ECJ confirms no higher standard for blocking mergers short of dominance

CK Hutchison had appealed this to the EU General Court, whose 2020 judgment raised hopes for future consolidation in the telecoms sector and more broadly, by annulling the EC’s decision for reasons which effectively raised the bar for the EC to prohibit transactions in markets characterised by a few major players but falling short of creating a single dominant firm.

The ECJ’s judgment comprehensively reverses the General Court, restoring the previous understanding of the legal test and standard of proof. As such, it restores the EC’s wide scope to block mergers both in the telecoms sector and elsewhere that risk harming competition without creating a dominant position.

The road to the ECJ’s ruling

We reported on the EC’s decision and the General Court’s judgment in detail in an earlier alert (available here).

The key questions at issue in the litigation related to the interpretation of the legal test and the associated standard of proof to be applied by the EC in reviewing mergers under the EU Merger Regulation. This was in particular when considering transactions that do not create or strengthen a single dominant player or a position of ‘collective dominance’, but rather involve the combination of two (or more) of a small number of large market players.

On these points, the General Court materially tightened the conditions to be met before such a deal can be blocked by the EC. It ruled that in these circumstances: a transaction must not only eliminate important competitive constraints that the parties had exerted on each other, but must also result in a reduction of competitive pressure on the remaining operators; that to be classed as an “important competitive force” (a concept from EC guidelines playing a critical role in its assessment), a firm must “stand out” from its rivals; and that parties needed to be “particularly close” rather than merely “close” competitors.

In addition, the General Court held that the EC needed to show “with a strong probability” (not merely on the “balance of probabilities”) that the transaction would result in a significant impediment to effective competition (SIEC).

Further, the General Court’s judgment appeared to require the EC to consider, on its own initiative and as part of its analysis of a merger’s effects on price, certain “standard” efficiencies. This marked a significant departure from the generally understood position that the EC was only required to consider efficiencies that were proven by the parties (reflecting that, as the EC’s guidelines observe, most of the information allowing efficiencies to be assessed is solely in the possession of the merging parties).

As such, the judgment suggested greater scope for mergers in concentrated markets (but falling short of creating a dominant player) to be cleared, raising hopes for consolidation in telecoms markets and elsewhere.

Unsurprisingly, the EC appealed and the hopes raised by the judgment were significantly diminished last year, when Advocate General Kokott recommended that the ECJ overturn it. Her opinion rejected the General Court’s holdings regarding the conditions for finding an SIEC in cases involving unilateral effects and concluded that the same “balance of probabilities” standard of proof applies in all cases, rather than a higher “strong probability” standard applying in certain cases. She also faulted the General Court’s “rather innovative approach” to efficiencies. (See further our alert here.)

ECJ fully reverses the General Court’s ruling

The ECJ’s judgment essentially follows Advocate General Kokott’s opinion.

• As regards the legal test, it underscores that the EC is able to block any transaction resulting in a SIEC. As such, it may be sufficient for competition between the merging parties to be lost, without the transaction also having to reduce the pressure on the remaining operators. Similarly, it is not necessary for a firm to “stand out” from its rivals (an “important competitive force” may simply have more influence than its market share suggests), or that the merging parties be “particularly” close competitors (“close” may be enough).
• On the standard of proof, it endorses a balance of probabilities standard in all cases. It is sufficient that the EC “demonstrate, by means of a sufficiently cogent and consistent body of evidence, that it is more likely than not” that the transaction would or would not significantly impede effective competition. The ECJ observes that while the forward-looking, predictive nature of the analysis the EC must carry out requires that it be undertaken “with great care”, the same consideration precludes a requirement for the EC to meet a particularly high standard of proof.
• It rejects the General Court’s treatment of efficiencies, confirming that only claims proven by the parties need to be considered.
• It finds that the General Court distorted various aspects of the EC’s decision.

Given the extent of the General Court’s errors, as well as the fact that it did not rule on a number of grounds advanced by CK Hutchison at first instance, the ECJ concludes that the case must be remitted to the General Court for a fresh ruling, rather than deciding the case itself.

Implications for telecoms mergers and beyond

For the transaction itself and its impact on the UK telecoms markets at issue, the litigation has been moot for some time. O2 merged with Liberty Global’s Virgin Media in 2021, and CK Hutchison is now seeking to merge Three UK with Vodafone’s UK MNO business. The litigation has no direct implications for that latter merger, since it will be decided upon by the UK Competition and Markets Authority (CMA), applying its own legal test and guidance.

However, as we noted in our alert on the Advocate General’s opinion, the judgment is highly significant for parties wishing to pursue mergers within EU markets, both in telecoms and in other concentrated sectors.

By endorsing the EC’s approach to assessing mergers giving rise to unilateral effects, the ECJ’s judgment may make it more challenging to secure clearance than had been hoped following the General Court’s ruling – making careful risk assessment vital and, potentially, re-establishing the need to give careful consideration to potential remedies when parties assess in-market M&A opportunities in relatively concentrated sectors.

In that respect, attention in the telecoms sector will now turn to the ongoing phase 2 review of the proposed combination between the Spanish operations of Orange and MásMóvil (another ‘four to three’ MNO merger). What remedies the EC requires in that case will be a signal as to the scope for in-market consolidation elsewhere. At a time when divergence between the CMA and the EC is in the news more than ever (not least following the Microsoft/Activision case), we expect the CMA will nonetheless be watching closely.