In 2016, the Commission blocked the proposed takeover of O2 by Hutchison under the EU Merger Regulation. As the deal would have reduced the number of mobile network operators in the UK from four to three, the Commission’s main concerns were that competition in the UK mobile market would be reduced, the development of the UK mobile network infrastructure would be hampered, and the ability of mobile virtual operators – hosted by the mobile network operators – to compete would be weakened. All in all, according the Commission, the merger would have significantly impeded effective competition for retail and wholesale mobile telecommunications in the UK. CK Telecoms appealed the decision.
The GC sided with CK Telecoms, annulling the Commission’s decision in 2020 (see our June 2020 newsletter). In its judgment, the GC increased the burden for the Commission to challenge mergers, in particular in oligopolistic or concentrated markets. The GC ruled, for instance, that the Commission would have to show “with a strong probability the existence of significant impediments” to effective competition following the merger. The Commission challenged that judgment before the ECJ. Last year, Advocate General Kokott issued her Opinion, concluding that the Commission’s appeal was well-founded on nearly all grounds.
Key takeaways from the ECJ judgment
In a Grand Chamber judgment, the ECJ essentially follows the Advocate General’s Opinion. The ECJ clarifies several key questions regarding the interpretation of EU merger control provisions, in particular relating to the legal test and the applicable standard of proof. These findings are especially relevant to certain ‘gap’ cases, which are mergers that do not create or strengthen a dominant position but may still give rise to a significant impediment to effective competition (SIEC). Such situations occur most commonly in oligopolistic markets.
First, the ECJ addresses the standard of proof that applies to those mergers that may lead to an SIEC but fall short of creating or strengthening a dominant player. The GC held that the Commission must show “with a strong probability” that the merger would significantly impede effective competition. However, the ECJ found this bar too high and instead held that the appropriate standard of proof was that an SIEC is “more likely than not”.
Similarly, the ECJ rejected the GC’s strict stance that the Commission must establish the existence of an SIEC – where the transaction would not create or strengthen a dominant position – by proving that two cumulative conditions have been met: (i) the elimination of the important competitive constraints that the merging parties had exerted on each other; and (ii) a reduction of competitive pressure on the remaining competitors. The ECJ disagreed with this interpretation, finding it too restrictive and contrary to the objectives of the EU Merger Regulation. This strict approach would mean that neither of these factors on its own would be enough to demonstrate an SIEC.
According to the ECJ, the GC also misinterpreted the concepts of ‘important competitive force’ and ‘close competitors’, which are two factors that the Commission set forth in its Horizontal Merger Guidelines to assess whether significant non-coordinated effects are likely to result from a merger. In contrast to the GC, the ECJ set a much lower threshold for an undertaking to classify as an ‘important competitive force’. It would be sufficient for it to have “more of an influence on the competitive process than its market share or similar measures would suggest.” The ECJ also did not consider it necessary for the Commission to demonstrate that the merging parties are “particularly close” competitors, as the GC had done. Instead, to assess the closeness of competition between the parties to the merger, the Commission would have to show that those parties are “close competitors”. This means that the Commission does not have to demonstrate a high level of substitutability between the merging parties’ products or services in a differentiated product market.
Moreover, the ECJ did not accept the GC’s view that certain ‘standard’ efficiencies are specific to all concentrations and that therefore the Commission must proactively take these into account in its analysis. The ECJ emphasized that it is up to the notifying parties to demonstrate those efficiencies, so that the Commission can take them into account for their review. It also rejected the idea, let alone the presumption, that all transactions lead to ‘standard’ efficiencies.
- The strict requirements that the GC placed on the Commission when reviewing mergers have been taken off the table by the ECJ, making it easier for the Commission (and national competition authorities) to intervene in ‘gap’ cases.
- When reviewing a merger, competition authorities can rely on different factors to (i) find an SIEC and (ii) determine whether a merger may result in non-coordinated effects.
- While the ruling is a special warning to telecom companies seeking to merge in already consolidated markets, it also serves as a warning to companies operating in other sectors with oligopolistic tendencies. They too will need to conduct a thorough legal and economic assessment when pursuing opportunities for further consolidation.
- Interestingly, a proposed merger between Three UK, a subsidiary of CK Telecoms, and Vodafone was recently announced. This transaction would have to be reviewed by the UK’s Competition and Market Authority (CMA), which is not bound by this ruling. It will be interesting to see whether the CMA decides to follow the ECJ’s/EC’s approach to assessing mergers in the telecom sector.
This article was published in the Competition Newsletter of August 2023. Other articles in this newsletter: