| Regulating mergers - how has the Competition Authority been doing? |
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| By far the most important and potent weapon in the Irish Competition Authority’s regulatory armoury is its merger control function. Since 1 January 2003, every large M&A transaction with a potential impact on Irish markets must, prior to closing, be notified to and approved by Authority officials. If the Authority takes the view that a deal may lessen competition, it can without the need to prove its case in Court prohibit that transaction outright. Without doubt, that makes the Competition Authority Ireland’s most powerful business regulator, writes Philip Andrews. |
To be sure, M&A activity can, at least in certain circumstances, result in significant and adverse effects on competition. The purchase by a dominant player of an upstart competitor, for instance, could foreclose the market and stymie price competition. That’s why most countries around 140 worldwide have merger control rules.
At the same time, however, it is universally recognised that M&A activity is an essential part of the competitive process. Indeed, the vast majority of deals (around 97 per cent according to most economists) are pro-competitive or, at worst, competitively neutral. Further, the compliance burden merger control rules place on business, particularly large multinationals, is considerable. Deals involving global players can trigger merger notifications in numerous jurisdictions, and notification will often be mandatory even if those deals have no impact on national markets. According to international best practice, therefore, regulators must exercise merger control powers in a permissive, ‘light-touch’ fashion that minimises the compliance cost on business.
A study of Irish merger control in 2003, year one of the Authority’s exercise of the merger control function in this jurisdiction, provides an opportunity to gauge the Authority’s performance by this measure. In that year, merger review rapidly established itself as one of the central activities of the Authority. The Authority received a total of 47 merger notifications. Out of that number, the Authority launched three ‘Phase 2’ investigations (in around 6 per cent of cases), thereby prohibiting the parties from closing at least until finalisation of the Authority’s extended investigation. It is a credit to the Authority that the remaining cases (around 92 per cent) were cleared, on average, in 28 days.
The more rapid the clearance, the more limited the delay and consequent expense to business.
Of the three mergers that involved protracted Phase 2 investigations, Scottish Radio Holdings/FM 104 was cleared within 105 days after the parties agreed several conditions satisfactory to the Authority, including divestiture of a minority interest in NewsTalk 106. The Stena/P&O notification, which concerned the planned purchase of P&O’s routes from the UK to Ireland, was withdrawn after approval of the transaction by UK competition authorities was withheld. The Dawn Meats/Galtee deal, involving Dawn Meats acquisition of Galtee, was cleared after 72 days.
The Authority has also established a good track record on transparency. Impressively, most Authority decisions are publicly available on the website within days of being taken. That helps achieve consistency, predictability and, ultimately, fairness in applying merger control laws.
Some question whether this review efficiency and speed has, however, adversely impacted the content levels and analysis in the Authority’s determinations. In many of the Authority’s decisions, the rationale to key issues is not immediately obvious. That undermines the precedent value of Authority decisions, thus increasing the compliance cost for business. Arguably, the development of a sound body of precedent allowing merging parties to better understand and predict the likely outcome of particular cases, was behind the legislature’s explicit requirement that the Authority make public its determinations.
In addition, by adopting an extremely expansive view of its competence the Authority claims that every firm with sales here, including minimal sales over the Internet, is carrying on business here and therefore meets a key criteria for notification the Authority has significantly (and, some would say, needlessly) increased the burden on business. This assertion of jurisdiction has resulted in a large number of ‘foreign-to-foreign’ deals that have no effect on markets here being caught by Irish merger rules. In total, around 59 per cent of the 47 filings made to the Authority in 2003 were foreign-to-foreign deals with no significant nexus to this country.
To be fair to the Authority, however, it has shown a willingness to engage and listen to business on these fronts. Learning from the first year of its operation of the merger control regime, the Authority is already taking steps to manage the compliance cost. For one thing, the Authority has announced it is to revise its standard-form notification (which, as even Authority officials admit, currently requires firms to provide excessive amounts of information). In addition, recognising that the net is now spread too wide, the Authority is also in the course of reviewing its assertion of jurisdiction over foreign-to-foreign deals.
Interestingly, a study of the merger control review in 2003 also shows that most notifications to the Authority (around 25 per cent) came from the media sector. The other key sectors in which M&A appeared most active were raw materials or mining sector (13 per cent), the IT/outsourcing and communications sector (11 per cent), and the banking and the retail sectors (9 per cent each).
In the course of the year, only one merger was referred to the European Commission under the EC Merger Control Regulation (the ‘MCR’), which allows the Authority refer multi-jurisdictional deals to the Commission for review. On 5 April 2003, the Competition Authority referred a notification concerning General Electric's proposal to acquire Agfa-Gevaert (a company specialising in the manufacture of equipment for testing the strength and durability of construction material) to the European Commission. That referral involved a joint request from the national competition agencies of Germany, Austria, Greece, Ireland, Spain, Portugal and Italy for the Commission to review the merger under Article 22 of the MCR. The Commission cleared General Electric's acquisition of Agfa on 5 December 2003.
In terms of lessons learnt, it is clear that the Authority considers ‘gun-jumping,’ i.e., closing a notifiable deal prior to obtaining clearance from the Authority, a serious violation of competition rules. Indeed, in at least two cases, the Authority investigated whether the parties had attempted to jump the gun by putted their deals into effect without first obtaining Authority approval. In both cases, the Authority dropped its investigations after issuing a stern warning against such behaviour.
In addition, it is clear that even transactions involving relatively small Irish players may need to be notified to the Competition Authority prior to the parties proceeding to close. The Authority takes a special interest in ‘below-the-radar’ deals that could have anti-competitive effects. 2003 also clearly established that venture capital and private equity investments can be caught by Ireland’s notification rules. Indeed, around 21 per cent of all notified transactions concerned venture capital or private equity acquisitions. |
Philip Andrews is a solicitor in McCann Fitzgerald.
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| Article appeared in the July 2004 issue.
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