Merger Notification Criteria. Can the Ukrainian Merger Notification System be Streamlined?

General principles

It is a common understanding that merger notification principles must have a jurisdictional nexus to the types of merger control criteria that exist in a particular country. This means that the type of notification criteria must, of course, fully cover all necessary information for the assessment of the notified concentration but this means, at the same time, that they should not require notification of data or facts which are not relevant for the assessment by the competition authority. Exactly this last point often creates problems, since competition authorities argue the need for supplementary information in a notification with the interest to know all aspects of the concentration development in their country, even without regard to a particular case. Even more so, authorities also ask about numbers and facts of merging or acquiring parties outside the country where the concentration takes place with the argument that big market players may create competitive risks as a pure consequence of their economic size. This article deals with notification criteria which may have the best economic relationship to the assessment of competitive risks and are, therefore, best suited for practical purposes.

More precisely, the setting of pre-notification thresholds for merger control purposes has the function to identify transactions of planned concentrations in relevant markets which may create the danger in the future of having, as a result of the concentration, detrimental effects on the process of competition within a given jurisdiction. This principle clearly means that, at the same time, all planned concentrations that because of their size or their character have absolutely no negative competitive effects, shall be excluded from notification or, at least, shall be notified in a simplified procedure where certain given thresholds are met. This saves substantial notification costs for the enterprises planning a concentration and for the competition authority that would have to analyze the notifications through the input of manpower and budgetary resources.

Depending on the characteristic elements of the requirements for pre-notification of concentrations, the enterprises involved in a concentration may face a cost and time-consuming process of collecting information not only with respect to the markets in the country where the concentration takes place but, as a rule, on a world-wide basis with respect to related enterprises, competitors, turnover and market shares, assets, names of responsible persons, including details down to addresses and telephone numbers. Such a process reduces the reaction time for enterprises under competitive conditions and involves, as a rule, high costs due to law firms carrying out the legal process and to the competition authorities requesting a notification in the form of a fee. All such expenses must — at the end — be added to the costs of production and distribution of products and services, thereby contributing to a higher price for the end product or service offered. If a considered concentration is small in terms of perceived future income, merger notifications may even have a deterrent effect on such type of investment.

Criteria that hint at concentrations having a risk to future competition

In order to define pre-notification criteria for concentrations, which types of concentrations possibly having a future risk, if carried out, it must be established for the process of competition within affected markets in a given jurisdiction. For this analysis, a lawmaker may follow two different approaches, in order to be effective:

The first principle could be to define the notification criteria in such a way that the likelihood of competitive detrimental concentrations that escape merger control through exclusion from notification is minimized. Such an approach would try to expand the scope of notification so as to be on the safe side. But it increases costs and time for the affected enterprises and the competition authority dealing with such notifications.

The other principle would be to limit the number of notifications as much as possible to save costs and time by limiting notifications to such events where a potential risk to the competitive process cannot be excluded.

As a kind of “try and error” process, the competition authority will be able to adjust the criteria up or down as a result of actual prohibitions of concentrations. Where, for example, 1000 pre-notifications per year in a given country may lead only to a handful or less prohibitions, it is clear that the criteria are too narrow and create too much administrative and other burdens for all parties.

Which concentrations may result in a future competitive risk in affected markets in a given territory? Since the competition authority obtains more concrete information about planned concentration only through a notification, the notification criteria must have a more general nature, without being too general. Therefore, the purpose is to obtain information in such cases where, as a result of a concentration, the market power of the affected enterprises in given markets is substantially increased.

For more than 100 years competition authorities have been discussing elements that may substantially increase the market power of enterprises. Having no precise details, the common view has developed that the competitive market power of an enterprise can best be generally measured by the criteria “market shares”, “turnover” and “assets”. While “market shares” directly refer to markets and thereby to the influence that an enterprise may have on a given market as a result of its market shares, the criteria “turnover” or “assets” relate more to the objective size of an enterprise without any hint to its market relationship.

The fact that higher market shares may have a negative impact on competition in a given market does not need further explanation. It is evident, in particular, where these market shares are above certain thresholds, like 30% where they give substantial influence to the owner of such market shares. But what about assets and turnover?

Both criteria obtained their justification in competition policy in the 1950s and 1960s when market power was discussed in the framework of the “deep pocket doctrine”. Enterprises possessing extraordinarily high assets or turnover in national or world markets were considered to be “big players” or “large enterprises” which, purely through their financial power, could deter competitors, influence markets and even endanger the democratic process in a country.

The size as such was considered to be a danger to competition, particularly in markets characterized by small and medium sized enterprises. Through globalization of the world economy and the overall presence of big players this theory of “deep pocket” has lost its appeal, but the view still remains that big as such may be a competitive risk. That is the reason that most competition authorities have established, for the sake of merger control purposes, pre-notification criteria that hint at global size as such without a direct effect on affected markets. Here the view is: if big comes to big, there is a competitive risk, without regard to particular defined product and geographical markets.

It is worthwhile analyzing that the three named elements for pre-notification of concentration purposes to find out whether these elements still make sense, and if so, which element is the best suited for the named purposes. While carrying out this analysis, a differentiation must be made about application of these criteria within the jurisdiction of a particular competition authority and on a world-wide basis.

“Market shares” as pre-notification criterion

As mentioned above, market shares have a direct relationship to markets and, therefore, are highly effective in giving a first view as to the competitive influence of an enterprise in a given market. Where in a merger case market shares are overlapping and added as a result of concentration (horizontal merger), the picture is even clearer. This is an undisputed positive argument for the use of this criterion.

There is, however, one substantial drawback: the determination of a market share on national or world markets requires a proper definition of the relevant product and geographic markets. These definitions require a broad and partly subjective analysis and also require a broad database at world-wide level, the levels of the countries which are affected and often at sub-regional levels where the relevant markets are more narrow (like bakeries, where a market may come down to a single street). Court cases in the field of competition, also beyond merger control purposes, have shown that the question of market definition is the most disputed question in competition law and the outcome of court cases through all levels of the judiciary has shown that deviations from the initially assumed market shares are tremendous.

Therefore, in practice it is virtually impossible to assume that enterprises as merging or acquiring parties are in a position to obtain all the necessary databases for all markets involved from world-wide down to sub-regional levels. And even where data was available, it may be lengthily discussed with the competition authority as to which markets are relevant markets. Since many legal consequences are linked to the notification or failure to a notification of a concentration, the market shares criterion is too subjective and too difficult to apply in practice. For legal security reasons it is even advisable to delete this notification criterion from all merger control laws worldwide that still apply this criterion in order to achieve a unified notification approach.

“Assets” as pre-notification criterion

The assets criterion may be a useful indicator of the size of an enterprise, but it has no relationship with market power in competition terms. Depending on the market sector, some businesses may require high technical equipment with a low number of employees (like oil drilling), while other businesses require a high number of employees with a relatively low assets basis, like usually all service-oriented enterprises. As a result of the fact that in industrialized nations of today more than 50% of generated turnover is made through services, the traditional view to assets as an indicator for market power or even size is outdated. There is also the fact that business cycles play a significant role in the size of assets through depreciations of assets over time. The making of such assets value as an indicator for merger notification is no longer appropriate in modern business development. Therefore, this criterion is not a good indicator for market power in a system of merger notification.

“Turnover” as pre-notification criterion

The turnover criterion is also no optimal indicator for the power of an enterprise in a relevant market. The overall turnover for products and services may be the result of a multitude of market activities, whereby the enterprise involved has no strong position in any of its markets.

Or the enterprise may enjoy a high turnover but is, in fact, virtually bankrupt and needs state subsidies to survive.

On the other hand, this criterion has one substantial advantage compared with the other two criteria: it is objectively verifiable through bookkeeping records and is not depreciated over time.

All countries applying a merger control regime have, therefore, decided to use this criterion as the decisive criterion or at least one important criterion for a first view of the size of an enterprise and its potential power on a worldwide basis as well as on national or regional levels. The mistake this criterion may produce in the determination of the real market power of a notifying enterprise will not lead to mistakes in the assessment of the merger and the additional expenses.

The workload for the notifying parties is tempered by the fact that turnover figures are easily available and controllable by the competition authority.

In other words, turnover is seen as the best “surrogate” for market power or enterprise size, as long as no other better suited criterion is available.

One question must, however, be answered: is it necessary to have the requirement for worldwide global turnover of parties to a concentration in addition to all turnover in markets affected by the concentration within the jurisdiction where the concentration takes place?

Within the EU system of merger control the notification of worldwide and national turnover thresholds make sense as a jurisdictional element for the decision of the Community dimension of the concentration (Article 1.2 EC Merger Regulation). Only such concentrations shall in general terms fall under the EU merger control regime where the combined aggregate worldwide turnover of all undertakings concerned has been in the last year above EUR 5 billion with the assumption that such mergers are large mergers (whatever that may imply on the issue of market power) when they fulfill, at the same time, some other thresholds of Community-wide turnovers. Smaller mergers may come under the jurisdiction of national merger controls in member states where markets are affected. But this division between EU relevant concentrations and other concentrations by itself has absolutely no indication of the market power involved.

Where criteria of aggregate worldwide turnover are established in notification requirements for single countries, the question arises whether such information is necessary at all, independently from the fact that there is usually no problem for notifying parties to assemble and give such information on an aggregate basis.

The International Competition Network (ICN) for its Annual Conference in Japan in April 2008 has published a report on Setting Notification Thresholds for Merger Review (by its Notification and Procedures Subgroup). Country studies for Belgium and Sweden annexed in this report clearly show that single jurisdictions should delete the notification of aggregate worldwide turnover numbers.

The Swedish report states the following as a summary: “The current rule, which references global turnover, was deemed to be inappropriate, since global turnover is typically a poor indicator of domestic competitive impact”. (p. 28 of the report). And the Belgium report (p. 19) describes appropriately the goals of reform of the notification requirements reform:

— the new threshold test must be clear and objective to ensure legal certainty. The new threshold had to be objective and based on turnover;

— the new threshold test should limit the number of notifications to only those having a material impact on the Belgian market;

— the new threshold test must have a local nexus and therefore the turnover test applied should only be Belgian turnover;

— the new threshold test should be set at a sufficiently high level to free up resources and to allow the Authority to focus on notifications with material issues.

Ukraine still uses all three discussed criteria for notification purposes. It is hoped that Ukraine will take up this issue and decides accordingly to make its merger notification system easier to apply by the affected business community.