European buyout houses have legitimate cause to complain about the impact that European merger control rules have on their ability to do deals and, as the deals have got larger and more cross border, those rules have been an increasing nuisance. On one level, the pan-European approach – which creates a 'one-stop shop' to clear larger deals – is very helpful, and avoids the need to consult several national regulators. But problems with the rules themselves, and the way they treat financial investors, are well known.
Radical review of the regime – announced in 2001 by the European Commission, coinciding with a barrage of criticism and, more recently, a series of embarrassing defeats in the courts – could have been good news for the industry. It certainly hoped to influence the changes. There was some disappointment, then, when the new regulation (which will take effect in May) was approved last month. Although there were some significant changes (many for the better), the reform does not go far enough for private equity practitioners.
True, a more flexible approach to determining which is the most appropriate regulator to assess a transaction will sometimes be helpful, especially since discussions will be possible pre-notification, reducing delay. A deal which is not big enough to fall within the Commission's jurisdiction can now be referred to it anyway if it would otherwise need to be cleared in three or more European countries (so long as no relevant national regulator objects); and, conversely, a deal which does fall within the Commission's jurisdiction can be referred back to a national regulator where competition concerns arise in just that country. Because of the extremely low domestic merger thresholds applied by a number of countries (notably Austria, Germany, Italy, Finland and France), even relatively small deals falling below the European thresholds can trigger a number of domestic filings. The new process, coupled with the ability to pre-notify, should offer a useful mechanism for speeding up completion and reducing costs in these cases.
But, contrary to expectation, the pan-European turnover thresholds remain unchanged, and will effectively be lowered with the addition of a further ten Member States in May. Nor does the reform deal with the artificiality inherent in the turnover calculation, which can bring deals within the regulation when there is patently no competition concern.
It is also good that the timetables have been reviewed. Because notification can be made earlier in the process, approval should come sooner in straightforward cases, while giving the Commission enough time in more complex situations. But there is no fundamental shift in the position which requires pre-clearance of any deal which technically qualifies for consideration; approval might come more quickly for deals where there is no concern, but it will still be needed. And an expected generalised exception for simple cases was struck out by the European Parliament.
That contrasts sharply with the UK system, which allows a buyer to complete a deal if its advice indicates that there is no competition issue, while the French authorities now automatically accept that the deal can be closed before the clearance is granted for deals done by private equity houses where there is no market overlap. The possibility of seeking the Commission's permission to close a deal prior to receiving authorisation has always existed, and hopefully the Commission will in practice grant these derogations more frequently in the case of private equity deals. The Commission should talk to the industry to agree suitable policy guidelines on this practice in future.
The other much-heralded change is to the test for assessing mergers. Currently based on individual dominance', the regulator will in future consider whether the deal 'significantly impedes effective competition' in the common market or a substantial part of the common market, in particular as a result of the creation or strengthening of a dominant position. The Commission has emphasised that the amended test applies to all kinds of mergers that may have an anti-competitive effect, including where such effects are created in oligopolistic markets, and this change should bring Europe closer to the US/UK position.
In practice, though, it is unlikely to make any difference to the vast majority of cases. And, although there are other changes that are aimed at improving the quality of the economic analysis applied, many of these seem largely cosmetic. It is true that the direction of the organisational changes taking place is encouraging: the Commission is clearly working towards establishing better internal checks and balances, with 'scrutiny panels' representing a very significant development in this area. However, more needs to be done to provide clear evidence that consumer interest, procedural transparency and predictability are getting real attention. And (despite some beefing up) the size of the team assessing mergers will still compare unfavourably with its equivalent in the US.
SJ Berwin is a pan-European law firm, with leading teams focussing on private equity and on competition law. For further information on reform of the European merger rules, and their impact on private equity deals, please contact firstname.lastname@example.org or email@example.com.