bout de papier, Vol. 18, No. 2 (2001) — Summer 2001 // Été 2001, pp. 5–6
Recently, Bombardier announced its successful purchase of Daimler
Chrysler’s Adtranz rail division. The Commission of the European Union (EU) scrutinized the acquisition in some detail, expressing concerns that the merged company would not serve to encourage competition within the EU. The Commission’s spotlight will shine with increasing intensity on the new entities created by this era of merger mania. Given the global nature of many enterprises, including Canadian-based companies, it’s helpful to examine the EU’s approach in formulating its competition policy.
The first objective of EU competition policy is antitrust regulation and the maintenance of open markets to ensure that competition remains the driving force of the European economy. The second objective is to contribute to the goal of obtaining and maintaining the single market. The policy is designed to force open and create a common market, free from trade distortions.
This is particularly important because this policy applies to any enterprise, European or otherwise, doing business within the EU, even if it has neither branches nor subsidiaries within the EU. Take the Boeing- McDonnell Douglas merger, which the EU approved only after the terms of the merger were changed to meet the Commission’s demands, despite the fact that both companies are based in the US. This is the power of EU competition policy.
The European Economic Community (EEC) was established in 1957, with the signing of the Treaty of Rome. Articles 81 and 82 of the treaty form the foundation of EU competition policy. In 1990, an additional merger regulation was adopted, establishing the European Commission’s jurisdiction over mergers and acquisitions with a “community dimension.” Regulatory responsibility rests with the Directorate-General for Competition of the European Commission. The Commission has been granted a considerable degree of influence over merger decisions. Over the course of its history, the number of cases that it takes per year has been steadily increasing, at an annual rate of 36 per cent based on the latest figures. In 1998, the number of merger notifications made exceeded 200 for the first time.
The EU’s competition policy is effect-based, meaning agreements or undertakings are examined for the impact they will have on competition, rather than the precise nature of the agreement itself. These effects are examined in light of articles 81 and 82 of the EU treaty. Article 81 (formerly art. 85 of the Treaty of Rome), essentially an anti-cartel regulation, prohibits agreements between firms that negatively affect competition. Sections I and 2 mention agreements that are illegal, most notably: agreements to fix prices or trading conditions; agreements to fix output, markets, technological development, or investment; and agreements to split markets or sources of supply. Exceptions to these rules are allowed if the firms involved demonstrate to the Commission that they can improve the production or distribution of goods, or promote technical or economic progress. This is contingent on the notion that the consumer will profit from these improvements. The minimum fine under EU law for companies found guilty of operating a cartel is 20 million Euro. Guilty parties can also be fined up to 10 percent of their worldwide turnover; however, it takes quite a large amount of resources for a sanction to be imposed pursuant to article 81. The European Court of Justice has ruled that for sanctions to be imposed, competition must be affected to a noticeable extent.
Article 82 (formerly art. 86 of the Treaty of Rome) regulates the behaviour of firms with dominant market positions. The four essential elements of an infringement are: an agreement between undertakings, a decision by an association of undertakings or a concerted practice; which may affect trade between member states; which must have as its object or effect the prevention, restriction or distortion of competition within the common market; and, which affects competition to a noticeable extent. If the predicted effects of an agreement meet the following criteria, article 82 dictates that the agreement be scrutinized: if the combined worldwide revenues of the firms concerned are greater than 5 billion Euro; the intra-EU revenues of at least two of the firms involved are 325 million Euro each; not all of the firms involved achieved more than two-thirds of their intra- EU revenue in a single member state.
Complementing articles 81 and 82 is the 1990 Merger Control Regulation, which gave the EU jurisdiction over mergers, acquisitions and joint ventures, known in Europe as concentrations. This regulation gives exclusive jurisdiction to the Commission if the situation under review is found to have a community dimension, that is to say, it may affect trade between member states. This occurs when the above criteria are met.
Firms planning to merge are required by EU regulations to inform the Commission of the arrangement, as was the case with the Bombardier merger. The deals are then suspended temporarily until the agreement can be examined. The Commission has up to four months to decide whether the planned merger can proceed. It’ll reject agreements that will create or strengthen a company’s dominant position, arguing incompatibility with the common market.
The EU stays very true to its founding principles when it hears cases that challenge its competition policy. These include seven criteria: the need to maintain effective competition within the common market; consideration of the market power of firms involved; taking into account available substitutes; examining the barriers to market entry; supply and demand conditions for the goods or services at issue; consideration of the interests of intermediate and ultimate consumers; and the development of technical and economic progress that is to consumers’ advantage and doesn’t create obstacles to competition.
Member states can also petition the Commission to investigate concentrations not meeting the requirements stated above if the merger would result in the creation of a dominant position particularly harmful to a single member state.
The Commission’s powers are broad. Article 81 deals with any agreement that has an effect on trade between member states. Witness the AOL-Time/Warner merger, which was subject to approval by the Commission, despite the fact that both parties involved were based in the US. It’s important to note that in the past very few mergers were ever prohibited; however, there are notable cases of EU blockage. Recently the Commission prevented Alcan Aluminium of Canada to merge with France’s Pechiney SA and the Alusuisse Lonza Group of Switzerland. In situations where effects of agreements amongst firms are mainly felt by one member state alone, national authorities retain jurisdiction.
The interpretation of competition policy in Canada and the EU is fairly congruent, based on similar ideological rationale. In Canada, the Competition Bureau and the Competition Tribunal are separate entities. The Bureau does the investigation, and then presents the facts to the tribunal. This system is designed to ensure transparency and to withstand public scrutiny. Conversely, the EU uses an administrative system, where the bureaucratic system investigates, negotiates and rules on business dealings. Some claim that system lacks transparency, and that its dealings are generally kept quiet. This lack of transparency is of concern to some in Canada, as it is difficult to monitor exactly what is going on inside the EU’s competition directorate. Partial details are published once decisions have been finalized, in the Official Journal of the European Communities.
The Canadian government generally does not have a role to play when Canadian companies are planning mergers or acquisitions in the European Union, as the transactions scrutinized by the EU are private business dealings. It’s up to the companies themselves to monitor their commercial behaviour. The only time the Canadian government would become involved in the EU competition process is when it believes the EU is not respecting its own rules, or when it suspects the EU of favouritism. In such cases, Canada would start asking some questions, generally upon request of the firms involved
The Commission is increasingly involved in competition issues on a global level, including dialogue with Canada. In 1999, Canada signed an agreement with the EU based on courtesy principles. This is an early warning system between Canada’s competition tribunal and that of the EU. The EU is also pressing for the inclusion of competition issues under the scope of the WTO, employing a consensus building technique.
The Department of Foreign Affairs and International Trade facilitates communication between its own competition authority and that of the EU, in order to minimize the risk of conflict. Recent trends in Canada have led to an increasing number of cooperation agreements. Many international trade policy negotiations are beginning to include competition provisions, such as in the Free Trade Agreement of the Americas and the Canada- Costa Rica Free Trade Agreement; however, such international agreements are still far from having enforceable and mutually agreed-upon competitive considerations incorporated into their texts. There is still a need to hammer out a level playing field in this area.
Perhaps the future will see national and regional competition authorities transfer some of their competencies to a global body mandated to monitor global competition rules. Multinationals create an environment where decisions made in one region affect nations around the world. Referring to the example of the Boeing-McDonnell Douglas merger, the EU found that the actions taken by this US-based firm might have repercussions in Europe. While the Commission was successful in protecting its interests, it’s conceivable that over time the power of national or even regional competition tribunals to police multinationals will be eroded. In the future, it’ll be imperative to create a global monitor with sweeping powers to protect consumers’ rights. The challenge will be to create an organization that remains independent and sees its rulings respected by companies around the world.
View the original scanned pages →
Originally published in bout de papier, Vol. 18, No. 2 (2001) — Summer 2001 // Été 2001, pp. 5–6. Read the rest of this issue →
