Update: competition

State aid measures to combat the global financial crisis

The global financial crisis which has taken hold in the last couple of months has given rise to a flurry of activity in the state aid field as a number of financial packages have been put in place to save struggling banks and to ensure the stability of the financial systems of various member states. These packages necessarily need prior EC clearance as state aid.

To protect financial stability and avoid spill-over effects on the rest of the economy, new temporary arrangements were put in place by the European Commission on 1 October to allow quicker approval decisions on emergency rescue measures in favour of financial institutions. This has seen, for example, the recent approval of rescue aid to Hypo Real Estate in Germany within a couple of days of notification and the approval of aid to Bradford & Bingley in the UK within just 24 hours of formal notification following urgent informal discussions with UK authorities on how to structure the package to limit distortions of competition.

The Commission has also published guidance (in the form of a Communication) to member states as to how they can structure support schemes, such as guarantees or recapitalisation schemes in a way that would be compatible with EU state aid rules. The communication considers that Art.87(3)(b), under which the Commission may allow state aid 'to remedy a serious disturbance in the economy of a member state', is available as a legal basis for aid measures undertaken to address the financial crisis in light of the level of seriousness that the current crisis in the financial markets has reached and of its possible impact on the overall economy of member states. The Commission has recently approved a number of support schemes under Art.87(3)(b) in the UK and other EU member states.

The Commission's recent activity in this field shows its willingness to adapt its usual procedures in exceptional circumstances. While the above measures have helped a number of struggling financial institutions, struggling firms in other sectors are unlikely to have support approved on the same basis in the absence of a comparable risk to the wider economy.

Creation of a new public interest consideration in UK merger control

Following the announcement by Lloyds on 18 September 2008 of its intention to merge with HBOS, the secretary of state issued an intervention Notice to the OFT stating that he believed the stability of the UK financial system ought to be specified as a public interest consideration under the Enterprise Act and that this may be relevant to the consideration of the Lloyds/HBOS merger situation. An order was subsequently laid before Parliament introducing this new public interest consideration into the Act. As with the state aid measures described above, the intention was to ensure that the regulatory process did not prevent rapid action being taken to address issues arising from the global financial crisis.

The UK merger regime provides limited powers for the secretary of state to intervene in mergers in order to protect legitimate public interest considerations. Previously, the only specified public interest considerations had been national security and plurality of media ownership. However, it was felt that the new public interest consideration was necessary as the financial services sector is vital to the economy and the failure of a bank would leave individuals and businesses unable to access savings, raise finance or meet day-to-day financial obligations, with potential knock-on effects in other parts of the financial system.

Following its review of the transaction, the OFT concluded that there was a realistic prospect that the anticipated merger would result in a substantial lessening of competition in relation to personal current accounts, banking services for small- and medium-sized enterprises in Scotland and mortgages. It was felt that it would not be appropriate to deal with the competition concerns by way of undertakings in lieu of reference to the Competition Commission (CC). The secretary of state (with whom the final decision rested) however considered that the stability of the UK financial system outweighed the competition concerns identified by the OFT and therefore decided not to refer the merger to the CC.

This is an exceptional case and is the first time a public interest consideration has been created in order specifically to facilitate a particular merger. As many commentators have noted, the merged entity will of course be subject to the ordinary competition rules in its daily operations.

BSkyB/ITV

A recent judgment of the CAT, dismissing an appeal by BSkyB, has upheld a decision of the secretary of state of January 2008 (implementing a report from the CC) that BSkyB's acquisition of a 17.9 per cent per cent shareholding in ITV would give rise to adverse effects on competition. The CAT held that the CC had been entitled to find in its report that the acquisition constituted a relevant merger situation, on the basis that it granted BSkyB the ability to exert material influence over the policy of ITV, and that it would lead to a substantial lessening of competition. The judgment supported the CC's approach to the consideration of material influence, finding that BSkyB had identified no defect that would render the findings perverse or irrational.

The CAT did however find that the CC had incorrectly applied the plurality of the media public interest consideration in finding, in this regard only, that the acquisition would not be expected to operate against the public interest. The judgment provides interesting analysis of the media plurality public interest consideration, this being the first time that the secretary of state has intervened in a merger on this (or any other) ground since the Enterprise Act gave decision-making authority to the OFT and CC. The CAT held that the Commission ought to have treated BSkyB and ITV as wholly controlled by only one person and treated the fact that in practice BSkyB shares control over ITV with others as irrelevant for the purpose of the plurality assessment.

This case is also noteworthy for the fact that the CAT went on to consider separately in a second judgment whether to remit the media plurality question back to the CC and secretary of state. It held that the remedy imposed (requiring BSkyB to reduce its shareholding to 7.5 per cent) was not undermined by the report's deficiency in relation to the plurality issue and that remitting the plurality issue to the CC and secretary of state would therefore serve no useful purpose: it could not result in any lesser remedy being considered appropriate (the reduction in shareholding was still necessary to remove the adverse effect on competition) and there was no realistic prospect of any additional or different remedy being imposed as the existing remedy would also be sufficient to remove the effects of the transaction on the plurality of media owners.

Uncertain future for parallel trade

On 16 September, the European Court of Justice (ECJ) handed down judgment on a reference from a Greek court relating to the ability of a dominant company to restrict output to wholesalers in order to prevent parallel trade. In this case, GSK had limited supply to pharmaceutical wholesalers to a level which was sufficient to satisfy national demand but did not allow those wholesalers to sell additional quantities of the drugs to customers in other member states.

The ECJ held that it was not objectively justifiable for a pharmaceuticals company in a dominant position to cease to honour the ordinary orders of an existing customer for the sole reason that part of the quantities ordered were then exported to other member states with higher prices; the differences in price regulation across Europe did not on their own justify supply restrictions.

However, the court did recognise that dominant companies should be entitled to protect their own commercial interests (and hence limit supply) if confronted by orders that are out of the ordinary in light of the size of those orders both in relation to the requirements of the market in question and the previous business relations between that undertaking and the wholesalers concerned.

This judgment has failed to remove the uncertainty regarding dominant firms' ability to combat parallel trade, with both parallel traders and pharmaceutical companies having welcomed the judgment as furthering their position.

In particular, the lack of detailed guidance as to what constitutes an 'ordinary' order (which has been left for national courts to ascertain) may well lead to further litigation. Pharmaceutical companies may however now be wary of routinely accepting overly large orders from the outset as this may set a precedent for what will be deemed an ordinary order further down the line.

New Liner consortia block exemption

On 21 October the Commission published a preliminary draft block exemption regulation for liner shipping companies participating in consortia. Liner shipping essentially involves the provision of regular services on which cargo is transported by container and consortia are defined in the draft regulation as arrangements between two or more carriers which provide international liner shipping services exclusively for the carriage of cargo, chiefly by container, the object of which is to bring about co-operation in the joint operation of a maritime transport service.

Consortia arrangements have benefited from a block exemption since 1995 and the Commission has now opened consultations (with comments invited by 21 November 2008) on a draft Regulation revising the existing block exemption that is due to expire on 25 April 2010. If adopted, the revised regulation will remain in force until 2015.

An accompanying technical paper published by the Commission explains that consortia generally help to improve the productivity and quality of liner shipping services through the economies of scale and efficiency they allow in the operation of vessels and utilisation of port facilities; customers benefit from the improvements in service quality and the global coverage that such arrangements bring about.

This comes at a time however when the Commission has been phasing out other sector-specific block exemptions such as the aviation block exemption and the liner conference block exemption, and when the only other sectoral block exemption regulations in force (the Insurance Block Exemption and the Motor Vehicle Block Exemption) are undergoing review, with the possibility that they will not be renewed. This could therefore be the last sector-specific block exemption adopted by the Commission.

Commission imposes highest-ever cartel fine

On 12 November the Commission announced that it had imposed fines totalling ‚¬1.38 billion on four European producers of car glass involved in cartel activity between 1998 and 2003. The companies were found to have been involved in illegal market sharing and the exchange of commercially sensitive information regarding deliveries of car glass in the EEA.

Not only is this the highest total fine imposed on a cartel and the first time fines have exceeded the ‚¬1 billion mark, but the fine of ‚¬896m imposed on Saint-Gobain is also the highest-ever individual fine; in fact it is almost double the previous highest individual fine in a cartel case '“ ‚¬479m imposed on ThyssenKrupp for its participation in the elevators and escalators cartel in 2007. The fine on Saint-Gobain was increased by 60 per cent as it was a repeat offender.

This groundbreaking fine comes hot on the heels of a ‚¬ 676m fine imposed by the Commission on 1 October on participants in a paraffin wax cartel. These are the first significant fines imposed since early 2007 and act as a clear and stark reminder to companies engaged in cartel activity that the Commission remains intent on sending out a strong message that such activity will result in severe penalties. The Commission's press release notes the right of injured parties to seek damages for loss arising from the operation of the cartel.