in the U.S., while Seadrift is one of two U.S. manufacturers of petroleum needle coke, the primary input for graphite electrodes. The DOJ was concerned that the merger would give Seadrift access to competitor pricing and production information that GrafTech receives in its dealings with its customer, ConocoPhillips, Seadrift's primary competitor.  This access to information, the DOJ feared, could result in anticompetitive price and output coordination between Seadrift and ConocoPhillips.

As a remedy, DOJ required GrafTech to strike provisions in its long-term supply contract with ConocoPhillips that would otherwise have allowed GrafTech to access ConocoPhillips' competitively sensitive information.  The consent decree also prohibited GrafTech from implementing similar provisions in future supply contracts, and to ensure compliance, required pre-approval of all future agreements between Conoco and GrafTech/Seadrift.  Additionally, to deter output coordination, the consent decree required GrafTech to report to the DOJ on production and sales, implement information firewalls, and segregate GrafTech employees who negotiate Conoco contracts from Seadrift employees.

Google/ITA

In April 2011, the DOJ approved various conduct remedies for Google's acquisition of the software company ITA.  ITA provided customized search engine technology (called QPX) for online travel intermediaries (OTIs), such as Hotline, Orbitz, and Bing Travel.  Google planned to enter the travel search business in direct competition with other OTIs.  According to the DOJ, the merger would have given Google control of QPX, along with access to sensitive information about its future competitors.

Under the DOJ's consent decree, Google agreed to various conduct remedies designed to ensure ongoing access to QPX for its OTI competitors.  Google agreed that, for the next five years, it would continue and renew current licenses; offer contracts to new parties on "fair, reasonable, and nondiscriminatory" (FRAND) terms; and invest in research and development of QPX to substantially the same extent as ITA did premerger.  It also agreed to offer to competitors any innovations related to a new ITA product that had been under development at the time of the merger.

Additionally, under the consent decree, Google is required to resolve fee disputes with OTIs in a special fast-track arbitration proceeding and to create firewalls to prevent Google employees from accessing confidential information regarding Google's OTI competitors. Google is also prohibited from giving preferential treatment to companies that purchase certain other Google products.

*          *          *         *

Overall, the issuance of the new Policy Guide is a welcome development from the standpoint of consistency and predictability because it aligns the DOJ's written policy with its current practice and with FTC guidance.  Of course, the new Policy Guide and the recently-revised Horizontal Merger Guidelines point to closer scrutiny and somewhat more aggressive enforcement of mergers and acquisitions.  Firms should consult experienced antitrust counsel for a perspective on how these recent developments may impact particular proposed mergers, acquisitions, and joint ventures. 

U.S. Merger Litigation Update

Only a small percentage of mergers subject to HSR ultimately wind up being decided through litigation with the agencies, but litigated merger cases can have far-reaching effects on the antitrust analysis of mergers.  In particular, a number of court decisions over the past year involving FTC merger challenges provide a glimpse of how courts and the FTC analyze the issue of market definition.

FTC v. LabCorp: On March 24, 2011, the FTC withdrew its appeal of a federal district court order denying the FTC's motion to enjoin Laboratory Corporation of America, Inc.'s (LabCorp's) further integration of Westcliff Medical Laboratories, Inc. (Westcliff), which LabCorp had acquired in May 2010.  The FTC filed a complaint in federal court in December 2010, alleging that LabCorp's acquisition of Westcliff threatened competition by combining two of the only three providers of "capitated clinical laboratory testing services to  physician groups" in Southern California.  Commissioner Rosch dissented from the FTC's decision to issue the complaint, arguing that clinical laboratory testing services paid under "fee-for-service" arrangements should be included in the relevant product market. 

Commissioner Rosch's dissent appears to have presaged the ultimate outcome of the case.  In its order denying the FTC's request for injunctive relief, the district court noted that market definition was "the key to the ultimate resolution" of the FTC's claims, and rejected the FTC's proposed product market definition because it improperly excluded laboratory testing services provided on a "fee-for-service" basis.  The court reasoned that "otherwise identical products are not in separate markets simply because consumers pay for those products in different ways."  In ruling for the defendant, the court also gave significant weight to evidence that the cost of complying with the FTC's hold separate order--which would have continued to escalate in the event of an injunction.  The court noted that these costs threatened to "financially devastate or destroy" the Westcliff business and may prevent the parties' from realizing cost efficiencies associated with the integration of the LabCorp and Westcliff assets.     

In her statement dissenting from the Commission's 4-1 vote to withdraw the FTC's appeal of the district court decision, Commissioner Brill argued that the district court had improperly credited the parties "private" interests over "public equities," such as the alleged harm to consumers. 

FTC v. Ovation (Lundbeck):  In September 2010, a U.S. district court rejected FTC claims in yet another case that turned on product market definition.  The FTC appealed the decision to the Eighth Circuit, which has not yet issued its ruling.

In 2005, Defendant Ovation Pharmaceuticals (now Lundbeck) acquired Indocin, a pharmaceutical used to treat serious heart conditions affecting premature babies.  Six months later, in early 2006, Ovation acquired NeoProfin, which the FTC alleged would become a "close competitor" to Indocin once approved by the FDA.  Shortly after purchasing NeoProfin, according to the FTC, Ovation allegedly proceeded to increase Indocin prices by nearly 1300 percent.

Despite evidence of post-acquisition price increases and internal Ovation documents indicating that NeoProfin was a competitive threat to its Indocin product, the district court dismissed the FTC's claims on the ground that the FTC failed to demonstrate that NeoProfen and Indocin compete in the same product market.  The court relied heavily on three findings.  First, the court accepted the defendants' argument that the neonatologists, not the hospitals that purchased the drugs, were the relevant customers because the hospitals deferred to these physicians' expertise in deciding which drug to buy.  Second, the neonatologist witnesses testified that they were largely indifferent to the relative price of the two drugs.  Third, the neonatologists also testified that they did not view NeoProfin and Indocin as clinical substitutes for each other.  The FTC, according to the court, failed to adequately rebut this evidence.

Several other cases are currently being litigated by the agencies.  FTC v. Phoebe Putney Health System, Inc., a hospital merger case in which the district court denied the FTC's request for an injunction, is currently being reviewed by the 11th Circuit.  The district court denied the FTC's injunction, ruling that the buyer was working on behalf of a state agency, and as a result the transaction was protected from antitrust scrutiny by the state action doctrine. 

In addition, the DOJ has filed a complaint seeking to block H&R Block's acquisition of TaxACT, a rival tax preparation firm.  The case is currently being litigated in federal district court.  The DOJ also recently filed a complaint against Verifone Systems alleging that its proposed acquisition of Hypercom and related transactions would leave only two competitors in a market for Point of Sale (POS) terminals that enable retailers to accept credit cards and other methods of payment.  It appears that the parties have agreed to settle the litigation.  Under the terms of the settlement, the merging parties will divest Hypercom's POS terminals business to a private equity firm. 

*          *          *          *

The latest version of the Horizontal Merger Guidelines is now nearly a year old, and as we observed shortly after the new Guidelines were issued, one open question is whether the Guidelines signal a diminished role for market definition in merger analysis.  The 2010 Merger Guidelines state that "the Agencies analysis need not start with market definition" and that market definition may play reduced role where other "direct" evidence of competitive effects is available.  The Agencies have not yet directly tested this principle in a litigated court case. 

However, as demonstrated by the FTC's recent district court losses in Ovation and LabCorp (where the district court acknowledged the Guidelines' diminished emphasis on market definition), many cases will continue to start--and end--with an obligation requiring the agencies to define markets and provide evidence in support of their market definition.  In each case, after closely scrutinizing seemingly conflicting evidence, the court rejected the FTC's market definition.  Although the outcome of both cases hinged on the facts specific to those cases, the broader lesson appears to be that market definition will continue to play a significant role in merger litigation and merger analysis in general.  Any allegation that specific products or services are part of the same relevant market (or are outside a purported relevant market) should be supported evidence showing that the products are, in fact, substitutes.   In many cases, such evidence may include data from economists indicating that demand for one product in the candidate market responds to changes in the price of the other product.  Other sources of evidence, including customer views and the transacting parties' internal documents, will also continue to be relevant. 

Again, as noted above, the antitrust analysis of mergers and acquisitions, and the application of the 2010 Horizontal Merger Guidelines, is and will continue to be highly fact-specific.  Firms considering a transaction that may raise antitrust concerns should consult with experienced antitrust counsel. 

THE EUROPEAN UNION

By the Numbers:  More EU Transactions Subject to Greater Scrutiny

It has also been an eventful year in EU merger enforcement.  Based on European Commission (the "Commission") data, the Commission reviewed 163 mergers in the first six months of 2011 (an annualized total of 326).  While the annualized 2011 figure is lower than the peak of 402 mergers reported to the Commission in 2007, it nonetheless constitutes a significant increase from the 274 transactions reviewed by the Commission in 2010.   

MergersNotified-01-11

Even more importantly, the overall number of notified transactions that are subject to a "Phase II" in-depth review is much greater than in recent years.  During the first six months of 2011, the Commission issued 5 Decisions initiating Phase II proceedings, more than in all of 2010 (4) and equal to the total number of Phase II Decisions in 2009 (5). 

This increase in Phase II reviews might suggest that the Commission is adopting a more rigorous approach in its merger reviews, especially in light of the fact that a number of recently notified mergers appear to be more strategic than opportunistic in their nature. For example, the mergers already reviewed by the Commission during this first half of the year include UPM-Kymmene/Myllykoski and Votorantim/Fischer, which were both cleared unconditionally, despite being subject to an extended review.  In spite of the high market shares that those two transactions would bring about in the respective supply of magazine paper and orange juice, the Commission found in both cases that the merged entity would continue to face competition and customers would still have sufficient alternative sources of supply.

The four Phase II investigations still under review are Caterpillar/MWM, Samsung/Seagate Technology, Hitachi/Western Digital Corporation, and Deutsche Börse/NYSE Euronext

The change of Competition Commissioner in February 2010 from Neelie Kroes to Joaquín Almunia has not appeared to have resulted in significant changes to Community merger control policy.  For example, there has been little dampening of enthusiasm for theories of harm based on vertical[5] and conglomerate effects[6] within the Commission even if these theories have not yet resulted in merger prohibitions. 

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New Appointments at Commission's DG Competition

By the end of Q1 of 2011, Cecilio Madero Villarejo and Bernd Langeheine were appointed to the positions of Deputy Director-General at DG Competition, which is responsible for overseeing the Commission's review of antitrust and merger investigations respectively. 

Before his appointment, Mr. Madero was the Director for the "Information, Communication and Media" unit at DG Competition, where he led the action against Microsoft's alleged abuse of dominance. Since November 2010, he has also been acting Deputy Director-General for Mergers and Antitrust.

Mr. Langeheine previously served as the Director for e-Communications Policy at the Commission's Information Society and Media Directorate-General (which he had held since 1 July 2002), where he played a key role on controversial dossiers including the capping of international roaming fees, the EU's new regulatory framework for telecommunications, and the Recommendation on next-generation broadband.  Mr. Langeheine is not new to competition policy, having served as the head of DG Competition's policy unit from 1999 through 2002.  He also served as a Référendaire at the EU's Court of Justice before joining the Commission's Legal Service. 

In addition, Ms. Lindsay McCallum has left her previous position as the Head of the Antitrust Transport-Post Unit to reinforce the Unit in charge of Mergers in the Communications sector.

The Aegean/Olympic Case: The Most Recent Prohibition Decision

The first month of 2011 witnessed the first outright merger prohibition since the Ryanair/Aer Lingus merger in 2007. In a Decision adopted on 26 January 2011, the Commission prohibited the proposed merger between the two main Greek national carriers, Aegean Airlines and Olympic Air, based on the finding that the transaction would have resulted in a quasi-monopoly on the Greek air transport market. Despite a tendency over the years to emphasize the role of "hub-and-spoke" systems in air transport markets, the prohibition of this merger confirms that, consistent with the approach taken in the Ryanair/Aer Lingus case, mergers between air carriers in point-to-point markets where entry is unlikely will receive very close scrutiny.

In this regard, skepticism has arisen over the years on the effectiveness of slot divestitures as a remedy, especially where market entry is otherwise difficult.[7]  This has led to a broader debate as to whether small EU Member States are relatively disadvantaged by the strict application of Competition rules, insofar as local operators face competition and other pressures (such as financing and allowances) from outside their respective national markets.  That is, although a local airline may have a large market share in a national market, that market share may not translate into market dominance because of competitive pressures from global airlines.

More broadly, it has become clear that while "National Champions" will not be supported by EU merger policy, a merger that results in the creation of an "EU Champion" may arguably be seen in a more favorable light, especially where the merger brings together operations from different EU Member States (e.g. resulting the creation of greater pan-European markets in sectors such as energy).

Recent unconditional merger clearances, in particular those relating to cases such as TomTom/Tele Atlas (and the parallel case of Nokia/Navteq) and Oracle/Sun Microsystems, which had been granted after the initiation of in-depth (Phase II) investigations and the issuance of a formal Statement of Objections, had left a large question mark over whether the Commission was still willing to use its veto power over mergers.  However, the Commission's Decision to block the Aegean Airlines/Olympic Air merger sends a clear message that the Brussels-based regulator will not shy away from prohibiting mergers that present serious competition concerns. Despite this, Competition Commissioner Almunia stressed that "prohibition decisions will remain rare, since in most cases we are able to accept the solutions proposed by the parties."[8]  An appeal has been filed against the prohibition Decision before the General Court in Luxembourg.[9] 

Proposed Policy Reforms: Minority Shareholdings and Increased Cooperation

In addition to the highly publicized reforms that Commissioner Almunia is willing to implement in State Aid rules (namely the creation of a fast-track approval procedure and the amendment of the rules relating to Services of General Economic Interest), the Commissioner is also seeking to address a number of perceived "gaps" affecting merger control.

To this end, he has indicated that the Commission is currently examining whether the scope of the EU Merger Regulation could be extended so that acquisitions of significant minority stakes falling short of the acquisition of "control" could be subject to the European Commission's scrutiny. In contrast, other competition regulators such as the DOJ and even a number of European National Competition Authorities ("NCAs") do have the competence to review such acquisitions. According to the Commissioner, DG Competition is examining "whether it is significant for us to try and close this gap in EU merger control."[10]

In addition, the Commission has published a set of draft best practices aimed at fostering and facilitating information sharing between NCAs within the European Union for those mergers that are not subject to EU merger control, but which require clearance in several Member States (the "Draft Best Practices").  The EU's 20-year-old EU Merger Regulation (the "EUMR") created a one-stop-shop for the regulatory review of mergers and acquisitions above certain turnover thresholds.  However, many mergers and acquisitions fall below the EU threshold but meet the notification requirements of one or more national merger regimes of the EU Member States.  For example, in 2010, 240 transactions fell outside the Commission's exclusive jurisdiction, but still required notifications to two or more NCAs. 

The Draft Best Practices are intended to foster and facilitate information sharing between NCAs in the EU when they are engaged in the review of the same merger or acquisition that does not qualify for the one-stop-shop review at the Commission level.  In this regard, the text encourages the NCAs involved the same multi-jurisdictional merger to keep each other informed of important developments related to their respective investigations and to discuss their respective jurisdictional and/or substantive analyses at key stages of the investigation. The document also encourages the notifying parties to permit the concerned NCAs to exchange confidential information.

Comments received by stakeholders thus far tend to emphasize that the Draft Best Practices focus more on the obligations of the merging parties than in increasing the needed convergence of the procedural and substantive national merger rules.[11]  Indeed, Commissioner Almunia's calls for greater convergence in the area of mergers in a recent speech indicate that there is a need for some reform of national merger rules and procedures.[12]  The final version of the Best Practices is scheduled to be published in Autumn 2011.

Streamlining of Merger Control Practices in Innovative Industries

One of the most active areas of EU merger enforcement over the past few years has been in relation to innovative industries, especially in the high-tech and pharmaceutical sectors.  The Commission is increasingly developing a more dynamic analysis of such markets, especially given its focus on vertical and conglomerate effects of mergers. In doing so, it has emphasized that it is seeking to foster the launch of new technologies and the entry of new competitors that could potentially displace incumbents.

The Commission cleared the Intel/McAfee merger -- bringing together the world's largest computer chip manufacturer and a major vendor of information technology security software -- in January 2011.  Senior Commission officials have expressed the view that the Commission's approach in that case reflects how it is most likely to approach other IT sector cases. 

The merger was ultimately cleared with remedies after a Phase I investigation of the transaction.  According to the Commission, the remedies were designed to ensure that Intel did not leverage its alleged market power in chips into the security solutions market.  In particular, Intel committed to ensure the interoperability of the merged entity's products with those of competitors (inter alia, the commitments ensure that vendors of rival security solutions will have access to all necessary information to use the functionalities of Intel's CPU's and chipsets in the same way as those functionalities used by McAfee).  Intel also committed not to actively impede competitor's security solutions from running on Intel CPUs or chipsets.  Finally, Intel committed to avoid hampering the operation of McAfee's security solutions when running on personal computers containing CPUs or chipsets sold by Intel's competitors.   

Interaction with Other Jurisdictions

The phenomenal growth of the Chinese economy has recently produced a number of international mergers which have fallen within the scope of the EUMR. In the first months of 2011, the Commission reviewed several mergers involving Chinese State-owned companies:  China National Bluestar/Elkem, Huaneng/Intergen and DSM/Sinochem.  These proposed mergers were cleared after Phase I reviews, and more merger activity involving Chinese acquirors can be expected.

In May, during its investigation for the DSM/Sinochem case, the Commission was called upon to assess to what extent Sinochem had an independent power of decision-making from the Chinese State and to what extent this kind of acquisition could be analyzed following the "default" procedure.[13] This issue, which was also raised in January 2011 by Xinmao's planned acquisition of a Dutch cable manufacturer,[14] was ultimately left unanswered in both cases given the low market shares of the firms involved in the relevant markets affected by the transactions.

As regards mergers with a trans-Atlantic dimension, the U.S. and EU Competition Authorities continue to work together in order to achieve a more effective enforcement strategy in relation to affected markets which are global in nature.  Relatively recent examples of cooperation of the European Commission with the U.S. antitrust authorities include the Cisco/Tandberg merger, where the commitments accepted by the Commission were taken into account by the DOJ in its Decision to clear the deal, with both institutions adopting their respective clearance decisions on the same day. In addition, in the Intel/McAfee case (see above), Commissioner Almunia stressed that the Commission and its U.S. counterpart had "maintained an excellent dialogue even though [the E.U. regulator] adopted commitments and the US authorities did not."[15]

General EU Court Challenges

A number of relatively controversial EU merger clearance Decisions are currently the subject of legal challenge before the General Court in Luxembourg. Those challenges involve a number of important legal principles, including the appropriateness of the commitments proposed by the parties to a merger (i.e. Oracle/Sun Microsystems, where no legally binding commitments were offered). ), the assessment of the incentives to foreclose competitive entry and the importance that control over essential data has acquired during the last decade in relation to such foreclosing concerns (Thomson/Reuters).[16]

Also as expected, an appeal has been lodged before the General Court challenging the prohibition Decision in relation to the Aegean Airlines/Olympic Air case. The parties argue, among other things, that the Commission failed to define the markets properly and failed to states its precise theory of harm.

Merger Review and Other Competition Issues

Recent notifications of mergers in various sectors have raised the issue of the scope of merger reviews in light of pending competition law investigations in the sectors affected by the merger review. In addition to the Thomson / Reuters' case mentioned above, the Commission is currently investigating a number of antitrust infringements by companies involved in mergers. For example, in April 2011, the Commission opened an investigation into an alleged "pay-for-delay" settlement between US-based pharmaceutical company Cephalon and Israel-based generic drugs firm Teva. A week later, Teva announced its intention to acquire Cephalon. The filing in that announced merger is due to occur in the autumn of 2011.

Another example of the frequent overlap between mergers and other antitrust practices can be found in the so-called "power cables" cartel investigation.  In this case, Prysmian, an Italian company allegedly involved in a global price-fixing and market-sharing cartel (and which recently received a Statement of Objections from the European Commission), acquired Draka, a Dutch competitor, after having obtained clearance by the European Commission in February 2011.

DEVELOPMENTS OUTSIDE THE U.S. AND EU

As we reported in a recent Gibson Dunn Client Alert, after years of delay, a new merger control regime was passed into law in India.  This is an important development given the growing size and importance of India's economy.  As discussed in our recent Gibson Dunn Client Alert, the new regime establishes a mandatory pre-notification merger control regime for a wide range of transactions, insofar as they exceed a certain value of the assets and/or turnover.

The new merger control regime in India has been criticized for being overbroad given that, unless further guidance is provided by the Competition Commission of India, it appears that companies with a sufficient presence in India to trigger the statutory thresholds will need to notify virtually all transactions to the Competition Commission, including transactions that include only an acquisition of shares or even intra-group reorganizations.  Such transactions may need to be notified even when the transaction would clearly have no effect on competition in any market involving India. 

 


[1]   33 FTC & DOJ Hart-Scott-Rodino Ann. Rep. (FY 2010).

[2]   One transaction, in addition to the 30 noted here, was subject to FTC enforcement but still pending review.  The FTC's HSR report did not identify this action or the ultimate resolution, so we have not counted this case as an "enforcement action" for purposes of this update. 

[3]   The DOJ alleged that the proposed Ticketmaster-Live Nation merger raised both horizontal and vertical concerns.  The conduct remedies applied in the consent decree are designed to address the DOJ's alleged vertical concerns, whereas the structural remedies (e.g., the spin-off of Ticketmaster's Paciolan business) are designed primarily to address the DOJ's horizontal concerns. 

[4]   Notably, the district court judge reviewing the settlement recently stated that he may not approve the consent decree (as drafted) because the results of commercial arbitration, which in some circumstances may replace arbitration under FCC procedures, are binding and non-appealable.  It remains to be seen whether the DOJ and the parties will be required to make adjustments to the commercial arbitration provisions to address the court concerns.  Because DOJ has embraced arbitration provisions as a means of enforcing consent decree provisions in its new Policy Guide, any adjustments to the Comcast decree may have implications for future cases.   

[5]   See, e.g., M.6189 IMERYS / RIO TINTO TALC BUSINESS. The Commission's Press Release of 8 July 2011 can be found here.

[6]   See, e.g., M.6237 COMPUTER SCIENCES CORPORATION / iSOFT GROUP. The Commission's Press Release of 21 June 2011 can be found here.

[7]   In cases related to air transportation, both the European Commission and the Department of Transport usually impose the so-called "slot divestments" as remedies. These remedies allow other air carriers to enter routes which, before the divestment, were inaccessible given the absence of slots in the origin and / or the destination airport. An example of "slot divestments" is to be found in the recent Joint Venture created by American Airlines, British Airways and Iberia for their transatlantic businesses.

[8]   Almunia, J. Introductory remarks at the press conference on the Aegean Airlines/Olympic Prohibition, Brussels, 26 January 2011.  See further Almunia, J., Improving Europe's Competitiveness in the Global Economy, Annual British American Business Conference, London, 28 June 2011. 

[9]   Case T-202/11, Aeroporia Aigaiou Aeroporiki and Marfin Investment Group Symmetochon v. Commission, 2011/C 160/40. The summary of the pleas can be accessed here.

[10]   Almunia, J. , EU merger control has come of age "Merger Regulation in the EU after 20 years", co-presented by the IBA Antitrust Committee and the European Commission Brussels, 10 March 2011, SPEECH/11/166.

[11]   See, e.g., International Bar Association, Antitrust Committee Working Group on the European Commission's Public Consultation on Draft Best Practices on Cooperation between EU National Competition Authorities in Merger Review.

[12]   Almunia, J., A new decade for the International Competition Network, 10th Annual Conference of the International Competition Network, The Hague, 18 May 2011.

[13]   In principle, a merger is assessed by considering exclusively the parties to it. However, where one of the parties to the transaction does not have an independent power of decision, the scrutiny of the transaction will be based not only on the concerned party, but also on all the parties exercising the power of decision on this party.

[14]   More information on the failed acquisition of Draka by Xinmao can be found here.

[15]   Almunia, J., Improving Europe's Competitiveness in the Global Economy, Annual British American Business Conference, London, 28 June 2011. 

[16]   It must also be noted that the Commission has also opened a parallel investigation against Thomson-Reuters concerning an alleged abuse of dominance related to the so-called Reuters Instrument Codes.

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you work, any member of the firm's Antitrust and Trade Regulation Practice Group, or any of the following: 

New York
John A. Herfort (212-351-3832, jherfort@gibsondunn.com)
Peter Sullivan (212-351-5370, psullivan@gibsondunn.com)

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Joshua Lipton (202-955-8226, jlipton@gibsondunn.com)
John Christopher Wood (202-955-8595, cwood@gibsondunn.com)
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Cynthia Richman (202-955-8234, crichman@gibsondunn.com)

Brussels
Peter Alexiadis (+32 2 554 7200, palexiadis@gibsondunn.com)
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David Wood (+32 2 554 7210, dwood@gibsondunn.com)

London
James Ashe-Taylor (+44 20 7071 4221, jashetaylor@gibsondunn.com)
Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com)
Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com)
Charles Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com)  

Munich
Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com)

© 2011 Gibson, Dunn & Crutcher LLP

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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