1. Minority interests in competitors attracting attention
Minority shareholdings are attracting attention from European competition authorities. The UK Competition Commission decided that Ryanair will have to reduce its current (almost 30%) stake in rival Aer Lingus to a maximum of 5%. Earlier this month IF P&C notified the Commission of the fact that it had acquired control over Topdanmark on the basis of its minority shareholding of 25.18% after Topdanmark bought back a number of its own shares. These developments come at a time when the European Commission consultation on the reform of the EU Merger Regulation is pending. The Commission is considering introducing a system to monitor the competition law effects of non-controlling minority stakes.
Competition Commission decision on Ryanair / Aer Lingus
A Report from the UK Competition Commission of 28 August 2013 is the newest chapter in the Ryanair / Aer Lingus saga and is illustrative for the competition authorities' increased attention given to minority shareholdings.
In 2007 the EU Commission prohibited the intended acquisition of Aer Lingus by Ryanair. Aer Lingus then requested the European Commission to force Ryanair to divest itself of the minority shareholding in Aer Lingus. In a Decision of 11 October 2007 the Commission ruled that the minority shareholding did not constitute a concentration under the EU Merger Regulation and that it therefore did not have the power to require its divestiture. Both Commission decisions were upheld by the General Court. Ryanair made a second attempt to acquire Aer Lingus in December 2008 but abandoned this bid in January 2009. On 24 July 2012 Ryanair notified the European Commission for the third time of an intended acquisition of Aer Lingus. This plan was again prohibited by the European Commission in a Decision of 27 February 2013. Ryanair appealed the European Commission's decision. This appeal is pending before the EU General Court.
The UK Competition Commission now issued a Report on the minority stake of 29.82 per cent that Ryanair holds in Aer Lingus on the basis of UK law. The Competition Commission concludes that Ryanair's 29.82 per cent shareholding in Aer Lingus gave it the ability to exercise material influence over Aer Lingus. The Competition Commission took into consideration that Ryanair had the ability to block special resolutions and the sale of Heathrow slots under the articles of association of Aer Lingus. Ryanair's minority shareholding had the potential to impede or prevent Aer Lingus from combining with other airlines, which limited its possibility to increase the scale of its operations. This could reduce the effectiveness of the competitive constraint of Aer Lingus on Ryanair on the routes between Great Britain and Ireland. For these reasons, the Competition Commission concluded that Ryanair should partially divest its shareholding in Aer Lingus to 5 per cent, accompanied by an obligation on Ryanair not to seek or accept board representation in Aer Lingus. Ryanair stated that it intends to appeal the decision.
Notification of acquisition of control by IF P&C via a minority shareholding in Topdanmark
On 19 August 2013, the Swedish company IF P&C notified the acquisition of sole control over Topdanmark to the European Commission (Case COMP/M.6957). The company held a minority shareholding in Topdanmark since 2008. IF P&C stated that it unintentionally obtained control over Topdanmark as a result of a share buyback program that was running in the period from 2011 to 2013. Although IF P&C only owns 25.18% of the shares in Topdanmark, it would de facto have acquired control in the sense of the EC Merger Regulation.
The acquisition of a minority stake can indeed lead to control in the sense of the EC Merger Regulation. An example is the situation in which the remainder of the shareholdings is very dispersed. In the Electrabel Case the European Commission levied a large fine on Electrabel for failing to notify an increase in its minority shareholding in Compagnie Nationale du Rhone, and that fine was upheld by the General Court (Case T-332/09) , an appeal before the European Court of Justice is pending). Electrabel had acquired de facto control as its minority stake of 49.95% led to a stable majority on shareholders' meetings considering the attendance rates of these meetings. Acquisition of de facto control can even take place without active involvement of the 'acquirer' if the other shareholders become more dispersed as a result of another minority shareholder selling its shares to various small shareholders.
Review of EU Merger Regulation
On 20 June 2013, the European Commission began a public consultation for stakeholders to give their opinion on potential improvements for EU Merger Regulation. The consultation has a broader scope than the issue of minority interest stakes and includes, inter alia, the referral system to and from the European Commission to national competition authorities (see the European Commission website).
As far as minority shareholdings are concerned, the Commission consultation raises the question whether it should also be tasked with looking at non-controlling minority shareholding or "structural links". According to the Commission, also minority shareholdings could lead to a disruption of effective competition. Currently, in the absence of de facto control, minority shareholdings do not constitute a concentration under the EU Merger Regulation and the Commission therefore does not have the power to investigate such shareholdings.
The document describes two main options for notifying non-controlling minority stakes, one through an extension of the current procedure of ex-ante merger notification and the other through a self-assessment. Under the second option the Commission considers that an obligation may be imposed to file a short information notice to the Commission. Also, a possibility for a voluntary notification may be considered under the second option.
After having received the views of stakeholders in the consultation process the Commission will consider whether any improvements of the current merger notification framework are necessary.
2. Commission publishes Hutchison3G/Orange Austria merger decision, confirming the general acceptability in merger analysis of the "GUPPI" test
On 25 July 2013, the Commission published the non-confidential version of its decision in case M.6497. The case concerns the conditional clearance of the acquisition of Orange Austria by Hutchison 3G Austria ("H3G").
Upon notification in May 2012, the Commission had serious competition concerns as the transaction reduced from four to three the number of market players on the Austrian market for the provision of mobile telecommunications services to end customers. Even if the undertakings concerned were only the third and fourth largest market players and their combined market share of 20-30% remained below that of Telekom Austria and T-Mobile, the Commission held that the notified concentration would have significantly impeded effective competition. This conclusion was based on inter alia an analysis of the increased degree of concentration resulting from the operation, on the closeness of competition between H3G and Orange Austria, and on the fact that H3G was an important, if not the most important, competitive force in the market and would have less incentive to compete aggressively after the merger.
Noteworthy is that the Commission used for the first time the ‘gross upward pricing pressure index’ (GUPPI). This is a tool that has found its way into the U.S. Horizontal Merger Guidelines and that is already being used by some national competition authorities in the EU (mainly by the OFT), but which the Commission until recently has shied away from using. The GUPPI test is a spin-off of the ‘upward pricing pressure’ (UPP) test and aims at quantifying the incentive to increase prices post-merger on the basis of undertakings’ profit margins and diversion ratios. Contrary to the UPP test, the GUPPI test assumes no effiency gains from a merger. The essential rationale underlying upward pricing pressure is that post-merger, the new entity would not lose all switchers after a unilateral price increase of one of its brands, but rather would retain a significant number and therefore internalise part of the losses which a price increase would otherwise bring about.
While the notifying party raised a variety of objections in relation to the price pressure analysis, the public decision shows that the Commission went at lengths to rebut these. Thus, it rejected accusations that the analysis ignored the importance of investments in network quality. It dismissed the claim that the UPP-framework does not constitute an adequate tool to predict pricing outcomes in a Phase II merger investigation, stating that "GUPPI is a generally accepted component of a merger analysis”.
In order to address the Commission’s concerns, H3G committed to divest radio spectrum and additional rights to an interested new entrant and to provide wholesale access to its network for up to 30% of its capacity to up to 16 mobile virtual network operators (MVNOs) in the next 10 years. The revised commitments were ultimately found sufficient to remove the identified competition concerns and the operation was conditionally approved by the Commission on 12 December 2012.
3. European Commission conditionally clears proposed merger between US Airways and American Airlines
On 5 August 2013, the Commission granted conditional approval to a proposed merger between US Airways and the parent company of American Airlines (M.6607).
The competition concerns of the Commission surrounded the monopoly over the London-Philadelphia non-stop services route that would be held by the merged entity. This situation would arise because US Airways and American Airlines, through its transatlantic joint-venture with British Airways and Iberia (the "Transatlantic Joint Business") are the only carriers offering this non-stop flight.
US Airways and American Airlines submitted commitments to appease the Commission's concerns. These commitments include, releasing a day slot at each London Heathrow and Philadelphia airports, providing incentives for new entrants, entering into special traffic arrangements with new entrant, supported by the Transatlantic Joint Business.
The Commission found that in relation to the other overlapping routes, the merged entity would face continued strong competition. Therefore, the Commission took the view that these commitments address the competition concerns and would facilitate new entry on the London-Philadelphia route.
Conversely, on 13 August 2013 the US Department of Justice announced its intention to file a civil antitrust lawsuit to challenge the merger. The Department fears that the proposed merger would significantly decrease the competition throughout the United States.
4. Dutch Supreme court confirms limits on the use of requested information for punitive sanctions
By its judgment of 12 July 2013 (LJN: BZ3640), the Supreme Court confirmed that "will-dependent" material cannot be used to impose punitive sanctions. Persons can only be compelled to provide such material to a government authority with the explicit guarantee that it will not be used to impose a punitive sanction.
The case is relevant from a competition law perspective as the Dutch Supreme Court confirms the limits of the duty to provide information and to cooperate with government authorities. While authorities like the Authority for Consumers and Markets ("ACM") have broad powers and can levy heavy fines for non-cooperation, their powers are limited by the rights of defence as enshrined in, inter alia, Article 6 ECHR. The Supreme Court decision provides an authoritative confirmation that Article 6 ECHR and the case-law of the European Court of Human Rights ("ECtHR") have to be interpreted in such a way that Dutch government authorities cannot compel a person to submit will-dependent material without the guarantee that the material cannot be used to impose a punitive sanction on that person. If the ACM requests undertakings for information on the basis of its general monitoring and enforcement powers before opening an investigation, undertakings could demand the ACM to guarantee that any will-dependent materials provided cannot be used to impose punitive sanctions on it.
The case revolves around a dispute between an unidentified private individual, who appealed in cassation ("Appellant"), and the Dutch tax authority. The Supreme Court discusses the relationship between an individual's duty to provide the tax authority with all relevant information for that individual's taxation and the right against self-incrimination as guaranteed by Article 6 ECHR.
A lower court had, at the request of the tax authority, ordered Appellant to provide information about his foreign bank account and income. Appellant claimed that the order violated his right against self-incrimination as protected by Article 6 ECHR, since at least part of the requested information qualified as will-dependent materials within the meaning of the Saunders judgment of the ECtHR (Saunders v. the United Kingdom). Since Appellant could not exclude that the information would be used against him to impose a punitive sanction, he claimed that he could not be compelled to hand over that information.
The Supreme Court recalled the Saunders judgment and made a distinction between (i) information that exists independent of the will of the person concerned; and (ii) information that does not exist independent of the will of the person concerned, that is, "will-dependent" material. It ruled that a person can be compelled to submit both types of information for taxation purposes but the second type of information cannot be used to impose a punitive sanction on that person.
5. District Court of Central Netherlands awards damages for the abuse of dominance by operator of Payment Network
On 10 July 2013, the District Court of Central Netherlands ruled that Equens abused its dominant position. The case was brought before the Court by a customer, European Merchant Services (EMS), who was awarded part of its claimed damages.
EMS processes credit card transactions and closes contracts with "merchants". The closing of these contracts is referred to as acquiring. The transactions are processed via the merchant's terminals that are linked to a network. Besides owning such a network, Equens indirectly holds shares in PaySquare, EMS' competitor.
In September 2007 Equens introduced the "queue procedure". A direct effect of this procedure was that merchants wanting to change acquirer would need their current acquirer's help to connect to the new acquirer. EMS stated that Equens introduced this feature to provide PaySquare with the opportunity to frustrate the switch of its customers.
In determining whether Equens had a dominant position, the Court considered that the acquirers could not easily choose a different network, since 70% of the terminals made use of a specific protocol that only worked with Equens' network. Since all the transaction data exclusively originated from terminals, the Court assumed that the aforementioned 70% provided a clear indication of Equens' market share and, accordingly, of its dominant position.
The Court moreover found that Equens had abused its dominant position. According to the witness statement of a commercial manager at PaySquare, it convinced customers to stay by counteroffering through queue procedure. Consequently, the transfer was often delayed or even prevented. The Court continued by stating that the procedure was furthermore not objectively justified, as was demonstrated by the fact that the queue procedure was retracted on 25 February 2008. The fact that the 'old' procedure resulted in extra costs did not turn the queue-less procedure into an unreasonable alternative.
After establishing EMS' unlawful conduct, the court reviewed the claimed damages. EMS claimed damages for loss of turnover, discounts offered to counter PaySquare's offers and the cost for the extra work of its employees due to the negative effects of the queue procedure. The offered discounts were deemed awardable. The loss of turnover was however dismissed. The Court ruled that merely showing that fewer merchants were acquired during the queue period did not mean that this was the direct consequence of the queue procedure and PaySquare's conduct. No final ruling was issued, however, as the Court offered Equens the possibility to specify the claimed extra work.
This is one of the few cases in the Netherlands concerning abuse of dominant position. It moreover is a rare example wherein damages were actually awarded in relation to the infringement of the prohibition of the abuse of a dominant position.
6. District Court rules on a complaint that an incentive programme relating to chocolate displays was in violation of competition law
On 7 August 2013, the District Court of East Brabant (the "Court") issued an interim decision in a case between Mars and Nestlé (232816 / HA ZA 11-1168). The case concerned a complaint by Nestlé that Mars acted in violation of competition law by introducing an incentive programme which would stimulate independent owners of petrol stations to give Mars products and displays a prominent position in the petrol station shops.
The incentive programme provided the petrol station owners with a remuneration relative to their turnover in Mars products and a one-off bonus if they would comply with certain conditions relating to the presentation of the Mars products in the shops.
Nestlé claimed that the programme was in violation of competition law as it was not able to match the incentive programme of Mars without suffering structural losses. As a result, Nestlé would be driven out of the Dutch market of sales of out-of-home candy bars and bite-sizes via petrol stations.
With regard to the market definition, the Court decided that that there is a distinction between sales of chocolates via the out-of-home channel, meant for consumption out-of-home and/or on the way, and the at-home channel supermarkets. Mars would have a market share on the out-of-home market for chocolates in the Netherlands of at least 50.6%. According to the Court, it was not necessary for the purpose of the case to further define the relevant market.
The Court then considers that the incentive programme strongly resembled a category management agreement in the sense of the European Commission Guidelines for Vertical Agreements. Category management agreements are agreements by which the distributor entrusts the supplier with the marketing of a category of products including, in general, not only the supplier's products, but also the products of its competitors.
A category management agreement does not have the object but may have the effect of restricting competition. According to the Court the relevant question was whether a competitor as efficient as Mars could match the incentive programme of Mars. The Court came to the conclusion that it was not economically viable for Nestlé to introduce an equivalent incentive programme, as it would not be able to recoup its variable costs.
The Court did in this interim decision not decide whether the incentive programme lead to an appreciable restriction of competition. The Court gave Nestlé the opportunity to prove that this is the case. The Court intends to instruct an expert to compare the sales of chocolate products and the development of the market shares of Nestlé and Mars in petrol stations that participated in the incentive programme with similar petrol stations that did not participate in the programme.
7. Two Concerns Regarding the European Draft Directive On Antitrust Damage Actions
This article is a published analytical piece that takes a critical look at the draft directive on Antitrust Damage Actions and questions the basic premise of the draft directive, that the current system is inefficient. The article also looks at the potential effect of the provisions in the draft on settlement procedures. To read the article in full, please click on the title:
Two Concerns Regarding the European Draft Directive On Antitrust Damage Actions
Jeroen Kortmann and Rein Wesseling, CPI Antitrust Chronicle, August 2013