This article explains the referral scheme under the new European Community Merger Regulation1 ("ECMR") which aims at introducing a greater degree of flexibility into case allocation between the European Commission ("Commission") and Member States.
The ECMR provides for concentrations with a "community dimension" a one-stop shop where companies can request clearance for their mergers and acquisitions in the whole of the territory of the European Union. "Community dimension" is defined as the turnover thresholds that must be exceeded by the parties to the transaction. Where the parties to the transaction do not exceed the ECMR turnover thresholds, national merger control regimes may apply with the result that — depending on the case — a multitude of national merger control filings to national competition authorities ("NCA") with associated costs, bureaucracy, and legal uncertainties may be required. To the extent the ECMR applies, in general, no notifications pursuant to national competition legislation are required.
Case Referrals at a Glance
The ECMR establishes exceptions from the one-stop shop principle by setting four mechanisms of case referrals: two of them relate to referrals from the Member States to the Commission, and two relate to referrals from the Commission to the Member States. Using a different classification, two referrals relate to referrals made before a notification to the competent authority — Commission or NCA — has been made, and two relate to referrals made after a notification to the competent authority has been made.
Already the old EC Merger Regulation 4064/89 (as amended) contained procedures for referral of concentrations between the Commission and Member States but these only operated at the request of the Commission or Member States and after a transaction had been notified. The new ECMR adds two new pre-notification referral rights for the parties to a concentration. The following table shows the different scenarios:
From Member State to Commission
Article 4(5) ECMR
Article 22 ECMR
Member State requests
From Commission to Member State
Article 4(4) ECMR
Article 9 ECMR
Member State requests
Details of the referral mechanism are explained in the ECMR, the "Commission Notice on Case Referral in Respect of Concentrations (2005/C 56/02)," and in the "Principles on the Application by National Competition Authorities within the European Competition Authorities of Articles 4(5) and 22 of the EC Merger Regulation."
The guiding principle for any referral is to identify the most appropriate authority capable of ensuring effective protection of competition in all markets affected by a transaction. The one-stop shop principle must be guaranteed for cases that have cross-border effects. For legal certainty referrals should only be made when there is a compelling reason for departing from the "original jurisdiction," particularly at a post-notification stage. The referral mechanism is subject to strict legal criteria that must be fulfilled to make a referral. By nature, such criteria can only be assessed preliminarily, and this prima facie assessment is without prejudice to the outcome of the main investigation. In general, the Commission and Member States retain a considerable margin of discretion in their referral decisions.
Pre-notification Referral from Member States to the Commission upon Request of the Parties (Article 4(5) ECMR)
In order to tackle the problem of multiple national filings of concentrations that do not have a "community dimension", Article 4(5) ECMR provides that companies can benefit from the one-stop shop if filing criteria are fulfilled in three or more Member States — the so-called "3+ clause". In such a case, the Commission can be requested to take jurisdiction over the whole concentration with Member States being excluded to apply their national merger control legislations. This is a fairly low standard, as for example, in a cross-border deal involving significant overlaps and possibly fairly high market shares, it easily may be the case that the merger control thresholds in Portugal (30%), Spain (25%) and the UK (25%) are met. Aside from the above "market share jurisdictions", there are other EU Member States with relatively low merger thresholds. Austria and Germany are usually likely candidates.
Procedurally, the parties following possible informal contacts with the Commission and the NCA must submit a so-called "reasoned submission" (Form RS) to the Commission. In this document, a kind of mini Form CO, detailed information on the parties, the transaction, and in particular on the affected product markets has to be furnished. Without delay, that is regularly within one working day, the Commission transmits this request to the 25 Member States. Within 15 working days, anyone of those Member States that could have examined the deal under national filing requirements may opt to block the referral request, and the concentration has to be notified to the competent NCAs.
If they agree or remain silent, the whole transaction becomes one over which the Commission has exclusive jurisdiction and the parties then notify the transaction to the Commission on the basis of a regular notification by using Form CO. All the filing requirements associated with a notification to the Commission will apply including the timetable for the Commission’s investigation of the notification. No Member State can apply national merger control to the concentration.
Whether from a substantive point of view the Member States in which the national filings had to be made will agree depends inter alia on the following factors which indicate that the Commission is likely to be in the best position to carry out the investigation:
- Genuine cross-border cases that have a potential impact on competition in one or more markets;
- Wider than national markets in which there may be a potential impact on competition;
- The potential need of investigative efforts in several countries as well as the need of appropriate enforcement powers. In this respect it is worthwhile to note that the parties may put forward transaction-related arguments, such as time delay and costs of multi-jurisdictional filings.
The Commission may also be more appropriately placed to treat cases if there are potentially significant competition concerns in a number of national or sub-national markets in the EEA and where NCAs expect problems in identifying and coherently enforcing commitments the parties may offer in order to remedy competition concerns.
By contrast, Member States may be more inclined to agree to a referral request where:
- A NCA has already examined a case that involves the same parties or product markets;
- Where the main impact of the concentration is in that NCA’s national market; or
- Where there may be a risk of a subsequent referral back from the Commission under Article 9 ECMR (see below).
In strategic terms, the parties thinking of a referral pursuant to Article 4(5) ECMR need to take into account the following: The advantage is the one-stop shop which can reduce the cost and administrative burden arising from multiple filing obligations. It also secures a coherent investigation across a number of markets, and may facilitate the negotiation of remedies.
The disadvantages are in many cases a time delay:
- The preparation of Form RS and the 15 working days during which a competent NCA can veto the referral request adds time to the transaction process, in particular against the background of relatively short national administrative review periods in some countries (such as in Germany);
- The process of notifying the request to all 25 Member States gives Member States access to information they might not otherwise have seen;
- As the margin of discretion of the Member States is considerable, it may also be difficult to predict whether the Member States in which national filings are required, veto the referral request. Finally,
- Once the Form CO is submitted, the Commission will look at the competitive effects in all Member States and might require remedies addressing competition problems in numerous Member States, and not only in those Member States in which national filings were required.
Since 1 May 2004, the date when the new ECMR came into force, 22 requests were successfully submitted by the parties, and two were vetoed by Member States.
Pre-notification Referral from the Commission to Member States upon Request of the Parties (Article 4(4) ECMR)
An Article 4(4) ECMR referral from the Commission to Member States may be appropriate if a concentration significantly affects competition in a market and such a market is within a Member State and presents all the characteristics of a distinct market. Such referrals may concern the whole or only a part of a concentration.
Procedurally, following possible informal contacts with the Commission and the Member States, parties must make a referral request to the Commission by using Form RS in which the parties have to demonstrate that the transaction may have a potential significant impact on competition in a distinct market in a Member State. The Commission delivers this request to all Member States. The Member State to which the parties seek to refer the concentration has 15 working days to agree or disagree with the request.
If a Member State disagrees, the concentration will not be referred to it, and the concentration has to be notified to the Commission on the basis of a regular Form CO notification. If a Member State agrees, the Commission decides within 25 working days as of receipt of Form RS whether the case, in whole or in part, will be examined by the Member State. Where a concentration will be referred partially only, the non-referred part in addition has to be notified to the Commission.
If a referral to the Member State does take place, the NCA must inform the parties of the results of its preliminary competition assessment and the next steps it will take within 45 working days of the referral by the Commission.
It should be noted that the Member State and the Commission must either accede to or refuse the request made by the parties, which means the Member State and the Commission may not refer only parts of a concentration where the parties requested to refer the whole concentration.
The parties substantively do not have to demonstrate that the effects of the concentration are detrimental to competition in that particular Member State. But they have to consider whether the Member State to which referral is sought is the most appropriate place for dealing with the case. A relevant factor, inter alia, is the experience/expertise of the Member State’s NCA in that industry, its familiarity with local markets, and its enforcement powers.
- Most likely referral candidates are transactions that are likely to affect a national or local market, and the competitive effects are limited to one Member State only, or cases that despite affecting a number of national markets, show significant differences in competitive conditions;
- Less likely candidates are transactions that may engender competition concerns in a number of Member States, and require coordinated investigations and remedial action. In cross-border cases, where potentially the Commission and the NCA are equally well equipped to handle the case, the authorities have a considerable margin of discretion in deciding whether or not to refer.
Strategically, parties are most likely to request a referral back from the Commission if a transaction is only affecting national or local markets in one or few Member States, and where the process and outcome of the investigation is sufficiently predictable.
In most other situations, parties, in general, are not well advised to give up the benefit of the one-stop shop before the Commission. The preparation of Form RS plus 25 working days (!) after its submission, plus 45 working days the NCA has to publish its findings adds time to the process, so that parties will need to balance the benefits of a referral against the loss of a relatively short first-phase waiting period of 25 working days if they stayed at the Commission’s level. It is therefore maybe no surprise that no requests have been made so far.
Post-notification Referral from Member States to the Commission upon Request of Member States (Article 22 ECMR)
After the parties have made a notification to a national authority, pursuant to Article 22 ECMR one or more Member States may request the Commission to examine such a concentration that does not have "community dimension" but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. This was previously called the "Dutch clause" and was originally intended to protect Member States that did not have a genuine national merger control legislation.
Procedurally, a Member State can make such a request within 15 working days of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned. The Commission then informs all the Member States and the parties to the concentration. Any Member State has the right to join the initial request within another 15 working days period. The Commission has 25 working days after it has informed the Member States about the initial request, and must decide whether or not to pick up the case. In total, the referral procedure could take 40 working days and more. Until the decision where the case will be examined, all national time limits are suspended. While the Commission cannot take a case from a Member State by itself nor make a respective request, it may invite a Member State to make a referral request.
If the Commission accepts the referral request, national proceedings in the referring Member States are terminated and the Commission examines the case on behalf of the requesting States. Non-requesting Member States continue to apply national law. If the Commission does not accept, national law applies and the suspended waiting periods restart.
In substantive terms, a concentration affects trade if it is liable to have some discernible influence on the pattern of trade between Member States. As to the effects on competition, the referring Member State is required to demonstrate that there is a real risk that the transaction may have a significant adverse impact on competition, and it thus deserves close scrutiny.
The following concentrations are normally most appropriate for a referral from the Member States to the Commission:
- Cases which give rise to serious competition concerns in one or more markets which are wider than national in geographic scope, or where some of the potentially affected markets are wider than national, and where the main economic impact of the concentration is connected to such markets;
- Cases which give rise to serious competition concerns in a series of national or narrower than national markets located in a number of Member States, in circumstances where coherent treatment of the case (regarding possible remedies, but also, in appropriate cases, the investigative efforts as such) is considered desirable, and where the main economic impact of the concentration is connected to such markets; and
- Cases where national authorities expect to encounter difficulties in information gathering as the parties or the main third parties from whom information is likely to be sought are not based in their Member State.
It should be noted that only 12 cases have been referred from Member States to the Commission in the past 12 years, the last of which in 2003, which clearly shows the tendency of national competition authorities not to give up their jurisdiction. Interestingly, a decision of the Federal Supreme Court in Germany2 could revive this referral mechanism: According to the Court’s decision the German Federal Cartel Office has to assess the impacts of a concentration on the economic market, and not only on the market in the territory of Germany. As such, the Federal Cartel Office could be more inclined to refer transactions to the Commission which raise serious concerns on EEA-wide or worldwide markets, and which require an investigation that the Commission may be better placed to deal with thanks to its personal and organizational capabilities.
Post-notification Referral from the Commission to Member States upon Request of Member States (Article 9 ECMR)
Article 9 ECMR (also called "German clause", because the original clause was included in order to obtain Germany’s agreement to the old ECMR) provides two options for a Member State to request a referral of a concentration with "community dimension" to a Member State after it has been notified to the Commission. The Commission can trigger such referral request by asking a Member State to request it to refer a concentration to a Member State.
In any transaction, the Member States receive a copy of a notification from the Commission. In the event a Member State whishes to make a referral request, for both options under Article 9 ECMR such requests must be made within 15 working days after receipt of the notification. The Commission must decide within 35 working days after the parties’ initial notification whether or not to refer the case to the Member State. If the Commission refers the concentration to a Member State, the case will be examined pursuant to the national legislation; to the extent the Commission refers only a part of a concentration, the Member State examines the referred parts while the non-referred part stays under the investigation of the Commission.
As mentioned, substantively there are two options pursuant to which a case can be referred. Pursuant to Article 9(2)(a) ECMR a Member State can request a referral if the concentration threatens to affect significantly competition in a market, and the market in question is within the requesting Member State and presents all the characteristics of a distinct market.
The first criterion is met if the requesting Member State can demonstrate that there is a real risk that the transaction may have a significant adverse impact on competition.
In relation to the second criterion, the Member State is required to show that a geographic market in which competition is affected by the transaction is national, or even narrower in scope. In addition, the Member State should demonstrate that the NCA is in the best position to deal with the case. To this end, consideration should be given both to the likely locus of the competitive effects of the transaction and to how well equipped the NCA would be to scrutinize the concentration.
Pursuant to Article 9(2)(b) ECMR a Member State can request a referral if the concentration affects competition in a market, and the market in question is within the requesting Member State and presents all the characteristics of a distinct market, and the market must not constitute a substantial part of the common market.
As to the latter criterion, it appears that such situations are generally limited to markets with a narrow geographic scope, within a Member State. Unlike the situation under Article 9(2)(a) ECMR, the Commission has no discretion to refer cases if the legal conditions under Article 9(2)(b) ECMR are met, in other words, the Commission must refer such cases.
In nearly 15 years since existence of European merger regulation, only 65 cases out of approximately 3,000 have been referred from the Commission to the Member States, which shows the exceptional character of Article 9 referrals so far.
Conflicting, Partial and Multiple Referrals
There is a risk of conflicting referrals between a pre-notification referral pursuant to Article 4(5) ECMR and Article 9 ECMR. Although the Commission states that such scenario should be avoided, there could exist cases where a Member State asks the Commission to refer a case to it after the case was referred to the Commission.
Partial referrals or referrals to more than one Member State and/or the Commission may be subject to divergent procedural and substantive rules applied by different authorities. While, for example in Germany, the first phase takes one month, it takes two months in Poland and even more time in Greece. While the dominance test will be applied in Germany, the UK’s OFT assesses a transaction against the substantial lessening of competition test, the Spanish Fair Competition Department against the capability of hindering the maintenance of effective competition test, and the Commission against the significant impediment of effective competition test. Only time will tell how real these risks are and how difficult these issues are for parties and regulators alike.
1 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings. The regulation came into force at 1 May 2004.
2 See Jens Peter Schmidt, The scope of the relevant geographic market — Germany’s Federal Supreme Court opens the border, Antitrust Quarterly Q3 and Q4, Issue 7, page 21 et sec.
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