Hutchison-O2 court case puts EU merger test on trial

13 May 2019 3:21pm

10 May 2019. By James Pressley, Nicholas Hirst and Andrew Boyce.

European telecom executives want to know if CK Hutchison’s court challenge to an EU veto of its O2 UK buyout will make it easier to do mobile mergers.

But European Commission officials are asking a more existential question: Could this case wreak havoc on a fundamental rule they rely on when deciding whether a deal threatens competition? For them, the verdict might determine what they can consider to be a “significant impediment to effective competition” during merger reviews.

During a two-day hearing last week, judges at the EU’s lower-tier General Court questioned commission lawyers about this test, which underpins the bloc’s merger rules but which has, Hutchison says, escaped judicial scrutiny throughout its 15-year history.

The judgment, which could come as soon as this autumn, may shed light on how much evidence the commission needs to prohibit mergers. The ruling could either endorse the way officials conduct reviews of complex mergers — or raise the bar for blocking a transaction or wringing tough concessions from dealmakers.

— ‘Significant impediment’ —

At the center of the court fight is EU legislation from 2004 empowering the commission to stop mergers that pose a “significant impediment to effective competition.”

While merger officials were already able to nix deals that harmed competition by creating or reinforcing a dominant position, the new test was designed to catch a wide range of anticompetitive scenarios.

In the absence of a court ruling on the question, EU merger case handlers have been free to interpret the legal test as they see fit — as they did in forbidding Hutchison to acquire O2 UK in 2016. At the time, they found that the merger would have raised prices, reduced choice and chilled innovation by cutting the number of mobile operators in the country from four to three.

Hutchison lawyers say the O2 UK decision shows the commission is stretching the test too far. It’s one thing to claim that the two operators are important wholesale providers and each other’s closest rivals, but another to prove that their merger would “significantly impede” competition, they say. The 2004 rule change wasn’t intended to reduce the evidentiary burden, they say.

— ‘Enforcement gap’ —

The new legal test emerged from a contentious debate in the run-up to the 2004 revamp, which came after EU judges dealt the commission a body blow by overturning a string of merger prohibitions.

The original 1989 Merger Regulation targeted deals that threatened to “create or strengthen a dominant position as a result of which effective competition would be significantly impeded.” That wording posed a quandary for merger officials.

Could they block a deal that didn’t create or reinforce a dominant position? What if the No. 2 and 3 competitors in a market merged and gained the power to raise prices, even though the No. 1 company remained dominant?

For EU judges, the answer was clear. If there was “no creation or strengthening of a dominant position, the transaction must be authorized, without there being any need to examine the effects of the transaction on effective competition,” they ruled in a 1994 case involving Air France.

— ‘Collective dominance’ —

To get around this dilemma, commission officials cultivated alternative theories of harm. One was the idea of “collective dominance,” which posited that competition could be distorted if a merger reduced the number of rivals in an oligopolistic market. This is the situation in national mobile telecom markets, where a four-to-three merger may reduce competition without creating a dominant position.

But EU case handlers continued to worry that an “enforcement gap” left potentially harmful cases falling through the cracks. So the revised Merger Regulation said it was enough to show that a concentration would “significantly impede” competition. Dominance remained important, but it was no longer the sole test for determining whether a deal should be approved or banned.

A recital in the regulation said the revision was meant to capture the loss of competition in “oligopolistic markets,” where a merger can ease the pressure on remaining rivals, even in the absence of coordination. To increase “legal certainty,” the 2004 regulation subjected such “noncoordinated effects” to merger control if they threatened a significant impediment.

Fifteen years down the line, the commission routinely intervenes in mergers that may not create a dominant position but — in the commission’s view — give rise to a “significant impediment.” In most instances, the concerns are settled, meaning officials have vetoed barely a handful of mergers on that basis.

— ‘Dangerous precedent’ —

Some lawyers argue that the evidentiary burden for blocking deals that don’t create or buttress a dominant position should be high. To them, it’s absurd for the commission to intervene simply because two merger partners have high market shares and are close competitors. What else would you expect in an oligopolistic market?

But the new test has escaped an EU court review until now, Hutchison maintained during last week’s hearing in Luxembourg. While an appeal brought by United Parcel Service challenged the way the commission applied the test, judges ultimately decided that case on different grounds.

The O2 UK case is of “critical importance” because it involves the first time the commission decided that a deal represented a “significant impediment to effective competition” without finding evidence of dominance or coordination on the market, said Brian Kennelly, a lawyer acting for Hutchison.

The new test was designed to catch gap cases, not “to lower the threshold for commission intervention,” according to Hutchison’s pleas. Commission officials are still “required to prove the existence of particular circumstances which result in non-coordinated effects,” the pleas say.

Nor is it enough to cite “the mere elimination of competition.” Competition must be impeded “to a significant degree” — a degree “comparable to that which results in the creation of a dominant position,” the pleas say.

In its O2 UK decision, the commission set the threshold so low that the term “significant” lost all meaning, Kennelly said. The ruling risked allowing EU officials to block “any” horizontal merger in an oligopolistic market, setting a “dangerous” precedent for merger control, he said.

— Judicial pushback —

Commission lawyer Carlos Urraca Caviedes called that idea “manifestly wrong.” The regulator carried out a detailed assessment of the transaction, he said, and its decision was supported by several national competition authorities.

Judges pushed the commission on how much evidence it had used to show that the deal would have significantly harmed competition in retail and wholesale markets. They also asked about evidence it used to show Hutchison was an “important competitive force.”

Hutchison argued that commission officials had used questionable evidence to support a finding that the buyer and O2 UK were close competitors: They had, for example, relied on a questionnaire to market participants that had received only 50 responses.

The General Court review comes as the commission’s opposition to mobile deals is showing signs of strain. After years of resisting four-to-three mergers in the business, the commission unconditionally cleared Deutsche Telekom in November to combine its T-Mobile Netherlands unit with Tele2’s Dutch business. The approval came even though case handlers had concluded that the transaction would likely increase prices.

Telecom executives watching the proceedings doubtless hope mobile mergers will become easier. But the consequences for EU merger reviews could extend far beyond the world of smart phones, telecom towers and network-sharing agreements.

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