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Today's judgment from the European Court of Justice ("ECJ") in the case Commission v CK Telecoms (C-376/20 P) provides insight into how the EU merger control provisions should be assessed in consolidated markets, such as telecommunications. Understanding the judgment may be relevant for consolidation plans in many industries with tendencies towards oligopoly.

In 2016 the European Commission prohibited the £10 bn merger between O2 and Three, two of the four large mobile operators in the UK. In 2020, the General Court annulled the European Commission's decision. Today, the ECJ annulled said ruling and referred the case back to the General Court.

Mergers that do not create a dominant position (often meaning a market share of at least approximately 40–50%) can prove problematic from a competition-law perspective when only a few competitors will remain in the market after the deal.

The ECJ's judgment clarifies merger control risks in these situations:

• What is the standard of proof for a competition authority to prohibit a transaction, in the case of the transaction not creating (or strengthening) a dominant position?
• How should the test of significant impediment to effective competition be applied in these situations?
• When should a party to a merger be considered an "important competitive force", meaning that the merger may significantly impede competition, even if the party's market shares would not in themselves suggest so?
• How close competitors should the parties be, for their closeness of competition to support a competition authority to intervene in the transaction?

How probable does the significant impediment to effective competition need to appear for an authority to intervene in the merger?

According to the ECJ, the required standard of proof for intervening in a transaction must be the same for all theories of harm to competition. It is therefore sufficient to show that it is more likely than not that a transaction would significantly impede competition, regardless of the type of concentration at hand.

The General Court had held that the Commission, to prohibit a deal when relying on complex theories and evidence, must with a strong probability demonstrate that a significant impediment to effective competition would result from the transaction. The ECJ sided with the Commission and laid down a lower standard of proof for justifying an intervention than the General Court did in its judgment. The General Court in its judgment had expressed the view that mergers between competitors in oligopolistic markets would be systematically prohibited unless a higher standard of proof would be imposed, but this did not sway the ECJ.

What are the correct legal criteria for prohibiting a merger based on non-coordinated effects?

Furthermore, the ECJ held that to find a significant impediment to effective competition, the strict cumulative criteria adopted by the General Court do not need to be met.

The General Court had ruled that two conditions must be met for non-coordinated effects arising from a transaction to result in a significant impediment to effective competition: (1) the elimination of important competitive constraints that the merging parties had exerted upon each other and (2) a reduction of competitive pressure on the remaining competitors.

The ECJ's judgment implies that competition authorities can rely also on other facts to find a significant impediment to effective competition. Accepting the General Court's stance would have meant that merely eliminating the competitive constraints exerted between the parties could not in itself warrant intervening in a deal. As noted in the Attorney General's earlier non-binding recommendation in the case, such an approach would also not have allowed considering the competitive pressure that the remaining competitors exert on the parties after the transaction.

When is a company an important competitive force?

When prohibiting the Three/O2 merger, one key factor the Commission took into consideration was that Three constituted an important competitive force in the market.

The ECJ today clarified that to consider a company as an important competitive force, it is not required that a company stands out from its competitors in terms of the impact of its pricing policy on competition or that the company has been competing particularly aggressively in terms of prices. Instead, it is sufficient that the company has more of an influence on the competitive process than its market share (or similar measures) would suggest, which is in line with the Commission's merger control guidelines.

How close competitors should the parties be to support intervention in a deal?

Opposed to General Court's ruling, the ECJ took the view that the closeness of competition between the parties can speak for blocking the deal even if the parties are not particularly close competitors. This means that competition authorities do not necessarily need to find a very high level of substitutability between the parties' products in a differentiated product market. The ECJ recognised that also lower levels of substitutability may incentivise the parties to increase prices and that, for example, high pre-merger margins can imply competition problems, even if the parties are not particularly close competitors.

Furthermore, the judgment additionally clarifies that the burden of proof for any efficiencies resulting from the transaction remains on the parties and the Commission is not obligated to take into account any efficiencies on its own initiative. The General Court had taken the view that all transactions lead to certain standard efficiencies, which the Commission would have to consider proactively, but this was not accepted by the ECJ.

Going forward

Today's judgment in the case Commission v CK Telecoms shows that the standard of intervention applied by the General Court in its earlier ruling was too stringent and adds support that the Commission's approach has largely been correct.

Nevertheless, the judgment does not mean that mergers would systematically be prohibited if the result would be a decrease of the number of competitors from four to three. However, it shows that competition authorities can rely on a broad body of evidence to show that it is more likely than unlikely that a merger will significantly impede effective competition. Therefore, a careful legal and economic assessment in the early stages of deal planning remains important to understand the potential risks from a merger control point of view.

 

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