On October 22, 2008, the European Commission (the Commission) published its new Notice on remedies acceptable under the Merger Control Regulation1 (the 2008 Remedies Notice or the Notice).2 At the same time, the Commission published some amendments3 to the Implementing Regulation (EC) No 802/2004 (the Implementing Regulation),4 including a new "Form RM", which specifies the information to be provided by parties that intend to submit remedies proposals to the Commission.
The Notice sets out, in far greater detail than the previous 2001 notice on remedies, the conditions that remedies need to fulfill in order to be accepted; the types of remedies the Commission has experience with; and the process for assessing and approving remedies. The new Notice discusses in detail the Commission's approach to such issues as carve-out and reverse carve-out remedies, re-branding remedies and access remedies (including IP licensing as a way to grant access to gateway technology).
The 2008 Remedies Notice
Under the Merger Control Regulation, merging parties are allowed to modify a concentration that raises competition issues to obtain Commission clearance of the transaction as modified. Such modifications are commonly known as "remedies" since their object is to eliminate the competition concerns identified by the Commission. The merging parties may modify a proposed concentration either before or after their notification to the Commission.
The key requirement is that the proposed remedies eliminate all the competition concerns raised by the Commission. In particular, depending on the stage of the procedure when they are offered, the remedies must either clearly rule out the Commission's "serious doubts" (if they are offered in the first investigative stage known as Phase I and before the Commission issues the Statement of Objections in the second, in-depth investigative stage known as Phase II) or must be sufficient to eliminate the significant impediment to effective competition indicated by the Commission in its "preliminary findings" contained in the Statement of Objections (in Phase II).
The purpose of the 2008 Remedies Notice is to provide guidance concerning remedies that merging parties propose to eliminate the Commission's competition concerns.
The 2008 Remedies Notice substantially revises the previous Commission notice on remedies of 2001,5 but does not change much with respect to the Commission's current practice. Rather, the new Notice seeks to codify existing practice and reflect the Commission's evolving experience with assessing, accepting and implementing remedies, recent judgements of the European Courts and the new Merger Regulation in force since 2004.
In codifying existing practice, the Notice adopts a rather rigid view of the world, without taking into account many practical difficulties faced by the parties when framing remedy proposals. This is, however, to be expected of a general document of this nature and the Notice's apparent rigidity should not necessarily deter the parties from seeking creative solutions that the Notice does not explicitly contemplate.
The 2008 Remedies Notice provides guidance on the types and forms of remedies acceptable to resolve competition concerns, as well as the substantive and procedural issues that notifying parties should consider when proposing remedies to obtain clearance. The main points to note in the 2008 Remedies Notice are the following:
General principles under which remedies can be proposed and implemented:
- General requirements: The Notice reconfirms the general requirements that must be fulfilled for proposed remedies to lead to approval of the modified transaction: the remedies must eliminate the competition concerns entirely; be comprehensive and effective; and be capable of being implemented effectively within a short period of time.
- Proportionality of the remedies and Commission preference for divestiture remedies: The Commission reconfirms that its responsibility is to show that a concentration would significantly impede competition. It cannot impose unilaterally any conditions to clear a transaction. Rather, it is for the parties to propose remedies adequate to eliminate the competition concerns. If the parties fail to do so, the only option for the Commission is to adopt a prohibition decision.
At the same time, the 2008 Remedies Notice clarifies that the Commission's role is not only to assess whether the remedies are sufficient to eliminate the competition concerns it has identified, but also to verify that the remedies do not go further than required to address these concerns. It may indeed happen that the notifying parties offer commitments that go beyond what is necessary to address the Commission's competition concerns. Typically, this happens when remedies are offered at the very early stages of the procedure when the competition concerns are not very clear or, conversely, in the very late stages of the procedure when the parties are under extreme time pressure and may be prepared to offer more than what is necessary in order to get the transaction cleared.
The Commission's formal recognition that it must take into account the proportionality principle when assessing proposed remedies is a welcome development, albeit one directly inspired by current decisions of the European Courts.6 In this context, it is slightly disappointing that, in other parts of the Notice, the Commission maintains its continued preference for one-shot, structural divestiture remedies, with little regard for the fact that these expensive, far-reaching remedies may be disproportionate in certain cases. Instead, the Notice seems to confirm the Commission's dislike for less restrictive remedies, such as IP licensing or behavioral remedies.
- Procedure for submitting commitments/Form RM: The notifying parties are now obliged to provide, when offering commitments, the information and documents prescribed in the new Form RM.
Form RM concerns both divestitures and other types of remedies (i.e. behavioral). In general, notifying parties will have to provide information about the object of the commitments offered and the terms/conditions for their implementation; they will also have to provide information showing that the commitments offered remove the significant impediment to effective competition the Commission has identified.
The Form RM requires more information/documents when a business will be divested. However, the information required is largely similar to that already required by the Commission's model text for divestiture commitments. The main differences relate to additional explanations about the activities of the business to be divested and its position within the group to which it belongs. Moreover, the parties are formally requested to set out the reasons why they think a suitable purchaser will be found for the divested business in the time-frame proposed in the commitments offered. This latter information may be particularly important in those (until now relatively rare) cases where there may be doubts about whether a suitable purchaser will be found. In such a circumstance, as discussed below, the Commission may require an up-front buyer or a fix-it-first commitment.
Ultimately, the added value of Form RM is limited, although it is somewhat useful in codifying existing practice in terms of the type and quality of information the Commission typically requires to better understand and assess the remedies submitted. However, the new requirement that the parties submit a formal Form RM may, in some instances, represent a (considerable) additional burden, especially in Phase I proceedings where serious doubts may emerge late in the proceedings. Given that the Commission offers only limited opportunities in Phase I for parties to supplement their offer once made, it will be important that parties include in Form RM all the potentially relevant information the Commission requires to assess the remedy. In the past, parties were able to ensure that the Commission received everything it needed by submitting a draft commitment proposal a few days before the final deadline for making a formal offer. Parties will now similarly need to try to provide the Commission with an advance draft of Form RM.
Different Types of Remedies
The 2008 Remedies Notice gives a broad overview of the main types of remedies that the Commission has accepted in merger cases, such as divestiture of a business to a suitable purchaser; divestiture of a minority shareholding; and arrangements to provide access to key infrastructure or essential inputs (including key technology through, among other things, IP assignments or licenses or termination of exclusive contracts). The Notice provides some details on rarer or less-preferred remedies, such as carve-outs, re-branding, or fix-it-first remedies (in the divestiture category), or various commitments granting access to assets or essential inputs (in the non-divestiture category).
- Carve-outs: Divestiture of an existing, viable, stand-alone business remains the Commission's preferred remedy. However, in many cases the parties will want to or have to propose a less bright-line remedy, particularly where the business to be divested has strong links or is partially or wholly integrated with businesses retained by the parties and therefore needs to be "carved out" from its current context. Parties also often consider a "mix-and-match" approach, whereby assets belonging to different parties are combined to form a new business.
The Notice confirms the Commission's reluctance to accept carve-out commitments, except where it feels it can be certain that, when sold to the purchaser, the divested business will be viable and competitive on a stand-alone basis. The Notice also describes the Commission's preference for "reverse carve-outs" as the best method to effect separation of integrated businesses. Under a reverse carve-out, the parties will take out the business activities they want to retain and divest the original business without those parts, rather than taking out the activities to be divested to sell them as a new entity. The Notice fails to recognise that, in many cases, tax or accounting considerations and other business requirements may make a straight carve-out the easiest to implement, least disruptive, and least expensive option for the parties, while still effectively addressing the Commission's competition concerns.
The Notice says little about mix-and-match combinations, except to observe that a crucial element for evaluating a combination of assets is whether each of these assets is viable on its own. Some cases may require an up-front buyer solution, whereby the parties may not implement the approved transaction until a suitable purchaser has been found for the divested business, to address the Commission's concerns about whether the remedy will prove adequate to restore competition.
Re-branding: In exceptional circumstances, the Commission has accepted a commitment to grant an exclusive time-limited license for a brand--a so-called re-branding commitment. This remedy is often proposed where the brand is highly valued by the parties and is also used for a different range of products that the merging parties will retain (where no competition problems arise). It aims to allow the licensee to use the period during which it can use the brand to put in place a re-branding strategy that will enable it to ensure that customers will transfer from the licensed brand to its own (new) brand. In a second phase, after the end of the license, the merging parties commit to abstain from any use of the previously licensed brand (black-out period).
According to the Commission, this remedy carries substantially higher risks for restoring effective competition than a divestiture. The Notice sets out a number of conditions that must be fulfilled in order for the re-branding remedy to be reasonably expected to work properly (and thus for the Commission to approve the remedy): the brand at stake must be well known; assets or know-how related to the products marketed under the licensed brand should also be transferred; the license must be exclusive and not be limited to a certain range of products within a specific market; and both the license and the black-out period must be sufficiently long so that re-branding will have effects similar to a (brand) divestiture.
Identification of a suitable purchaser/fix-it-first: The Commission clarifies that in some cases the parties may need to identify a purchaser for the business to be divested and enter into a binding agreement during the Commission's procedure (so-called "fix-it-first" remedy). In general, fix-it-first remedies appear to be particularly suitable in cases where the identity of the purchaser is crucial for the effectiveness of the proposed remedy, i.e., where only very few potential purchasers would be suitable. This is likely to be the case when a divested business is not viable standing alone, but must be combined with specific assets the purchaser owns or where the purchaser must have specific characteristics in order for the remedy to solve the competition concerns. An up front buyer remedy differs in that the identity of the purchaser is not known to the Commission before the clearance decision. Both solutions, however, lead to a comparable result: the merger will not be implemented before a suitable purchaser has been identified.
Access remedies and IP licensing: The Notice clarifies that the Commission may accept other types of remedies where they will be at least as effective as divestiture. In particular, the Commission has several times accepted commitments granting non-discriminatory and transparent access to key infrastructure, networks, key technology (including patents, know-how, or other intellectual property rights), and essential inputs. This type of remedy is likely to come into play when a divestiture is not possible or when certain assets necessary to facilitate competitive entry cannot be duplicated. However, the Commission clarifies that it would ultimately accept access remedies when competitors "will likely use them" (so that foreclosure concerns will be eliminated). We hope that the Commission will base its assessment of the "likely use" criterion on objective criteria, rather than on third parties' (sometimes opportunistic) responses to the market testing of the proposed remedies.
The Commission's approach concerning access to key technology or IP rights could be disappointing to many. In line with its usual preference for structural solutions, the Commission claims that a divestiture of technology or IP rights is the preferable remedy because it eliminates uncertainties linked to the lasting, ongoing relationship between the merged entity and its competitors, as well as the risks for disputes between them. The Commission, however, is prepared to accept licensing arrangements as an alternative to divestiture where the latter would jeopardize ongoing research or where a divestiture would be impossible due to the nature of the business. The Commission also accepts licensing of IP rights when a number of competitors rely on such IP rights as essential input for their activities. In those cases, the main concern for the Commission is that such licenses should be granted on a non-exclusive basis and on terms and conditions that "do not impede the effective implementation of the remedy." At the risk of over-simplifying a complex issue, the Commission considers royalty-free licenses as an alternative solution when there are no clear market-based licensing terms or conditions. The Notice's position on IP-based remedies is one example of the Commission's failure to recognise that appropriate application of the overriding proportionality principle may lead to the conclusion that a IP divestiture is not required more often than the Commission seems to contemplate.
Requirements for the Implementation of Commitments
The Notice also formalizes existing procedures for implementing divestiture commitments, including the divestiture process and the appointment of a monitoring trustee to oversee the process. In doing so, the Notice introduces some new elements:
Divestiture timelines: In the Commission's view, short divestiture periods contribute substantially to the success of the divestiture because, otherwise, the business to be divested will be exposed to an extended period of uncertainty. To this end, the Commission will normally consider appropriate a period of around six months for the first divestiture period (i.e., when the party has the control of the divestiture process) and an additional period of three months for the trustee divestiture period (i.e., the fire-sale period). Although these periods may be modified on a case-by-case basis and parties may request extensions in exceptional circumstances, the Commission's message is that it would rather err on the side of shortening, rather than lengthening, these periods. It remains to be seen whether the current acute global financial crisis will lead the Commission to be more flexible in assessing the reasonable duration of the divestiture process.
Specific obligations of the parties: The Commission further clarifies that the commitments must specifically contemplate that (a) potential purchasers can carry out the necessary due diligence and obtain sufficient information on the divested business to allow the purchaser to fully asses the value, scope, and commercial potential of the business; and (b) potential purchasers will have direct access to relevant personnel.
Appointment of trustees: The role and the appointment of independent trustees to monitor and ensure correct implementation of the commitments was, until now, provided for only in the Commission's standard commitments text; the Commission ensured enforceability of these obligations by, among other things, approving the appointment of a trustee as part of the conditions for its approval of the transaction. Amendments to the Implementing Regulation that the Commission has issued in parallel with the new Notice fill this vacuum and clarify that the commitments offered by the notifying parties may include the appointment of such a trustee (or trustees). Under the new Article 20a of the Implementing Regulation, the Commission may also directly appoint the trustee, but this possibility appears to be limited to cases where the Commission has rejected all the trustees the parties have proposed.
Role of the monitoring trustee: The Notice clarifies that, among other tasks, the monitoring trustee is responsible for overseeing the parties' efforts to find potential purchasers and to transfer the business; to this end, the monitoring trustee shall verify that potential purchasers receive sufficient information relating to the business. In a new development, the Notice contemplates that the monitoring trustee will function as the "contact point" for any request by third parties, in particular potential purchasers, in relation to the commitments. Given that only the divestiture trustee (not the monitoring trustee) plays an active role in the process of selling the business to be divested, the role of the monitoring trustee as a "contact point" for third parties' requests arguably may relate only to possible issues or concerns regarding the interpretation or implementation of the commitments. In this context, the monitoring trustee's ability to answer third party questions will be limited by its duty of confidentiality. Ultimately, it should be for the Commission to determine, based on input from the monitoring trustee and the parties, whether the trustee is allowed to divulge confidential information. Such power is, however, subject to judicial review in light of the fundamental principle of Community Law that business secrets must be protected.
1 Council Regulation (EC) No 139/2004 of January 20, 2004, on the control of concentrations between undertakings, OJ L24/1 29.01.2004.
2 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004, OJ C 267, 22.10.2008.
3 Commission Regulation (EC) No 1033/2008 of October 20, 2008, amending Regulation (EC) No 802/2004 implementing Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, OJ L279/3, 22.10.2008.
4 Commission Regulation (EC) No 802/2004 of April 7, 2004, implementing Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, OJ L131/1, 30.04.2004.
5 Commission Notice on remedies acceptable under Council Regulation (EEC) No 4064/89 and under Commission Regulation (EC) No 447/98, OJ C 68/3, 02.03.2001.
6 Judgment of the European Court of Justice in case C-202/06 P, Cementbouw, paragraph 54.