SPEECH/02/545

Prof. Mario Monti

European Commissioner for Competition Policy

Merger control in the European Union : a radical reform

European Commission/IBA Conference on EU Merger Control

Brussels, 7 November 2002

Introduction

Just over two years ago, we celebrated the 10th anniversary of the entry into force of the EC Merger Regulation. It was a remarkable event; an occasion to review extensively the first decade of application of European merger control. Today, I have the honour of opening a similar conference to reflect on the challenges facing our merger control regime in the years ahead and discussing the reforms that we will propose to meet these challenges.

As you know, I took the firm commitment to submit a reform package to the Commission before the end of this year. It will be the most far-reaching reform of European merger control since the adoption of the EC Merger Regulation in December 1989. Our proposals are the result of a long period of review, which commenced in July 2000 with the submission of a Report to the Council on the functioning of the Merger Regulation, and continued with the adoption of a Green Paper by the Commission in December of last year. The more than 120 submissions that were received in reply to the Green Paper, presenting various options for reform, have been crucial for our reflection. I would like to thank warmly all those who replied or contributed one way or another, to our discussions.

A comment on the recent judgements

Before describing our proposed reforms, let me briefly turn to matters which have been drawing a lot of my attention in recent weeks, and no doubt have caught many of your eyes too. The Commission, as you know, has faced unprecedented criticism in the wake of three judgements of the Court of First Instance over-turning on appeal the prohibition decisions we had taken in Airtours/First Choice, Schneider/Legrand and Tetra Laval/Sidel. Two of those judgements were rendered just a fortnight ago, and we are still studying them carefully before deciding whether or not to lodge an appeal to the European Court of Justice in either or both cases.

I believe that, in a certain time, with more hindsight, we will say that these judgements, no matter how painful, came at a right moment. Indeed, there are no doubt lessons to be drawn from the judgements: in particular, it is clear that the CFI is now holding us to a very high standard of proof, and this has clear implications for the way in which we conduct our investigations and draft our decisions. We have taken very seriously into account the shortcomings in our process highlighted in the judgements by strengthening our reforms even further.

While the judgements were sharply critical of the Commission in some respects, they also confirmed some of our views. In Schneider/Legrand, the Commission's decision was over-turned on account of what the CFI saw as a procedural error by the Commission. The Court did, however, confirm that the operation would have engendered serious competition problems in France. And in Tetra Laval/Sidel, the Court upheld the principle that conglomerate mergers could, under certain circumstances, fall under the Merger Regulation.

In any case, we should not allow these setbacks to distort our view of the Community's merger control policy. We should transform them into an opportunity for even deeper reform than originally envisaged. At the same time, let me reassure you that, if the Commission reaches the conclusion that a merger is likely to give rise to serious competition concerns, it has a duty to intervene and will continue to do so. Let us not lose sight of the crucially important job that the Commission is doing here - we are seeking to ensure that markets function properly and, ultimately, that our consumers do not suffer as a result of having to pay higher prices or being offered poor choice.

The objectives of the reform

Let me turn now to discuss briefly the aim of our reforms. It has been our objective, throughout our review period, to substantially improve the EU Merger Control system, but without loosing sight of the merits inherent in that system.

There are, indeed, important merits to preserve. The Merger Regulation, far from standing in the way of industrial restructuring in Europe, has facilitated it, while ensuring that it did not result in damages to competition. It has provided a "one stop shop" for the scrutiny of large cross-border mergers, dispensing with the need for companies to file in a multiplicity of national jurisdictions here in the EU. It has guaranteed that merger investigations are completed within tight, pre-determinable deadlines; a remarkable degree of transparency has been maintained in the rendering of decisions - each and every merger notified to the Commission results in the communication and publication of a reasoned decision. Above all, we have put in place a merger control system which is characterised by the complete independence of the decision-maker, the Commission, and by the certainty that mergers will be exclusively assessed for their impact on competition.

Merger activity has increased beyond most expectations since the introduction of the Merger Regulation. The number of concentrations notified to the Commission increased spectacularly during the 1990's, to the point where the Commission now annually reviews more than five times as many cases as in the early years, even if we noticed a slowdown in the last year. Only a very limited proportion of all these notified transactions, though, has required intervention by the Commission. Outright prohibitions are rare: the total of 18 such prohibitions since 1990 represents just under 1% of all notified transactions. During the same period, a further 6% or so of notifications resulted in clearances conditional on the acceptance of remedies. All the remaining cases were cleared, mostly in a period of one month after notification.

It has to be acknowledged, however, that whilst the current EU merger control system has performed well, it has shown some strains. Through our reform, we should resolve the shortcomings that have been appearing these years and ensure that the original goals and merits of EU Merger Control are preserved, in the legal framework as well as in the behaviour and attitudes of the staff that applies it. Allow me, at the same time, to underline publicly my appreciation for the professionalism of the members of the MTF and of its Director, Gotz Drauz, and in particular the hard work and devotion to public service, even under sometimes very difficult circumstances.

The reform package

I will describe now the reforms that I will be proposing to the Commission. I will start by dealing with the substantive issues covered by the reform, before turning to matters of procedure and to the improvements to the Commission's decision-making system. I will also say a few words about judicial review and finish by briefly outlining the jurisdictional changes I have in mind.

Substantive issues

First, the issues of substance.

As you know, the Commission's Green Paper launched a reflection on the merits of the substantive test enshrined in Article 2 of the Merger Regulation. In particular, it invited comment on how the effectiveness of this test compares with the "substantial lessening of competition" (SLC) test used in several other jurisdictions (and notably in the USA). The consultation spawned a wide range of commentary pleading both for and against change. The main thrust of the arguments for a change to SLC is that such a test would be inherently better-suited to dealing with the full range and complexity of competition problems that mergers can give rise to, and in particular that there may be a "gap" or gaps in the scope of our current test. In addition, there is a fear that a broadening of the concept of dominance in Article 2 ECMR in merger cases is at the same time broadening the category of companies to whom the "special" rules in Article 82 EC Treaty apply, thereby potentially curtailing their ability to engage in certain types of commercial conduct.

Based on our experience to date, however, these potential drawbacks to retention of the dominance test should not be over emphasised. What matters even more than the precise wording of the test itself is, in my view, the way in which it is applied. The dominance and SLC standards have produced broadly convergent outcomes, especially in the EU and US in recent years, and the dominance test is proving to be an instrument capable of being adapted to a wide variety of situations. In particular, it is worth noting that the test has been successfully used to assess the dynamic impact of mergers, and has not confined the Commission to making static market analyses. Indeed, I believe that the dominance test, if properly interpreted, is capable of dealing with the full range of anti-competitive scenarios which mergers may engender. Not changing it has the additional advantage of preserving the jurisprudence that the Courts have developed all these years in interpreting its meaning and, therefore, in maintaining a high degree of legal certainty.

However, with a view to enhancing transparency regarding the scope of our current test, I will be proposing a clarification of the notion of dominance contained in the current substantive test (by the addition of a paragraph in Article 2 and of further pre-ambles to the Regulation), so as to make it clear that the test also applies where a merger results in so-called "unilateral effects" in situations of oligopoly, a potential "gap" to which some commentators have pointed. The clarification which I will be proposing is consistent with how the ECJ has defined dominance in merger cases, but the approach has - I think - the advantage of not linking the definition of dominance under the Merger Regulation to any future interpretations given by the ECJ to the concept of dominance under Article 82 of the Treaty.

We should not, in my view, however, exaggerate the importance of this (undoubtedly intellectually fascinating) dominance versus SLC debate. After all, what surely matters most is the reasoning underlying our analytical approach to merger analysis. What is in my view, therefore, of considerably more importance is the fact that the Commission now intends to clearly and comprehensively articulate the substance of its merger policy. Accordingly, it is my intention to submit to the Commission a draft Notice on the assessment of dominance in "horizontal" mergers as part of the reform package, thereby providing transparency and predictability regarding the Commission's thinking, and consequently greater legal certainty for all concerned. It is also my intention that the Commission should adopt, at a later stage, further guidance on its approach to the assessment of "vertical" and "conglomerate" mergers.

The first set of guidelines will be drafted with a view to setting out a sound economic framework for the assessment of concentrations where the undertakings concerned are active sellers on the same relevant market or potential competitors on that market. In doing so, it will deal with how the effect of a merger on competition in a market should be analysed, providing clarity, among other issues, about how the Commission will apply the notion of collective dominance.

The guidelines will deal as well with particular factors that could mitigate an initial finding of likely harm to competition - factors such as buyer power, ease of market entry, and efficiencies. I consider this last point as particularly relevant.

We are of the opinion that an explicit recognition of merger-specific efficiencies is possible without changing the present wording of the substantive test in the Merger Regulation. Article 2(1)(b) of the Merger Regulation provides a clear legal basis in that respect by stating that the Commission shall take account, inter alias, of "the development of technical and economic progress provided it is to consumers' advantage and does not form an obstacle to competition".

The guidelines should say that the Commission intends to carefully consider any efficiency claim in the overall assessment of the merger, and may ultimately decide that, as a consequence of the efficiencies the merger brings about, the merger does not create or strengthen a dominant position as a result of which effective competition would be significantly impeded.

A note of caution, however: efficiency claims should only be accepted when the Commission is in a position to conclude with sufficient confidence that the efficiencies generated by the merger will enhance the incentive of the merged entity to act pro-competitively for the benefit of consumers, because the efficiencies generated by the merger will either outweigh any adverse effects on consumers or make these effects unlikely. For the Commission to reach such a conclusion, the efficiencies would have to be of direct benefit to consumers, as well as being merger-specific, substantial, timely, and verifiable. The burden of proof should moreover clearly rest on the parties, including the burden of demonstrating that the efficiencies are of such a magnitude as to outweigh the negative effects of the merger on competition. The draft guidelines will also indicate that it is very unlikely that efficiencies could be accepted as sufficient to permit a merger leading to monopoly or quasi-monopoly to be cleared.

During tomorrow's Panel sessions Dietrich Kleeman and Enrique Gonzalez-Diaz will spell out in more detail our approach to the substantive test and the new Notice on horizontal mergers. Claude Rakovsky will explain our approach to efficiencies.

Decision-making process

Now let me turn to decision making process. The Green Paper already opened a debate on this issue and the consultation process, as well as the subsequent developments, have demonstrated that this issue is central to the success of our reform. We will adopt changes, as radical as needed, to ensure that our merger investigations are conducted in a manner which is more thorough and more firmly grounded in economic reasoning and to further strengthen the due process guarantees built into our merger proceedings.

Let me begin by some of the most relevant changes that we seek to introduce to our decision making process, but that do not require a change of the Regulation, only important internal changes in our organisation.

First of all, in view of the increasing complexity and global scale of merger cases, it is clear that there is a need to improve the economic capabilities of the Competition Directorate-General. Accordingly, I will be proposing that a new position of Chief Competition Economist be created within the Competition DG, with the staff necessary to provide an independent economic viewpoint to decision-makers at all levels, as well as guidance throughout the investigative process. He or she should be an eminent economist, on temporary secondment to the Commission, thus ensuring that the holder of this post is someone with very sound knowledge of industrial economics. He or she will be directly attached to the Director General. It goes without saying that the role of the Chief Competition Economist would not be limited to his/her involvement in merger control, but would also extend to competition law enforcement generally, including the control of State aids.

I also intend to accelerate the Competition D-G's recruitment of industrial economists, something that has already been a priority for some time, and that greater use be made of outside economic expertise. In particular, I envisage that we will more frequently be commissioning our own independent econometric studies in Phase 2 merger investigations.

I intend to introduce systematic use of a peer review "Panel" system in Phase 2 merger cases. A Panel, independent from the Merger Task Force, composed of experienced officials, would be appointed for all in-depth investigations, and would have the task of scrutinising the case team's conclusions with a "fresh pair of eyes" at key points of the enquiry. This will prevent that the natural tendency of all human beings of being convinced by their own arguments determines the outcome of our investigations.

Those serving on the Panel would be chosen from throughout the Directorate-General. Officials from other relevant services of the Commission will be, when appropriate, invited to contribute to the discussions. To this end, I have charged my Director-General, Philip Lowe, with overseeing the creation of a new Unit providing the necessary support and structure to allow these Panels to become a real and effective internal check on the soundness of the investigators' preliminary conclusions. Indeed, it is my intention that this Panel system should be deployed throughout the Directorate-General: I see no reason why our decision-making in the antitrust and State aid areas would not benefit equally from such an approach.

The Commission decision making process has been also sometimes criticised for being too prone to capture by the competitors of the merging parties, who, the critics say, are able to influence excessively the investigation. While I believe that this criticism is exaggerated, and that it is in the interest of the Commission to listen to all - merging parties, consumers and competitors - I also consider that the merging parties should be given ample opportunities to defend their points of view during the procedure and confront the concerns of third parties at the earliest stages of the investigation.

To this purpose, I intend to allow an earlier access to the Commission's file than is currently foreseen. First, the merging parties will be granted full access to the file shortly after the opening of an in-depth investigation (i.e. following the issuance of a 6(1)(c) decision). Secondly, I intend to ensure that merging parties are given ad hoc access throughout the investigation to the main third party submissions running counter to the merging parties' views - respecting, of course, legitimate claims to the protection of confidential information. This will enhance even further the transparency of our procedures and allow the parties to contest these submissions at early stages of the investigation and not, as presently, only once the Statement of Objections is issued.

An opportunity should, in my view, furthermore be provided for the parties to confront to "complaining" third parties in a meeting which should ideally be held in good time before the issuing of a Statement of Objections. This should enable some arguments against the proposed merger to be given an earlier "hearing" and, if appropriate, to be thrashed out informally before a Statement is issued.

I also intend to introduce some further discipline and transparency in the conduct of investigations, by offering merging companies the possibility to attend so-called "State-of-Play" meetings with the Commission at decisive points in the procedure. This should guarantee that the merging parties are kept constantly updated on progress in the investigation, and that they are given an ongoing opportunity to discuss the case with senior Commission management.

A further strengthening of the Hearing Officers role will also be part of our reforms. They already perform an indispensable role in guaranteeing protection of the merging parties' rights of defence and the appropriate conduct of our procedures. I intend to see to it that the Hearing Officers are equipped with resources, including A grade officials, sufficient to enable them to fully discharge their responsibilities.

This afternoon, Serge Durande and Karen Williams will outline their ideas in more detail.

We also plan to enhance consumer involvement in our proceedings. Even if our ultimate goal is the protection of consumer welfare, consumers rarely express their views to us about the likely impact of specific mergers. We will be taking measures designed to change this situation. In particular, I will propose to create a Consumer Liaison function within our Directorate General, to encourage and facilitate the involvement of consumer associations which are often poorly resourced bodies.

Unlike these mentioned so far, other key improvements to the decision making process that I will be proposing will require an amendment to the Regulation. First, timing issues.

While I am firmly opposed to general erosion of the tight timetable inherent in the current regime under the Merger Regulation, I consider it important to introduce a degree of flexibility with regard to the timeframe for merger investigations, in particular in complex Phase 2 cases. To that end, I will propose a number of significant changes. First, I would like to allow the parties to request an additional 3 weeks being added to Phase 2 following the submission of a remedy offer, thereby allowing more time for the proper consideration of remedies, including the consultation of the Member States.

Second, I will also be proposing that more time (up to 4 weeks) could be added to Phase 2 for the purpose of ensuring a thorough investigation in complex cases, particularly in view of the high evidentiary burden that is incumbent upon the Commission in cases where it proposes to intervene. This extra time could be added at the request of the merging parties, or at the request of the Commission, but with the agreement of the merging parties, where the Commission is convinced that additional investigation time is warranted.

I have also decided that more flexibility is merited as regards when merging companies can present a notification to the Commission. I propose to make it possible to notify prior to the conclusion of a binding agreement, and would, provided no steps are taken towards its implementation, also remove the current deadline for notification of one week after such an agreement has been reached. The more flexible rules should allow companies to better organise their transactions without having to fit their planning around unnecessary regulatory rigidities, and would at the same time facilitate international co-operation on merger cases (particularly when it comes to synchronising the timing of investigations by different agencies).

I will also propose to amend the Merger Regulation's provisions on enforcement powers. (Fact-finding and fining powers) to align them with those being proposed in the new draft implementing Regulation for Articles 81 and 82. I would like, in particular, to underline the importance of enhancing the effectiveness of our fact-finding powers in merger control, particularly given the very tight time constraints that we are working with. However, as I already announced some months ago, I will not be proposing that the Merger Regulation include the power to conduct home searches. That is a power which is specifically required for the detection of secret cartels: I am not convinced that it is necessary for the effective enforcement of the Merger Regulation.

Finally, I intend to see that important practical management measures are taken to improve the way our investigations are conducted. To this purpose, a post of Deputy Director General for Mergers was recently established by the Commission. For the time being, I have requested Philip Lowe, our new Director General, to take up these functions directly.

Let me underline some of these necessary improvements. We will have to ensure that there is sufficient management oversight to deal with the Commission's full merger case-load, that case teams are sufficiently large, and that they are equipped with the expertise necessary to cope with in-depth investigations. We must also see to it that due attention is paid to the quality of evidence, and to ensuring that decisions reference such evidence clearly and comprehensively. Ensuring that the staff resources of the entire D-G are deployed to maximum benefit, including via increased flexibility of staff tasks, will be an immediate priority to achieve these goals.

Judicial review

Our reflection on how to improve EU's Merger control has also focused on judicial review. I am acutely conscious of the fact that, as with any administrative system, effective judicial review is the ultimate guarantor of accountability. That is as it should be, and the CFI's recent judgements have demonstrated beyond any doubt that the European Courts provide meticulous and stringent review of the substance of the Commission's analysis in merger cases. Moreover, the CFI has for all practical purposes become a specialised competition court, exerting constant pressure on the Commission to continuously improve its level of expertise.

However, due process requires that judicial review should not only be effective in terms of substance - it must also be timely. There is clearly still some scope for improvement in the speed with which judgements are delivered, particularly in cases where the merging parties are keen to "keep the deal alive" pending the outcome of the appellate process.

To that end, the introduction by the CFI of a fast-track procedure represents an important step forward, demonstrating that judicial review can be delivered with relative speed: the efficiency with which the CFI disposed of the appeals in Schneider/Legrand and Tetra Laval/Sidel represents real progress. It would be desirable, however, to further shorten the time it takes for merger appeals to be dealt with. And let me once again stress what I have said on several occasions before: to the extent that the Commission can assist, I am ready to advocate strongly for the additional resources that would no doubt be required by the CFI for such further improvements.

There may, however, be additional ways of further improving the timeliness of the judicial review process, and the merits of any proposal to that effect deserve careful examination. It may, for example, be appropriate to consider introducing improvements in the field of the interim measures procedure. Already now, the Treaty allows parties to claim interim relief. However, we should explore whether this procedure can be adapted to better serve the needs of merger proceedings.

It would also be useful to examine whether, for the purposes of speeding up the judicial review process, it might be appropriate to create specialised "judicial panels" (an option available once the Treaty of Nice enters into force) to deal with certain categories of cases at first instance or to create a specialised merger chamber within the CFI.

As regards the creation of judicial panels, one option would be to create a competition judicial panel acting as the first instance court. Another option would be to transfer other categories of cases to judicial panels, thereby liberating resources within the CFI, which could then be allocated to dealing with competition cases. Staff cases, which currently make up a significant part of the caseload of the CFI, could be obvious candidates.

The creation of a special merger chamber within the CFI would also be an alternative to consider, but it seems evident that this would contribute to speed up the review process only when the CFI obtains new resources.

As you can see, there are a number of options that could speed up the rendering of judgements on appeal. We have already started a discussion with the CFI on these issues and I also plan to consult shortly Member States on their views. As you know, the Commission might play a role in advocating, or proposing, any such changes, and we will be considering doing this in due time, but it does not correspond to it to take the final decision.

I will be very interested to listen to the remarks and ideas of President Vesterdorf later today.

Jurisdiction

And now, to conclude, a few words on jurisdiction.

One of the objectives of the review is to optimise the allocation of merger cases between the Commission and national competition authorities in the light of the principle of subsidiarity, while at same time tackling the persistent phenomenon of "multiple filing" (i.e. notification to various competition authorities within the EU). It should also be recalled that, unlike in 1989, all of our Member States (with the exception of Luxembourg) now have merger control systems, as do the ten candidate countries for early accession to the Union, hopefully in 2004, many of whom I am glad to see are represented here today.

The core of our jurisdictional reform will be centred around a proposal to simplify and render more flexible the Merger Regulation's provisions concerning referral of cases from the Commission to Member States and vice versa.

So what would we like to change?

First, we will be proposing a simplification of the criteria for such referral, including a closer "mirroring" of the criteria for referral in both directions. Second, we would propose that referral be made applicable at the pre-notification stage. Notifying parties would make a reasoned request for a pre-notification referral of the case in either direction. The request would have to be acceded to by both the Commission and the national competition authorities concerned. Third, we would propose that, if a minimum number of Member States agree to a case being referred to the Commission, the case should be deemed to fall under exclusive Community jurisdiction.

Fourth, we would propose to make it possible for the Commission to invite Member States to make referrals, and for the Commission to invite Member States to request the Commission to refer cases to them; currently the Commission has no such "right of initiative". The amendments to the Merger regulation would be complemented by a set of guiding principles upon which referral decisions should be based.

Goetz Drauz will, during the panel session on jurisdictional issues this morning, set out in more detail the changes we have in mind.

The package form

Wrapping up, then, let me spell out what form the reform package that I will submit to the Commission in December will take. It will consist of:

Conclusion

Let me now, at the end of my presentation, take a broader perspective.

European merger control policy, by facilitating restructuring but at the same time maintaining markets competitive and, eliminating barriers to cross border consolidation, has contributed decisively to foster structural and economic reform in Europe. This is one of the major long-term benefits provided by a vigorous enforcement of competition policy instruments, not only merger control, but also the fight against cartels, liberalisation measures and, above all, control of public subsidies to companies. By reforming the present merger control system as radically as needed, therefore, I am determined to ensure that it remains a key instrument to foster Europe's economic success in the years ahead.