Public interest considerations in merger control:a practitioner’s perspective

OECD Competition CommitteeWorking Party No. 3 on Co-operation and Enforcement

John Davies, 14 June 2016

Agenda

• Introduction: the relevance of public interest crit eria to merger activity

• The challenge presented by public interest regimes• Illustrative examples of Australia, China, Ecuador, South Africa and the United States

• Merger activity within the EU: Article 21(4) EUMR• Reflections on the Article 21(4) EUMR regime

• Conclusions

2

Introduction: the relevance of public interest factors to merger activity

Potential benefits of merger activity

Public interest factors associated

with merger activity

Impact on technical capabilities, jobs and

exports

Effect on businesses of national strategic

importance

Impact on national security

Effect on competition

Driving efficiencies, productivity and

technological innovation

Movement of capacity from declining to growth sectors

Purchase of weak firms

Opportunities for management

innovation

3

The challenge presented by public interest regimes

4

Lack of legal

certainty and

predictability

Complexity Merger specificity

• Public interest goals expressed in broad terms

• Limited examples of ‘soft law’ guidance or comprehensive jurisprudence

• Unpredictable in application

• Subject to change according to governmental approach

• Highly differentiated rules generate procedural and substantive complexity

• Can give rise to important differences in some transactions

• Concerns and/or remedies may not relate to issues specifically raised by the merger

• Potential for remedy clash

Illustrative examples (1)

Country Rule Application

Australia The Foreign Acquisition and Takeovers Act 1975 enables the Treasurer (advised by the Foreign Investment Review Board (FIRB)) to make orders to restrict or prohibit foreign investments which are deemed to be contrary to the national interest

According to FIRB guidance, factors which may be taken into account include national security, governmental policy (taxes, the economy, the environment etc.) and the character of the investor

Archer-Daniels-Midland Co/ GrainCorp Ltd. : cleared by the ACCC but blocked by the Treasurer on the grounds that there was a lack of sufficient competition in the grain handling industry

5

Illustrative examples (2)

6

Country Rule Application

China Anti Monopoly Law 2008 (AML)• Article 1 of the AML states that the reasons

for its enactment include:� “protecting consumers and the public

interest”� “promoting the healthy development of the

socialist market economy”• Article 31 enables MOFCOM to undertake a

“national security review” of mergers involving foreign investors

Myriad of highly complex and specialised foreign investment laws in China containing strong indications of public interest factors. E.g.:• Wholly-Owned Enterprises Law 2000 Article

3 states that wholly foreign-owned enterprises “must benefit the development of the Chinese economy”.

• The draft Foreign Investment Law 2015 also indicates that its purpose includes maintaining “national interest and public benefits”

Overlap between the AML and the foreign business licensing process

AML allows MOFCOM to impose extensive remedies to address its concerns, competition or otherwise

e.g. Marubeni/ Gavilon (2013): MOFCOM imposed a hold-separate remedy on the parties’ entities exporting soy beans to China

MOFCOM did not disclose the parties’ combined share of the soy bean import market but information publically available suggests it cannot exceed 27%

MOFCOM’s stated rationale related to the merged entity’s ability to damage downstream Chinese players’ bargaining power due to:• Enhanced ability to increase the export of soy beans to

China• Strengthened position in the soy bean import market in

China• Ability to increase control of the Chinese market

InBev/ Busch (2008): MOFCOM imposed a condition requiring InBev to obtain its approval before acquiring new interests or increasing existing interests in certain Chinese companies

MOFCOM’s stated rationale was that the transaction was sizeable and the merged entity would have substantial market share and an increased competitive ability

Illustrative examples (3)

Country Rule Application

Ecuador Organic Law for Regulation and Control of Market Power

• Art. 4: the human being is the subject and purpose of the economic system

• Art. 21: in clearing transactions, the degree of employees’ participation in company equity should be considered, and conditions may be imposed to facilitate employee participation in company equity

• Art. 22: criteria to evaluate mergers includes the promotion of technological or economic progress of the country, and the participation of workers in the merging parties’ equity

The LORCPM was only adopted in 2011 and there are limited examples of public interest remedies being imposed

In Arca/Coca-Cola/Toni (2014) a behavioural remedy was imposed requiring the merged entity to permit its customers to use Arca-provided coolers to also stock non-Arca products, with a preference for products marketed under an Ecuadoran trademark or produced locally

7

Illustrative examples (4)

8

Country Rule Application

SouthAfrica

The CA 1998 requires the authorities to consider the merger’s effect on the public interest, including the ability of national industries to compete in international markets

Final guidelines were published in May 2016, outlining a 5 step test for assessing public interest factors.

Wal-Mart/Massmart : despite no competition issues• 2 year ban on merger-specific redundancies to

address concerns over potential job losses• development fund established to address concerns

over the impact on domestic production

Afgri/ AgriGroupe : Competition Commission initially recommended unconditional approval after finding no public interest or competition concerns. Four government departments continued to have concerns on public interest grounds and reached agreement directly with the parties to address these. The Competition Tribunal amended the clearance decision to impose the terms of the agreement as conditions for approval of the transaction

United States

Under the Exon-Florio provision, the President has power to block foreign acquisitions where “there is credible evidence… that the foreign interest exercising control might take action that threatens to impair the national security”

Ralls Corporation’s acquisition of four US wind farm companies : President Obama blocked a Chinese owned company from acquiring four small wind farm projects as they were located geographically close to a naval weapons systems training facility

Shuanghui International Holding/Smithfield Foods : Smithfield Foods’ role in supplying pork to the US military was used as justification for launching a review of the proposed merger on public interest grounds

Merger activity within the EU: Article 21(4) EUMR

• When EU Merger Regulation jurisdictional tests are met, the Commission generally has exclusive competence to review a merger and it will only consider competition factors in that review

• However, under Article 21(4) “Member States may take appropriate measures to protect legitimate interests other than those taken into co nsideration by [the EUMR] and compatible with the general principles and other provisions of Community law”

• Actions to protect interests recognised by Article 21(4)• Public security, plurality of the media and prudential rules are all specifically recognised interests

• Measures taken to protect recognised interests will be compatible with EU law so long as they are proportionate and non-discriminatory

• Actions to protect ‘any other public interest’ • Member states wishing to take action to protect any other interest must communicate that to the

Commission

• The Commission has 25 days to assess the compatibility of the proposed action with the “general principles and other provisions of EU law”

• Member states must not take action until a decision is adopted by the Commission

9

Reflections on the Article 21(4) EUMR regime: benefits

From a practitioner’s perspective, the EUMR regime generates greater legal certainty and minimises complexity

Most large scale transactions with an EU dimension will fall within the exclusive competence of the European Commission

The Commission’s review of proposed mergers is limited to competition interests

Very limited gateways for EU member states to intervene on public interest grounds

When the Commission reviews a merger, member state power is limited to prohibiting or applying conditions to mergers that cause legitimate public interest concerns

Even then, member state actions must be proportionate and non-discriminatory and may require prior approval from the Commission

EU member states have made few attempts to bypass these rules and the Commission has demonstrated willingness to initiate enforcement proceedings in such circumstances (e.g. Portugal in Cimpor (2000), Poland in Unicredito/ HVB (2006) and Italy in Abertis/ Autostrade(2006). See also UK in AstraZeneca/ Pfizer (2014))

10

Reflections on the Article 21(4) EUMR regime: limitations

Operation of national regimes where the EUMR thresholds-based test is not met:a) Lack of harmonisation in member states’ procedures and substantive considerations could generate complexity and/or legal uncertaintyb) National rules can, in some cases, be used to authorise the creation of a national champion notwithstanding any potential harm to competition in the EU

Where the EUMR jurisdictional test is met, Article 21(4) does not provide an exhaustive list of public interest factors that may be taken into consideration so there is an element of legal uncertainty/ risk of unpredictable outcomes if a member state invokes the Article 21(4) regime to protect a non-recognised interest

The extent to which EU member states may restrict foreign investment from outside the EU/EEA is not clear

11

Conclusions

• Foreign investment and M&A activity raises a number of competition and other public interest considerations for national governments

• National rules for considering public interest considerations in merger control vary considerably across the world both in terms of process and substance, generating complexity

• Public interest goals are generally broad and lacking in clear guidelines by which to assess them, leading to uncertainty and unpredictability

• Mechanisms are available to minimise these concerns, such as soft codification (e.g. the South African guidelines) and imposing limitations on the exercise of discretion (e.g. the EUMR approach)

• Merger activity around the world would benefit greatly from such steps being adopted more widely, although this may be an ambitious aim as governments are unlikely to want to impose limitations on the exercise of their powers

12

Freshfields Bruckhaus Deringer LLP is a limited liability partnership registered in England and Wales with registered number OC334789. It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to www.freshfields.com/support/legalnotice. This material is for general information only and is not intended to provide legal advice.

© Freshfields Bruckhaus Deringer LLP 2014

Thank you