Merger harmony

European competition commissioner Mario Monti is under fire for his handling of high-profile mergers.

The commission has pledged to review its merger regulation but will these reforms go far enough? Anne Mizzi talks to lawyers about how controls can be improved

European competition regulators have been working overtime as they try to live down the humiliation of a string of adverse European court judgments.

And lawyers are watching closely as European competition commissioner Mario Monti fights back strongly against pressure to junk the European model of regulation in favour of the US version, in which regulators must have the courts' permission to block mergers.

Instead, Mr Monti has unveiled an extensive list of reforms to his directorate-general (see further down).

The trigger for the move was a series of defeats in the European Court of Justice's court of first instance and judges' scathing criticism of the commission's investigative methods.

At the end of last month, the Luxembourg court found that the commission had been wrong to block the high-profile mergers of Tetra Laval and Sidel - the Swedish and French drinks packaging firms - and of French electronics companies Schneider and Legrand.

And it rapped the regulator's knuckles for not doing its homework.

In the Schneider ruling, the judges pointed out 'errors, omissions and contradic-tions in the commission's economic reasoning'.

But signs are that the Brussels legal market is standing behind 'Super Mario' and his team and have cautiously welcomed the reforms announced after the two latest defeats.

Sources say the commission feels betrayed by a fellow EU institution.

'They are both embarrassed and bemused, and feel let down,' says one lawyer.

Mr Monti's department has blocked eight mergers in two years, starting with Airtours' 850 million hostile takeover of First Choice in his first week.

Airtours' appeal cost a reported 2 million and took three years.

It succeeded in June, showing it was possible to challenge a prohibition in the courts.

GEC's $43 billion bid for Honeywell caused a furore when the commission rejected it despite US approval last year.

And in Tetra Laval and Schneider, the court not only decided against the commission, but also hammered it for basing its decisions on assumptions, deductions and hypothesis rather than on fact.

Slaughter and May's competition head Malcolm Nicholson, who led the Airtours appeal, says: 'The court was unhappy with the performance of the commission in a number of the cases that have come before it.

It has been quite critical of fact finding, evidencing and establishing the burden of proof and so forth and [the judges] have been quite outspoken in a number of their criticisms.'

Ashurst Morris Crisp partner Denis Waelbroeck , who advised Tetra Laval, points out: 'Many mergers are unproblematic.

These aren't normal horizontal mergers, they are very delicate, borderline cases, and very awkward for the companies concerned.

'In our case they said: "They are so big there must be a problem." We said: "Well, hold on a moment - we have one client in cartons and another in plastics.

It's all a bit abstract.

In such a case you cannot assume, you must establish that there are comple-mentary products involved.

These are not straightforward horizontal mergers."'

But some lawyers feel the setbacks could strengthen the commission.

Mr Waelbroeck agrees with John Schmidt, a competition partner at Linklaters, who says the decisions do not indicate something rotten at the commission.

'The court gave the commission quite a bashing in these cases, but it doesn't mean that the commission's procedures and analysis are bad per se,' says Mr Schmidt.

'The commission is taking stock.

They were reviewing merger regulation in any event, but the court was very forceful.

But I don't think the commission is going to be weaker as a result,' says Mr Schmidt.

The commission has admitted to weaknesses in decision-making and economic analysis and claims the review represents a major overhaul of the system, which was already under way.

Mr Monti has vowed to win back the trust of the legal and economic communities.

But do the reforms go far enough?

Herbert Smith partner Stephen Kinsella says: 'People will always say they don't go far enough, but most of it is a good step in the right direction.

'We are waiting to see the detail of what the commission wants in the proposals.

In the end it's a management issue and many of the changes will affect internal matters, not introduce legal rights.'

Like Mr Kinsella, Mr Nicholson is reserving judgement.

He says: 'As regards the review panel, the reforms do not go as far as I would have wished, but they are better than nothing.

'I would have separate teams responsible for considering and writing the decisions.

The merger task force is the prosecuting authority but should they be responsible for writing the decision?' he asks.

Although the reforms may not go as far as some would have liked, they certainly reach further than they would before Airtours, Tetra Laval and Schneider.

Linklaters has advised its clients that the commission may now be more careful to block mergers in future.

After Airtours, the commission passed the P&O/Carnival merger with no strings, signalling perhaps that the commission is becoming warier about stopping deals if it cannot back the decision with hard facts.

Mr Kinsella, who advised Carnival, says that Schneider and Tetra were 'pre-Airtours behaviour' and adds: 'It will be interesting to see what happens in cases notified after that.'

The reforms fall into three broad categories: internal reforms, substantive changes, and improving access to the courts by speeding up judicial reform.

Some would like to see a specialist independent body set up to review the commission's work.

Others would like more substantive change than has been proposed, even following the US model.

The judicial reforms are also likely to play a key role in future.

But to make this possible, member states must agree to pay more for judicial resources.

The commission is now backing a move to tap the EU purse for more funds for the court.

If it gets the money, it plans to set up a specialist competition chamber at the court.

Raising funds is one thing, but lawyers are also concerned about plans to extend the commission's deadlines, as they say the tight deadlines is one of the major advantages of the EU system.

Already, lawyers complain that the inadequate provision of information is used by the commission as an excuse to re-set the clock and that extensions will be used if they are available, whether necessary or not.

Merger control is a sensitive area for clients because of the big bucks involved.

Not only are competition lawyers reluctant to come across as trying to influence the courts in any way by commenting in the press, but they must also worry about their clients.

Mergers are now getting more scrutiny than ever before.

Not only is the commission keen to get things right, the mergers and acquisitions downturn means that all eyes are on the fewer mergers that are notified and national regulators are left twiddling their thumbs.

Under article 81 of the Treaty of Rome, national and European courts have concurrent enforcement jurisdiction.

Talks are under way to set thresholds for referral, which should form part of the regulatory reform.

It seems that Mr Monti is determined to preside over the reforms.

He has ruled out falling on his sword and it seems unlikely that heads will roll in his department as a result of the Airtours, Tetra Laval and Schneider investigations.

The commissioner announced the reforms at a recent International Bar Association conference in Brussels.

'I think he put on a good performance,' says Mr Kinsella, who is vice- chairman of the IBA's antitrust and trade law committee.

'Monti was really quite disarming.

Nobody likes to lose cases and the criticisms are quite serious, but it's not a disaster to lose cases.

You would expect that from time to time.'

The next battle Mr Monti faces is where to draw the line between US and EU anti-trust theory.

'The danger is to forget that there is a lot of the commission's work in the past that was very good and gave the EU system an advantage over the US process.

You shouldn't throw out the baby with the bathwater,' says Mr Schmidt.

'In Airtours, the commission got its law and economics wrong; in Schneider it cut corners, but the economic theory was sound.

GE/Honeywell is a big transatlantic battle between economic theory in the US and EU,' he surmises.

'It always is a very controversial area if you are talking about a power that can block the largest merger in the world.'

Mr Monti clearly has his work cut out.

But there is one thing in his favour - the economic downturn may give his home improvement team a little extra time to carry out the work before the next merger boom kicks in.

Anne Mizzi is a freelance journalist

The reforms - EU competition investigation

EU competition commissioner Mario Monti has announced plans to:- Monitor the Merger Task Force (MTF) more closely; - Propose regulation to simplify referral of cases to member states;- Publish draft notice on horizontal mergers, and;- Improve notifying parties' rights of access to files.And he announced plans to adopt best practice guidelines on: - Case handling;- Notifying parties and third parties, and; - Staffing and resources.

He also announced plans to: - Extend use of 'devil's advocate panel' - a fully briefed investigative team, which debates the merits of the case with interested departments; - Appoint a chief economist to advise the MTF;- Look at establishing a specialised competition chamber at the European court of first instance;- Introduce a new timeframe - two weeks extra for phase two investigations, and;- Introduce a pre-notification procedure.