European Commission Clears Acquisition on “Failing Firm” Arguments
The European Commission (EC) recently provided an unusual example of an acquisition being cleared on the basis of the so-called “failing firm defence”. This allows the clearance of a transaction where, although normally it would be seen as anticompetitive, the target would have failed anyway and the buyer provided the best alternative owner.
The transaction was the acquisition of certain Shell refinery assets at Harburg in Germany by Nynas of Sweden, which the EC cleared on 2 September 2013 under the EU merger control rules. After the transaction, Nynas would be the only naphthenic base and process oil producer and the largest producer of transformer oils (TFO) in the EEA. It would face substantial competition only from Ergon, a US-based importer. Nevertheless, Shell demonstrated that it would not have continued to operate the Harburg refinery, as the refinery was economically unsustainable. Nynas’ business model was shown to be different. Further, other than Nynas, there were no alternative buyers. The EC was therefore able to apply the failing firm defence, stating that: “If this acquisition did not take place, the … plant would simply close down, dramatically reducing production capacity in Europe for a number of specific oil products. We authorised this acquisition because it is the only way to avoid a price increase for consumers”.
Classic Resale Price Maintenance Case in the UK
On 20 September 2013, the UK Office of Fair Trading (OFT) issued a Statement of Objections (SO; preliminary statement of case) to several companies in what appears to be a straightforward resale price maintenance (RPM) situation.
The agreements that are the subject of the SO, between a manufacturer of sports bras (DB Apparel UK Limited (DBA)) and three UK department stores, allegedly simply set a fixed or minimum resale price on a brand of sports bras. According to the OFT, these alleged agreements had the aim of increasing the retail prices of DBA’s Shock Absorber brand of sports bras in each of the three department stores.
This case, plus the UK investigation into Amazon also reported on in this newsletter and a UK investigation into the pricing of hotel rooms by online travel agents, shows that vertical restrictions on pricing continue to be a topic of strong regulatory interest in the UK (as elsewhere in the EU, with national competition authorities leading the way). Compliance programmes should as ever focus on this issue.
Minority Shareholding Under the Microscope in the UK
On 28 August 2013, the UK Competition Commission (CC; the second stage regulator), applying the UK merger control rules, required airline Ryanair to reduce its 29.8 per cent stake in airline Aer Lingus down to 5 per cent. This will be accompanied by obligations on Ryanair not to seek or accept board representation or acquire further shares. Ryanair and Aer Lingus compete on routes between the UK and Ireland.
The rationale for this decision was that Aer Lingus’ commercial policy and strategy were likely to be affected by Ryanair’s minority shareholding, in particular because it was likely to impede or prevent Aer Lingus from being acquired by, or combining with, another airline (in a market in which scale is important). The CC was also concerned that Ryanair’s minority shareholding was likely to affect Aer Lingus’ commercial policy and strategy in other ways: by allowing Ryanair to block certain shareholder decisions; by restricting Aer Lingus’ ability to issue shares and raise capital; and by limiting Aer Lingus’ ability to manage effectively its portfolio of London Heathrow Airport slots. Ryanair’s shareholding also increased the likelihood of Ryanair mounting further bids for Aer Lingus, with the associated disruption to Aer Lingus’ ability to implement its commercial strategy.
The case demonstrates that the UK merger control (and general competition law) implications of the acquisition of a minority stake by one company in a competitor need to be considered carefully. The same issue may arise in other EU jurisdictions. It should also be noted that the European Commission is currently consulting on potential modifications to EU merger control law, including whether to expand the EU merger control rules to address the anticompetitive effects arising from certain acquisitions of non-controlling minority shareholdings (the issue in the Ryanair/Aer Lingus case).
Amazon Ends Price Parity Policy; Other Online Sales Channels Warned
On 29 August 2013, the OFT announced that Amazon had decided to end its price parity policy in the EU. This policy restricted Amazon UK Marketplace sellers from offering lower prices on other online sales channels.
The investigation was started as a result of numerous complaints to the OFT regarding the price parity requirement in the agreements between Amazon and the third-party sellers trading on the Amazon UK Marketplace platform. Many such complaints were from the third-party sellers themselves, who were concerned that such arrangements restricted their ability to set prices on their own websites or other online sales channels.
The OFT was concerned that indeed the policy was potentially anticompetitive, since it may raise online platform fees, curtail the entry of potential entrants and directly affect the prices which sellers set on platforms (including their own websites), resulting in higher prices to consumers.
The OFT took the opportunity to provide a warning to other online sales channels, stating that “other companies operating similar policies [should] review them carefully” and that “businesses concerned that they are being prevented from setting their own prices should not hesitate to contact the OFT”. It also stated that the online retail sector continues to be a key priority for the OFT.
Additional European competition law news coverage can be found in our news section.
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