Carmen Peli and Carmen Korsinszki*
as part of the European Union, romania has implemented a merger control system that is largely similar to the European one. Under this system, transactions resulting in a change of control over a certain company or business must be cleared by the romanian Competition Council to the extent they exceed the legal thresholds and at the same time are below the de minimis thresholds set by EC merger regulation no. 139/2004.
The merger control system was put in place by Law 21 of 1996. Under the domestic antitrust rules, an economic concentration is performed through the merger of previously independent undertakings, through the creation of full-function joint ventures or through acquisition of control over an undertaking. Transactions above the following thresholds must be examined by the Competition Council:
- the aggregate turnover of the parties (e.g., the purchaser and the target) and their
groups is above €10 million; and
- at least two companies of each involved undertakings have registered a turnover
in Romania exceeding €4 million.
The Competition Council issued in 2004 a series of instructions and guidelines in order to bring practical and procedural clarifications. A detailed description of the merger authorisation procedure is provided within regulation on merger authorisation from June 2004 (the ‘merger regulation’). The Competition Council has also issued instructions in march 2004 on remedies in the event of commitment decisions (‘remedies instructions’) and Guidelines for the calculation of turnover in merger procedures. The clearance test is the absence of the creation or strengthening of a dominant position as a result of which competition might be significantly restricted or distorted. The procedure includes a Phase i analysis and, if the Council suspects that the clearance test will not be met, it
* Carmen Peli is a partner and Carmen Korsinszki is an associate at PeliFilip.
can start a Phase ii investigation. most transactions are cleared under Phase i, with very few having undergone Phase ii so far.
II YEAR IN REVIEW
i General considerations Statistics
There have been 41 decisions clearing mergers in 2009, compared with over 80 in 2008. most transactions were carried out in sectors that were particularly vulnerable to the effects of a financial crisis or economic downturn, including the retail or distribution of fast-moving consumer goods or iT and electronic products and constructions. There were 20 decisions referring to consumer goods, 15 regarding various services sectors and six in the energy and heavy industry sectors.
Trends and predictions
The financial crisis and general absence of financing for acquisitions and development clearly showed in 2009. most transactions were carried out this year either as a result of previous arrangements or as a need for financial strengthening.
There are few landmark transactions this year that have undergone clearance procedures before the Competition Council. one of them is the acquisition by Cosmote (part of the Deutsche Telekom Group) of Telemobil, the smallest local operator on the mobile market, another might be advent’s acquisition of ozone’s pharmaceutical portfolio, while on the market for general retail of daily consumer goods some local players were acquired either by investment funds, by their franchisors or by larger players.
many transactions have been carried out in industries that were particularly vulnerable to the effects of the financial crisis that hit Romania in late 2008. The retail and distribution may be low margin sectors in the absence of proper size and were therefore rapidly affected by the absence of financing. The telecoms industry requires a large amount of capital for the financing of network maintenance or expansion, and an operator with a small market share is surely endangered by the general unavailability of financing.
For 2010, the trend looks set to continue, as the few private transactions announced so far have been related to the retail sector. Two large concentrations carried out as a result of public policy in the energy sector are currently being reviewed by the Competition Council and a short overview can be found in Section V, infra.
Main issues raised in 2009
as mentioned, from an antitrust perspective, an interesting transaction was the Cosmote/ Telemobil acquisition. For unclear reasons, the enforcer did not analyse collective dominance in a merger in the telecoms industry (operators), while the general reasoning on overlap of licences and availability of spectrum was dismissed in just a few lines.
Gun jumping was another aspect analysed by the antitrust authority in a few decisions, either sanctioning purchasers for failure to notify in time or granting
authorisations for partial implementation of the transactions ahead of issuance of the antitrust clearance. For the first time, the Competition Council carried out a dawn raid to check if the transaction was implemented before its clearance.
in many cases, the Competition Council addressed issues regarding non-compete obligations assumed by the parties. in all these cases, it remained committed to the guidance given in the merger regulation and authorised non-compete clauses in a very conservative and narrow manner.
Lack of sufficient transparency in RCC decisions
in all decisions, the Competition Council has completely redacted information that would have otherwise served as guidance for the future practice. This goes in some cases beyond the needs of protecting the parties’ proprietary information. For example, the information regarding the market shares in examinations of overlapping was entirely redacted, without replacement by any guiding instrument, such as ranges. The decisions leave us in the dark as to what is the approximate level of overlap that may raise concerns in the eyes of the Competition Council or what overlaps in horizontal mergers are likely to be authorised without further investigation. This lack of transparency is even more regrettable when it concerns industries where the players have substantial information at hand regarding their market share, such as the pharmaceuticals industry. any player in this industry has access to databases largely used in the pharmaceutical industry (e.g., Cegedim, imF) and would therefore be able to review and calculate the market shares of the parties to a transaction based on the information regarding the relevant markets. The parties do not own the data any longer, as they conveyed it to the independent database. Why this secret is so closely kept by the Competition Council is a serious question.
ii Unbearable lightness of reasoning: Cosmote/Telemobil
The Competition Council’s regular standard of analysis goes into many details: even for small transactions it seeks to understand the relevant market (players, market shares, positions, etc.) and be satisfied that following the merger the competition conditions would not change to a significant extent.
The decision approving the Cosmote/Telemobil concentration is scarce in all relevant aspects: description of competition conditions; market definition and analysis of transaction’s effects; and reasoning. This is even more unusual given some competitors’ allegations regarding spectrum concentration, creation of dominance on the market for the supply of networks and associated infrastructure as well as the local fixed incumbent’s (parent of Cosmote) practice of conditioning the supply of fixed data services on the acquisition of fixed or mobile voice services from Cosmote. Some of these allegations are not even examined in the clearance decision; other allegations, like the fact that post- merger the entire CDma band will be held by the Cosmote group, are dismissed on the basis that the telecoms regulatory authority must prevent the restriction, hindering or distortion of competition in connection with spectrum administration. Unlike the European Commission (e.g., in the T-Mobile/Orange UK case), the Competition Council was satisfied with a short-term view on the competition conditions regarding the lack of substitutability of fixed-point internet access to mobile internet; this issue had been raised by competitors considering the spectrum concentration on the low-frequency
bands, which are arguably cheaper to exploit than other frequencies and hence, mobile and fixed-point internet access could be substitutable on these frequencies; the Competition Council concluded that, even if the low-frequency CDma bands are held entirely by Cosmote and its group, there will be no restriction of competition, as the current demand and offer conditions do not allow such substitution.
The decision does not provide any reasoning regarding the risk of collective dominance, on a market where, as long as it had access to sufficient financing, Telemobil was a maverick player particularly in the business segment. overlaps are acknowledged on 10 out of 14 markets identified, but are deemed not to raise competition concerns, without any other explanation.
The Competition Council’s availability and capacity for prompt analysis (the decision was issued in about three months after the application) should be welcomed by the business community. However, a guarantee of future prompt and positive resolution is not assured. on another hand, the Council has in the past cleared a few mergers in a market, only to later bring allegations of abuse of collective dominance or find that cartels were favoured by the high market concentration.
- Gun jumping and financial distress
The parties to a merger cannot take any implementing measures until the final clearance by the Competition Council and in its practice so far, the authority has been very keen on enforcing this provision. The legislation allows the parties to request derogation from this rule, but there have been very few granted so far.
in 2009, the Council issued two derogation decisions allowing the parties to take certain implementation measures in cases where immediate rescue programmes had to be put into effect swiftly. The mergers regarded different local players on the market for retail consumer goods and the paper supply market, two economic sectors affected by the economic downturn in Romania. In the first case, the target company, Fidelio, registered significant financial difficulties, with decreasing sales, the reduction of invoices payment terms and general payment difficulties. In the second case, the critical financial situation of Pehart Tec, the target company, encouraged the Council to approve immediately the capital increase operation allowing the target to obtain liquidity for the payment of outstanding debts.
These two cases indicate that the Competition Council considered issues that occurred as a result of the liquidity crisis and the general market deterioration and was capable of reacting promptly. in the absence of procedural or regulatory guidance, these decisions are useful instruments, showing that a full substantive analysis of the merger will be carried out before a decision granting derogation is issued.
- Conservative view in the assessment of non-compete obligations
The Competition Council has always been careful in its assessment of ancillary restraints and in particular of non-compete obligations assumed by the parties to a merger.
The merger regulation treats non-compete obligations differently depending on whether they are assumed by a seller at exit or by the parent companies to a joint venture. in all cases, non-compete obligations must be limited to the relevant market activities, from both a product and geographic perspective. Time-wise, the non-compete assumed
by a seller under a sale-purchase agreement are cleared as directly linked and necessary to the transaction if they are limited to two years after the transaction, or three years if know-how is transferred. in a joint venture arrangement, the parties must limit their non-compete in time to five years.
The Council addressed non-compete issues in several decisions and one public communication. in several cases, it only issued the clearance after the parties amended the transaction documents such that the non-compete would be limited in scope and time. There are two aspects that may raise interest:
- in transactions with a staged exit, a non-compete will be treated as ancillary to the
first transaction if the following cumulative conditions are met:
- the subsequent transaction must be concluded between the same parties;
- the subsequent step is carried out within two years from the first step approved by the Council; and
- no change of control will occur as a result of the second
The clarification should be useful, as no guidance existed so far for this type of transactions, which is quite frequent. However, the last condition seems to deny the purpose of the staged clearance and further practice should tell whether the Council would be willing to be more flexible on this aspect; and
- in a decision regarding a joint venture agreement, the Council reinforced a rule that was so far applied selectively, namely that the non-compete obligations between the parent companies and the joint venture company must be limited to five years. This is not only a different position compared to the EU merger regulations, but also awkward, since in the case of joint ventures the clearance test includes the absence of coordination risks between the parents and the What happens after the five years? Will the parents be able to compete with the JV, without triggering coordination risks? No clarifications were made regarding this.
III THE MERGER CONTROL REGIME
The current romanian merger control regime has been in force since 1997. a reform of certain details was carried out in 2004, to update the model with the latest merger control rules issued in the European Union. after romania’s accession to the EU (in 2007), there have been no further updates of the rules and the EC merger regulation applies directly when needed.
Under the merger clearance procedure provided within the merger regulation, economic concentrations meeting the thresholds must be submitted for approval to the Competition Council within 30 days from the signing of the merger arrangements (in the case of mergers and acquisition of sole control) or from the day the involved undertakings become aware of the transaction (applicable for any other situation).
The parties must submit a standard notification form accompanied by attached relevant documentation requested in the annex to the notification form. The Competition Council may ask questions and it regularly uses this right. once the parties provide all necessary information, the notification shall be considered effective. No later than 30 days after the notification becomes effective, the Competition Council must decide
whether the concentration (1) comes under the scope of the merger rules, (2) does not raise serious antitrust concerns and the concentration is cleared or (3) raises competition doubts. The assessment test is whether the concentration creates or consolidates a dominant position potentially infringing competition on the romanian market or on a significant part of thereof. In the latter case, the Competition Council is likely to initiate an investigation that shall be finalised within five months from the date when the notification became effective.
Once the entire procedure is finalised, the Competition Council shall issue:
- a non-approval decision if the merger raises serious competition concerns;
- a decision clearing the merger, if the Competition Council ascertains that the analysed transaction is not deemed to create or to consolidate a dominant position threatening competition on the relevant national markets; or
- the Competition Council may as well consider it appropriate to impose a commitment decision that shall provide those remedies to be fulfilled by the parties. The Competition Council shall choose from a series of remedies provided within the remedies instructions (e.g., the divestment of a part of the business, the termination of exclusive arrangements, the transfer of an important technology).
The Merger Regulation also provides a simplified clearance procedure that can be used in very limited circumstances and in any case only if the aggregate market shares of the parties do not exceed 15 per cent. in practice the Competition Council is reluctant to use this procedure even for quite small transactions and the assessment of how the transaction affects the ‘normal course of competition’ requires as much information and time as the regular procedure. Therefore, the interest in using a simplified procedure has faded with time.
During the review procedure, the access to the file is allowed only to the merging parties (i.e., the buyer’s and seller’s shareholders and the merging company’s managers). The Merger Regulation seems to preclude the access to the file for third parties and the Competition Council is always reluctant to allow such access. nevertheless, the Council constantly invites third parties (i.e., the merging parties’ competitors or commercial partners, regulatory authorities or any other interested entities) to submit observations or any other comments or information whenever a new submission for merger approval is addressed to the Competition Council. Interested third parties may challenge the final decision under the regular procedure regarding the resolution of administrative disputes (e.g., a third party may challenge a commitment decision imposing the termination of a lawful distribution agreement concluded between the merging entity and the third party).
The initiation of the merger clearance procedure stops the transaction and the parties cannot take any measure as to implement the transaction. Whenever the Competition Council finds proof of gun jumping a fine of up to 10 per cent of the turnover from the year preceding the infringement decision may be applied. The parties may, however, ask the Competition Council to grant derogation and allow implementation of the transaction before its clearance if sufficiently strong financial or economic arguments are made.
The Competition Council’s decision may be challenged by the parties before the Court of appeal Bucharest within 30 days from its communication. The Court of appeal’s decision may in its turn be reviewed by the High Court of Cassation and Justice.
in practice, it will usually take from two to three months for the Competition Council to clear a merger not raising dominance concerns. it is the case, however, that these time frames are exceeded, even if no particular dominance concern is raised. For example, in 2009 it took one month for the Competition Council to clear a merger on the IT market between national players on the market (i.e., the notification was lodged on 9 October 2009 and the decision was issued on 13 November 2009); however, in the same sector, the parties waited for almost six months before seeing their transaction cleared in Phase i, without any conditions and without an indication of particular antitrust concerns. another lengthy procedure in 2009 was on the markets for pharmaceutical products,1 when it took approximately four months for the Competition Council to finally clear the merger while the antitrust authority found no or only minor overlaps between the merging companies. it is worth mentioning that the parties are constantly able to accelerate the procedure before the Competition Council by correctly preparing the notification form, by promptly responding to the Competition Council requests for information and by being proactive and proposing solutions (reports, etc.) to alleviate any concerns of the case handling team.
IV OTHER STRATEGIC CONSIDERATIONS
Since accession to the European Union, the Competition Council has not been called to issue a decision in merger cases that may affect several member States, while still falling under the European de minimis thresholds. additionally, based on the public information available, it did not claim jurisdiction over a case examined by the European Commission, under the referral procedure of the EC merger regulation.
in these cases, clearly the parties’ counsels should be in the position to advice on the best course of conduct on a case-by-case basis (application for clearance with the European Commission or clearance in several EU member States). Consideration should be given to the fact that the romanian Competition Council has not issued any rules of procedure dealing with cases, and although the European rules will be followed, some delays attributable to the need to cooperate with other competition authorities may be expected. Another consideration should regard the timing of the notification: in practice as shown above the Competition Council is quite keen on sanctioning parties for failures to notify within the legal deadline (30 days after the signing of the transaction document). As there are no such deadlines for notification of the European Commission,
1 Decision no. 66/2009 cleared the merger between SC ozone Laboratories Pharma Sa and Perpetuem Limited (part of advent Group) taking control over a number of assets previously pertaining to SC ozone Laboratories SrL, oP ozone Pharma Limited, ozone Laboratories BV and ozone Laboratories Limited.
the legal counsel should take care of the risks of referral of a transaction notified to the
European Commission back to the romanian Competition Council.
But purely romanian transactions may also raise strategic issues: when to start discussions with the Competition Council, what information is available in the short term, whether expert reports will be needed, etc. in several cases in 2009 the duration of the authorisation process was excessive. While the merger regulation provides that a clearance decision may be issued within 30 days from the date when complete information is submitted by the applicant or applicants, in practice the Competition Council uses its right to request supplementary information every time. Even if in a year of financial crisis one can assume that a rapid clearance is of paramount importance, the 2009 practice shows that there are decisions issued four or five months after the application, although the transactions did not ultimately raise any antitrust concerns. From the facts of the cases it appears that these situations occurred mostly as a combination of insufficient party experience to handle a merger notification process and a very institutional and stick-to-the-book approach by the Competition Council. if they are concerned with the quality of the outcome as much as timely approval, the parties are well advised to use experienced counsel for this process.
V OUTLOOK & CONCLUSIONS
The Competition Council continues to have a conservative approach to the assessment of mergers, while there are many areas where further clarification should be expected. The Council’s positive approach is welcomed, however, as is flexibility in allowing the parties to implement the transaction before the antitrust clearance, if the financial condition of the target requires this. The parties should expect that this derogation is not granted immediately and without effort: they need to assure the Council that following the full assessment they will clear the transaction, and that this will happen in 45 days or more.
As the economic downturn is likely to continue in Romania at least in the first half of the year, we will probably continue to see the trend of consolidation on retail and distribution markets continuing. already, a few decisions have been issued in these sectors.
other interesting developments are the creation of two national champions (i.e., Hidroenergetica and Electra) from the existing state-owned players in the energy sector in the context of the reorganisation of the national energy sector. The transactions were notified to the Competition Council and raised debates on how they will affect different markets in the energy sector (i.e., the generation, the transmission, the distribution and the supply of heat, the exploitation of mines and of lignite mines and the generation of nuclear fuel and the exploitation of coal mines). Prior to the mergers, the degree of concentration on the market for electricity generation was already relatively high (HHi 1800). The Council had already raised concerns regarding the existence of long-term arrangements concluded with preferential customers, the presence of high barriers to entry on the markets, the low rate of supply switching by customers and the lack of market liquidity. it has, therefore, initiated an inquiry for a better understanding of the energy sector. in the case at hand, the merger may be deemed to lead to the creation or
strengthening of a dominant position (individual or collective) given that: the electricity generation market passes from a structure with several players to a structure with only two players, each having over 44 per cent market share; the HHI would increase to 9,000 with remaining competitors holding less than 10 per cent of the market; and electricity imports do not represent a competitive threat, due to insufficient connections with neighbouring countries. Post-transactions, the mergers are likely to raise anti- competitive effects both at the horizontal level (i.e. significant price increases, possibility for merging companies to limit output) and the vertical level (i.e., upstream foreclosure, favouring the exchange of commercially sensitive information and raising barriers to entry to both upstream and downstream markets). The creation of the champions might also raise state aid concerns, since some of the merging companies are heavily indebted. it remains to be seen whether and how these transactions will be cleared and whether the Council will have sufficient power to impose commitments or remedies.
About the Authors
International league tables place Carmen Peli as a top-tier competition lawyer in Romania. She has assisted clients in landmark cases in Romania, including the first investigations in the pharmaceutical and the telecommunications industries; the first investigation of an alleged collective dominance; Phase II merger control investigations; state aid issues in the context of privatisations; vertical integration; and unbundling in the energy sector.
Recent work includes: advising a leading international mobile communication operator in relation to two investigations; advising a leading pharmaceutical company in relation to investigations by the Romanian Competition Council; advising various clients in relation to structuring of distribution and agency policies, sales, marketing and pricing policies, training, etc.
Carmen is a frequent speaker at seminars on Romanian and EU competition law matters as well as the author of numerous articles on Romanian and European antitrust and merger control law. Carmen is a founding member of PeliFilip, a dynamic law firm focused on corporate and M&A, competition, energy, commercial, projects and infrastructure and capital markets.
Carmen Korsinszki is an associate with PeliFilip, having graduated with merit from the Faculty of Law at the University of Bucharest, and holds a Masters degree in EU and International law from the French-Romanian College of European Studies, University Paris 1 Pantheon-Sorbonne and also a Masters degree in International and European business law from the University of Strasbourg, France.
Carmen is currently advising clients in antitrust investigations, mergers and public procurement in various sectors.
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