Remedies in EU
Merger Control – An Essential Guide
Simon VANDE
WALLE[1]
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
4.2.4.1 Divestiture of a viable business
4.2.4.2 Divestiture of a stand-alone business
4.2.4.3 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
4.2.7.4 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
5.3.3.1 Does the purchaser meet the purchaser
requirements?
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
1 Introduction
1.1
The importance of remedies in EU merger control
1.1.1
Merger control’s most frequently used tool to protect
competition
The goal of EU
merger control is to prevent concentrations from causing lasting harm to
competition in the EU.[2]
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.[3] 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[4], 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).[5]
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[6] or
skip it altogether.[7] Only
a handful address the topic in some depth[8] and even fewer in a comprehensive
way.[9]
Monographs on the topic are also scarce.[10]
1.1.2
Remedies consume significant resources and have
important economic consequences
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,[11] 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. [12]
Given that some remedies are in place for a long period of time,[13] the trustee’s involvement with a case can last for
several years. Only a handful of persons and firms offer trustee services.[14] 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[15], was
one of the largest divestitures in EU and U.S. history.[16] Other recent deals have also resulted in very large
divestitures, including cases such as AB InBev / SAB Miller,[17] Dow / DuPont,[18] GE / Alstom,[19] Holcim / Lafarge[20], and Ball / Rexam.[21]
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.[22] 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”’.[23] Yet there is no gainsaying that remedies can have important
economic consequences. They may raise issues that touch upon economic
sovereignty, employment[24],
competitiveness and industrial policy. [25] 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.
1.2
Recent debate and controversy surrounding remedies
1.2.1 Are merger remedies
effective?
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’.[26] However, apart from this deterrent effect of
prohibitions,[27]
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[28] of previously published ex post assessments of
mergers, i.e. studies that estimate a merger’s impact on prices. [29] His analysis covered 49 mergers,[30] 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%.[31] 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.[32]
On the basis of
these figures, Kwoka concluded that ‘many challenged mergers are subject to
remedies that fail to prevent postmerger price increases.’[33]
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’.[34]
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.[35] The
study, published in 2016, found that unconditionally approved mergers led to a
price increase of 5% on average[36],
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%.[37] 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%.[38]
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’. [39]
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.’[40] 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.[41]
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.[42]
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,[43] 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).
1.2.2 The
structural vs. behavioural debate
Like most
competition authorities across the world,[44] 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.
1.2.3 The call for
ex post assessments of remedies
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[45] 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.[46] 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’.[47] With that caveat in mind, the study found that 57% of
all remedies analysed had been effective.[48] 24% of all remedies had been partially effective,
while 7% had been ineffective.[49] 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).[50]
Since then, no
large-scale ex post assessments have been conducted, although two
meta-analyses were conducted that included several mergers approved with
remedies.[51]
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.[52]
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.’[53] This suggests some ex post assessments of
mergers will be conducted in the near future.
2
Legal framework and criteria for assessing remedies
2.1
Terminology: remedies, commitments, ‘conditions and
obligations’
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’[54], 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.[55] Commitments, by contrast, denote the obligations
voluntarily taken up by companies in order to avoid the finding of an
infringement by the Commission.[56] 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’.[57] 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’[58].
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’.
2.2
Legal framework
2.2.1
Remedies in Phase II
Under the EU
Merger Regulation, the Commission must prohibit concentrations that would
significantly impede effective competition.[59] 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[60] the commitments binding on the parties by attaching
them to the decision as ‘conditions and obligations’.
2.2.2
Remedies in Phase I and the requirement of ‘clear-cut’
remedies
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)’.[61]
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.’[62]
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’.[63]
2.3
Basic criteria for assessing remedies
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.
2.3.1
The remedy must entirely eliminate the competition
problem
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.[64] Some
court judgments have formulated this in a slightly different manner: the remedy
must ‘be comprehensive and effective from all points of view’.[65]
2.3.2
The remedy must be proportionate
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.’[66]
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.[67]
However, the precise implications of this principle will depend on the specific
context.[68] 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”.[69]
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’.[70]
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’.[71]
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.’[72]
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.[73]
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.[74]
2.3.3
The remedy must be capable of being implemented in a
short period of time
In order to be
acceptable, commitments must be ‘capable of being implemented effectively
within a short period of time.’[75] The
remedies notice explains that this is because ‘conditions of competition on the
market will not be maintained until the commitments have been fulfilled’.[76]
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’.[77]
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.[78] 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.[79]
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.[80] This, the Commission concluded, ‘cast serious doubts
on Ryanair’s capability of delivering this remedy in time’.[81]
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[82] or
ten years[83]). Up
until the 2000s, commitments of unlimited duration were not uncommon,[84] but no such remedies have been approved in recent
years.
2.4 The burden
to submit remedies is on the parties but the burden of proof is on the Commission
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.[85] They also have a duty to supply the Commission with
the information necessary to assess the remedies.[86] 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[87] and when approving one.[88] These rules on the burden of proof also apply when
the parties submit commitments.[89]
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’.[90]
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.[91] Conversely, if the Commission accepts the commitments it must show
that they eliminate the competition concerns raised by the merger.
3
Designing the remedy
3.1
Key documents
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.[92] 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.
3.2
Practical aspects of remedies discussions between the
Commission and parties
The Commission
is keen to point out that the search for an adequate remedy is not a bargaining
process.[93]
Rather than negotiations, parties can expect a ‘constructive dialogue’[94], 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.[95] In some
cases where the competition problems were particularly self-evident, parties
have done so.[96] 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.[97]
3.3
Market test of proposed remedies
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.[98] 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[99],
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.[100] 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.[101]
The Commission
has discretion on whether to conduct a market test of merger remedies.[102] If the proposed remedies are
clearly inadequate, the Commission will normally refuse to market test them.[103] 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.[104]
Remedies submitted after the Phase II deadline will normally not be market
tested[105],
although exceptionally they are.[106]
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.[107] 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.[108] 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.[109] 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.[110] 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.[111] 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.[112] 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,[113]
while in a merger between two train makers, national rail regulators may be
consulted.[114]
3.4
Modifying proposed remedies and the issue of ‘late
remedies’
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.[115] 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’[116] 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.’[117] 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’.[118]
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’.[119] In
addition, there must still be ‘sufficient time to allow for an adequate
assessment.’[120]
4
Types of remedies
4.1
Labels and their relevance
4.1.1
Structural and behavioural remedies
Remedies can be
categorized in several ways, but the most commonly used distinction is the one
between structural and behavioural remedies.[121] 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’.[122]
Although the
distinction seems straightforward, semantic discussions occasionally arise.
4.1.2
Structural remedies: only divestitures?
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.[123] 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.[124] 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’.[125] 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.’ [126] 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’.[127] 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.[128]
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[129], will not eliminate horizontal
competition concerns,[130] and
that ‘it may be difficult to achieve the required degree of effectiveness of
such a remedy’.[131]
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’.[132]
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
4.1.3
All divestiture remedies include ancillary behavioural
remedies
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.
4.2
Divestiture remedies
4.2.1
The Commission’s preference for divestitures
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’.[133] Although other types of remedies
may be acceptable in some cases, ‘divestitures are the benchmark for other
remedies in terms of effectiveness and efficiency.’[134] 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’. [135]
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’.[136]
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’,[137] 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.[138] Vertical and conglomerate competition concerns are more frequently
removed through non-divestiture remedies,[139] although divestitures are also
sometimes used.[140]
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.’[141]
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.[142] 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.[143]
The position of
the General Court in Gencor was later confirmed in several other
judgments, including the Court of Justice in Tetra Laval,[144] and it was ultimately incorporated
in the Remedies Notice as the Commission’s policy stance on remedies.[145] 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’.[146]
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.[147] 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.[148] 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.[149]
4.2.2
The structural vs. behavioural debate
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,[150] especially in vertical mergers,[151] 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’ [152] 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.[153]
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’
[154] 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.[155] 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.[156]
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’[157]
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.’[158] 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’.[159]
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[160] 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’.[161]
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’.[162]
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.[163] 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.
4.2.3
Divestitures are preferred but not risk-free either
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’[164], 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.[165]
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.[166] These 68 remedies led to 59
serious design and/or implementation issues that had remained unresolved.[167] The inadequate scope of the
divested business was the most frequent issue, followed by situations where an
unsuitable purchaser had been approved. [168]
Issues with the carve-out of assets and the transfer of the divested business
were also frequent. [169]
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.[170] 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.[171]
4.2.4
Scope of the divested business
4.2.4.1
Divestiture of a viable business
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’.[172] 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’.[173]
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.[174] 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).[175]
The Remedies
Notice in principle requires the business to be divested to be ‘viable as such’[176], 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.[177] 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’.[178] 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.[179] However, it seems doubtful that
such techniques can truly remove the risk that the purchaser ultimately
abandons what is a loss-making business.[180]
4.2.4.2
Divestiture of a stand-alone 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.’[181]
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.’[182] 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.’[183] Likewise, all personnel which is
currently employed, or which is necessary to ensure the business’ viability and
competitiveness will normally have to be transferred.[184]
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’.[185] 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’.[186]
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.[187] The plant could produce most of
its input needs itself, but it did source “a not insignificant part” from other
Aleris entities.[188] 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.[189]
4.2.4.3
Carve-outs and divestitures of assets
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.[190] 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.[191]
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.[192]
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’.[193]
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.’[194]
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.[195] 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.
4.2.5
Third party rights in relation to the divestiture
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.[196]
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.[197]
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.[198] 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