Siemens/Alstom Revives Debate on Public Interest Considerations in EU Merger Review

The European Commission’s February 6 prohibition of the proposed Siemens/Alstom merger, which was supported by the French and German governments, has revived debates on what role public interest considerations should play in EU merger control.  Since the adoption of the EU Merger Regulation (EUMR), the Commission’s Directorate-General for Competition (DG COMP) has steadfastly resisted political influence, insisting on the impartiality of its reviews.  However, other merger control regimes in Europe and around the world do take public interest considerations into account, and many Member State officials do not share DG COMP’s approach.

Indeed, France and Germany reacted angrily to the Siemens/Alstom prohibition.  In a “manifesto” adopted on February 19 (the Manifesto), the French and German Ministers of Economy called for significant EU policy changes, including three potential changes to EU merger review:

• Introducing the possibility for the European Council to override Commission decisions in “well-defined cases” and “subject to strict conditions”;
• Revising the EUMR and the Commission’s current merger guidelines to take greater account of competition at the global level, potential future competition and the timeframes the Commission considers when assessing the effect of notified transactions to “enable a more dynamic and long-term approach to competition, at the global scale”; and
• Taking into greater consideration the State control of and subsidies for undertakings within the framework of merger control.

The Manifesto drew considerable criticism in the antitrust community, including from former Competition Commissioner Mario Monti and head of the French competition authority Isabelle de Silva, as well as Commissioner Vestager, who reject arguments that EU merger review prevents European companies from growing to the scale needed to compete globally and fear that the Franco/German proposals would undermine the EU’s impartiality.

Neither the Franco/German proposals nor the antitrust community’s positions are new; similar debates have flared up when antitrust authorities have been seen as interfering in politically popular transactions.  Nonetheless, the reaction to Siemens/Alstom builds on broader political pressure for a proactive European industrial policy, as discussed in a December 2018 Council meeting.  The strong  political support for the Franco/German proposals, reinforced by the Prime Ministers of both countries, and the fact that 2019 is an election year, further increase the likelihood that the current debates will lead to concrete changes.

This article analyses the shape such changes may take, taking account especially of the current German law mechanism allowing the Minister of Economy to overrule a Bundeskartellamt decision to block a transaction on antitrust grounds.

Background

As mentioned, the Commission is not currently allowed to take public policy considerations into account when reviewing transactions under the EUMR.  This impartiality has been a bedrock principle since the adoption of the EUMR’s predecessor in 1989, when Member States and many business leaders feared that DG COMP would be vulnerable to political influence.  Accordingly, the Commission must assess notified transactions based on a neutral standard, whether the transaction would significantly impede effective competition, in particular by creating or strengthening a dominant position (the SIEC test).  Over the years, DG COMP’s approach has become more and more formalized and economics-based.  It has published increasingly detailed guidance on its approach, including notably its Guidelines on the assessment of horizontal and non-horizontal mergers (the Horizontal Guidelines and Non-Horizontal Guidelines, respectively) and its notice on the definition of relevant markets (the Market Definition Notice).

Also as mentioned, however, a number of EU Member States take a different approach, and the proper role of public interest considerations in merger review has been hotly debated.  In 2016, the OECD held a roundtable discussion to which 18 countries (including the EU and Germany, but not France) submitted contributions.

In the same year, the EU Merger Working Group (the EUMWG) issued a final report on public interest regimes in the EU.  The EUMWG concluded that “public interest considerations do not play a prominent role in the vast majority of merger control regimes across EU Member States. These considerations do remain relevant, however, and there are significant differences in terms of how public interest may be taken into account and what public interest grounds can validly be relied upon.”  All members of the EUMWG agreed that “government intervention based on public interest grounds should be reserved for exceptional circumstances and operate on the basis of objective criteria, applied in a non-discriminatory manner and should not restrict competition more than necessary to achieve the public interest objective.”

As the Manifesto and subsequent discussions indicate, complaints about DG COMP’s approach to public interest considerations are often associated with claims that DG COMP fails to take sufficient account of global competitive conditions.  Such complaints can be understood as a more technical argument that DG COMP takes an overly narrow approach to defining the geographic markets in which it assesses the impact of notified mergers.

DG COMP has also looked at geographic market definition in recent years.  In March 2015, the Commission published a competition policy brief on market definition in a globalised world.  The Commission also engaged two academics to conduct an independent study, published in January 2016, on geographic market definition.  In its policy brief, the Commission defended its approach, noting that the Commission is increasingly focusing on wider geographic markets, but many markets still remain national.  While the January 2016 study recommended a number of improvements to DG COMP’s approach to geographic market definition, it did not find a bias towards overly narrow geographic market definitions.  The study further noted DG COMP’s practice of taking account of competitive constraints outside defined geographic markets.

Finally, it is worth noting that the EU has recently adopted a new framework regulation for the screening of certain foreign direct investment (FDI) transactions on national security and public order grounds.  This regulation complements Article 21(4) of the EUMR, which requires Commission approval where Member States take measures in respect of transactions approved under the EUMR on grounds other than public security, media plurality and prudential rules.  However, these regimes reflect a fundamentally different perspective than the Franco/German proposals.  The new EU FDI screening framework and Article 21(4) EUMR deal with the possibility for Member States to prohibit or impose conditions on transactions, including those approved by the Commission under the EUMR, while the point of the Franco/German proposals is to allow certain transactions to proceed even though they would otherwise be prohibited under the EUMR as presently applied.

Franco/German Proposals

As mentioned, the Manifesto proposes three potential changes to the EUMR and/or the Commission’s current guidelines and practices in the implementation of the EUMR.  The Manifesto does not say specifically what the French and German governments have in mind, but certain inferences can be drawn based on current law and practice, in particular in Germany.

Council Override of Commission Decisions

The Manifesto proposal that has drawn the strongest reaction is the proposal to introduce a “right of appeal” to the Council.  While merging parties already have a right to appeal Commission decisions to the European Courts, French and German governments apparently contemplate a right for merging parties to appeal certain EUMR decisions to the Council (or a new body under the Council), which could override the Commission decision.

Although the Manifesto provides no details, this idea seems to be based on the current procedures under German law allowing the Minister of Economy to intervene in merger cases on public interest grounds.  Since the adoption of the law on modernization of the economy in 2008, French law also provides for intervention by the Minister of Economy in transactions subject to French merger control, but the process is more general and has been invoked only once, to impose additional conditions on a transaction that was approved for antitrust purposes, rather than to authorize a transaction that had been prohibited under antitrust rules.  Accordingly, this article focuses on the German procedure and lessons that can be drawn from it regarding the Manifesto proposal.

The German procedure is based on Article 42(1) of the German Competition Act (“Gesetz gegen Wettbewerbsbeschränkungen”, GWB)).  This procedure, in operation since 1973, has been used in a significant number of cases.  This article thus focuses on the German procedure and offers observations on implications for any specific proposals that may be put forward based on the Manifesto.

General framework.  German merger control strictly separates competition and non-competition considerations.  When reviewing mergers, the Bundeskartellamt only applies the SIEC test (Section 36(1) of the The authority’s decision closes the merger control proceedings, and the undertakings concerned may appeal that decision to the Higher Regional Court in Düsseldorf.

If the Bundeskartellamt prohibits a transaction, the parties can also apply to the Federal Ministry for Economic Affairs and Energy (Ministry) for authorization (so-called Ministererlaubnis), permitting the transaction to proceed on non-competition grounds in spite of the antitrust prohibition (Section 42(1) GWB).

Such an application starts a new administrative procedure, separate from the Bundeskartellamt’s and subject to different substantive criteria and procedures.  Since the ministerial authorization was introduced in 1973, applications for a ministerial authorisation have been made in 22 cases, out of around 200 prohibition decisions.  The Minister has granted the authorization in nine cases, but six of these were subject to conditions designed to ensure that the relevant public interest objective was met (not to mitigate competitive harms). To our knowledge, the German government has never conducted an ex-post analysis as to whether the public objectives in authorized transactions were in fact achieved and outweighed the competitive harms.

Substantive criteria.  A ministerial authorization can be granted only if the Minister finds that the transaction’s advantages to the economy as a whole outweigh restraints of competition or an overriding public interest justifies restraints of competition.  The law does not define the public interests the Minister can take into account, so the Minister is generally free to introduce new public interest considerations.  However, the transaction must be important to achieve these objectives, as demonstrated by concrete evidence, and  a transaction can only be authorised if the restraint of competition does not “pose a danger to the market system.”

Public interest grounds invoked in previous cases include securing technological progress, supporting international competitiveness, securing employment (including safeguarding jobs and protecting workers’ rights), securing energy supply, and maintaining a high level of health care and/or securing research and higher education at a university hospital.  Notably, the Minister has accepted relatively local public interest considerations to justify anti-competitive mergers; global competitive conditions and industrial policy are not necessarily involved.

Procedure.  The ministerial authorization process is initiated by an application within one month after the Bundeskartellamt’s prohibition decision becomes final.  An application can be lodged in parallel with a court appeal against the Bundeskartellamt decision.

The Minster must decide within four months (extendable to eight months).  If the decision is not taken within four months, the Ministry must inform the German Parliament immediately.  If the applicant does not receive a decision within six months (or eight months in case of extension) following receipt of the complete application, the application is deemed rejected.

During the review , the relevant German Länder may submit comments, and the Monopoly Commission (an independent expert committee advising the German government on competition law and policy) must give its opinion on the public interest arguments put forward by the applicant and weigh the competition concerns against the public interest grounds (deals concerning the private TV broadcasting sector require also a prior opinion of the Commission on the Determination of Concentrations in the Media (Kommission zur Ermittlung der Konzentration im Medienbereich (KEK))).  This opinion is not binding; in the nine cases in which ministerial authorizations have been granted, the Monopoly Commission advised against authorization in five.

The process also envisages a mandatory public hearing.  Interested third parties, including competitors, suppliers, customers and/or associations or labour representatives, can participate.  An authorization decision must be reasoned and can be appealed by interested parties.

Takeaways.  The Manifesto refers to a “right of appeal of the Council which could ultimately override Commission decisions” in “well-defined cases” and under “strict conditions.”  Taking account of the existing German framework, however, any concrete proposals based on the Manifesto seem likely to involve a separate process with different procedures and standards, rather than an appeal based on the EUMR.  Interested parties would presumably continue to have the right to appeal EUMR decisions to the European Courts.

The Manifesto proposes a public interest intervention only in “well-defined cases” and “subject to strict conditions”.  The reference to “well-defined cases” may mean that only prohibition decisions in significant economic sectors would be eligible for “appeal.”  By way of comparison, the new EU FDI screening regulation will apply to industries including agriculture, defense, energy, healthcare, information technology, media, and transportation.

The reference to “strict conditions” is also unclear.  Unlike the German framework, the proposed EUMR “appeal” could specify the types of public interests that could form the basis for an authorization.  These would presumably focus on EU industrial policy objectives, excluding more local objectives that have sometimes served as the basis for German authorizations. overriding a Commission prohibition.

In any case, any new framework would likely apply only to Commission prohibition decisions under the EUMR, not to conditional approval decisions.  Under the EUMR, parties are free to propose remedies to Commission concerns; the Commission cannot impose conditions on approval decisions.  Assuming no changes to the EUMR in this respect, introduction of a new possibility to challenge prohibition decisions would change the dynamics of EUMR reviews in some cases, reducing notifying parties’ incentives to offer remedies to obtain conditional approvals.

In contrast to the German process, in which decisions are taken directly by the Minister, any new framework involving a Council decision would naturally entail a collegial process.  The voting requirements (unanimity, super-majority or simple majority) would be highly controversial.  Many other procedural issues would also need to be addressed.  It would, for instance, be useful to provide for an independent opinion, such as the Monopoly Commission’s opinion in the German framework.  Absent a relevant existing EU institution, a new body would likely have to be created for this purpose.

Revising the EUMR and Guidelines

The Manifesto’s second proposal, revising the EUMR and the Commission’s current merger guidelines, potentially includes four distinct elements.

Geographic market definition.  The Manifesto’s suggestion to “take greater account of competition at the global level” and “at the global scale” apparently target the Commission’s approach to geographic market definition.  The Commission’s approach to geographic market definition is discussed in the Market Definition Notice and the implementing rules under the EUMR.

As mentioned, the Commission and experts appointed by them examined the question of geographic market definition in 2015/2016.  They came to the conclusion that geographic markets indeed seem to be widening over time but also noted that many markets remained local and found no basis to make fundamental changes.

It is not clear what changes the French and German governments may propose in relation to geographic market definition.  Any such changes would likely have to be made in the Commission’s Guidelines and Notices, especially the Market Definition Notice, rather than through changes in the EUMR itself.  As witness the January 2016 study, however, geographic market definition is a highly technical issue and the Commission already has the flexibility to define broad markets and take account of out-of-market constraints in appropriate cases.  Thus, it is not clear how the Manifesto’s proposal would be implemented in relation to geographic market definition.

Potential competition.  The Manifesto recommends revising the Commission’s assessment of potential  competition.  Commissioner Vestager and other Commission officials have themselves called for more focus on the competitive impact of potential competition in notified transactions.  Commissioner Vestager has called attention in particular to the risk of “killer acquisitions” in the digital sector, on the basis that traditional tools may not capture the competitive effects of large companies’ acquisitions of small start-ups whose competitive potential may not be clear.  The Commission has also focused on this issue in transactions involving innovative markets, notably Dow/DuPont.

In the context of Siemens/Alstom, however, the Commission and the French and German governments are coming at the question from opposite directions.  The Commission wants – in appropriate cases – to be able to prohibit more transactions that could eliminate potential competitors.  The French and German governments want more transactions to be allowed on the basis of constraints from potential competitors the Commission would currently consider outside the relevant geographic market (see above) and/or unlikely to enter the market in the relevant time horizon (see below).

In any event, the Commission’s Guidelines already provide a framework for taking potential competition considerations into account.  These can take different forms, both as a “sword” and as a “shield.”  For instance, the Commission may raise concerns in a transaction even where historical overlaps are low in cases involving potential or recent entrants or where one or more parties are important innovators (e.g., Horizontal Guidelines, Article 20) or where the transaction may make the entry or expansion of potential competitors more difficult (Horizontal Guidelines, Article 36; Non-Horizontal Guidelines, Articles 49, 64, 75, 101, 112).  The assessment of mergers with potential competitors is discussed specifically in Articles 58-60 of the Horizontal Guidelines.  On the other hand, the Commission may take account of the role of potential competitors to mitigate concerns that would otherwise arise (e.g., Horizontal Guidelines, Article 60 and 65).  Factors to be considered in considering the impact of potential entry are set out in Articles 68-73 of the Horizontal Guidelines.

Again, it is not clear what changes the French and German governments contemplate in relation to the assessment of potential competition, but any such changes would likely be made in the Commission’s Guidelines and Notices, rather than through changes in the EUMR.  The treatment in the Horizontal Guidelines is more detailed than in the Non-Horizontal Guidelines, but a more systematic discussion of potential competition issues might benefit both Guidelines.  The Commission might welcome the opportunity to broaden its flexibility in this area and to take account of experience gained in recent cases in which innovation competition has played a significant role.

Timeframe for assessment.  The Manifesto calls for a re-assessment of the timeframes the Commission considers when assessing the effect of notified transactions to “enable a more dynamic and long-term approach to competition.”  While not entirely clear, this concern is likely related to the assessment of potential competition, specifically the timeframe in which potential competitors can be expected to enter a market for such entry to be considered a significant competitive constraint on the merged entity.  Indeed, the Horizontal Guidelines specify that entry is considered timely only if it occurs within two years (Article 74).  The Non-Horizontal Guidelines contain no such specific statement.

Compared to the other areas, the concerns underlying the Manifesto could be addressed relatively simply by changes to the Horizontal and Non-Horizontal Guidelines.  Specifically, the two-year limitation in the Horizontal Guidelines could be replaced by a recognition that the relevant timeframe for entry or expansion by potential competitors may vary from case to case, and in any event be longer than two years.  In practice, the Commission already takes into account periods of three or more years.  A similar discussion could be added to the Non-Horizontal Guidelines.

Standard of review.  Finally, the Manifesto raises the possibility of changes to the EUMR.  It is not clear what changes the French and German governments may have in mind, since the EUMR does not address technical issues such as market definition, potential competition and timeframes in detail.  Since most of the related issues raised in the Manifesto would probably need to be addressed through revisions to the Commission’s Guidelines and Notices, the French and German governments may contemplate requesting a change to the SIEC test and the efficiency defense, which is subject to strict requirements and has so far not been successfully invoked to avoid a prohibition decision.  This could be appropriate, in the French and German governments’ view, to allow public interest considerations to be taken into account.  If the proposal to introduce a “right of appeal” (see above) were pursued instead, however, such a change would not be needed.

State Control and Subsidies for Undertakings

Finally, the Manifesto recommends that the Commission take into greater consideration the State control of and subsidies for undertakings within the framework of merger control.  In the context of Siemens/Alstom, where an important actual or potential competitor was Chinese, it seems likely that the French and German governments contemplate a greater, or more specific, recognition of how State ownership and/or subsidies may make an actual or potential competitor a more important competitive constraint than other factors, such as historic market shares, would indicate.

Under its Guidelines (in particular the Horizontal Guidelines), the Commission already has broad discretion to consider factors other than market shares that may make an actual or potential competitor an effective competitive constraint on merging parties.  As noted above, however, this topic could be addressed more specifically in both Guidelines, but especially in the Non-Horizontal Guidelines (which do not include such a comprehensive description of how potential entry and expansion should be addressed).

Conclusion

The Siemens/Alstom prohibition triggered a fierce backlash and revived the long-standing debate on the role of public interest considerations in EU merger review.  While past debates on this topic have not led to significant changes, the strong political pressure from France and Germany, which chimes with other initiatives for a stronger EU industrial policy, increases the likelihood that this debate will lead to significant changes, although these will have to await this year’s European Parliamentary elections and the formation of a new Commission.

The most radical suggestion in the Manifesto is the creation of a new right to “appeal” Commission prohibition decisions to the Council, which in fact would likely involve the creation of a new procedure with its own standards.  Such a procedure could be inspired by the existing German framework, but possibly limited to certain industry sectors and subject to more specific criteria.  As in Germany, any authorization pursuant to such a procedure should be reasoned and subject to appeal to the European courts.  The collegial nature of Council decisions ensures that such a process would differ significantly from the German procedure, and issues such as the required majority would be highly controversial.  Before introducing such a radical change to EU merger review, it would seem prudent to conduct an ex-post review of how successful the German procedure has been in promoting public interest objectives in transactions authorized by the Minister, and how competition has been impacted by those transactions.

In any event, it would be helpful for any concrete proposals reflect the principles stated by the EUMWG:  government intervention based on public interest grounds should be reserved for exceptional circumstances and operate on the basis of objective criteria, should be applied in a non-discriminatory manner and should not restrict competition more than necessary to achieve the public interest objective.  No matter how strictly separated, however, in some cases such a procedure would likely reduce the incentives for merging parties to offer remedies to address antitrust concerns raised in the EUMR review.

The Manifesto’s other suggestions, to change the Commission’s approaches to geographic market definition, potential competition, the timeframe for review and the assessment of State ownership and subsidies, are less dramatic but also potentially controversial.  Any such changes would likely involve a review of the Commission’s own Guidelines and Notices, rather than legislative changes.  In spite of the negative reactions to the Manifesto, DG COMP may be open to certain revisions, for example in relation to the framework for assessing potential competition considerations and the timeframe in which such competition may be considered significant.

The long-term effects of the Manifesto will depend significantly on this year’s elections and the agenda of the new Commission.  But France, Germany and other Member States are unlikely to drop the issues raised in the Manifesto, which seems set to play a significant role in shaping the agenda of the next Commission.

Jay Modrall, Partner Norton Rose Fulbright LLPJames R. Modrall is an antitrust and competition lawyer based in Brussels.He joined Norton Rose Fulbright LLP in September 2013 as partner, having been a resident partner in a major US law firm since 1986. A US-qualified lawyer by background, he is a member of the bar in New York, Washington, D.C. and Belgium. With 27 years of experience, he is a leading advisor for EU and international competition work, in particular the review and clearance of international mergers and acquisitions. Mr Modrall also has extensive experience with EU financial regulatory reform, advising the world’s leading private equity groups in connection with the new EU directive on alternative investment fund managers and leading banks and investment firms on EU initiatives including EU regulation of derivatives, EU reforms in financial market regulation and the creation of a new EU framework for crisis management, among others. Mr. Modrall’s native language is English, and he is fluent in Italian and proficient in Dutch and French.		Max Seuster, Of Counsel, Norton Rose Fulbright LLPMax Seuster is a competition (antitrust) and regulatory lawyer based in Brussels.He advises clients on the full range of EU, German and international competition law with a focus on merger control, cartel/antitrust investigations and general antitrust compliance advisory work (including trainings and audits), and EU regulatory matters. As German-qualified lawyer with more than 10 years of experience, Max Seuster has acted for clients in various industry sectors including energy, shipping, transport, automotive, manufacturing, chemicals, food and aviation. He is a member of the bars in Brussels and Frankfurt am Main and the Studienvereinigung Kartellrecht (the main association of German competition lawyers).