Remedies in merger cases

The Competition Commission have published a very helpful and clear analysis of how the remedies in three merger cases have worked out. The analysis can be found, rather obscurely, on this page: http://www.competition-commission.org.uk/governance/specialist-groups/remedies-standing-group by clicking on "Understanding past Merger Remedies" and going to page 82! Three inquiries are discussed: Clifford Kent/Deans, Macquarie UK Broadcast/National Grid Wireless and Nufarm/A H Marks, all of which were completed mergers from around 2007-08.

Clifford Kent/Deans was a merger between the two largest suppliers of eggs in the UK and the CC decided that this would result in an SLC in the supply of fresh eggs. The CC's preferred remedy was the divestiture of Stonegate, the subsidiary of Clifford Kent, from the merged entity, now called Noble. The process was, to put it mildly, not straightforward. The initial divestiture period was three months, from the acceptance of the final undertakings, with the possibility of a three months extension. In the event, the entire process took nine and half months from the acceptance of the undertakings and the appointment of a divestiture trustee. The delay was caused partly by the unexpected fact that one of the bidders was the hold separate manager, who became the preferred bidder, which led to a substantial revision of their offer, and more discussion of their suitability. Just when everything appeared to be set, the bidder's lender withdrew financing, apparently because of the credit crunch, and it took another couple of months before a new offer of finance was in place and Stonegate was eventually sold. Perhaps more importantly, the CC's evaluation suggests that Stonegate has operated as an effective competitor, albeit in a context where Noble has a very strong market position.

The other two cases are particularly interesting because they involve the successful use of complicated behavioural remedies, as opposed to the difficult implementation of a standard divestment remedy. The Macquarie case involved the acquisition by Macquarie's subsidiary, Arquiva, of National Grid Wireless Group's operations in relation to managed transmission services (MTS) and network access (NA) to sites and associated facilities to terrestrial television and radio broadcasters. In essence, this is doing the work of making sure that television and radio broadcasts are transmitted properly from the various sites across the country, around 1,000. The CC found that there would be an SLC because the merger combined the only active providers of MTS/NA to UK television broadcasters and that the two entities were the most significant providers of these services to radio broadcasters, with a market share over eighty-five per cent, that they exercised a competitive constraint on each other and that there was insufficient threat of entry. Although intuitively, these circumstances might be thought to lead to a full divestiture, the CC also identified that the merger could give rise to significant relevant customer benefits (RCBs) which would be lost if the merger was not allowed to go ahead. The other background issue was that the merger was taking place during the switchover to digital television and there was a strong concern that this should not be disrupted.

The CC therefore came up with a set of complicated behavioural remedies. The main points were that customers would get a variety of significant price reductions, contract renewals or new contracts would be based either on existing contracts or cost-oriented and FRAND terms, protection for quality of services, the creation of an independent adjudicator (http://www.adjudicator-bts.org.uk/index.htm) to deal with disputes, the preparation and audit of regulatory accounts for Arqiva and protection for confidential information, among other rules. The analysis suggests that the remedies have worked well, although the CC cautions that there has not yet been any stress test of the provisions, for example, through a contract renewal. In particular, there has been better information provision and the adjudicator has been seen as a clear success, even though there have been no formal disputes! As the CC points out, a lack of disputes can be seen as a sign of success.

The final case is Nufarm which involved the acquisition of a company producing herbicides, plus related products, as part of a complicated supply chain. The CC found that there was likely to be an SLC in relation to two herbicides, MCPA and MCPP-p, at various levels in the supply chain. This merger was also investigated in a number of other countries, notably the US and Canada. The final remedies agreed upon were a complex mixture of structural and behavioural ones, which also required careful attention to the regulatory context. To be more precise, in relation to MCPA to remedies were: the extension and improvement of a supply agreement to a potential competitor (Dow), the transfer to this potential competitor of a formulated product registration, and the creation of a new formulated product and the transfer of it to another potential competitor (Sarzyna, a Polish company). For MCPP-p the remedies required: entry into two toll manufacturing agreements, the transfer of the registration of a formulated product to a customer, access to a particular technology and a commitment to allow two customers to continue to rely on certain product registrations, so long as the merged entity maintained those registrations for its own use. There was a fallback divestiture remedy which the CC noted helped to provide a strong incentive on the parties to agree undertakings and implement the preferred remedies. Almost all of the agreements were reached within the timetable set down by the CC, with one minor exception, and some were reached earlier. The MCPA remedy appeared to be effective, even though Dow had not entered the market, because Sarzyna had entered – although Sarzyna had not given any information directly to the CC about its activities. The customers for MCPP-p said that the remedies had been effective because the agreements and the transfer of registration had worked well.

This analysis of how remedies have worked in relation to particular inquiries is very valuable but it does make one wonder why the European Commission cannot do something similar. The use of behavioural remedies is particularly interesting, as they often are seen as the poor relations of the remedies universe. The CC cautions, however, that behavioural remedies are more likely to be effective if the pace of change in the industry concerned is both relatively slow and predictable.

 

OFT refers private motor insurance to the CC

The OFT announced today that it had referred the private motor insurance market to the CC (http://www.oft.gov.uk/news-and-updates/press/2012/85-12). This means that the OFT has made four market investigation references to the CC in the last twelve months which is a new record. By contrast, from June 2007 to June 2011 only one such reference was made by the OFT (local bus services). Given government concerns about the underutilisation of market investigations, it is difficult to see this change in pattern as a coincidence. Given that a new regime will be in place from April 2014, courtesy of the Enterprise and Regulatory Reform Bill, it will be interesting to see if any further references are made between now and the start-up of the Competition and Markets Authority, although presumably there must be some provision for finishing off CC inquiries started before its abolition but finishing afterwards. With a fair wind, the private motor insurance market investigation could be finished in time for the start of the Competition and Markets Authority.

First Chair of the Competition and Markets Authority

BIS has announced that Lord Currie will be the first Chair of the new CMA from this summer for a four year term (the press release is at: http://news.bis.gov.uk/Press-Releases/Chair-appointed-to-the-new-Competition-and-Markets-Authority-67d2f.aspx). This is good news, not merely because of his high profile, but also because he was the first chair of Ofcom from its inception. For those with longish memories, Ofcom was formed from the Office of Telecommunications, the Independent Television Commission, the Broadcasting Standards Commission, the Radio Authority and the Radiocommunications Agency. So putting two agencies (the OFT and the Competition Commission) together into one must feel like a simple task! Certainly as an organisational merger, Ofcom has been successful and it will be interesting to see if some of the other people who helped create Ofcom, such as Stephen Locke, will surface in the CMA. One big difference is that the CMA is not a sector regulator and that formal enforcement action will be a much larger part of its activities than Ofcom. Getting this right is, of course, the big challenge.

Enterprise and Regulatory Reform Bill

Some interesting oral evidence from Sir John Vickers, Simon Pritchard, Professor Catherine Waddams, Malcolm Nicholson and Robert Bell on the competition aspects of the Bill available at: http://www.publications.parliament.uk/pa/cm201213/cmpublic/enterprise/120621/am/120621s01.htm There was a distinct lack of enthusiasm from the witnesses, when asked whether the proposed reforms would improve competition law enforcement – a summary of their views would suggest their opinion is, "wait and see". Malcolm Nicholson wins the prize for best description of the new system: "a single unitary authority built on the OFT format with a kind of a goitre on the face, which is the Competition Commission". Among other interesting points, Sir John Vickers gave a strong defence of the markets regime, while Simon Pritchard made the point that market investigations were "for much more sparing use than mainstream opinion suggests". Also, there was some disagreement over the new powers in relation to public interest market investigations, with Simon Pritchard being nervous about this, Robert Bell, very much against the introduction of the powers, Catherine Waddams thinking that it raises concerns and Malcolm Nicholson not being worried about this, as long as the authority (the new Competition and Markets Authority) was independent. The relationship between competition and consumer policy was also given a bit of an airing by both Sir John Vickers and Simon Pritchard.

It is noticeable that the Public Bill Committee has very little time to devote to these sessions. The witnesses mentioned above are all examined within the space of two hours, which includes discussion of other aspects of the Bill. There is also written evidence which has been submitted, but not yet published. As is perhaps to be expected, most of the discussion in the Committee has centred on the employment law aspects of the Bill.

Enterprise and Regulatory Reform Bill

This was introduced into the House of Commons on 23^rd May 2012 and had their second reading on 11^th June 2012 and the reforms to competition law are contained in Parts 3 and 4, as well as Schedules 4 to 14. The competition law reforms are part of a wider package of reforms which cover a Green Investment Bank, changes to employment law, certain measures aimed at reducing regulatory burdens in legislation, some changes to copyright law and provisions relating to the remuneration of directors. This is important because it first signals that competition policy is part of a broader package of measures aimed at deregulation and stimulating growth and also that it is possible that the Parliamentary passage of the legislation may be delayed because of concerns regarding other parts of the Bill. It was noticeable that the most of the controversy in the second reading debate surrounded the employment provisions of the Bill and there was little discussion of the competition provisions (http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120611/debtext/120611-0002.htm#12061114000001). At the moment, there would appear to be little difference between the government and the opposition on the competition aspects, as the Shadow Business Secretary, Chuka Umunna, has said that in principle the Labour party support the reforms to the competition law regime. Quite how easily the reform of the criminal cartel offence will go down, with the removal of dishonesty, remains to be seen as the CBI has already expressed its disquiet. As regards line by line scrutiny of the Bill, the Enterprise and Regulatory Reform Committee has seven days set aside and must complete this phase by 17^th July.

It never rains …

There I was, thinking that I could happily get away with a bit of time digesting, on the Eurostar, the government's response to its consultation on competition policy before posting anything (which is available here: http://www.bis.gov.uk/Consultations/competition-regime-for-growth) and possibly including the General Court's decision in Cases t-29 and 33/10 Netherlands and ING v Commission, judgment of 2 March 2012, which is the first case to deal with the legality of decisions in the financial crisis, when certain other things happened. To wit, the OFT is consulting on changes to its procedures for antitrust cases, as a follow on from the UK government's decisions on reform of competition policy (available at: http://www.oft.gov.uk/OFTwork/consultations/ca98-investigation-procedures/), the General Court has decided Cases T-336/07 and T-398/07 Telefónica, Telefónica de España and Spain v Commission, judgment of 29 March 2012 on margin squeeze (the court press release is here: http://curia.europa.eu/jcms/upload/docs/application/pdf/2012-03/cp120040en.pdf - no English language version yet) and the Northern Irish gas regulator has referred a price control case to the Competition Commission (http://www.competition-commission.org.uk/our-work/phoenix-natural-gas-limited-price-determination). By now, it is old news that John Fingleton will be leaving the OFT in September (although he had interesting things to say in a newspaper interview: http://www.telegraph.co.uk/finance/financetopics/profiles/9105975/John-Fingleton-Im-not-sure-if-companies-are-more-compliant-or-just-more-devious.html ). So, apologies, as things may well come out in a somewhat bitty fashion, especially as the weather's nice and the garden needs some work …

Joaquin Almunia on IPRs and patents

An interview with Joaquin Almunia on IPRs, patents and competition issues.  As before, my thanks to Kasper Peters of viEUws for this content.  

Interview with Commissioner Almunia on state aid

 A very interesting interview with Commmissioner Joaquin Almunia on his plans for state aid reform.  My thanks to Kasper Peters of viEUws for permission to show this.  

Their website is at:  http://www.vieuws.eu/

Conference on reform of UK competition policy

Newcastle University are holding a conference entitled, "The BIS Consultation on a Competition Regime for Growth: One Year On" on 13 April 2012. There is a very strong group of speakers, including Peter Freeman (ex-Chairman of the Competition Commission), William Kovacic (ex-chairman of the Federal Trade Commission) and Alison Jones, among others. Details are here: http://www.ncl.ac.uk/niassh/events/supported/CompetitionLaw.htm

Interesting title, which might be taken as meaning they know something the rest of us don't! Also it will be interesting to see if the competition law community will leave the comforts of London for Newcastle or travel down from Edinburgh.

Reform of UK competition policy

A well informed source tells me that BIS is planning to publish a consultation paper on collective redress and damages actions in competition policy sometime in March. Given that they have not produced a response to their previous consultation document, this will be interesting. Quite how they will then manage to coordinate changes in public and private enforcement of competition law with the changes in the consumer landscape is another good question.

In the meantime, I'm off to a government department to play a small part in policy-making by PowerPoint!

Essay marking

If I never have to mark another essay on predatory pricing, it will be too soon! Just discovered the aquatic version: "pricing below coast".

State aid and merger control

Competition Commissioner, Joaquin Almunia, took the opportunity of the European Competition Forum to announce reform of the Commission's procedures for state aid control (the speech is here: http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/59 ). This was presented, partly, as part of the bigger picture in relation to new rules on budgetary surveillance and control, and consistent with it. The Commissioner is looking for better prioritisation of enforcement activity and he singled out subsidised network industries, publicly supported incumbents in liberalised markets, and selective tax advantages for particular attention. He also wanted better powers for the Commission to act on its own initiative. There was also promise of procedural reform and rationalisation of the myriad amounts of guidance, with the treatment of cross-subsidy being singled out. More detail will be provided in a Communication sometime before the summer.

Simplification of the rules and speeding up of the procedures would be improvements in themselves but I would have preferred them sooner, given I have to write a second edition of a textbook based on the old ones. Whether substantive reform of the policy can get anywhere, and will be better, is a much more open question.

At the same time, the Commissioner announced that he had blocked the proposed merger between Deutsche Börse and New York Stock Exchange – Euronext (further details here: http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/12/52&format=HTML&aged=0&language=EN&guiLanguage=en ). This is only the second time that he has blocked a merger and one of only four prohibition decisions since 2002. The justification given was that, "If allowed, the merger would have resulted in a quasi-monopoly in exchange traded financial derivatives based on European underlyings [presumably underlying assets], where the two companies control more than 90% of the global market." It is interesting that this is presented as a straightforward horizontal merger, the anticompetitive effects of which could only have been solved by the companies concerned divesting sufficient assets to create a viable competitor. Although both companies strongly disagree with the Commission's decision, there is no sign that they will challenge it (see: http://deutsche-boerse.com/dbag/dispatch/en/listcontent/gdb_navigation/investor_relations/Content_Files/press_120201.htm?teaser=Pressaddress1February and http://deutsche-boerse.com/dbag/dispatch/en/listcontent/gdb_navigation/investor_relations/Content_Files/press_120201.htm?teaser=Pressaddress1February ).

Deterrence and competition law

One of the more entertaining pre-Christmas reads was the report by London Economics for the OFT, The impact of competition interventions on compliance and deterrence (available at: http://www.oft.gov.uk/OFTwork/publications/publication-categories/reports/Evaluating/oft1391). The headline was that for every OFT investigations in the following categories, numerous cases were deterred: 28 cartel cases, 40 other commercial agreements and 12 abuse of dominance cases. The key drivers of compliance were identified as: knowledge of competition law, sanctions and enforcement and voluntary compliance measures. So far, so good but looking beneath the headlines unearths some interesting points. Perhaps the most entertaining part is the report of a behavioural experiment conducted with a number of competition compliance officers that tested their willingness to engage in a cartel. One of the results of this experiment was that those participants with a higher level of knowledge about competition law were more likely to choose to participate in a cartel! Or, to put it another way, some knowledge of competition law is desirable from the competition authorities' perspective, but not too much.

Also interesting is that the OFT's effectiveness on rightly detecting anti-competitive conduct and clearing competitive conduct is rated as no better than mediocre (between 5.7 and 5.9 on a ten point scale). Knowledge and awareness of competition law and specific competition interventions is limited, especially amongst small businesses, and few companies have compliance measures in place. The legal professionals surveyed suggested that the probability of detection was relatively low in competition cases, which might tie into the experimental results above. So, although the headlines look good, the pictures beneath them look more murky.

Reforming UK Competition Law

Just off to a conference, organised by the Oxford Centre for Competition and Regulatory Policy at City University, which contains, among other things, a round table on the reform of UK competition law. BIS produced its consultation paper back in April 2011, with a closing date in June. Government practice is supposed to be to respond to consultation within three months of the closing date. I suggested in a recent article that this might be a challenge and so it has proven. Here we are in January 2012 and no sign of a response. A delay at this end is likely to put back the timetable for any reforms and further delays might push it all back into an election year. Just to complicate matters, reform of the OFT is also tied into reform of the consumer landscape, so the two policies need coordination.