EU Merger Control : Ancillary Restraints

EU Merger Control : Ancillary Restraints

© Łukasz Stępkowski

• The Merger Regulation alludes to the idea that not all restrictions of competition are prohibited under merger rules, in that only significant impediments to

competition are supposed to be included in the Commission’s analysis and then prohibited (see 2(3) of the Merger Regulation)

• At the same time, the application of the Merger Regulation normally precludes the application of other rules of competition law, in particular Regulation no 1/2003 (see 21(1) MR)

• The practical consequence of this is that certain restrictions are not caught by Article 2(3) MR

• This concept amounts to the idea of the so-called „ancillary restraints”

• Admittedly, ancillary restraints are restrictions of competition that are deemed to be permissible under a merger

• The proper name for ancillary restraints is „restrictions directly related and

necessary to the implementation of the concentration”

• The phrase „ancillary restraints” is not found under the MR

• However, recital 21 of the MR reads:

• „This Regulation should also apply where the undertakings concerned accept restrictions directly related to, and necessary for, the implementation of the concentration.

• Commission decisions declaring concentrations compatible with the common market in application of this Regulation should automatically cover such restrictions, without the Commission having to assess such restrictions in individual cases. At the request of the undertakings concerned, however, the Commission should, in cases presenting novel or unresolved questions giving rise to genuine uncertainty, expressly assess whether or not any restriction is directly related to, and necessary for, the implementation of the concentration.

• A case presents a novel or unresolved question giving rise to genuine uncertainty

if the question is not covered by the relevant Commission notice in force or a

published Commission decision”.

• The MR’s position is therefore that any purported ancillary restraints are to be included in the Commission’s analysis

• In addition, ancillary restraints are not to be assessed separately

• Should there be a positive decision from the Commission, ancillary restraints are covered by it and thus permitted

• Articles 6 and 8 MR : „A decision declaring a concentration compatible shall be deemed to cover restrictions directly related and necessary to the

implementation of the concentration”

• Apart from the MR, there is a dedicated set of guidelines from the Commission:

• Commission Notice on restrictions directly related and necessary to concentrations

• https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52005XC0305(02)#

ntr11-C_2005056EN.01002401-E0011

, hereinafter „Ancillary Restraints Notice / ARN”

• The ARN is without prejudice to the case-law of the Court of Justice of the

European Union

• Why there is a permission for ancillary restraints?

• The core idea is that a merger may leave an undertaking vulnerable to the other undertaking’s anti-competitive conduct

• Suppose that there is a concentration between A and B, in that A sells a part of its business to B; A is a well-known undertaking and has goodwill on the market

• After the transaction, A quickly rebuilds the sold part of its business and forecloses B from entering the market

• A profits both from the transaction and its operations

• B gets the part of A’s business, but cannot actually act on the market, potentially turning a loss or becoming insolvent in an extreme case

• Hence, some measures allowing for a „stable” merger may be called for

• The Court of Justice has long since accepted that there may be permitted ancillary restraints in a merger

• The reasoning therefor is that without certain safeguards, the acquiring party or a newly formed undertaking would be vulnerable to the other party’s conduct,

were it to attempt to claw back its customers immediately after the merger, with the competition on the market affected by the potential collapse of the acquiring party/newly formed undertaking

• The Court stated in 42/84 Remia, p. 20 that:

• „In order to have that beneficial effect on competition , such clauses must be necessary to the transfer of the undertaking concerned and their duration and scope must be strictly limited to that purpose”

• https://eur-lex.europa.eu/legal-content/EN/TXT/?

qid=1545080159693&uri=CELEX:61984CJ0042

• As such, ancillary restraints:

• 1) must be genuinely necessary for the transfer of an undertaking to take place

• 2) their scope must be limited

• 3) their duration must be limited

• Where those criteria are fulfilled, Article 101 TFEU does not apply

• The Court in Remia reviewed a 10 year non-competition clause which the Commission prohibited on grounds, inter alia, that the clause had a duration longer than necessary (longer than 4 years in regard to a market that was

characterized by neither high technology requirements nor the need of securing

long-term supply); the Court found that the Commission correctly found that this

restraint went beyond what was necessary

• There is no „rule of reason” in regard to ancillary restraints in the context of mergers

• Sometimes, economic sciences (in particular, economic scientists based in the USA) advocate – generally speaking - that there should be a certain limit to the appreciability of restraints

• However, the CFI (now the General Court) stressed in a merger context that there is no such rule under what is now EU law

• T-119/99 Metropole :https://eur-lex.europa.eu/legal-content/EN/TXT/?

qid=1545080176910&uri=CELEX:61999TJ0112 , para. 72, 76

• The CFI in Metropole further clarified that a „necessary” restriction means a

restriction which is „any restriction which is subordinate to the implementation of

that operation and which has an evident link with it” (para. 105)

• Further, the CFI in Metropole stated that:

• „The condition that a restriction be necessary implies a two-fold examination. It is necessary to establish, first, whether the restriction is objectively necessary for

the implementation of the main operation and, second, whether it is proportionate to it (…)

• There is no need „to weigh the pro and anti-competitive effects of an agreement”

in the scope of Article 101(3) TFEU

• However, a restriction must not only be objectively necessary for a merger, but

also must be proportionate (see para 106)

• The Commission’s sole jurisdiction to decide on ancillary restraints while

assessing a merger implies that a national court may not, by virtue of direct application of Article 101 TFEU, check their compatibility on its own

• CFI in T-251/00 Lagardere

• https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:62000TJ0251&qid=

1545080195780

• Para. 84: Furthermore, the defendant cannot successfully plead the direct effect of Article 81(1) EC [now: 101(1) TFEU] to argue that it is for the national court to

rule whether restrictions are directly related and necessary to a concentration which the Commission has approved, without the national court being bound by the Commission's reasoning on that point in the grounds of the decision

approving the concentration.

• The ARN provides further data on ancillary restraints from the point of view of the Commission

• 12. For restrictions to be considered ‘directly related to the implementation of the

concentration’, they must be closely linked to the concentration itself. It is not sufficient that an agreement has been entered into in the same context or at the same time as the concentration (10). Restrictions which are directly related to the concentration are economically related to the main transaction and intended to allow a smooth transition to the changed company structure after the concentration.

• 13. Agreements must be ‘necessary to the implementation of the concentration’ (11), which means that, in the absence of those agreements, the concentration could not be implemented or could only be implemented under considerably more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably greater difficulty (12).

• Agreements necessary to the implementation of a concentration are typically aimed at

protecting the value transferred (13), maintaining the continuity of supply after the break-up of a former economic entity (14), or enabling the start-up of a new entity (15). In determining

whether a restriction is necessary, it is appropriate not only to take account of its nature, but also to ensure that its duration, subject matter and geographical field of application does not exceed what the implementation of the concentration reasonably requires.

• If equally effective alternatives are available for attaining the legitimate aim pursued, the undertakings must choose the one which is objectively the least restrictive of competition.

• Multistage mergers and ancillary restraints

• ARN, para 14

• „For concentrations which are carried out in stages, the contractual

arrangements relating to the stages before the establishment of control within the meaning of Article 3(1) and (2) of the Merger Regulation cannot normally be considered directly related and necessary to the implementation of the

concentration. However, an agreement to abstain from material changes in the

target's business until completion is considered directly related and necessary to

the implementation of the joint bid (16). The same applies, in the context of a

joint bid, to an agreement by the joint purchasers of an undertaking to abstain

from making separate competing offers for the same undertaking, or otherwise

acquiring control.”

• Joint control and break-up

• 15. Agreements which serve to facilitate the joint acquisition of control are to be considered directly related and necessary to the implementation of the

concentration. This will apply to arrangements between the parties for the joint acquisition of control aimed at implementing the division of assets in order to divide the production facilities or distribution networks among themselves, together with the existing trademarks of the undertaking acquired jointly.

• 16. To the extent that such a division involves the break-up of a pre-existing economic entity, arrangements that make the break-up possible under

reasonable conditions are to be considered directly related and necessary to the implementation of the concentration, under the principles set out below [ie

under specific paragraphs of the ARN].

• Who gets more leeway, the vendor or the purchaser?

• 17. Restrictions agreed between the parties in the context of a transfer of an undertaking may be to the benefit of the purchaser or of the vendor. In general terms, the need for the purchaser to benefit from certain protection is more

compelling than the corresponding need for the vendor. It is the purchaser who needs to be assured that she/he will be able to acquire the full value of the

acquired business.

• Thus, as a general rule, restrictions which benefit the vendor are either not

directly related and necessary to the implementation of the concentration at all

(17), or their scope and/or duration need to be more limited than that of clauses

which benefit the purchaser

• The ARN points out several examples of possible ancillary restraints that are commonly encountered, subject to conditions thereunder

• - non-competition clauses

• - licence agreements

• - purchase and supply obligations

• - service and distribution agreements

• - non-solicitation agreements

• - confidentiality agreements

• - limitations on the vendor's right to purchase or hold shares in a company competing with the business transferred

• This list is not exhaustive

• Special cases

• ARN’s 3 : The Commission's residual function is addressed in recital 21 of the

Merger Regulation, where it is stated that the Commission should, at the request of the undertakings concerned, expressly assess the ancillary character of

restrictions if a case presents ‘novel and unresolved questions giving rise to genuine uncertainty’. The Recital subsequently defines a ‘novel or unresolved question giving rise to genuine uncertainty’ as a question that is ‘not covered by the relevant Commission notice in force or a published Commission decision.’

• Such special cases are not subject to the ARN and the Commission, per the request of the parties, would assess them expressly in the context of a merger

• According to the Commission, „to the extent that cases involving exceptional circumstances have been previously addressed by the Commission in its

published decisions, they do not constitute ‘novel or unresolved questions’ within

the meaning of recital 21) of the Merger Regulation”.

• What happens where there is a restraint which is not ancillary?

• „(…) for restrictions that cannot be regarded as directly related and necessary to the implementation of the concentration, Articles [101 and 102 of the FEU]

Treaty remain potentially applicable.

• However, the mere fact that an agreement or arrangement is not deemed to be ancillary to a concentration is not, as such, prejudicial to the legal status thereof.

Such agreements or arrangements are to be assessed in accordance with Article [101 and 102 of the FEU] Treaty and the related regulatory texts and notices

• They may also be subject to any applicable national competition rules.

• Hence, agreements which contain a restriction on competition, but are not considered directly related and necessary to the implementation of the

concentration pursuant to this notice, may nevertheless be covered by those

provisions”.

• Ancillary restrictions and intentions of the parties

• Parties, obviously, may treat or even expressly adress some clauses in a merger as

„ancillary”

• However, the intention of the parties is not relevant for a restriction to be treated as ancillary

• 11 ARN :

• „The criteria of direct relation and necessity are objective in nature. Restrictions

are not directly related and necessary to the implementation of a concentration

simply because the parties regard them as such”.

• Case study

• A and B anticipate a merger. The merger would involve creation of a new entity, C, which would operate on a market where A and B are inter alia active. A and B would withdraw from that market.

• A and B, before initiating a merger, enter into a confidentiality agreement which is unlimited in time.

• Then, A and B, for the purposes of a merger and as a part of its scheme, enter into a non-competition agreement; they should not compete with one another, and with C, for the period of 5 years on the market where C would be active.

• Further, A and B agree not to solicit employees from C, for the period of 5 years.

• All parties enter into a purchasing agreement, in that A and B shall buy goods related to the market at issue only from C. This agreement would last a year from C’s setup.

• Lastly, A and B agree to transfer a patent to C, for the activities it would perform. This transfer is unlimited in time and irrevocable.

Consider the above to find whether the clauses should be treated as ancillary restraints.

Provide reasons and cite relevant sources.

• Thank you for your attention