National and EU competition authorities alike are generally opposed to any adaptation of competition rules in response to a crisis situation. The majority of their decisions confirm this stance. The fact remains, however, that in special cases such adaptations are implemented. This practice could evolve with the economic crisis, especially for the control of mergers with a Community dimension. If so, the European Commission, which is tasked with such control, would come under pressure.

At a colloquium on the crisis and competition, on 27 April in Paris, Louis Vogel, president of University Panthéon-Assas (Paris II), put the matter simply: competition law will not stand up to the crisis. So how can it adapt to the economic crisis at the lowest cost? The answer seems to be that competition law can tolerate 'exemptions' and 'flexibility'.

Certain national laws allow special exemptions for mergers that raise competition issues as a means of addressing a crisis. This method has its advantages and its drawbacks. On the positive side, the crisis is dealt with on the fringe of the legal system and will consequently not undermine the rules. On the negative side, "if there are too many exemptions in a legal system, some conclude that the law is nothing more than an economic policy instrument," explained Vogel.

STRONG PRESSURE

According to Dominique Brault, a lawyer specialised in EU and French competition law and a partner at the Herbert Smith law firm in Paris, "the European Commission will come under strong pressure along these lines [to grant exemptions]," even beyond the grounds of public interest recognised by EU law as prevailing over competition requirements: national security, media plurality and prudential rules.

Signals are already being seen. In France, first of all, the new Economic Modernisation Act enables the economy minister to counter a merger control decision taken by a national competition authority for reasons other than competition. In other words, the minister can invoke grounds of general interest to authorise a merger that would encourage the creation or safeguarding of jobs or stimulate French industrial policy.

The German system also allows for such exemptions, although it is applied with great restraint.

The British made a name for themselves in matters of exemptions with the takeover of the Scottish bank HBOS, based in Edinburgh, by its rival, Lloyds TDS. To justify its intervention, London amended the national law by adding a new public interest – the instability of Britain's financial system – on top of national security and media plurality.

FAILING FIRMS

Flexibility directly affects the fundamentals of law, as in the case of the 'failing firm' theory, conceived in the United States and imported into EU and French law. This theory allows authorisation, under certain conditions, of an anti-competitive merger when the target company is in danger of failing. Such reasoning is not based on the idea of an exception. It is purely competitive. "It states that there is no cause and effect relationship between the transaction and the adverse effect on competition since the target company would have disappeared from the market in any case," explained Vogel. The problem is that if such a theory were applied very liberally, it could render merger law completely meaningless. That, moreover, is why it has been used very little in US, EU and French competition law.

A subtextual question remains, namely the 'criteria' on which mergers are judged, which "in principle are highly supervised," noted Jacques Buhart, another partner at Herbert Smith in Paris. Under EU law, the Commission checks whether the merger significantly hampers actual competition on the market, notably by creating or strengthening a dominant position (as laid down in Regulation 139/2004 on merger control).

Are these economic criteria the only ones applied or are they being widened to industrial policy criteria? This is a debate the French adore.

EFFICIENCY GAINS

Just how far can such flexibility go? The legal experts agree that the Commission could in future take other criteria further into account to authorise a merger that raises competition problems, in particular 'efficiency gains'. "These include, for example, economies of scale that reduce production costs and can thus benefit the consumers of products manufactured by the firms involved in the merger," commented Sergio Sorinas, expert in EU and French competition law (Herbert Smith, Paris).

"The Commission has not always looked kindly on efficiency gains and sometimes even finds that they go against the operation. It sees them as offering an undue advantage over competitors," continued Sorinas. Today, although the Commission agrees in theory to consider efficiency gains as a positive element of the operation, such gains still have to be clearly demonstrated, identified and quantified by the parties before they can be seen as offsetting only partially certain negative effects of the operation, added the lawyer. All the same, "this is an area where the Commission can show more flexibility without really calling into question the fundamental principles of its analysis. It has a bit of leeway".

Are other criteria for derogations conceivable, such as the impact of a merger on saving jobs? "We're not there yet," noted Brault and Sorinas. The addition of such criteria would require amendment of the Merger Regulation. "But if the crisis drags on, there will need to be a debate," conclude the legal experts.

EXCEPTIONAL SITUATION

"In fact," stated Vogel, "I have a preference for exceptional means rather than for ordinary flexibility, which seems more dangerous. The use of exceptional means allows a problem to be isolated within the legal system and I have the impression that it is necessary with regard to the fundamental rules". That in fact is precisely how the Commission has responded to the financial crisis. It has not relied on ordinary texts, such as rescue aid or restructuring aid, because it may have deeply deformed them in the process. Instead, it made use of a special text that had almost never been implemented previously: aid to remedy a serious disruption to a member state's economy (Art. 87.3(b) of the EC Treaty). This measure allowed the drafting of temporary compatibility criteria meant to be disposed of once the crisis has subsided. "This seems to be the right method," concluded Vogel.

Flexibility directly affects the fundamentals of law, as in the case of the ‘failing firm’ theory

Cartels: Can the crisis prevent infringements?

“No,” said Caroline Montalcino, economic and financial general controller at the French Directorate-General for Competition, Consumption and Anti-fraud (DGCCRF), particularly for cartels (unlawful concerted agreements on prices or sharing of markets), which are very serious infringements of competition law actively fought by the Commission. She pointed out that the EU executive has held that the crisis situation may be “part of an analysis”. The Commission nevertheless laid down “strict conditions”: the crisis must be structural, the crisis cartel must be the only possible way of improving the situation, and the crisis must be harmful for consumers. In addition, the crisis must endanger the viability of the supply chain, undermine product quality or make products more costly. Proposed measures, added Montalcino, must be structural and “genuinely necessary”.