Remedies in EU Merger Control – An Essential Guide
Simon VANDE WALLE
Professor, University of Tokyo
Table of Contents
1.1 The importance of remedies in EU merger control
1.1.1 Merger control’s most frequently used tool to protect competition
1.1.2 Remedies consume significant resources and have important economic consequences
1.2 Recent debate and controversy surrounding remedies
1.2.1 Are merger remedies effective?
1.2.2 The structural vs. behavioural debate
1.2.3 The call for ex post assessments of remedies
2 Legal framework and criteria for assessing remedies
2.1 Terminology: remedies, commitments, ‘conditions and obligations’
2.2.2 Remedies in Phase I and the requirement of ‘clear-cut’ remedies
2.3 Basic criteria for assessing remedies
2.3.1 The remedy must entirely eliminate the competition problem
2.3.2 The remedy must be proportionate
2.3.3 The remedy must be capable of being implemented in a short period of time
2.4 The burden to submit remedies is on the parties but the burden of proof is on the Commission
3.2 Practical aspects of remedies discussions between the Commission and parties
3.3 Market test of proposed remedies
3.4 Modifying proposed remedies and the issue of ‘late remedies’
4.1 Labels and their relevance
4.1.1 Structural and behavioural remedies
4.1.2 Structural remedies: only divestitures?
4.1.3 All divestiture remedies include ancillary behavioural remedies
4.2.1 The Commission’s preference for divestitures
4.2.2 The structural vs. behavioural debate
4.2.3 Divestitures are preferred but not risk-free either
4.2.4 Scope of the divested business
188.8.131.52 Divestiture of a viable business
184.108.40.206 Divestiture of a stand-alone business
220.127.116.11 Carve-outs and divestitures of assets
4.2.5 Third party rights in relation to the divestiture
4.2.6 Finding a suitable purchaser of the divestiture
4.2.7 Standard arrangement, upfront buyer clause, fix-it-first remedy
18.104.22.168 Which arrangement in which case?
4.3 Removal of links with competitors
4.4.1 Digital sector: interoperability remedies
4.4.4 Airline mergers: slot remedies
4.5 Other behavioural remedies
5.1 Interpretation of the remedy
5.2 Appointment of a monitoring trustee
5.3 Approval of a suitable purchaser
5.3.1 The parties’ search for and negotiations with a purchaser
5.3.2 Submission of the purchaser proposal
5.3.3 Assessment of the purchaser proposal
22.214.171.124 Does the purchaser meet the purchaser requirements?
126.96.36.199 The divestiture agreement: is the divestiture being sold in a manner consistent with the commitments?
5.3.4 The Commission’s decision on the suitability of the purchaser
5.4.2 Access and behavioural commitments
6.1 Commission’s powers to investigate compliance
6.2 Complaints from third parties
6.3.1 Distinction between ‘conditions’ and ‘obligations’
6.4 Arbitration and expert determination as a parallel enforcement mechanism
6.4.3 Safeguards to protect third parties relying on arbitration
6.4.4 Other features of merger arbitration
6.4.5 Actual arbitration cases
6.5 Enforcing the remedy in national courts
The goal of EU merger control is to prevent concentrations from causing lasting harm to competition in the EU. Remedies are by far the most common tool by which the European Commission seeks to achieve this. They constitute the Commission’s most widely used form of intervention. The only other formal way for the Commission to prevent harm to competition is to prohibit a concentration. Prohibitions are rare. In three decades of EU merger control, the Commission has only prohibited 30 concentrations, an average of one prohibition per year. By contrast, there have been more than 450 cases where remedies were made binding. In short, the vast majority of concentrations that raise competition problems are approved with remedies. Figure 1 illustrates this, by comparing the yearly number of remedies decisions and prohibition decisions in the past decade.
Figure 1 – Number of approvals with remedies vs. prohibitions per year (2011-2020)
Hence, remedies are central to the European Commission’s merger control activities. The European Commission is by no means unique in this respect. Competition authorities in other EU Member States, with the exception of Germany, also rely mostly on remedies, not prohibitions, to protect competition. Likewise, in the United States, most problematic mergers are not blocked by the courts but cleared with remedies, through ‘consent orders’ (FTC) and ‘consent decrees’ (entered by a court at the request of the Department of Justice).
In spite of their importance, remedies are somewhat of a niche topic in the academic literature. Most of the major EU competition law textbooks either treat the topic very summarily or skip it altogether. Only a handful address the topic in some depth and even fewer in a comprehensive way. Monographs on the topic are also scarce.
The importance of remedies within merger control is also reflected in the significant resources that flow into the design, implementation and enforcement of remedies. European Commission staff working on mergers spend considerable time and efforts on remedies, as do undoubtedly the parties themselves and their lawyers.
The steady flow of merger clearances with remedies has also increased the demand for the services of monitoring trustees, the independent third parties that oversee the merging parties’ compliance with remedies.  Given that some remedies are in place for a long period of time, the trustee’s involvement with a case can last for several years. Only a handful of persons and firms offer trustee services. Some trustees focus solely on providing trustee services in competition cases, while others are part of firms that offer a variety of services, typically consulting, audit, accounting or banking services.
The economic importance of remedies is evidenced by the size of some divestiture transactions. Divestitures – the most common type of remedy in EU merger control – have sometimes constituted very significant transactions in their own right. As the size and geographic reach of mergers has grown, so has the size and complexity of divestitures. In 2018, for instance, Bayer, a German-based multinational, agreed to divest part of its business as a remedy to obtain clearance for its acquisition of U.S. seeds company Monsanto. The resulting deal, which had a value of 7.6 billion euro, was one of the largest divestitures in EU and U.S. history. Other recent deals have also resulted in very large divestitures, including cases such as AB InBev / SAB Miller, Dow / DuPont, GE / Alstom, Holcim / Lafarge, and Ball / Rexam.
The large size of these divestitures highlights the impact that remedies can have not just on specific markets but on entire industries. In line with this, some commentators have emphasized the role remedies play in restructuring markets, and argue that they constitute opportunities for government authorities to intervene in markets for an extended period of time, transforming mergers into a trigger for economic regulation. This is probably not a characterization which competition enforcers would embrace. Indeed, in court proceedings, the Commission has stated that remedies ‘cannot be instrumentalised by the Commission as a means or opportunity for “engineering markets or economic planning”’. Yet there is no gainsaying that remedies can have important economic consequences. They may raise issues that touch upon economic sovereignty, employment, competitiveness and industrial policy.  This also explains why a topic that appears technical at first attracts the attention of policymakers, who are interested in the economic and strategic impact of remedies.
Given the central role that remedies play in merger enforcement, it is probably not an exaggeration to say that, if remedies are ineffective, merger control is also largely ineffective. Admittedly, the threat of a prohibition – even if prohibitions are rarely actually issued – probably also has an impact. It probably stops many clearly anticompetitive mergers from being pursued. These are the ‘deals that never leave the boardroom’. However, apart from this deterrent effect of prohibitions, effective remedies are crucial in ensuring that merger control fulfils its promise of keeping markets competitive.
The effectiveness of remedies and, by extension, the effectiveness of merger control has been the subject of some controversy in recent years. The debate has been most vigorous in the United States, where it became part of a broader debate about economic concentration and the role antitrust law should play in the economy.
An important contribution to the debate came in 2015, when John Kwoka published his study on the consequences of mergers in the United States. Kwoka assessed, among others, whether remedies had been effective in preventing price increases from mergers. To do so, he conducted a meta-analysis of previously published ex post assessments of mergers, i.e. studies that estimate a merger’s impact on prices.  His analysis covered 49 mergers, of which 12 had been cleared with remedies by the U.S. antitrust authorities. Kwoka found that those 12 mergers led to significant price increases, in spite of the remedies. On average, the mergers cleared subject to a divestiture remedy led to a price increase of 5.65%. Conduct remedies did even worse: they led to a 13.33% price increase, although that estimate was based on a sample of only two mergers.
On the basis of these figures, Kwoka concluded that ‘many challenged mergers are subject to remedies that fail to prevent postmerger price increases.’
Kwoka’s findings sparked a rebuke from FTC officials, who challenged Kwoka’s findings on various grounds. They argued that the studies he had analysed covered only a small number of transactions, which had occurred in a small and unrepresentative set of industries. They concluded that ‘[Kwoka’s] evidence cannot support [his] broad conclusions’.
Kwoka’s study also stirred up the debate across the Atlantic. His study related to price effects of mergers in U.S. markets, which begged the question: what has the impact of mergers been on prices in Europe? Have remedies in the EU been able to prevent price increases? At first sight, one would expect a similar tendency as in the United States, because the Commission’s approach to merger remedies is not fundamentally different from the one of the Department of Justice and the FTC. All these authorities use remedies, not prohibitions, as the primary tool to address anticompetitive effects from mergers. All have a preference for structural remedies, but at the same time accept behavioural remedies in certain cases.
Almost immediately after the publication of Kwoka’s book, the European Commission commissioned a similar meta-analysis, but this time of ex post assessments of European mergers. The study, published in 2016, found that unconditionally approved mergers led to a price increase of 5% on average, suggesting that merger control in Europe had not caught all anticompetitive mergers. Remedied mergers, however, had a more moderate effect. On average, the price after a remedied merger increased by 1.64%. A subsequent meta-analysis by the same authors, based on a slightly different set of ex post studies, suggested that the remedies did even better. That study found that remedied mergers led, on average, to a price decrease of -0.6%.
Does this mean that remedies in the EU have been effective in preventing the harm from mergers, in contrast to remedies in the U.S.? This was not the conclusion which the authors of the two studies drew. On the one hand, they acknowledged that ‘a stylized conclusion (…) would be that remedies are effective in eliminating post-merger price increases’.  However, they then went on to conclude that the difference between Kwoka’s findings and the study’s finding was ’likely to be due to the differences in the way the two samples were selected.’ Indeed, the study conducted for the Commission had significant limitations. The sample of mergers was small: 25 mergers, of which seven had been reviewed by the European Commission, while others were reviewed by other European competition authorities. Of these 25 mergers, only eight had been subject to remedies, approved by various competition authorities in the EU. Only one merger had been subject to remedies approved by the European Commission. Hence, it seems difficult to draw any firm conclusions on the effectiveness of remedies in the EU from this study and even less so on the effectiveness of remedies approved by the European Commission.
With no recent study to draw any conclusions from, the question on the effectiveness of remedies in the EU remains open. Anecdotical evidence about specific merger remedies demonstrates that some merger remedies have not been effective or only partly effective, but it is difficult to assess how widespread these problems are.
The only large-scale study is DG COMP’s merger remedies study of 2005, which is discussed in section 1.2.3 (The call for ex post assessments of remedies).
Like most competition authorities across the world, the Commission has a policy that favours structural remedies over behavioural remedies. However, this still leaves room for behavioural remedies in some cases. The optimal stance on this issue continues to spark discussions. The debate is also linked to questions about how interventionist the Commission should be in regard to vertical and conglomerate mergers. Those are the type of mergers where the choice between behavioural and structural remedies presents itself most acutely. In that type of mergers, divestitures are sometimes extremely difficult to conceive, leaving the Commission with a choice between prohibiting the transaction or accepting a behavioural remedy.
This topic is explored in greater detail in section 4.2.2.
Ex post assessments of mergers, also known as merger retrospectives, seek to assess whether a merger has had an impact on competition in one or more of the relevant markets. If the merger was accompanied with remedies, such assessments also shed light on the effectiveness of the remedy. If the remedies were effective, the merger should not have any negative impact on competition.
Some ex post assessments focus specifically on remedies. The 2005 Merger Remedies Study conducted by DG COMP was a major such study, analysing 96 remedies, imposed in 40 Commission decisions that were issued in the five-year period from 1996 to 2000. It revealed several shortcomings in the remedies accepted in those cases. Those learnings were subsequently reflected in the Commission’s Remedies Notice of 2009.
The 2005 study was based on interviews and mainly aimed at identifying issues in the design and implementation of remedies. It did not conduct a detailed ex post assessment of the evolution of each market concerned. The study’s findings on the effectiveness of remedies were therefore presented as ‘a first indication of how effective a remedy might have been in preserving effective competition’. With that caveat in mind, the study found that 57% of all remedies analysed had been effective. 24% of all remedies had been partially effective, while 7% had been ineffective. In 12% of cases, the effectiveness of the remedy could not be determined, for instance because of a lack of information.
Among different types of remedies, the study found that commitments requiring a party to exit a joint venture had been most effective (77% of such remedies had been effective), while access remedies had been least effective (40% of such remedies had been effective).
Since then, no large-scale ex post assessments have been conducted, although two meta-analyses were conducted that included several mergers approved with remedies. However, those analyses included only a very small number of mergers with remedies approved by the European Commission, namely one and three cases. The results of those studies were discussed in section 1.2.1 (Are merger remedies effective?).
The lack of large-scale retrospectives on EU mergers has led to a growing chorus of observers calling for more ex post assessments.
In September 2020, Commission Vestager announced that the Commission would ‘look back at some of [its] recent decisions, to see, for instance, what effect those decisions have had on prices and choice, quality and innovation.’ This suggests some ex post assessments of mergers will be conducted in the near future.
In the context of EU merger control, the terms ‘remedies’ and ‘commitments’ are synonyms. This contrasts with the field of Article 101 and 102 TFEU, a field which the European Commission sometimes refers to as ‘antitrust’, where the two terms have distinct meanings. In that field, remedies denote orders imposed by the European Commission to bring an infringement of Article 101 or 102 TFEU to an end. Commitments, by contrast, denote the obligations voluntarily taken up by companies in order to avoid the finding of an infringement by the Commission. The latter concept bears similarities to the merger control concept of commitments (or remedies, as the two are synonymous in the context of merger control). While commitments/remedies in merger control are made binding and avoid a prohibition, commitments in the field of antitrust are made binding and avoid a finding of an infringement.
The EU Merger Regulation only uses the term ‘commitments’ but the Implementing Regulation and the European Commission, in its decisions and guidance, use both ‘commitments’ and ‘remedies’, sometimes in one and the same text. For instance, the Implementing Regulation explains that, when companies offer ‘commitments’ to the Commission, they have to be accompanied by a ‘form RM relating to remedies’. The Commission’s guidance on commitments is known as the ‘Remedies Notice’ and mostly uses the term ’remedies’.
The term ‘conditions and obligations’ refers to the commitments as attached to the Commission decision. For all practical purposes, the term ‘conditions and obligations’ is interchangeable with the term ‘commitments’. However, strictly speaking, there is a subtle difference. The term commitments looks at the process from the viewpoint of the parties: they commit to do certain things. The term ‘conditions and obligations’ is simply the flipside from the perspective of the Commission. The Commission makes the parties’ commitments binding by turning them into ‘conditions and obligations’ attached to the decision. This slight difference in nuance is borne out by the text of the EU Merger Regulation, which provides that the ‘conditions and obligations’ are ‘intended to ensure that the undertakings concerned comply with the commitments they have entered into vis-à-vis the Commission’.
Together, ‘conditions and obligations’ constitute the commitments, but the terms ‘conditions’ and ‘obligations’ each have a distinct meaning. The difference is relevant for the enforcement of the remedies, namely what happens in case of a breach, and we discuss the exact meaning in that section (section 6.3.1 Distinction between ‘conditions’ and ‘obligations’).
Sometimes, the term ‘undertakings’ is also used as a synonym of commitments. This happens less frequently, perhaps because of the obvious risk of confusion with undertakings in the sense of the economic units that are the subject of competition law. Sometimes specific parts of commitments are denoted as ‘undertakings’.
Under the EU Merger Regulation, the Commission must prohibit concentrations that would significantly impede effective competition. The merging parties can avoid such a prohibition by making commitments. These commitments modify the concentration and, if the modified concentration would no longer significantly impede effective competition, the Commission must approve the concentration, subject to compliance with the commitments. Such a decision is known as a ‘conditional clearance decision’ or an ‘approval with remedies’.
The legal basis for such decisions in Phase II is Article 8(2) of the EU Merger Regulation. Article 8(2) essentially provides that the Commission shall approve concentrations which, following modifications by the undertakings concerned, would not significantly impede effective competition. These modifications are in principle brought about by commitments and the Commission makes the commitments binding on the parties by attaching them to the decision as ‘conditions and obligations’.
The Commission can also approve a concentration with commitments in Phase I. In that case, the dynamics and legal standard are slightly different. In Phase I, the Commission does not determine whether a concentration would significantly impede effective competition. Instead, it has to determine whether the concentration raises serious doubts as to its compatibility with the internal market. If the concentration does raise serious doubts, the Commission opens an in-depth investigation.
The ‘serious doubts’ standard is lower than the ‘significant impediment to effective competition’ standard, meaning the Commission’s level of confidence that the merger harms competition does not need to be as high as when it finds a significant impediment to effective competition in Phase II.
Just as parties in Phase II can avoid a prohibition decision, they can avoid a decision raising serious doubts by offering commitments that modify the concentration. If the modified concentration no longer raises serious doubts, the Commission will approve the concentration subject to remedies. The legal basis for such a conditional clearance decision with commitments in phase I is Article 6(1)(b) combined with Article 6(2). A decision clearing a merger in Phase I with remedies is often referred to as an ‘Article 6(1)(b) decision with conditions and obligations’ or as a decision based on ‘Article 6(1)(b) in conjunction with Article 6(2)’.
Recital 30 of the EU Merger Regulation explains that ‘it is also appropriate to accept commitments before the initiation of proceedings [i.e. before the opening of Phase II] where the competition problem is readily identifiable and can easily be remedied’. The General Court has also made clear that commitments in Phase I ‘must constitute a direct and sufficient response capable of clearly excluding the serious doubts expressed.’
This implies that remedies in Phase I have to meet a higher standard than in Phase II. That is in any event the position taken in the Commission’s Remedies Notice, which explains that, for commitments to be accepted in Phase I, ‘the competition problem needs to be so straightforward and the remedies so clear-cut that it is not necessary to enter into an in-depth investigation and that the commitments are sufficient to clearly rule out ‘serious doubts’.
This section discusses the basic conditions which remedies must meet in order to be acceptable. In addition to these basic conditions, there are more specific requirements for specific types of remedies. For instance, a divestiture must include all assets to ensure its viability and competitiveness. Those more specific conditions are discussed later, when I discuss each type of remedy.
The Merger Regulation, case law and the Remedies Notice all make clear that the Commission can only accept remedies if they entirely remove the competition concerns raised by the merger. Some court judgments have formulated this in a slightly different manner: the remedy must ‘be comprehensive and effective from all points of view’.
The principle of proportionality is one of the general principles of EU law. The EU courts have specified that ‘the principle of proportionality requires measures adopted by [EU institutions] not to exceed the limits of what is appropriate and necessary to attain the objectives pursued; when there is a choice between several appropriate measures recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued.’
As the principle of proportionality is a general principle of EU law, Commission decisions in EU merger control, including decisions imposing remedies, must respect this principle. However, the precise implications of this principle will depend on the specific context. The question is therefore what the principle specifically implies when the Commission assesses merger remedies. In that context, the proportionality principle implies that “commitments should be proportionate to the competition problem and entirely eliminate it”.
At first sight, some tension appears to exist between the requirement that remedies are effective, i.e. the requirement that they entirely remove the competition problems, and the requirement that they are proportionate to the competition problem. Imagine, for instance, a merger where competition problems arise on a market for product A. Product A is manufactured in a plant together with products B and C, and it is impossible to extract the production equipment for product A from the plant. To remove the competition concerns, must the entire plant be divested, including the production assets for products B and C? If the requirement of proportionality were to be applied in isolation, that is without also taking into account the requirement of effectiveness, the answer would be yes. By contrast, if remedies first and foremost need to be effective, it is clear that the entire plant must be divested.
The Commission has consistently taken the view that the requirement of effectiveness takes precedence over the requirement of proportionality. In other words, the principle of proportionality cannot be used to force the Commission to accept a commitment that would not be effective. This stance finds support in the case law of the General Court, and particularly the Cementbouw judgment. That case involved an acquisition of joint control over an entity (CVK), which the Commission approved subject to the admittedly far-reaching commitment that the parties would dissolve CVK. The parties argued before the court that this commitment was disproportionate and that the initial commitments they had offered – an arrangement to end their joint control – were sufficient. The Commission’s defence was that the concentration not only gave the parties (Cementbouw and Haniel) joint control over CVK but had also created CVK’s dominant position. This was because the concentration consisted of two parts: the acquisition of joint control over CVK and, in an interrelated transaction, the acquisition by CVK of control over several companies that used to be member of CVK but existed independently. The General Court rejected Cementbouw’s argument based on proportionality, as the initial commitments would have removed the competition problems arising from joint control but would not have removed CVK’s dominant position. In what is perhaps the most well-known paragraph of the judgment, the General Court stated that ‘the parties’ commitments must not only be proportionate to the competition problem identified by the commission in its decision but must eliminate it entirely’.
On appeal, the Court of Justice confirmed the General Court’s analysis, noting that ‘when reviewing the proportionality of conditions or obligations which the Commission may, by virtue of Article 8(2) of Regulation No 4064/89, impose on the parties to a concentration it is necessary (...) to be satisfied that those conditions and those obligations are proportionate to and would entirely eliminate the competition problem that has been identified’.
The Commission’s position that proportionality cannot be used to justify ineffective remedies is also expressed in the Remedies Notice. It states that, if this is necessary to ensure the viability of the divested business and thus create an effective competitor, ‘it may be necessary to include activities which are related to markets where the Commission did not identify competition concerns.’
In line with this, in many cases, commitments have included elements that are not directly related to the competition concerns identified but have nonetheless been included to make the remedy effective.
This is not to say, however, that the proportionality principle is a toothless tiger. Parties regularly invoke the principle, and it can play a role in different constellations.
First, the principle of proportionality comes into play when two possible remedies exist, each of them effective. In that case, the Commission is obliged to accept the remedy that is less burdensome for the parties. This may result in a remedy that is smaller in scope, for instance a divestiture has to include fewer businesses or product lines. It may also result in a remedy that has a smaller territorial scope. If a territorial limitation does not dampen or undermine the effectiveness or viability of a remedy, this limitation is justified by the principle of proportionality.
Second, the principle of proportionality implies that the commitments have to address the competition problems caused by the merger but no more than that. Here, the principle of proportionality meets the requirement of merger-specificity, i.e. the idea that the Commission can only challenge a merger based on competition problems caused by the merger. Likewise, the remedy must only remove the problems caused by the merger. This use of the principle of proportionality was echoed in Advocate General Mazák’s opinion in Odile Jacob v. Commission.
In order to be acceptable, commitments must be ‘capable of being implemented effectively within a short period of time.’ The remedies notice explains that this is because ‘conditions of competition on the market will not be maintained until the commitments have been fulfilled’.
This requirement reflects the fact that, as long as the commitments are not implemented, they are unlikely to have any remedial effect. The word ‘implemented’ in this context therefore refers to the commitment becoming effective, i.e. starting to have its effect felt on the market. If it takes more than ‘a short period of time’ for those effects to be felt, the remedies will not prevent a significant impediment to effective competition and will therefore be inadequate. In line with this, the Remedies Notice provides that access commitments aimed at fostering new entry will only be acceptable if they ‘actually make the entry of sufficient new competitors timely and likely’.
In practice, the requirement means that commitments whose implementation will depend on an uncertain event or an event that will take considerable time to materialize, may be unacceptable.
In Siemens / Alstom, for instance, the Commission rejected Siemens’ commitment to offer a software license to address competition concerns in the markets for mainline signalling. In that case, the beneficiary of the licence would have to transfer the software to its own platform, something which would likely take several years. This part of the commitments was therefore considered to fall short of the requirement that remedies must be capable of being implemented in a short period of time.
Likewise, in Ryanair / Aer Lingus (I), the Commission rejected the remedies proposed by Ryanair to make Aer Lingus’ slots at Heathrow available, in part because certain minority shareholders of Aer Lingus held veto rights over slot transfers. This, the Commission concluded, ‘cast serious doubts on Ryanair’s capability of delivering this remedy in time’.
The requirement that commitments must be capable of being implemented in a short period of time does not mean that commitments must necessarily be a one-off intervention, i.e. a divestiture. As explained in section 4.2.1 (The Commission’s preference for divestitures), in some cases, non-divestiture remedies may be acceptable. It is common for such non-divestiture remedies to be in place for some time. Although this long duration may certainly raise problems in terms of effective implementation – which is why divestitures are preferred – they may nonetheless be considered effective in some circumstances. In line with this, the Commission has accepted commitments with a duration of several years (e.g. eight years or ten years). Up until the 2000s, commitments of unlimited duration were not uncommon, but no such remedies have been approved in recent years.
Although the Commission is available to give the parties informal guidance on draft remedies, the onus is ultimately on the parties to submit remedies that are sufficient to remove the competition concerns. They also have a duty to supply the Commission with the information necessary to assess the remedies. Particularly important in this respect is the duty to submit the so-called Form RM and accompanying documents.
On the other hand, the Commission bears the burden of proof, regardless of whether it concludes that the commitments are adequate or not. This flows from the Commission’s double-sided burden of proof in merger control: it bears the burden of proof both when prohibiting a concentration and when approving one. These rules on the burden of proof also apply when the parties submit commitments. Indeed, as the General Court has held, ‘in so far as the burden of proof is concerned, a concentration modified by commitments is subject to the same criteria as an unmodified concentration’.
In practice, this means that, if the Commission rejects the commitments validly offered by the parties and wants to prohibit the concentration, it must show that those commitments do not render the concentration, as modified, compatible with the internal market. Conversely, if the Commission accepts the commitments it must show that they eliminate the competition concerns raised by the merger.
Apart from the EU Merger Regulation, the most important document guiding parties and the Commission is undoubtedly the Remedies Notice issued in 2008.
Also very important in practice is the Commission’s Model Text for Divestiture Commitments, last updated in 2013. Although the title of this document suggests that it only serves as a model for divestiture commitments, in practice, it serves as a model for all commitments, mutatis mutandis. This means that the opening paragraphs, most of the definitions, most of the paragraphs regarding the trustee, the review clause and the paragraph regarding the entry into force of the commitments will normally also be included in non-divestiture commitments.
The Commission is keen to point out that the search for an adequate remedy is not a bargaining process. Rather than negotiations, parties can expect a ‘constructive dialogue’, in which the parties and the Commission explore which remedies could adequately address the competition concerns identified.
It is in the parties’ interest to start remedies discussions early. This is because it often takes several iterations before a commitments text stands a chance of being acceptable. In principle, parties could even submit proposals for commitments prior to notification. In some cases where the competition problems were particularly self-evident, parties have done so. This can contribute to making a conditional clearance in Phase I possible but is usually only meaningful if the competition concern is obvious and the remedies are clear-cut structural remedies, since in the prenotification stage the Commission has not yet conducted a market investigation and therefore has a very incomplete understanding of the potential competition problems and how to fix them.
The Remedies Notice explains that, when considered appropriate, the Commission will consult third parties on the remedies that have been submitted by the merging parties. This is known as a market test of the proposed remedies.
A market test allows the Commission to obtain information and views from market participants as to whether the proposed remedies will be workable and effective in removing the competition concerns. It is an opportunity for the Commission to hear from those who know the market best. This can partly mitigate the information asymmetry between the parties and the Commission. Competitors, customers and suppliers of the merging parties will often be able to spot shortcomings in a remedy that are hidden for non-insiders. For instance, in Deutsche Börse / London Stock Exchange, the market test revealed that the business proposed for divestiture was vitally dependent on the London Stock Exchange's trading platform MTS, which had not been included in the proposed divestiture. This led the Commission to conclude that the proposed divestiture would simply not be viable. The Commission therefore rejected the proposed commitments and prohibited the transaction.
The third parties that are consulted may include competitors, customers, suppliers and other interested parties. The questions can relate to anything that is relevant to assess the proposed remedies. In case of divestitures, questions typically seek to ascertain whether the scope and scale of the proposed divestiture is sufficient, whether the divested business will be viable, whether transitional agreements are needed, and whether specific purchaser requirements are warranted.
In case of a divestiture, another important goal of the market test is to gauge whether the proposed divestiture will attract buyers. For this purpose, potential buyers are usually directly asked whether they would be interested in acquiring the business that is being proposed as divestiture and, if not, which modifications would have to be made to make the business attractive.
To ensure that third parties can comment meaningfully on the commitments, the notifying parties must make available a non-confidential version of the commitments. That version must allow third parties to fully assess the workability and effectiveness of the proposed remedies. Excessive redactions will make this impossible, which in turn makes it impossible for the Commission to assess the adequacy of the commitments.
The Commission has discretion on whether to conduct a market test of merger remedies. If the proposed remedies are clearly inadequate, the Commission will normally refuse to market test them. In such a scenario, there is simply no reason to ask third parties to parse through the often lengthy commitments and reply to questions, only to reach the inevitable conclusion that the remedies are inadequate. Conversely, it is also conceivable that proposed commitments are so clear and comprehensive that the Commission can confidently decide, without market test, that they are suitable. This is, however, exceedingly rare. Remedies submitted after the Phase II deadline will normally not be market tested, although exceptionally they are.
The replies to the market test form part of the evidence on the basis of which the Commission assesses whether the remedies are adequate. Assessing the replies to the market test is not simply a matter of counting favourable or unfavourable views. It is not a popularity vote on the remedies. Although it is of course relevant if a large number of the respondents point out a particular flaw in the commitments or consider the divested business viable, numbers alone are not decisive. Instead, the Commission reviews all individual responses, and its assessment of the market test is based on the totality of the replies. In assessing the replies, the Commission weighs them based on elements such as the consistency and relevance of the reply, the expertise of the respondent, how well the reply is substantiated, and the possibility of replies being guided by self-interest. Competitors in particular may have a hidden agenda, either in favour or against the merger. They may also see themselves as a potential buyer of a divestiture. Their replies may therefore be strategic. In those cases, the weight given to their replies will depend on how well their reply is substantiated and whether it is echoed by other respondents.
Apart from consulting market participants through a market test, the Commission also consults the authorities of the Member States, who receive a copy of the commitments. This allows the Commission to benefit from the experience and expertise of national competition authorities, who may have dealt with the relevant markets or similar commitments in prior cases. The Commission also frequently obtains feedback on commitments from national regulators with expertise on the specific sector in which the merger takes place. For instance, in case of a merger between telecommunications operators, national telecom regulators may be consulted, while in a merger between two train makers, national rail regulators may be consulted.
If the Commission’s assessment shows that the proposed remedies are not sufficient to remove the competition concerns raised by the merger, the parties will be informed of this. If time allows, parties can then modify their proposed remedies and submit revised remedies.
However, since in Phase I, the Commission may only accept remedies that ‘provide a clear-cut answer to a readily identifiable competition concern,’ ‘only limited modifications can be accepted to the proposed commitments’ and such modifications may only be accepted ‘in circumstances where it is ensured that the Commission can carry out a proper assessment of those commitments.’ In practice, this means that when submitting remedies in phase I, the parties must make a genuine effort to propose their ‘best offer’ for a clear cut solution to the competition concerns identified by the Commission, rather than putting forward an ‘opening gambit’ with the idea that they can always improve the remedies later. The latter is a high risk strategy in view of the limited time and scope available to consider or modify remedies in phase I.
In Phase II, there is in principle no limitation on the type of modifications that can be made, at least prior to the deadline of 65 working days. After that deadline, the merger process is running towards its end and this limits the type of modifications that can be made. Commitments submitted after day 65 are known as ‘late commitments’ and are subject to a stricter legal standard. The General Court has found, in a case decided under the old Merger Regulation, which also had a deadline for submission of remedies in Phase II, that there is ‘no obligation on the Commission to accept commitments submitted after the deadline’. However, in its Remedies Notice, the Commission has voluntarily agreed to examine modified commitments submitted after the deadline under certain circumstances. More specifically, the Commission will accept modified commitments after day 65 ‘where it can clearly determine - on the basis of its assessment of information already received in the course of the investigation, including the results of prior market testing, and without a need for any other market test - that such commitments, once implemented, fully and unambiguously resolve the competition concerns identified’. In addition, there must still be ‘sufficient time to allow for an adequate assessment.’
Remedies can be categorized in several ways, but the most commonly used distinction is the one between structural and behavioural remedies. This distinction is also the most relevant, since it plays an important role in the Commission’s remedies policy. Behavioural remedies are also referred to as conduct remedies or non-structural remedies.
Structural remedies require that the merging parties divest, i.e. sell, a business or assets to a third party. The underlying idea is that the third party will compete with the business or the assets, thereby replacing the competition that is lost because of the merger. The divestiture will either strengthen an existing player or allow a new entrant to compete. Divestitures therefore essentially rely on a third party, independent from the merged entity, to maintain competition in the market, based on that third party’s own incentive to maximize its profits.
Structural remedies derive their name from the fact that they have a direct impact on the structure of the market, because a business or assets change hands. In essence, this transfer restructures the market, thereby remedying the harm generated by the merger, which itself is also a structural change in the market.
Behavioural or non-structural remedies, by contrast, require certain conduct by the merging parties (other than divesting a business which is of course also a type of conduct, albeit a very specific type). They either modify or constrain the merged entity’s conduct and typically last for some time. Usually, these remedies require medium-term or long-term monitoring.
These two categories are not defined in the EU Merger Regulation, but they nonetheless constitute an important distinction. The Remedies Notice expresses a preference for ‘commitments which are structural in nature, such as the commitment to sell a business unit’ because ‘such commitments prevent, durably, the competition concerns which would be raised by the merger as notified, and do not, moreover, require medium or long-term monitoring measures’.
Although the distinction seems straightforward, semantic discussions occasionally arise.
A first question is whether the category of structural remedies coincides exactly with the category of ‘divestiture remedies.’ Put differently: are there some remedies - other than divestitures – that also qualify as structural remedies?
The easy answer
is to reply that the question is irrelevant because the Remedies Notice’s
preference for structural remedies is, upon closer reading, actually a
preference for divestitures. Hence, the most relevant distinction from the
perspective of the Remedies’ Notice is not the distinction between structural
and behavioural remedies but between divestitures and non-divestiture remedies.
The Remedies Notice’s preference is explained in greater detail in section
4.2.1 (The Commission’s preference for divestitures).
A more thorough answer is to acknowledge that the dividing line between structural remedies and behavioural remedies is less sharp than the one between divestiture remedies and non-divestiture remedies.
The root of the problem lies in the fact that the label ‘structural’ in structural remedies refers to the impact of the remedy (a remedy is structural if it changes the structure of the market), while the label ‘behavioural’ in behavioural remedies refers to how the remedy is implemented (a remedy is behavioural if it requires behaviour, other than a divestiture, over a certain time period).
Some behavioural remedies are aimed at changing the structure of the market. The main example are access remedies, in which the merging parties grant third parties access to key infrastructure, networks, airport slots, etc. These remedies are aimed at lowering barriers to entry and their goal is often to allow new entrants to come into the market, using the assets to which the remedy ensures access. If successful, such remedies can ultimately change the structure of the market, although it is clear that the impact on market structure is less direct and certain than in case of a divestiture. However, because these access remedies may impact the structure of the market, they have sometimes been put in the structural box, i.e. they have been qualified as ‘structural remedies’ or – acknowledging the fact that they remain essentially behavioural – ‘behavioural remedies with structural elements’ or ‘quasi-structural remedies’.
This tendency – to put access remedies in the ‘structural’ box – may have been triggered by a finding of the General Court in the ARD judgment. That case involved a third party challenging the remedies approved by the Commission. The remedies were access remedies. They did not entail a divestiture but required the merged entity to give competitors access to certain assets (programming interface, technology, etc.). The third party argued that the remedies were insufficient, among others, because they were ‘mere promises not to abuse dominant positions’. The General Court rejected the third party’s challenge and, in doing so, held the following: ‘although the commitments appear to be rather behavioural in nature, they are nevertheless structural because they are aimed at resolving a structural problem, namely market access by third parties.’  The General Court then found that the commitments would ‘consistently provide for and strengthen competition’ and, hence, could not be categorized as ‘mere behavioural commitments unsuitable for resolving the competition problems identified by the Commission’. In line with this approach, the Remedies Notice mentions, in a single paragraph, ‘granting access to key infrastructure or inputs on non-discriminatory terms’ as an example of a structural remedy.
In the author’s view, it would be clearer to qualify access remedies as behavioural remedies, while acknowledging that, within the category of behavioural remedies, some remedies may have more of a structural impact than others. Ultimately, the reason why competition authorities prefer structural remedies over behavioural remedies is because behavioural remedies (1) are not a durable solution, (2) rely on the merging parties behaving in a way that is at odds with their incentive to maximize profit, and (3) are difficult to monitor and enforce over a long period of time. Access remedies are not free from these challenges. They require one of the merging parties to provide access, although that party usually has no incentive to do so, since the better access they provide, the more competition they will face. In addition, the conditions under which access has to be granted will have to be monitored and enforced over a long period of time. These features put access remedies squarely in the behavioural box. At the same time, third parties who obtain access under an access remedy will have their own incentive to compete in the market. In this sense, access remedies do somewhat harness the incentives of third parties to compete, just as divestitures do. This makes them potentially more effective than other types of behavioural remedies.
The Remedies Notice reflects these subtle distinctions. It distinguishes between divestitures – the gold standard for effective remedies – and non-divestiture remedies. However, within non-divestiture remedies, it again distinguishes between access remedies – which may be suitable if they are as effective as divestitures – and other non-divestiture remedies, such as promises to abstain from certain commercial behaviours (e.g. bundling). The latter type of remedies are arguably the purest form of behavioural remedies and the Remedies Notice reserves its most sceptical language for this type of remedies. It states that such commitments relating to the future behaviour of the merged entity may be acceptable only exceptionally in very specific circumstances, will not eliminate horizontal competition concerns, and that ‘it may be difficult to achieve the required degree of effectiveness of such a remedy’. Another type of remedy discussed in the Remedies Notice is the ‘change of long-term exclusive contracts’, which may help in remedying concerns of foreclosure, and which ‘will normally only be sufficient as part of a remedies package’. Figure 2 shows the different types of remedies discussed in the Remedies Notice and how they can be classified.
Figure 2: Types of remedies – classification used in the Remedies Notice
A second source of confusion is the fact that divestitures will normally be accompanied by some ancillary behavioural remedies, such as the obligation to preserve the business until it has been sold. Arguably, therefore, all remedies are a mix of structural and behavioural elements. However, in practice, the label structural or behavioural is applied based on what is at the core of the remedy. If the remedy entails a divestiture, it will be qualified as a structural remedy, even though ancillary behavioural remedies may also be included in the remedy.
In EU merger control, divestiture remedies are the preferred remedy and also the benchmark against which to assess the effectiveness of other types of remedies.
The Remedies Notice explains that divestitures constitute ‘the most effective way to maintain effective competition, apart from prohibition’, because they ‘create the conditions for the emergence of a new competitive entity or for the strengthening of existing competitors’. Although other types of remedies may be acceptable in some cases, ‘divestitures are the benchmark for other remedies in terms of effectiveness and efficiency.’ It follows, according to the Remedies Notice, that the Commission may only accept other types of commitments ‘in circumstances where the other remedy proposed is at least equivalent in its effects to a divestiture’. 
In short, divestitures are the gold standard of remedies according to the Remedies Notice: ‘divestiture commitments are the best way to eliminate competition concerns resulting from horizontal overlaps, and may also be the best means of resolving problems resulting from vertical or conglomerate concerns’.
At the same time, the Remedies Notice makes clear that non-divestiture remedies are not automatically ruled out. Whether a remedy is suitable to eliminate the competition concerns is ultimately examined ‘on a case-by-case basis’, and the Commission has accepted remedies other than divestitures in a significant number of cases. Figure 3 shows the number of cases where non-divestiture remedies have been accepted.
Figure 3: Types of remedies (2011-2019): type, number of cases, percentage of total
There is a clear correlation between the type of competition concerns and the type of remedies that are accepted. Horizontal competition concerns are almost always addressed through divestitures. Vertical and conglomerate competition concerns are more frequently removed through non-divestiture remedies, although divestitures are also sometimes used.
In the early years of the (old) EU Merger Regulation, the Commission’s stance on behavioural remedies was stricter. In Gencor / Lonrho, the parties had proposed behavioural remedies to clear the creation of their joint venture in the mining sector. The Commission rejected these, writing in its decision that ‘[t]he commitment offered is behavioural in nature and cannot therefore be accepted under the Merger Regulation.’ Gencor subsequently appealed and, on appeal, the General Court stressed that what mattered was not so much whether the commitments can be categorized as behavioural or structural but whether they were capable of rendering the notified concentration compatible with the common market. While it was true, according to the Court, that structural commitments are, as a rule, preferable, behavioural commitments cannot be automatically ruled out:
The categorisation of a proposed commitment as behavioural or structural is therefore immaterial. It is true that commitments which are structural in nature, such as a commitment to reduce the market share of the entity arising from a concentration by the sale of a subsidiary, are, as a rule, preferable from the point of view of the Regulation's objective, inasmuch as they prevent once and for all, or at least for some time, the emergence or strengthening of the dominant position previously identified by the Commission and do not, moreover, require medium or long-term monitoring measures. Nevertheless, the possibility cannot automatically be ruled out that commitments which prima facie are behavioural - for instance, not to use a trade mark for a certain period, or to make part of the production capacity of the entity arising from the concentration available to third-party competitors, or, more generally, to grant access to essential facilities on non-discriminatory terms - may themselves also be capable of preventing the emergence or strengthening of a dominant position.
The position of the General Court in Gencor was later confirmed in several other judgments, including the Court of Justice in Tetra Laval, and it was ultimately incorporated in the Remedies Notice as the Commission’s policy stance on remedies. It is less strong than an outright rejection of behavioural remedies as such. At the same time, it puts the bar high for behavioural remedies by requiring that they are ‘at least equivalent in [their] effects to a divestiture’.
The Commission’s preference for structural remedies in merger control is sometimes contrasted with the situation in the field of Articles 101 and 102, where the applicable legal framework is said to impose a preference for behavioural remedies. However, this interpretation of Regulation 1/2003 is not self-evident, and several commentators have argued that Regulation 1/2003 does not prefer or prioritise behavioural remedies over structural remedies. This being said, it is true that Regulation 1/2003 – unlike the Remedies Notice - certainly does not express a preference for structural remedies. In addition, in reality, structural remedies are much rarer in the field of Articles 101 and 102 than in merger control.
The Commission’s preference for structural remedies reflects a stance that is shared by many competition authorities across the world. In the United States, the Department of Justice and the FTC have historically shown a strong preference for structural remedies. In the early 2010s, behavioural remedies (usually referred to as conduct remedies in the U.S.) seemed to gain increased acceptance, especially in vertical mergers, but this revival was short-lived. The Department of Justice’s 2020 Merger Remedies Manual states that ‘structural remedies are strongly preferred in horizontal and vertical merger cases’  and then goes on to severely limit the circumstances in which it may accept a conduct remedy. More specifically, conduct remedies are only acceptable as an ancillary remedy, i.e. to facilitate structural relief, or when all of the following conditions are met:
1) a transaction generates significant efficiencies that cannot be achieved without the merger;
2) a structural remedy is not possible;
3) the conduct remedy will completely cure the anticompetitive harm, and
4) the remedy can be enforced effectively.
In Germany, the Bundeskartellamt has an ever stricter stance on behavioural remedies than the Commission. Its guidance not only expresses a ‘clear preference for divestments’  but points out that, under German law, a certain type of behavioural remedies, namely those that ‘require a constant control of the merging parties’ conduct’ is excluded by law. As an example, the Bundeskartellamt’s guidance mentions the maintenance of Chinese walls. The UK’s Competition & Markets Authority’s guidance on merger remedies likewise expresses a preference for structural remedies.
France is a jurisdiction where behavioural remedies are relatively frequently used in merger control. The Autorité de la Concurrence nonetheless generally favours structural remedies, albeit with more nuance than many other authorities. In a recent study of its behavioural remedies, the Autorité concluded that ‘although behavioural remedies are generally not the remedies favoured by the Autorité in merger control, they nevertheless play no small role in its decisional practice’
Perhaps the most accurate summary of the global stance on structural remedies is found in the Remedies Guide of the International Competition Network, which embodies a compromise text agreed upon by over 140 competition authorities. It states that ‘competition authorities generally prefer structural relief in the form of a divestiture to remedy the anticompetitive effects of mergers, particularly horizontal mergers.’ At the same time, the guide acknowledges that ‘[n]on-structural remedies (…) can be an effective method to remedy likely anticompetitive effects, particularly in respect of a vertical merger or in other circumstances where a structural remedy is not appropriate’.
Although the preference for structural remedies is widespread, there are also voices calling for more frequent use of behavioural remedies. Some scholars and practitioners have done so but, in recent years, Member State governments have been the most vocal advocates. In 2019, in the wake of the Commission’s prohibition of the Siemens / Alstom merger, the French, German and Polish government called on the Commission to encourage behavioural remedies, praising them as ‘more flexible than structural ones’, although also acknowledging that ‘such behavioural remedies should be subject to proper monitoring’. Shortly thereafter, Italy joined these three Member States in calling on the Commission ‘to consider, on a case by case approach, the effectiveness and viability of behavioural remedies, especially if competition conditions may change in the short run’.
The call was seen as a direct response to the Commission’s prohibition in Siemens / Alstom, a deal that had the support of both the French and German governments. In that case, the commitments proposed by the parties had been rejected, in part because they were very complex and behavioural. One of the parties’ arguments was that the merger should be cleared because a Chinese train manufacturer (CRRC) would soon enter the market and mitigate any anticompetitive effects of the merger between Siemens and Alstom. However, the Commission found that CRRC’s entry was unlikely to occur in the coming few years, and therefore rejected the argument based on future competition from a Chinese rival. This background may explain why behavioural remedies seemed particularly attractive to the governments who supported the Siemens / Alstom deal. They see them as a way to preserve competition in the interim (i.e. in the case of Siemens / Alstom until competition from China has materialized), while allowing the merging parties’ businesses to remain intact.
Although the Commission has a preference for structural remedies, because they are generally more effective than behavioural remedies, this is not to say that divestiture remedies are free from problems. On the contrary, ‘the potential for things to go wrong is high’, as the divested business may lack certain essential assets, it may be sold to the wrong purchaser, or it may deteriorate during the divestiture process.
Some of these issues are inherent in any M&A deal. Any merger or acquisition will indeed face the challenge of post-acquisition integration and there is no shortage of examples of failed M&A deals. However, in the case of divestitures, the risks are exacerbated because the incentives of the three parties involved are fundamentally misaligned.
The competition authority wants the divestiture to restore competition, by creating a new competitive player or strengthening an existing one. By contrast, the merged entity, i.e. the seller in the divestiture process, has exactly the opposite goal, as it will remain a competitor in the market and will benefit if competition is reduced in the market. It therefore has every incentive to divest less than a viable business and divest it to a buyer that will not compete vigorously with the divested business. The buyer, from its side, may at first sight share some of the competition authority’s goals. One would indeed expect the buyer to be keen on acquiring a viable business. However, it obtains the divested business as a result of a bargaining process, in which the price it has to pay for the divestiture is negotiated. This allows for a trade-off: the seller can sell a less than competitive business and compensate the buyer by reducing the purchase price.
Complicating matters further are the very significant information asymmetries between the merging parties and competition authorities. While the party divesting the business knows every nook and cranny of the divested business, the competition authority will usually be wholly unfamiliar with the divested business, until the remedy is proposed.
These inherent risks are not merely theoretical but lead to actual issues in actual cases. DG COMPs 2005 Merger Remedies Study analysed the outcome of 68 remedies that had been aimed at transferring a market position, a category which included divestitures of a stand-alone business, divestitures of a stake in a joint venture, divestitures of assets and divestitures or grants of a long-term exclusive licence of IP rights. These 68 remedies led to 59 serious design and/or implementation issues that had remained unresolved. The inadequate scope of the divested business was the most frequent issue, followed by situations where an unsuitable purchaser had been approved.  Issues with the carve-out of assets and the transfer of the divested business were also frequent. 
Notwithstanding these potential and actual problems, it is important not to lose sight of the fact that the few ex post assessments of remedies show that most divestiture remedies are in fact effective. The FTC published a study in January 2017, which included an in-depth case study of 50 remedies. That study showed that all divestitures of an ongoing business had been successful. Divestitures of more limited packages of assets fared less well, but still achieved a success rate of 70%. Likewise, DG COMP’s Merger Remedies Study, published in 2005, also found that the majority of divestitures had in fact been effective.
The Remedies Notice requires the divestiture of a ‘viable business that, if operated by a suitable purchaser, can compete effectively with the merged entity on a lasting basis and that is divested as a going concern’. To ensure the viability of the divested business, ‘it may also be necessary to include activities which are related to markets where the Commission did not identify competition concerns if this is required to create an effective competitor in the affected markets’.
There are many examples of cases where the divestiture included products or territories in relation to which the Commission did not raise competition concerns, but which had to be included to ensure the viability of the divested business. In Dow / DuPont, for instance, the parties ensured the viability of the divestment business by divesting DuPont’s entire global crop protection R&D organisation, although the concerns related to a number of specific ‘innovation spaces’ (early pipeline products and lines of research focused on finding crop protection products for specific crops-pest combinations).
The Remedies Notice in principle requires the business to be divested to be ‘viable as such’, meaning the resources of a possible or even presumed future purchaser are not taken into account by the Commission at the stage of assessing the remedy. An exception to this principle applies in case of a fix-it-first remedy, where the parties have already entered into an agreement with a specific buyer before a decision on the merger is issued. In that case, the Commission can take into account the future buyer’s assets. For instance, in Bayer / Monsanto, the parties had already identified and entered into an agreement with a purchaser (BASF). This allowed the Commission to assess the remedies taking into account BASF’s resources and assets.
If later, once a purchaser has been identified after adoption of the Commission decision approving the transaction, it turns out that some of the assets or personnel included in the divested business will not be needed by the proposed purchaser, ‘the Commission may, upon request by the parties, approve the divestiture of the business to the proposed purchaser without one or more assets or parts of the personnel’, provided that ‘this does not affect the viability and competitiveness of the business to be divested’. This is sometimes colloquially referred to as ‘giving back assets’ or ‘waiving assets’, as some assets which the merging parties had already committed to transfer ultimately are not needed, and therefore can be kept by the merging parties.
A viable business normally implies that the divestment business is economically profitable or, at the very least, bound to become economically profitable in the near future. In some cases, all or part the proposed divestment business was loss-making and needed investments. Such divestitures entail a risk that the purchaser acquires the divestment business and subsequently shuts it down or lets it languish. In some of those cases, attempts were made to ensure that the necessary investments would be made, for instance through a commitment by the seller to make funds available to the purchaser for investing in a plant. However, it seems doubtful that such techniques can truly remove the risk that the purchaser ultimately abandons what is a loss-making business.
The Remedies Notice explains that a viable business is normally ‘a business that can operate on a stand-alone basis, which means independently of the merging parties as regards the supply of input materials or other forms of cooperation other than during a transitory period.’
From this flows a ‘clear preference’ for the divestiture an existing stand-alone business, i.e. a pre-existing company or group of companies, or of a business division which was not previously legally incorporated as such.’ Many divestitures are of this type.
In most cases, the divestiture of a stand-alone business entails the sale of one or more legal entities. The divestiture of a stand-alone business will therefore normally take the form of a share deal. This is usually the cleanest way to transfer a business, as, in most legal systems, the sale of the shares results in the transfer of all rights and obligations (except for rights or obligations subject to a change of control clause).
By contrast, an asset deal is by nature less comprehensive, as only the rights and obligations specifically listed will be transferred. In addition, in case of an asset deal, it will typically be more difficult for contracts to be transferred. The Remedies Notice nonetheless acknowledges that, sometimes, a business division within a company that is not legally incorporated as such can be clearly distinguished and constitute a stand-alone business.
In accordance with the principle that the divested business has to be viable as such already at the design stage, the Remedies Notice provides that the divested business must contain ‘all the assets which contribute to the operation of the business or which are necessary to ensure its viability and competitiveness.’ Likewise, all personnel which is currently employed, or which is necessary to ensure the business’ viability and competitiveness will normally have to be transferred.
An issue that often causes some friction with the merging parties is how to deal with shared assets and employees. The Remedies Notice tries to reduce the risks to the viability of the divested business by stating clearly that ‘personnel and assets which are currently shared between the business toe divested and other businesses of the parties, but which contribute to the operation of the business or which are necessary to ensure its viability and competitiveness, also have to be included’. This implies that personnel and assets owned or allocated to other non-divested business units will also have to be included to some extent. Among others, the ‘personnel providing essential functions for the business such as, for instance, group R&D and information technology staff’ should be included ‘at least in a sufficient proportion to meet the on-going needs of the divested business’.
If the proposed divestiture is dependent on the merged entity for the supply of an input, this affects its independence and, hence, its suitability as a divestiture. In Novelis / Aleris, a merger between two producers of rolled aluminium, the parties proposed to divest Aleris’ plant in the Belgian town of Duffel. The plant could produce most of its input needs itself, but it did source “a not insignificant part” from other Aleris entities. The Commission concluded that the Duffel plant was not fully independent and rejected an initial remedies proposal partly on this basis. Ultimately, to resolve this issue, the merging parties committed to divest the plant together with the money to fund the capital expenditures that would make Duffel a stand-alone business. These funds were placed on a blocked escrow account, which could only be used for investments to make the plant independent from the merged entity’s inputs.
Although the divestiture of a stand-alone business is the rule, the Commission has accepted more complex types of divestitures in a number of cases. These divestitures entail the transfer of businesses that have existing strong links or are partially integrated with businesses retained by the parties. They therefore need to be ‘carved out’.
Such carve-outs present many risks. Support systems have to be split, employees that are shared between the carved out business and the retained business may not be willing to move with the divested business, IT systems have to be cut off, lines of supply have to be renegotiated, etc.
Carve-outs are therefore usually accompanied by a number of safeguards to mitigate these risks as much as possible. Whenever possible, parties should consider a ‘reverse carve-out’, meaning a stand-alone business is divested but the parties retain certain assets or employees, carving them out from the business that is divested.
In some cases, the Commission has accepted that parties do not divest a business but mere assets. This is relatively rare because ‘[s]uch an approach may be accepted by the Commission only if the viability of the business is ensured notwithstanding the fact that the assets did not form a uniform business in the past’.
If the assets come from different entities – typically the acquirer and the target – the divestiture is a so-called ‘mix-and-match’ divestiture. The Commission is sceptical of such divestitures as ‘a combination of certain assets which did not form a uniform and viable business in the past creates risks as to the viability and competitiveness of the resulting business.’
Although a divestiture of assets is disfavoured by the Commission as a remedy, there are nonetheless sectors where they are accepted with some frequency. Mergers in the pharmaceutical sector, for instance, have on several occasions been cleared subject to divestitures that consisted of mostly assets. At the core of these divestitures are usually intellectual property rights related to certain drugs or treatments, such as patents, market authorisations, brands and relevant studies and data.
Sometimes, cooperation of a third party is essential to the success of a divestiture. A third party may have veto rights over the transfer or it may be a particularly important partner of the divested business. The Remedies Notice explicitly mentions ‘third party rights in relation to the business’ as one of the risks that may accompany a divestiture.
A straightforward way for the parties to deal with this risk is to obtain, during the merger review process, the necessary consent or cooperation from the third party. This will normally remove the uncertainty resulting from the third party rights, in turn allowing the Commission to accept the commitments without excessive risks.
If this is not possible, parties frequently propose to include an upfront buyer clause or a fix-it-first solution in their commitments. The Remedies Notice explicitly mentions this safeguard as a way to deal with third party rights that may constitute a considerable obstacle for a divestiture. The underlying idea is that, since parties cannot close their own deal until the uncertainty surrounding the commitments is lifted, they have a strong incentive to resolve the issue. HeidelbergCement / Italcementi