The EU General Court’s new approach to merger control may give the green light to an increasing number of M&A deals

 

By Viktória Villányi

 

On 28 May 2020 the EU General Court annulled the Commission’s prohibition of a merger proposed by two telecom companies, Telefónica UK and its competitor among network operators, Hutchison 3G UK. The ruling is expected to have significant impact on M&A deals in the EU. The implications of the ruling, however, extend beyond the telecom sector, as it is expected to amend the EU’s established case-law based on the application of the competition test, which may lead to an increase in the number of authorized transaction among the Member States. 

In the past couple of years merger control in Hungary impacted main players of the local telecom sector barring most attempts at acquisition: recent cases include the proposed merger of DIGI and Invitel, where competition authority proceedings were initiated in 2018 and are still ongoing in 2020. The earlier proposed merger of two other telecom service providers, Telekom Nyrt and ViDaNet was actually cancelled due to possible impeding effects on the local market competition. 

However, with the review of a key element in European merger control, the SIEC test, the method used in merger control is also to be reconsidered in Hungary and all EU Member States. The scope of prohibited deals may be restricted, driving the Commission to give free way to transactions that would have regularly been given the red light. However, the lengthy control process and the rigorous requirements for evidence are expected to increase the procedural costs associated with the planned mergers. 

The ruling serves as a signpost indicating how the SIEC test – screening significant impediments to effective competition — shall be correctly applied to mergers proposed in an oligopolistic market. In the earlier control routine, the Commission was entitled to prohibit mergers in an oligopolistic market if the deal was deemed to significantly impede competition in a way that was held an equivalent of market dominance, even if actual dominance was neither established nor strengthened. In the ruling the General Court clarified which effects qualified as „significant impediments to effective market competition” equivalent in their impact to the establishment of a dominant market position. 

The revision of the EU regulatory practice was carried out in connection with a merger control proceeding examining the planned acquisition by two UK mobile network operators. The Commission prohibited the EUR 10 billion deal between Hutchison 3G UK and its competitor Telefónica UK as the merger was seen to have significant impeding effects on market competition between UK mobile network operators. In the course of merger control the Commission examined how three theories of harm applied to the case, and whether these adverse effects impacted the market: 

1) the merger would have decreased the number of four significant competitors (in the oligopolistic market) to a mere number of three — which would likely result in price increase and a decrease in service quality 

2) the merger would have not only limited competition between network operators but also would have disrupted network sharing agreements, whose parties (Vodafone UK, EE UK) had less incentive to development 

3) the merger would have exposed virtual network providers to the reduced number of operators pressing them into an unfavourable position in negotiations (eg. Virgin Media or Tesco Mobile). 

The Commission eventually rejected all proposals to resolve or alleviate the above problems as insufficient. The Commission is known to have regularly prohibited prospective mergers in oligopolistic markets where the deal would have eliminated one competitor out of four. According to the earlier 

practice, in order to maintain effective market competition in oligopolistic markets, at least four significant competitors were necessary — if one out of four competitors were to be eliminated in the proposed deal, the veto of the Commission seemed inevitable — until now. 

The regulation on merger control (EC 139/2004) was originally intended to introduce a stricter standard to screen possible impediments to market competition. According to the preceding EU legislation the Commission was not entitled to prohibit mergers where the newly formed corporation would not acquire (or strengthen) a dominant market position, even if the deal would pose significant impediment to effective market competition. The earlier EU legislation — focusing only on screening out the establishment of dominant position — was inefficient and filled with gaps, because even if it succeeded in screening out any coordinated effects related to dominance (eg. price increase, quality decrease, impediment to new competitors’ entry to the market) it did not offer any protection (specifically in oligopolistic markets) against other adverse effects unrelated to dominance: so-called unilateral effects (eg. the reduction of competitive constraints on other competitors, and the elimination of significant competitive constraint between the merging parties). To fill the gaps the merger control regulation of 2004 introduced a new standard to screen out deals that would have adverse impact on competition. This new standard was the SIEC test, which allowed the Commission to prohibit deals proposed in an oligopolistic market where merging companies would not actually acquire or strengthen a dominant position, but would still exert an equivalent impeding effect on competition in the market that were to face the newly formed power structures. 

However, a detailed interpretation on how to apply the SIEC test was not provided until June 2020: the EU General Court shared its interpretation the first time on which effects qualify as „significant unilateral effects” impeding market competition. Significant unilateral effects are, accordingly, a combination of the following two elements 1) the elimination of significant competitive constraints between the merging parties and 2) the reduction of competitive constraints exerted toward all other market competitors. The General court declared that, in itself, the reduction of competitive constraints toward other market competitors will not qualify as a unilateral effect set in the SIEC test. In this case all mergers could simply be prohibited as they all exert some reduction of competitive constraints toward other competitors. With respect to the UK companies the General Court concluded that even if they were close competitors in several segments of the telecom market, they never exerted competition constraints on each other that would qualify any more significant than the effects they exerted toward any other of their competitors. As a result, in their case only the reduction of competitive constraints toward other competitors could be taken into consideration, and, in itself, this effect does not exhaust the criteria defined in the SIEC test, there is no need to prohibit the transaction. In the course of investigation the General Court also refuted that the merger would significantly affect network sharing agreements and virtual service providers as Hutchison held only 0-5% share in the relevant markets. 

In addition to clarifying the application of the test, the General Court has set a stricter standard of proof, i.e.: the factors examined in the SIEC test will have to be substantiated by adequate amount of data and extensive examination, as well as a direct impact on the market. Therefore, in the near future, the costs of the investigation procedure are also expected to increase and the duration of the procedure will be extended. If the European Commission would disagree with the judgment of the General Court, which has so far indicated that it considers the analysis of the judgment to be urgent, it may appeal against the judgment to the European Court of Justice within two months.