Protecting Against Protectionism in EU M&A

In a recent paper, we explore EU law covering EU cross-border mergers. These are typically more difficult and costlier than purely national mergers. Additionally, political hurdles can exist. In a time of global political and institutional transformations away from open markets and towards protectionism, the opposition to takeovers and mergers based on public interest considerations, such as national security, sees a revival.

This trend towards protectionism, together with a focus on industrial policy, has different facets. For example, recently France and Germany seemed to defend the idea of European champions, corporations that can compete on the global financial and economic scene. This idea explains their joint opposition to the EU Commission’s (the Commission) decision to block a proposed merger between the two rail titans Alstom (France) and Siemens (Germany) on competition grounds. At the same time, there seems to be a revival of nationalism in some EU countries. This affects politicians’ attitude towards market integration. In such cases, national identities are used against open global or EU-wide markets. A phenomenon witnessed not only in the context of Brexit.

Yet, companies can use EU law to defend their cross-border takeovers or mergers against attacks based on real or perceived national public-interest grounds. A first line of defense is offered by Article 4 (1) of the Cross-border Merger Directive (CBMD) and the free-movement provisions. Companies can raise such defenses in national courts where they feel that a state has violated the above-mentioned provisions. Where these EU rules have been infringed, national law is set aside because of the EU law concepts of supremacy and direct effect.

Article 4(1)(b) CBMD requires companies to “comply with the relevant provisions and formalities of the national law” but also contains a non-discrimination clause. This non-discrimination requirement follows from the requirement that cross-border mergers be governed by the same rules that would apply to “a given internal merger.” Thus, Article 4(1)(b) prevents the application of rules that would apply discriminatorily, in particular those designed to apply only to cross-border mergers, i.e. discrimination de jure (such prohibition could equally be established by means of the EU’s general non-discrimination principle).

But EU law also prohibits de facto discrimination and all other measures that might make cross-border takeovers or mergers more difficult. Of particular relevance are the freedom of establishment and the free-movement of capital. Any measure that would make their exercise less attractive is deemed a forbidden restriction. National legislation that allows the blocking of takeovers or mergers based on public interest is, therefore, subject to further scrutiny. These rules must in fact protect a legitimate public interest and must be proportional to that aim. Thus, protectionist measures are prohibited.

Another line of defense is Article 21 of the European Union’s Merger Regulation (EUMR). Under the EUMR, the Commission assesses whether a cross-border change in corporate control restricts competition. And Article 21 EUMR regulates the extent to which member states might block mergers that have been cleared by the Commission. Article 21 distinguishes between privileged and non- privileged public interests. Privileged public interests are media plurality, public security, and prudential rules.

Where a member state wants to oppose a Commission-approved merger on the basis of any other (non-privileged) public interest, it must notify the Commission beforehand. The Commission will then assess whether the public interest claim complies with EU law (in particular, the non-discrimination and the free-movement provisions). Thus, all non-privileged public interest claims need to be cleared ex ante by the Commission. Member States are allowed to block cross-border take-overs or mergers only after the Commission’s competition clearance based on privileged public interests. Yet, even these privileged public interests are subject to challenge under the non-discrimination and free-movement rules in front of national courts.

The law, therefore, gives companies certain tools to protect themselves against member states that aim to block a merger or takeover on public interest grounds. Substantively, these protections are the non-discrimination principle and the free-movement rules, which are examined either by the Commission under Article 21 EUMR or by national courts. However, the main advantage and difference is procedural. Article 21 EUMR offers the companies a much higher level of protection: It is the member state that needs to notify the Commission of its (non-privileged) public interest and get clearance ex ante by the Commission. In contrast, court proceedings regarding compliance with non-discrimination and free-movement take place ex post as a form of judicial review. They might take a long time and therefore have a chilling effect.

This effect can be especially strong, given that not all courts in member states readily apply EU law. Unfortunately, only transactions by large (often multinational) companies that have a combined aggregated worldwide “turnover” (revenue) of at least 2.5 billion Euros are able to meet the threshold of the EUMR. Thus, only those companies that reach this threshold can take advantage of the benefits of Article 21 EUMR.

Though EU law offers some protection for companies wanting to engage in cross-border takeovers or mergers, smaller companies can only take advantage of that protection through ex post court proceedings. Only larger companies can benefit from the ex ante protection offered by the EUMR while also having the further ex post protection offered by national courts. The difference in treatment seems to be at odds with the Commission’s official position on small and medium-sized enterprises (SMEs) as the backbone of Europe’s economy. In fact, these companies represent more than 90 percent of all businesses in the EU and have created around 85 percent of new jobs and provided two-thirds of the total private sector employment in the EU in the past five years.[1] The lack of uniformity in the assessment of national interest defenses for cases of cross-border restructuring of SME seems a significant but unnecessary obstacle to more effective market integration.

ENDNOTE

[1] https://ec.europa.eu/growth/smes_en, last access 08/04/2019.

This post comes to us from Marco Claudio Corradi, senior research fellow at the Stockholm Centre for Commercial Law at Stockholm University and the Institute for European and Comparative Law, Oxford, and visiting assistant professor at ESSEC Paris, and from Julian Nowag, associate professor at Lund University and research associate Oxford University Centre for Competition Law and Policy. The post is based on their recent paper, “The Relationship between Article 4 (1)(b) Cross-Border Merger Directive and the European Merger Regulation,” available here.