Merger control review below filing thresholds – the ECJ Towercast judgment adds one more arrow to the quiver

On 16 March 2023, the ECJ decided that a M&A transaction, which was not subject to ex-ante EU merger control, can be reviewed – from an ex post perspective – as to whether the acquirer (through the acquisition) abused its dominant position within the meaning of Article 102 TFEU (prohibition of the abuse of a dominant position). This allows national competition authorities to apply Art. 102 TFEU to non-notifiable mergers. The judgment therefore provides competition authorities in the EU with a significant additional tool for their scrutiny of transactions, which are not reportable because the (mostly turnover-based) thresholds are not met. The tool could turn out to be even more effective since a review under Article 102 TFEU would usually be conducted after the closing of the transaction and thus at a time when the standard merger control toolbox is, save for a few exceptions, usually empty. The judgment supplements the EU Commission's new referral policy under Article 22 of the EU Merger Regulation (EUMR), which is predominantly triggered by the goal to extend the review of non-reportable "killer acquisitions".

Background

The ECJ judgment traces back to a complaint filed by the company Towercast with the French competition authority. Towercast is active in France in the market for terrestrial television broadcasting. In its complaint, Towercast maintained that its competitor TDF had abused its dominant position within the meaning of Article 102 TFEU by acquiring the only other competitor in the market, the company Itas. The acquisition of Itas by TDF was not reviewed under the merger control rules of the EU or France since neither the turnover thresholds of the EUMR nor those of French merger control law were met. Towercast put forward that through the acquisition of Itas, TDF would hinder competition on the upstream and downstream wholesale markets for digital transmission of terrestrial television services by significantly strengthening its already dominant position.

The French competition authority rejected the complaint and maintained that the EUMR is the exclusive competition law regime on EU level for concentrations as defined in Article 3 EUMR (such as the acquisition of another company) and that therefore member states are barred from applying Article 102 TFEU to such concentrations. Towercast lodged an appeal and the Court of Appeal made a reference for a preliminary ruling to the ECJ, seeking guidance, in essence, whether it is possible for a national competition authority to subject a concentration operated by an undertaking with a dominant position to an ex post assessment against the standard of prohibition of abuse of a dominant position within the meaning of Article 102 TFEU (where that concentration does not meet the relevant turnover-related thresholds of the EUMR and national merger control law) and therefore no ex ante assessment had taken place in that regard.

The ECJ judgment

The ECJ answered the question in the affirmative. The prohibition of abuse of a dominant position laid down by the TFEU permits an ex post control, at national level, of a concentration of companies provided the transaction has no community dimension.

The ECJ's conclusion is based on the finding that Article 102 TFEU as a provision of the TFEU (primary law), which produces direct legal effects, cannot be limited in its scope by provisions of the EUMR (secondary law) since this would run counter to the hierarchy of norms. Article 102 TFEU has such direct effects: the abuse of a dominant position is plainly prohibited by the TFEU and not exemptible in any way. Thus, in principle, each M&A transaction could be reviewed ex post as to whether or not the parties violated Article 102 TFEU. According to the ECJ, the supplementary application of Article 102 TFEU contributes to the effective protection of competition in the internal market, particularly regarding concentrations problematic under competition law that do not meet the thresholds under merger control law and are therefore not subject, in principle, to ex ante control.

The ECJ points out that according to the EUMR itself, Articles 101 (ban on cartels) and 102 TFEU (prohibition of the abuse of a dominant position) are not sufficient to control all concentrations. This may prove to be incompatible with the system of undistorted competition envisaged in the TFEU, but does not mean that the EUMR envisaged to constrain the member states in applying these provisions. With the EUMR, the EU introduced a single procedural instrument (a “one-stop-shop”) applicable to the prior and centralised examination of transactions for those with an effect on the market beyond the national borders of a member state. With the entry into force of the EUMR, the recourse to the EU procedural rules for the implementation of Art. 101 and 102 TFEU became "superfluous". The ECJ finds, however, that the legislature did not intend to (and could not) render irrelevant the control carried out at the national level of a concentration under Article 102 TFEU. Legislatures have recourse to national procedural rules for that purpose.

Limitation of the applicability of Art. 102 TFEU?

The application of Art. 102 TFEU seems to be excluded if the transaction is subject to the merger control rules of the respective national law. Unlike the Advocate General, the ECJ does not explicitly discuss this important topic, but apparently presupposes it as the text of the judgment as the reply to the referred questions show (para. 52, 53). It is unclear whether this blocking effect only refers to merger control under the respective national law of the authority intending to apply Art. 102 TFEU. The wording in the judgement refers only to the “applicable national law”.

Standard for the substantive assessment?

If a national competition authority reviews a transaction under Art. 102 TFEU, it is then for the national authority to assess whether by that conduct the acquirer, who is in a dominant position on a given market and has acquired control of another company on that market has, substantially impeded competition in that market.

As the ECJ points out, it follows from the case-law (from the time prior to the introduction of the EUMR when Art. 102 TFEU was applied to transactions with an EU dimension) that the mere finding that a company’s position has been strengthened is not sufficient to establish that there has been abuse. This is because it must be established that the degree of dominance thus achieved substantially hinders competition: that is to say, leaves only companies dependent on the dominant company. This test differs from the substantive test of the EUMR introduced in 2004 (and in the meantime also adopted in most EU countries), which focuses on a "significant impediment to effective competition" and allows for an efficiency defence. On the other hand, the standard under Art. 102 TFEU is generally stricter than the merger control standard. It remains to be seen what this means in practice. If the national authorities refer to the pre-EUMR practice of the European Commission (which applied Art. 102 TFEU at that time to transactions), the substantive assessment in “Art. 102 TFEU merger control” cases could be thrown back into the 1980s.

Practical consequences

The Towercast judgment introduces additional complexity to M&A transactions:

• Transactions not meeting the thresholds for prior merger control under the EUMR or the applicable national law (and have not been referred to the Commission under Art. 22 EUMR) may be scrutinised under Art. 102 TFEU by national authorities.
• The judgment is an additional blow to the principle of legal certainty. The EU Commission's new referral policy under Article 22 EUMR confronts companies already with the possibility of a merger control review of closed transactions. For companies with a dominant position in a market (or even the suspicion of such a position), however, additional "deal insecurity" has now been introduced by the judgment.
• Legal uncertainty is increased by the fact that violations of Article 102 TFEU can be brought before civil courts by each party impacted by abusive behaviour. It is not yet clear what practical differences will arise from the fact that the substantive test under Art. 102 TFEU differs from the EUMR. This particularly concerns the efficiency defence, which is recognised under the EUMR's "significant impediment to effective competition (SIEC)" test and may not be applicable under the “substantial hinderance of competition” test under “Art. 102 TFEU merger control”.
• There is also uncertainty as to the application of Article 102 TFEU by a member state on transactions subject to national merger control in other member states. In particular, the question arises whether Art. 102 TFEU is blocked for all member states if the competition authority of just one member state has reviewed, and ultimately approved, the transaction under its domestic merger control rules. The judgement does not provide clarity in this respect.

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