The European Court of Justice Resurrects an Old Tool to Tackle Below Threshold Mergers

Overview

• The European Court of Justice (CJEU) brought back to life an old theory which allows acquisitions, which fall below EU and national merger control thresholds, to be challenged post-completion under abuse of dominant position rules (Article 102 TFEU).

• The judgment creates yet another layer of legal uncertainty for M&A deals in concentrated markets which fall below merger control thresholds as dominant companies acquiring a competitor may be subject to fines, behavioral remedy or even face risk of demerger.

• The CJEU is silent on whether its jurisprudence can apply to transactions previously cleared by a competition authority pursuant to merger control rules. As a consequence, this may allow mergers which are cleared under merger control regimes to be challenged later under Article 102 TFEU.

• This constitutes a further tightening of merger control scrutiny for non-reportable deals, after the European General Court validated in July 2022 the possibility for Member States to refer such cases to the European Commission (EC) in accordance with Article 22 of the EU Merger Regulation (Illumina/Grail, see here^[1]).

What happened

In the French market for terrestrial television broadcasting, where only three companies were active, TDF Infrastructure Holding S.A.S (“TDF”) acquired control of Itas S.A.S. (“Itas”) on 13 October 2016. The acquisition was below the merger control thresholds set out by the EU Merger Regulation (nr. 139/2004) (“EUMR”) and the French merger control law (Article L. 430?2 of the Commercial Code). It was therefore not subject to ex ante control by the Commission or the French Competition Authority (“FCA”), nor was a referral made to the Commission under Article 22 of the Merger Regulation.

The third company in the market was Towercast S.A.S.U. (“Towercast”). Prior to the acquisition, TDF already had by far the largest market share and Towercast lodged a complaint with the FCA alleging that the acquisition constituted abuse of a dominant position by TDF contrary to Article 102 TFEU. Towercast relied inter alia on the Continental Can (6/72) case law, which pre-dated the adoption of merger control regulations in the EU. In that case, the CJEU held that where a dominant undertaking strengthens its position through concentration in such a way that the degree of dominance reached substantially fetters competition, it constitutes an abuse of dominance pursuant to Article 102 TFEU.

In its decision of 16 January 2020, the FCA accepted that TDF held a dominant position but rejected the complaint that they had abused their position. The competition authority held that concentrations within the scope of the Merger Regulation are exclusively and solely governed by the Merger Regulation and hence the Continental Can case law is obsolete. Following the appeal of the FCA’s decision by Towercast, the Paris Court of Appeal referred that question to the CJEU for a preliminary ruling.

Background and CJEU judgment

So far national competition authorities (“NCA”) have adopted diverging views in relation to whether Article 102 TFEU could be applied to below threshold concentrations. As mentioned above, the FCA rejected that proposition, but others have applied Article 102 TFEU in this context:

• In 2016, the Belgian Competition Authority (“BCA”) ruled on an application for interim measures lodged by a competitor (Aklen-Maes) against the acquisition by AB InBev of a competing local brewery, Brouwerij Bosteels. It ruled that an acquisition that is below merger control thresholds can be caught by Article 102 TFEU but only to the extent that there is a restriction on competition which can be distinguished from the mere effect of the concentration itself. This interpretation was upheld by the Brussels Court of Appeal; and

• In 2015, the Luxembourg Competition Authority opened an investigation after a complaint alleging that the cinema chain Utopia had abused its position when acquiring its sole competitor CinéBelval. Although the authority did not find anticompetitive effects, because CinéBelval was likely to have gone out of business had it not been acquired, the authority was nevertheless willing to rely on Article 102 TFEU to investigate the concentration.

It is notable that Belgium has notoriously high thresholds (meaning that many transactions escape the BCA’s review) whereas Luxembourg still hasn’t enacted merger control rules. This context may explain their more activist approach in the application of Article 102 TFEU. Nevertheless, both invoked the direct applicability of EU primary law and primacy over national competition rules, which has now been confirmed by the CJEU.

In its judgment of 16 March 2023 (Case C-449/21, Towercast), the CJEU clarified that a concentration which has not been the subject of ex ante merger control, either at EU or at national level, can still be subject to ex post control under Article 102 TFEU by a NCA or national court, applying national procedural rules, and be found to constitute an abuse of a dominant position.

The CJEU judgment clarifies the scope of application of Article 102 TFEU and sets the following conditions for a transaction to infringe it:

• The concentration (i) does not meet the EU and national merger control thresholds and (ii) has not been referred to the Commission pursuant to Article 22 EUMR (see here^[2]);

• The purchaser must be in a dominant position prior to the transaction;

• The degree of dominance reached as a result of the acquisition must “substantially impede” competition in the relevant market. This is considered to occur where the behavior of the undertakings remaining in the market is dependent on the dominant undertaking; and

• The concentration is susceptible to affect trade between Member States.

Key practical implication: ambiguous implementation and less legal certainty (yet again)

The threshold to bring a successful abuse of dominance case will remain high. Conditions for finding an abuse are much more stringent than the ‘significant impediment on effective competition’ test used in most national ex ante merger control reviews. It is likely the only mergers to be caught will be “2 to 1” or “3 to 2” mergers, or so-called “killer acquisitions” of innovative start-ups by established undertakings, for example in the fields of internet services, pharmaceuticals or medical technology.

Even so, the judgment creates significant legal uncertainty for dominant companies:

• Limitation period may be long – An infringement procedure under Article 102 TFEU can be opened as long as the limitation period to bring a case before national courts according to national rules has not expired. This will often be a period of five years from closing of the transaction.^[3] In addition, courts may find that as long as the acquired business remains under control of the dominant company, there is a single and continuous infringement (“SCI”) of Article 102 TFEU, meaning that the limitation period never starts.^[4] A similar approach has been taken under the merger control regime in relation to gun jumping, where the limitation period does not start until the gun jumping situation is resolved (either through relinquishing of control or the transaction ultimately being cleared). Therefore, if an SCI of Article 102 TFEU is found to exist, a concentration could be caught indefinitely;

• The judgment is ambiguous about cleared mergers – According to the Advocate General, “a concentration which has been approved under the more specific rules of merger control, and the effects of which on market structure and competition conditions have been declared to be compatible with the internal market, could not as such be qualified (any longer) as an abuse of a dominant position within the meaning of Article 102 TFEU.”^[5] Although, as the CJEU is silent on this point, the risk remains that, even if a transaction is cleared by a competition authority, a third-party may lodge a complaint in front of a NCA that cleared the transaction (prospects of success would arguably be low) or in another jurisdiction where the NCA has not ruled on the transaction;

• Potential applicable remedies, including divestiture, are not clear – The CJEU decision is also silent on the potential remedies that could be applied. According to the Advocate General’s Opinion, “in view of the primacy of behavioral remedies and the principle of proportionality, there is not usually a threat of subsequent dissolution of the concentration, but rather only the imposition of a fine.” However, considering the particularly severe impact on the market structure required for a transaction to be considered abusive, a competition authority or a court might choose to impose a divestiture as a proportionate remedy;

• The CJEU leaves ample room for private litigation – Direct applicability of Article 102 TFEU means that third parties (competitors, customers, suppliers) can lodge a complaint to a NCA but also attempt to seek damages or injunctive relief. The CJEU even seems to grant national courts a pivotal role: “That article [Article 102] creates rights for individuals which national courts must protect.”^[6] Some national courts do not have as sophisticated review tools as the NCA which increases the risk of overenforcement.

A few days after the CJEU’s blessing, the BCA opened an investigation into a possible abuse of dominance in relation to the acquisition by Proximus—the Belgian telecommunication incumbent operator—of its rival Edpnet. Following this transaction, Proximus remained the only market player for the wholesale and retail supply of fixed telecoms services on its own network. A spokesperson for the BCA commented that it could order Proximus to unwind its acquisition (a position that will still need to be tested in court).

Overall, however, the scope of application remains limited, especially considering that NCAs have the opportunity to refer cases (even after closing) to the EC for its review pursuant to the Article 22 upward referral mechanisms. Nevertheless, dominant companies—including relatively small companies active in niche markets or companies active in more “classic” sectors not primarily targeted by the EC’s change of policy on referral—should carefully assess the risk of abuse of a dominant position. This risk will need to be factored into transaction documents, such as with the type of remedies to be offered if the transaction is contested. To mitigate the chances of enforcement post-closing, dominant companies may want to seek comfort from relevant NCAs. Even then, as the Towercast case shows, dominant companies may not be safe from a complaint by a third party in front of a NCA or court.