Tetra Laval decision: good news for business?

Swiss-based Tetra Laval group (Tetra) includes the Tetra Pak packaging business, which is the worldwide leader in carton packaging for liquid food and drink. Sidel is one of the world's leading players in the production and supply of stretch blow moulding (SBM) machinery used in the production of polyethylene terephthalate (PET) plastic bottles.

The Commission's prohibition decision was based on an assessment of the "conglomerate" effects of the merger; that is, the competitive effects of combining products in neighbouring or unrelated markets.

The Commission found that the merger was likely to:

In October 2002, the European Court of First Instance (CFI) annulled the Commission's decision to prohibit the deal, and in January 2003, Tetra was given conditional approval to close the transaction (see News brief "Annulling Commission decisions: the CFI flexes its muscles", www.practicallaw.com/A27273).

The Commission appealed the case to the ECJ on a number of points of law:

Standard and burden of proof. The Commission argued that the CFI had exceeded its jurisdiction under Article 230 of the EC Treaty, which allows for the judicial review of Commission decisions on specified legal grounds but not a review of the facts or the merits of the parties' arguments. Because the CFI had re-examined and questioned the Commission's economic assessment and required that the Commission produce "convincing evidence" of conglomerate effects, the Commission argued that the CFI had:

The ECJ's findings confirmed that the Commission has a margin of discretion in economic matters on the one hand and endorsed the CFI's review of the Commission's economic assessment on the other. The ECJ held that such a review by the CFI would be particularly important in cases involving alleged conglomerate effects, which necessarily involve an element of crystal-ball gazing.

In this way, the ECJ implicitly endorsed the CFI's requirement that the Commission provide "convincing evidence" in conglomerate cases, with two apparent consequences:

Although the ECJ did not rule on the Commission's argument on the presumption of the legality of mergers, its general endorsement of the CFI's findings on this aspect of the Commission's appeal strongly implies that conglomerate mergers, at least, are legal unless they can be shown to be anti-competitive under Article 2 of the EC Merger Regulation (4064/89).

Behavioural commitments. The Commission challenged the CFI's ruling that in assessing the effects of the merger, the Commission should have taken into account the behavioural commitments offered by Tetra, namely undertakings to manage Sidel and Tetra Pak as separate entities on the one hand and not to breach Article 82 of the EC Treaty, which prohibits abuses of a dominant position, on the other.

The ECJ endorsed the CFI's findings: the Commission should not dismiss behavioural commitments out of hand; the undertakings concerning Tetra's future conduct were relevant to an assessment of whether it was likely that Tetra would in fact leverage its dominance on the carton market.

The only criticism that the ECJ made of the CFI was to reject the requirement it placed on the Commission to assess whether any anti-competitive effects of a merger might be reduced by hypothetical future sanctions for abuse of dominance. Such a requirement would run counter to the principle of ex ante control embodied in the ECMR (that is, ensuring that there will not be any anti-competitive effects before a deal goes ahead).

The ECJ's wholesale rejection of the Commission's appeal and effective extension of the CFI's power of review appears to bode well for the business community. Similar sentiments were expressed about the series of Commission defeats in the CFI in 2002, including the annulment of the Tetra/Sidel prohibition decision, which helped trigger sweeping reforms of the EC merger control regime (see News brief "EC merger control: reform at last", www.practicallaw.com/A37469). These reforms included:

Since the introduction of the new ECMR, at least one concentration would have been prohibited, it was rumoured, but for the new checks and balances (see News brief "Sony/Bertelsmann: the Commission changes the record", www.practicallaw.com/A43381) and only one deal has been prohibited (ENI/Energias de Portugal/Gas de Portgual, www.practicallaw.com/A47547).

But the merger control reforms and the Tetra judgment may, paradoxically, place additional burdens on business. As a consequence of the judgment, the Commission is likely to continue conducting ever more detailed and drawn-out fact-finding exercises and will be more anxious to ensure that its decisions are water-tight, with quite probably negative implications on the speed and cost of merger proceedings.

The standard of proof imposed by the ECJ is now so high that it is doubtful whether the Commission will attempt to prohibit a merger on grounds of conglomerate effects in the near future. In any event, it is almost inconceivable that the Commission would attempt to do so before the CFI's judgment in the General Electric (GE) and Honeywell appeals, which also concern leveraging arguments, and which are expected before the summer. Those judgments will help shape the guidelines on conglomerate mergers that the Commission is planning to release.

In the meantime, both sides have declared that the Tetra judgment supports their arguments in GE and Honeywell and former Competition Commissioner Mario Monti has been reported as saying of the Tetra prohibition: "I still think it was the right decision".