Anti-trust rules are an important hurdle for those executing larger deals in Europe, so the scope of those rules, and the way in which the competition authorities apply them, has a direct impact on the private equity industry. Buyout practitioners should, therefore, welcome a decision two weeks ago from the highest court in Europe, according to law firm SJ Berwin.
The most notable feature of the decision was its confirmation that the European Commission’s merger decisions are subject to broad scrutiny by the courts, and its critical analysis of the tests applied. But this case is not only good news for anyone concerned about the economic theories used by the Commission to block mergers; it also sends a direct message to buyers who are willing to offer behavioural commitments to alleviate competition concerns.
The judgement from the European Court of Justice relates to the European Commission’s blocking of the merger between Switzerland-based Tetra Laval and French company Sidel in October 2001. Both companies are active in food packaging. Tetra Laval belongs to a group of companies that hold a dominant position in the drinks carton packaging sector, and Sidel is a leading company manufacturing and supplying machines used to produce polyethylene terephthalate (PET) plastic bottles.
The Commission blocked the merger between the two companies on the basis of its future “conglomerate effects”, the same theory used controversially to block the merger between GE and Honeywell in July 2001.
This theory – interestingly, out of favour in the US – suggests that a conglomerate can stifle competition even in a market it does not dominate; for example, by bundling two related products. The Commission used the theory to block the merger on the basis that the combined Tetra and Sidel entity would be able to extend or leverage Tetra’s dominance in carton packaging equipment into the market for PET packaging equipment, persuading its customers to use Sidel’s machines in addition to Tetra’s products.
However, the Commission’s decision was annulled by the European Court of First Instance – the court that hears appeals directly from the regulatory rulings of the European Commission on issues of both fact and law. Its judgement was one of three historic judgements – the others are Airtours and Schneider/Legrand – that overruled the Commission in its decisions to block these mergers.
These cases dealt a considerable blow to the Commission and its Merger Task Force, an entity that no longer exists.
The latest judgement significantly undermines the Commission’s reliance on the “conglomerate effects” theory, but is also critical of the Commission’s failure to consider the behavioural pledges offered by Tetra Laval relating to future conduct. It had dismissed these out of hand, and the court said it was wrong to do so.