The Legal 500

This briefing highlights a number of recent and proposed changes to the European Commission’s guidance on EC competition law of which practitioners should be aware.

Merging guidance - a consolidated jurisdictional notice on the EC Merger Regulation

A transaction falling within the scope of the EC Merger Regulation¹ requires prior notification to, and clearance by, the European Commission (the Commission) before it can be implemented.² The Commission is expected to adopt a consolidated jurisdictional notice (the new jurisdictional notice)³ early this year, intended to assist practitioners in identifying whether a transaction needs to be notified to the Commission.

The existing guidance on whether a transaction falls within the scope of the EC Merger Regulation is contained in four separate notices, each of which addresses a separate technical issue. ⁴ These notices were introduced in 1998 to enhance transparency in the application of the previous EC merger regulation;⁵ they were not revised when the EC Merger Regulation was adopted in 2004. However, the Commission has since acknowledged that the existing guidance does not fully reflect the changes introduced by the EC Merger Regulation in 2004; nor does it incorporate certain important jurisdictional developments that have resulted from the practical operation of the EC merger regime over the years.

The new jurisdictional notice is designed to address this growing gap. It not only consolidates the existing technical guidance - which remains largely the same - but also draws upon the Commission's experience in applying the rules on EC merger control to clarify policy on jurisdictional issues and incorporates relevant case law from the European Court of Justice and the Court of First Instance.⁶

From a practitioner's perspective, the expanded and updated references to case law and policy and, in particular, the new technical guidance on the treatment of investment funds and outsourcing agreements are welcome. However, the notice also introduces certain new elements, in particular the possibility that the acquisition by a single shareholder of ‘negative control' may give rise to a notification requirement. This would represent a significant departure from existing practice. Under the present rules, sole control (and, accordingly, the requirement of prior notification and approval) may arise where de facto sole control arises - ie the ability to determine the outcome of a vote at a general meeting. In future the acquisition of a minority interest, falling short of de facto control, but accompanied by veto rights over certain strategic decisions, may trigger the notification and approval requirement. The draft notice provides only brief guidance on how this would operate in practice.

Nevertheless, the new jurisdictional notice is, overall, a logical and user-friendly document - it is certainly an improvement on the existing, fragmented jurisdictional guidance relating to the EC Merger Regulation, and should facilitate legal certainty in this complex area.

Clarity for leniency applicants

On 7 December 2006 the Commission adopted a revised notice on immunity from fines and reduction of fines in cartel cases (the revised leniency notice).⁷ The revised leniency notice - which replaces the previous leniency notice (dating from 2002⁸) - addresses concerns from the business and legal communities that the Commission's leniency process lacked transparency and, in particular, that potential applicants lacked sufficient guidance on the kind of information and evidence required in order to satisfy the conditions for immunity and reduction of fines. Consequently, the application process was perceived to be lengthy and uncertain, and therefore did not offer sufficient incentives to potential applicants.

The revised leniency notice is explicitly designed to address these shortfalls through a number of changes, including:

• More detailed guidance on the information and evidence required to satisfy the immunity thresholds, including an additional requirement to provide a corporate statement describing the way in which the cartel functions and its participants.
• Additional guidance that applicants seeking a reduction in fines must provide not only ‘added value' but also ‘compelling evidence', namely, evidence requiring little or no corroboration.
• The requirement for ‘full and continuous co-operation', previously limited to immunity cases, has been extended to applicants for reductions in fines, in accordance with the spirit of the leniency notice.
• The rule requiring applicants to terminate their participation in a cartel immediately has been relaxed in the recognition that, in some cases, continued participation may be required to avoid alerting other cartel members and jeopardising the Commission's investigation.
• A discretionary marker system has been introduced so that, where justified, an applicant can ‘reserve' its place in the queue whilst it collects sufficient information and evidence to satisfy the immunity thresholds.
• The introduction of a new procedure designed to protect corporate statements from discovery in subsequent civil damage proceedings.

For businesses and practitioners alike, these revisions to the Commission's existing leniency regime should result in more clarity and transparency, and should facilitate future leniency applications. The changes are also designed to produce a more effective leniency programme by streamlining the handling of applications by the Commission; in addition, it should reduce the need for supplementary applications where a leniency applicant has failed to provide the Commission with sufficient information and evidence on the first attempt.

New Fining Guidelines - the stick gets bigger...

On 1 September 2006, the Commission published new guidelines on the calculation of fines for breaches of the EC prohibitions against cartels/other restrictive practices and abuses of dominant positions under Article 81 and Article 82 respectively of the EC Treaty (the new fining guidelines).⁹

The new fining guidelines revise the former guidelines (dating from 1998)¹⁰ with a view to increasing the deterrent effect of fines, complementing the Commission's leniency programme and improving the transparency of the Commission's fining policy.

The existing maximum fine - up to 10% of a company's annual turnover in the preceding year - remains the same.¹¹ However, the new fining guidelines are designed to introduce a more objective mechanism for calculating fines within this statutory limit.

The principal changes are as follows:

• Under the former guidelines, the basic fine constituted a lump sum calculated to reflect the gravity of the infringement and multiplied by 10% for each year of the infringement. The new fining guidelines provide that the basic fine may be set at up to 30% of the value of the company's sales in the relevant goods or services within the EEA, multiplied by the number of years of participation in the infringement.
• The new fining guidelines introduce an additional ‘entry fee' of between 15% and 25% of a company's value of sales to be imposed, in addition to the basic fine, irrespective of the duration of the infringement. The entry fee is principally designed to deter companies from even entering into ‘hard core' anti-competitive arrangements, such as price-fixing agreements. However, there is also scope for it to be applied in respect of other categories of infringement.
• Repeat offenders may see their fines increased by up to 100% in respect of each previous offence.¹² The Commission will take into account decisions of the national competition authorities applying Articles 81 and 82 EC, as well as its own previous decisions, when considering multiple offenders.
• The other aggravating and/or mitigating factors that the Commission may take into consideration to either increase or decrease the level of the ultimate fine have also been revised. For example, a company may now claim mitigation where it can prove that its involvement in an agreement was limited because it in fact avoided applying the agreement by adopting competitive conduct in the market - this is significantly narrower than the mitigation previously available under the 1998 rules.

As a result of these changes, companies should be prepared to receive significantly larger fines for engaging in anti-competitive behaviour, particularly where the infringement has lasted over a number of years and has involved an economically significant market. This is aimed at not only increasing the deterrent effect of Articles 81 and 82 EC, but also complements the Commission's leniency programme by making it more attractive to assist it in exchange for either immunity or a reduction in fines. In a decision adopted on 24 January 2007, the Commission imposed fines totalling over £750m on the participants in a cartel involving gas-insulated switchgear. The fines included the highest fine ever imposed by the Commission on a single undertaking (£396m, imposed on Siemens).

Finally, although the new fining guidelines are designed to establish a more transparent methodology, they fall short in two key respects. First, they only concern the imposition of fines by the Commission at EU level. This means that national competition authorities will still be free to apply a different methodology for calculating fines when applying Articles 81 and 82 EC. Secondly, the Commission reserves the right to apply a different methodology, and even exceed the 30% limit on the new basic fine, in special cases or where there is a need to ensure a ‘sufficiently deterrent effect'¹³ - thereby introducing a significant measure of unpredictability within the new fining guidelines.

By David Harrison, partner, and Laura Patao-Caminas, trainee solicitor, Berwin Leighton Paisner LLP.