Legal environment for M&A
EU, US and international antitrust policies
Mariusz-
Jan Radło, Ph.D.
Legal environment for M&A
EU, US and international antitrust policies
Mariusz-
Jan Radło, Ph.D.
Outline & references
Rationale for merger regulations
EC Merger Regulation
US antitrust law
Merger control in Poland
Case study GE/Honeywell Merger
References:
DePamphilis (2010) Chapter 2.
COUNCIL REGULATION (EC) No 139/2004 of 20 January 2004 on the
control of concentrations between undertakings (the EC Merger Regulation)
Desai M.A. and Villalonga B. (2003) Antitrust Regulations in a Global
Setting: The EU Investigation of the GE/Honeywell Merger, Harvard
Business School, 9-204-081, December 23, 2003.
Rationale for merger regulations
Merger can bring benefits to the economy
and companies by increased efficiency
and higher-quality goods at fairer prices.
1.
Combining forces of various companies by mergers
and acquisitions can expand markets and bring
benefits to the economy and these companies.
2.
E.g.: companies after the merger can develop new
products more efficiently or to reduce production or
distribution costs.
3.
Thanks to their increased efficiency, the market
becomes more competitive and consumers benefit
from higher-quality goods at fairer prices.
Rationale for merger regulations
Mergers may
reduce competition
by
creating/strengthen
ing a dominant
player.
This can lead to:
higher prices,
reduced choice
less innovation.
Rationale for merger regulations
Mergers are also affected by other
legislation concerning e.g.:
labor market,
environment
or specific sectors
Mergers and the EU Single
market
Growing internal market of the EU make it more
attractive for companies to join forces.
This can result in growth of the competitiveness of European
industry and the raise of the standard of living in the EU.
However, it can also impede competition and result in additional
costs for European customers.
Therefore, the objective of the EU competition policy is to
prevent harmful effects of M&A on competition.
M&A going beyond the national borders of any one
Member State are examined at European level.
Antitrust regulations and M&A
strategy
Antitrust regulations are one of the most
important issues of the M&A planning process
A large number of regulatory agencies and
regulatory laws makes many mergers difficult
and costly.
Case:
Coca-Cola
’s 1999 acquisition of the Cadbury
Schweppes beverage brands, including Schweppes,
Dr. Pepper, and Canada Dry:
more than 160 countries.
more than 40 jurisdictions around the world
fees for seeking approval ranged from $77 to $2.5 billion in various
countries
EU Merger Law
In the European Union mergers going beyond
the national borders of any one Member State
are examined at European level. This allows
companies trading in different EU Member
States to obtain clearance for their mergers in
one go.
The general test is whether a concentration (i.e.
merger or acquisition) with a community
dimension (i.e. affects a number of EU member
states) might significantly impede effective
competition.
EU Merger Law
Treaty of Rome did not deal specifically
with mergers and acqusitions. In the early
years of the EEC the treatment of M&A
was by case law in the ECJ.
Articles 81 and 82 of the Treaty
Establishng the European Community
The Continental Can case of 1973 (Art. 82)
The BAT/PhillipMorris case of 1987 (Art. 81)
EU Merger Law
Articles 81 and 82 of the Treaty
Establishng the European Community
The Continental Can case of 1973
established that Art. 82 could apply to
mergers.
Article 82 EC deals with monopolies, or more
precisely firms who have a dominant market
share and abuse that position.
EU Merger Law
Articles 81 and 82 of the Treaty Establishng the
European Community
In 1987 BAT/PhillipMorris case the ECJ went further and
declared that in the absence of the domiant position, a horizontal
qcquisition could be penalised as forming an anti-competitive
agreement under Art.. 81.
Article 81 of the Treaty Establishng the EC (formerly the Treaty
of Rome). The European Community is the name for the
economic and social pillar of EU law, under which competition
law falls. EC, which deals with cartels and restrictive vertical
agreements. Prohibited are: "(1) ...all agreements between
undertakings, decisions by associations of undertakings and
concerted practices which may affect trade between Member
States and which have as their object or effect the prevention,
restriction or distortion of competition within the common
market...„
EU Merger Law
Also under Article 82 EC, the European
Council was empowered to enact a
regulation to control mergers between
firms, currently the latest known by the
abbreviation of Regulation 139/2004/EC.
EC Merger Regulation (2004) - ECMR
European Commission
– responsible for
execution of the EU Merger Law
EU Merger Law
The EC has exclusive jurisdiction over a
“concentration” of a “community
dimension.”
The EU Member States may not apply
their merger regimes to such transactions
(ECMR, Art. 21(3.)), except where the EC
refers such a transaction to Member State
authorities under ECMR Art. 9.2
What is concentration?
the merger of two or more previously independent
undertakings,
the acquisition (of one or more persons already
controlling at least one undertaking, or by one or more
undertakings - whether by purchase of securities or
assets, by contract or by any other means) of direct or
indirect control of the whole or parts of one or more
other undertakings,
the creation of a joint venture performing on a
lasting basis all the functions of an autonomous
economic entity.
A concentration has a Community
dimension where:
Test 1
worldwide turnover is exceeds EUR 5 billion and the
aggregate Community-wide turnover of each of at
least two firms involved exceeds EUR 250 million
None of the firms involved achieves more than two-
thirds of its aggregate Community-wide turnover
within one member state (MS).
A concentration has a Community
dimension where:
Test 2:
worldwide turnover of all firms exceeds EUR 2.5
billion
in each of at least three MS, the turnover of all firms
involved exceeds EUR 100 million
in each of at least three above MS the turnover of
each of at least two of the firms involved exceeds
EUR 25 million
the Community-wide turnover of each of at least two
of the firms involved exceeds EUR 100 million, unless
each of the undertakings concerned achieves more
than two-thirds of its aggregate Community-wide
turnover within one and the same Member State.
When Member States may review
Concentrations of a Community Dimension?
When:
1. the merger threatens to affect significantly competition
in a market within that Member State, which presents all
the characteristics of a distinct market; or
2. the merger affects competition in a market within that
Member State, which presents all the characteristics of a
distinct market and which does not constitute a
substantial part of the common market.
Procedure for controlling
mergers in the EU
Procedure for controlling
mergers in the EU
Procedure for controlling
mergers in the EU
When are mergers prohibited or
approved?
Mergers are aproved unconditionally when they
do not significantly impede effective competition
in the EU.
If they do, and no commitments aimed at
removing the impediment are proposed by the
merging firms, they must be prohibited.
Mergers may be prohibited, if the merging parties are major
competitors or if the merger would otherwise significantly
weaken effective competition in the market, in particular by
creating or strengthening a dominant player.
When mergers are approved
conditionally?
Even if the proposed merger could distort
competition, the parties may commit to taking
action to try to correct this likely effect.
They may commit, for example, to sell part of the combined
business or to license technology to another market player.
If the European Commission is satisfied that the commitments
would maintain or restore competition in the market it can give
conditional clearance for the merger.
The EC monitors whether the merging companies fulfill their
commitments and may intervene if they do not.
US antitrust law
Sherman Act of 1890
Clayton Act of 1914
Hart-Scott-Rodino Act of 1976
The Antitrust Guidelines
US antitrust law
Sherman Act of 1890
Section 1: prohibits mergers that would tend
to create a monopoly or undue market control.
Case: merger between Staples and Office Depot.
Section 2 is directed against firms that had
already become dominant in their markets in
the view of the government.
This was the basis for actions against IBM and
AT&T in the 1950s.
US antitrust law
Clayton Act of 1914
Created the Federal Trade Commission
– it
can block mergers resulting in tendency
toward increased concentration
It is illegal for a company to acquire another
company if competition could be adversely
affected.
US antitrust law
Hart-Scott-Rodino Act of 1976
Strengthened the powers of the Department
of Justice and and the Federal Trade
Commission by requiring approval before a
merger could take place.
Hart-Scott-Rodino Act requires that mergers
exceeding a certain size must notify the FTC
and DoJ at the time it makes an offer to the
target.
Before HSR, antitrust actions were usually
taken ex post.
US Critical Concentration Levels
Herfindahl-Hirschman Index (HHI) - a concentration measure
(the sum of the squares of market shares of each firm in the industry).
E.g.: 10 firms:
>>>>>>>each 10 percent market share: HHI=1000
>>>>>>>one 90 percent market share, and the nine others a
1 percent market share: HHI=8109
Market characteristics: the ability of the competitors to expand
the supply of a product if one firm tries to restrict output
…
Poland: merger control
Office for Competition and Consumer Protection (UOKiK)
Participants of the planned transaction are obligated to
obtain prior clearance of the President of the Office of
Competition and Consumer Protection when:
their turnover in the year preceding the application exceeded EUR 1
billion in the world
or EUR 50 million in Poland.
The obligation to notify is excluded due to potentially
insignificant impact of the planned transaction on the
market when:
the turnover of the target enterprise did not exceed the equivalent of EUR
10 million in Poland in any of the two financial years preceding the
notification or if the merger involves entities belonging to one capital group
Poland: merger control
The UOKiK clears transactions which do not lead to a
significant restriction of competition. Otherwise, it forbids
the consolidation.
It is also possible that a merger or acquisition clearance is
subject to certain terms and conditions, for example resale
of a part of assets.
Moreover, UOKiK may clear a transaction leading to a
significant lessening of competition if it simultaneously
contributes to economic development or technical
progress or has a favorable impact on the economy.
Poland: merger control
The President of the Office may impose a fine of
up to 10 % of previous year’s revenue, if an
enterprise, even unintentionally, carries out a
merger or acquisition without obtaining the
President’s prior consent.
Furthermore, if this merger proved to have been
anticompetitive structural sanctions may be
applied.
Office for Competition and Consumer Protection:
the most recent decision blocking the merger
The Office for Competition and Consumer Protection (UOKiK)
did not agree to the merger of two leading online stores: Empik
and Merlin.pl.
According to the UOKIK the takeover of Merlin by Empik would
result in:
significant limitation of free competition on the market of books
and music.
Analysts admit that the decision will have negative
consequences for both companies.
Case study: UOKiK blocks
acquisition of Energa by PGE
Case study: UOKiK blocks
acquisition of Energa by PGE
September 16, 2010
Ministry of Treasury signed an initial agreement with
state-owned PGE (leading energy producer on polish
market) concerning sell of 84,19 % of shares of third
largest energy producer on polish market Energa
for 7,529, bln zloty.
Case study: UOKiK blocks
acquisition of Energa by PGE
After Ministry announced preliminary agreement with
PGE was obliged to apply for clearance from UOiKiK
PGE had to provide full documentation of the planned
deal, market share, future plans, ect.- everything which
would be connected with the deal.
It was done on 20
th
of October 2010.
After that UOiKiK had 3 months to analyze possible
consequences of the transaction.
Case study: UOKiK blocks
acquisition of Energa by PGE
After in-depth analysis on January 13,
2011 UOiKiK decided to not agree on
merger.
Firstly UOKiK assumed that the scope of
energy market is internal. It means polish.
There are no reasons to widen definition of
the market taking to consideration weak
international trade possibilities within next few
years.
Case study: UOKiK blocks
acquisition of Energa by PGE
Secondly after investigation of possible
consequences on energy wholesale market
UOKiK verified that combined companies will
strengthen dominating position of PGE and
essentially reduce competition on this market.
PGE will control over 40 % share of sales.
Case study: UOKiK blocks
acquisition of Energa by PGE
Thirdly there will be also negative impact on
retail market. PGE will have more than 40% of
market sales ,and one of important
competitors will cease to exist.
After examining vertical and horizontal
integrations between merged companies
UOKiK verified that transaction will seriously
restrict completion.
Trends
Economic globalisation results in growing international competition
–
thus concentration ratios must take into account international
markets
…
The pace of technological change and the pace of industrial change
has increased substantially
– this requires more frequent
adjustments by firms, including M&A.
Deregulation in a number of major industries requires industrial
realignment and readjustments. These require greater flexibility in
government policy.
New institutions, particularly among financial intermediaries,
represent new mechanisms for facilitating the restructuring
processes that are likely to continue.
Case study
Antitrust Regulations in a Global Setting:
The EU Investigation of the GE/Honeywell
Merger