Merger Guidelines

Merger Guidelines

Influence of the U.S. Merger Guidelines on Other Jurisdictions

For information about Merger Guidelines in the context of the U.S. antitrust and the international trade law, click here.

By William J. Kolasky (U.S. Deputy Assistant Attorney General, Antitrust Division) and Andrew R. Dick (Acting Chief, Competition Policy Section, U.S. Antitrust Division):

In his 1992 article, Robert Pitofsky argued that “[i]n resisting incorporation of an efficiencies defense into merger enforcement, the United States is remarkably out of step with the law of other industrialized countries.”(146) As the foregoing history reflects, this view badly mischaracterized the state of agency policy and practice at the time the article appeared. It also understates the important role the Guidelines — and equally the intellectual debate about the ideas in the Guidelines — have played in shaping competition policy in this area outside the United States as well as within it. In recognizing an efficiencies defense, other jurisdictions were following the U.S. merger guidelines, although some, like Canada, adopted policies more receptive to efficiency arguments than they perceived the U.S. policies were because of the smaller size of their economies.(147)

In Argentina, the Guidelines for the Control of Economic Concentrations outline an analytical process that is similar to that in the U.S. Horizontal Merger Guidelines.(148) Efficiencies analysis is included; it may lead to approval of an otherwise prohibited merger if the efficiencies are great enough that the net impact on the general economic interest is beneficial.(149) Only merger-specific efficiencies may be considered.(150)

In Australia, the Merger Guidelines incorporate provisions on efficiencies.(151) They note that “efficiency enhancing aspects of a merger may impact on the competitiveness of markets” and that such impact is relevant to whether there is a substantial lessening of competition.(152) The emphasis is on efficiencies that “are likely to result in lower (or not significantly higher) prices, increased output and/or higher quality goods or services.”(153)

In Brazil, there are merger guidelines that employ an analytical approach similar to that of the United States, including an explicit step for consideration of efficiencies.(154)

In Canada, the U.S. Guidelines have had an impact, as well, although Canada has deliberately chosen to adopt an approach to efficiencies that it perceived as more favorable than the U.S. approach. The Competition Tribunal approved a propane merger on grounds that the efficiencies, using what it termed a “total surplus” approach, were greater than and offset the anticompetitive effect.(155) The Federal Court of Appeals reversed, citing and discussing the United States approach to efficiencies analysis; as the Tribunal later said, “the Court has placed weight on the treatment of efficiencies under U.S. antitrust law and has used it as the benchmark to evaluate the Tribunal’s assessment under the Act.”(156) On remand, the Tribunal disagreed with the court’s interpretation and took issue with the Court(157) for allegedly following too closely the U.S. approach to efficiencies, which the Tribunal regarded as “hostile” to efficiencies.(158) The Tribunal noted that the Canadian economy is smaller than that of the United States and thus more concentration in a market might be required before economies of scale were fully realized, and noted its perception that the Canadian economy historically was more open to trade than the United States economy among other differences.(159) The Tribunal concluded that the intent of Parliament was that “the consideration of efficiency gains is not to be tied into the analysis of the competitive effects of the merger”(160) and determined that “[t]he explicit efficiency defence in subsection 96(1) of the [1986] Act is clear evidence that Parliament intended not to follow the American approach to efficiencies.” On reconsidering, the tribunal took account of both wealth transfer effects and total surplus effects and allowed the merger.(161) In fact, as the discussion of the 1997 revisions to the U.S. merger guidelines shows, the U.S. approach does not foreclose consideration of efficiencies that are not immediately passed on to consumers to nearly the extent the Tribunal believed.(162)

In Israel, a merger is evaluated by a competitive effects standard, and efficiencies are considered in favor of approval of the merger.(163)

In Mexico, the 1998 Implementing Regulations of the competition law specify that an “assessment of efficiency gains in the relevant market” must be considered in evaluating a merger.(164) To be considered, the gains must be the result of the merger and must be proved by the merging parties.(165) Particular efficiencies are specified in the Implementing Regulations, primarily efficiencies that result in lower production costs, although also including reduction of administrative expenses.(166)

In New Zealand, an otherwise prohibited merger may be authorized, pursuant to the Commerce Act 1986, if the merger will result in a public benefit that justifies approval. “Increased efficiency is the main public interest justification.”(167)

In Norway, the purpose of the competition law is “to achieve an efficient utilization of society’s resources by providing the necessary conditions for effective competition.”(168) Mergers may be blocked if they create or strengthen a significant restriction on competition contrary to the purpose of the competition law. (169) Under Guidelines for Intervention against Acquisition of Enterprises issued in 1996, a three-step analytical process is used. In the third step, the Competition Authority evaluates whether the acquisition would generate cost savings for society that more than offset efficiency losses due to restricted competition. The cost savings must be merger-specific; moreover, income transfers and tax savings are not considered social cost savings. The agency emphasizes that if the anticompetitive effects of an acquisition are large, then documented efficiency gains need to be considerable.(170)

In South Africa, mergers are evaluated by whether they substantially prevent or lessen competition, but a merger that is likely to do so must also be evaluated to determine “whether the merger is likely to result in any technological, efficiency or other pro-competitive gain which will be greater than and offset the effects of any prevention or lessening of competition.”(171) To qualify, the efficiencies must be of a type that “would not likely be obtained if the merger is prevented.”(172)

In Venezuela, the Guidelines to Evaluate Operations of Economic Concentration recognize that mergers may have effects both of creating market power and generating efficiency; the Guidelines provide for evaluation whether the efficiencies “contribut[e] to obtaining major economic efficiencies from a social point of view.” The agency seeks verification of the efficiencies, determination of whether they are merger-specific, and demonstration of the extent to which they will benefit consumers.(173)

The European Union is the most recent jurisdiction to move toward integrating efficiencies as a positive factor in its review of mergers under its Merger Control Regulation (MCR). The MCR adopts what is called a dominance test for mergers, requiring the European Commission and courts to prohibit any merger that “creates or strengthens a dominant position as a result of which effective competition would be impeded in the common market or a substantial part of it.”(174) The MCR appears, on its face, to require that the Commission take into account efficiencies as a positive factor in making this determination: “In making this appraisal, the Commission shall take into account . . . the development of technical and economic progress provided that it is to consumers’ advantage and does not form an obstacle to competition.”(175)

In practice, when the Commission has considered efficiencies in its decisions, it, like the U.S. Supreme Court in the 1960s, has treated them more as an offense than as a defense.(176) In its very first decision prohibiting a merger under the MCR, Aerospatiale-Alenia/de Havilland,(177) the Commission found that while the merger would produce some efficiencies in the form of cost savings and expanded opportunities for one-stop shopping, those efficiencies would only serve to enhance the merged firm’s power to behave independently of its competitors. And as recently as last year in its decision prohibiting the GE/Honeywell merger,(178) the Commission based its conclusion that the merger would strengthen GE’s dominant position in the market for aircraft engines for large commercial aircraft in part on a finding that the merger would give GE an incentive to offer customers lower prices for jet engines by causing it to internalize the externalities associated with charging high prices on complementary products. While acknowledging that these lower prices would have benefitted customers in the short term (thereby enhancing allocative efficiency), the Commission found that these benefits were outweighed by the risk that GE’s rivals would be forced eventually to exit the market if they could not match GE’s lower prices.

Partly in response to criticisms of its decision on GE/Honeywell, the Commission has indicated that it is rethinking its view of efficiencies and that it intends to view efficiencies more favorably in the future. In a speech at Merchant Taylor’s Hall in London last July, Commissioner Monti gave the first sign of this shift in attitude, stating that, “We are not against mergers that create more efficient firms. Such mergers tend to benefit consumers, even if competitors might suffer from increased competition.”(179) The director of the EU Merger Task Force, Goetz Drauz, built on these remarks at the ABA Section of Antitrust Law’s Spring Meeting this April. He announced that the Commission was developing merger guidelines that would have a section on efficiencies. He invited merging parties to tell the MTF about the efficiencies they expect to realize from their transactions, assuring them that efficiencies would not be used as a reason to challenge a merger but would be viewed as a favorable factor in the Commission’s competitive effects analysis. The Commission is reported to be working on merger guidelines that would include a detailed discussion of how efficiencies will be considered in merger reviews.

To the extent that the Guidelines’ treatment of efficiencies, as well as the debates surrounding it, has any persuasive influence on EU law and practice, that influence will be retransmitted into transition economies that are adopting or invigorating competition law regimes for the first time, because they often follow the EU analytical framework for merger control.(180) This is particularly true in Central and Eastern Europe, where countries have closely followed EU law and practice in order to harmonize their regimes with the EU and thus ease their entry into the EU.(181)

Conclusion

As this brief history illustrates, the U.S. courts and antitrust agencies have made substantial progress since the 1982 Baxter Guidelines in learning how to integrate efficiencies into their evaluation of potentially anticompetitive mergers. Just as Oliver Williamson predicted in 1968, the courts and agencies have been able to refine the tools they use to review efficiency claims and have become more comfortable with their ability to balance any likely efficiencies against any potential increase in market power as they have gained experience evaluating efficiencies. The success of the U.S. in integrating efficiencies into merger review has had an important influence in persuading other jurisdictions to do likewise. This trend is now extending to Europe, where the European Commission has indicated that it is developing merger guidelines which will integrate efficiencies into their competitive effects analysis. The 1982 Merger Guidelines and the subsequent revisions to them have contributed importantly to this movement toward more rational antitrust enforcement and will continue to do so.

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Notes and References

146. Pitofsky, supra n. 105, at 213.

147. Interview with Calvin Goldman, who served as the first Director of the Canadian Competition Bureau after the Canadian Competition Act was amended in 1986 to incorporate an express efficiencies defense.

148. Javier Petrantonio & Marcelo den Toom, Argentina, in International Mergers: The Antitrust Process 2-1, 2-4 (J. William Rowley & Donald I. Baker, eds., 2001). The Guidelines are Resolution No. 726 of the Secretariat of Industry, Commerce and Mining, issued Aug. 25, 1999. Id.

149. Id. 2-23–2-24.

150. Id. 2-5.

151. Australian Competition and Consumer Commission, Merger Guidelines §§ 5.171-5.174 (1999).

152. Id. § 5.171. See Id. §§ 5.16-5.17. Separately, efficiencies that do not affect the competitiveness of the market, but that are of “public benefit,” may be considered in a determination whether to authorize an otherwise prohibited merger. Id. § 5.16, §§ 6.39-6.49.

153. Id. § 5.173.

154. Francisco R. Todorov, Advisory Agencies Issue Joint Horizontal Merger Guidelines, Baker & McKenzie Brazil E-Alert, Aug. 31, 2000 (fourth step is “analysis of efficiencies of the transaction”).

155. Commissioner v. Superior Propane Inc., 2000 Comp.Trib. 16.

156. Commissioner v. Superior Propane, Inc., Comp. Trib. (2002) (slip op. at ¶ 115). See discussion in the Competition Tribunal’s opinion on remand, Commissioner v. Superior Propane, Inc., Comp. Trib. (2002) (slip op. at ¶ 113-131).

157. Commissioner v. Superior Propane, Inc., Comp. Trib. (2002) (slip op. at ¶¶ 115-131).

158. Id. at ¶ 115 (“In the Tribunal’s view, the differences between the American and Canadian approaches to merger review and efficiencies are very significant and cannot be appreciated without some knowledge of the history of American antitrust.” Id. at ¶¶ 128-31 (“The Tribunal concludes that in the United States, there is virtually no efficiency defense to an anticompetitive merger . . . .” Id. at ¶ 129.).

159. Commissioner v. Superior Propane, Inc., Comp. Trib. (2002) (slip op. at ¶¶ 131-49). See Margaret Sanderson, Efficiency Analysis in Canadian Merger Cases, 65 Antitrust L.J. 623 (1997) (“The need for an emphasis on efficiency is all the more important in a small economy, such as Canada’s. Concentration levels are high in many Canadian industries, yet firms may not be operating at minimum efficient scale. In addition, regulatory constraints and/or trade barriers may have led to higher costs of production.”).

160. Commissioner v. Superior Propane, Inc., Fed. Ct. App. (2002) (slip op. at ¶ 137).

161. Id. ¶ 370-77.

162. See supra note 78, at § 4.

163. Lionel Kestenbaum, Israel, in International Mergers: The Antitrust Process 29-1, 29-4 (J. William Rowley & Donald I. Baker, eds., 2001).

164. Gabriel Castañeda Gallardo, Mexico, in International Mergers: The Antitrust Process 42-1, 42-3, 42-9, 42-34 to 42-35 (J. William Rowley & Donald I. Baker, eds., 2001).

165. Id. 42-35.

166. Id. 42-7, 42-32/12 (Article 6 of Implementing Regulations).

167. Bernard Matthew Hill, New Zealand, in International Mergers: The Antitrust Process 45-1, 45-3 to 45-4, 45-7 (J. William Rowley & Donald I. Baker, eds., 2001).

168. Jan Petter Romsaas, et al., Norway, in International Mergers: The Antitrust Process 46-1, 46-3 to 46-4, 46-21 (J. William Rowley & Donald I. Baker, eds., 2001).

169. Id. 46-3.

170. Id. 46-29.

171. Ed Southey & Anthony Norton, South Africa, in International Mergers: The Antitrust Process 54-1, 54-7, 54-26 (J. William Rowley & Donald I. Baker, eds., 2001) (quoting Competition Act 89 of 1998 § 16(1)(a)).

172. Id.

173. Omar E. Garcia-Bolivar & Ignacio De Leon, Venezuela, in International Mergers: The Antitrust Process 67-1, 67-58 (J. William Rowley & Donald I. Baker, eds., 2001) (quoting Guidelines to Evaluate Operations of Economic Concentration, Section VI, Efficiencies Generated by the Operation).

174. Council Regulation 4046/89, O.J. L 395/1 (Dec. 30, 1989), corrected version O.J. L 257/14 (Sept. 21, 1990), amended, Council Regulation 1310/97, O.J. L 180/1 (July 9, 1997, corrected version O.J. L 40/17 (Feb. 13, 1998), effective March 1, 1998, Article 2(3).

175. Id. at Article 2(1)(b).

176. Christopher Jones & F. Enrique Gonzalez-diaz, the Ecc Merger Regulation 193-194 (Colin Overbury ed., 1992); Frederic Jenny, EEC Merger Control: Economies as an Antitrust Defense or an Antitrust Attack?, 1992 Fordham Corp. L. Inst. 591 (Barry Hawk ed., 1993).

177. Aerospatiale-Alenia/de Havilland (Case IV/M53) [1991] OJ L334/42.

178. Commission decision of 03/07/2001 declaring concentration to be incompatible with the common market and the EEA Agreement (General Electric/Honeywell), 3 July 2001 ¶¶ 353, 360, 376.

179. See Mario Monti, Address before the Future for Competition Policy in the European Union, Address at Merchant Taylor’s Hall, London (July 9, 2001).

180. William E. Kovacic, Merger Enforcement in Transition: Antitrust Controls on Acquisitions In Emerging Economies, 66 U. Cin. L. Rev. 1075, 1089 (1998).

181. Id. at 1087.


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