Since the Treaty of Rome (signed 25 March 1957, entered into force on 1 January 1958), there have been thousands of EU Regulations and Directives, covering every conceivable aspect of society, its citizens and its businesses. It may be assumed that about 85 per cent of all regulatory laws affecting most businesses in the EU today are derived from one or more EU Regulations or Directives and there is ample evidence that a substantial number of business laws in other European countries are strongly influenced by such EU laws. The main purpose of this article is to review the state of affairs after 50 years of evolution and to provide some suggestions as to how to navigate the complex world of EU Regulations and Directives.
The story is, indeed, complex and has been affected by several additional European community treaties and amending treaties since 1957. For example, the Treaty on European Union (Maastricht, 1992), the Single European Act (1986), the Treaty of Amsterdam (1997) and the Treaty of Nice (2001). Any reference to the ‘Treaty’ herein means the Treaty Establishing the European Community (aka EC Treaty) as amended, consolidated and published by the Publications Office of the European Union in its ‘Consolidated Treaties’ (February 2003).
Since there are already many good studies and descriptions of the scope and nature of EU Regulations and Directives, in general, this article will focus more closely on their evolution, in the context of the Treaties and in the context of the various collateral documentation which is part of the way the EU has conducted its legislative business since 1957. Thus, in the background, one always needs to take into account a bewildering, overlapping, interlocking array of other available EU documents, including COM Docs (working documents of the European Commission), Decisions, Resolutions, Recommendations, Opinions, Action Plans, Framework Agreements, Framework Decisions, Joint Actions, Joint Action Positions, Common Positions, Proposals, Interpretative Communications, Explanatory Memoranda, Agreements, Green Papers, White Papers and, very importantly, EU jurisprudence as articulated by the European Court of Justice (ECJ), the European Court of First Instance (CFI) and the national courts in the 27 EU member states.
Not only is the realm of EU Regulations and Directives complex, it is also voluminous. Although at any one time, there are about 10,000 EU Regulations and Directives in effect, we have noticed that the ones that have affected the majority of business enterprises, from about 1962 onwards, can be boiled down to about 400 (the ‘400 Club’ of key EU Regulations and Directives), but even those, including their numerous amendments, take up about 15,000 printed pages in the EU’s Official Journal. Many EU Regulations and Directives are fairly short (five to 30 pages). Many others are very long. For instance, Regulation 1907/2006 = REACH (Registration, Evaluation and Authorisation of CHemicals) takes up 849 double-column pages in the Official Journal. Just three of the many Regulations regarding company accounting (Regulations 2236/2004, 2237/2004 and 2238/2004) occupy about 1,700 pages.
However, size is no sure-fire guide as to importance or complexity. The ten EU Regulations and Directives which, since 1962, have given rise to the most litigation involving the ECJ are all fairly short: Regulations 1408/71 and 1612/68 (social security), Regulation 17/62 (competition), Regulation 40/94 and Directive 89/104 (trade marks), Directive 69/335 (companies and free movement of capital), Directive 75/442 (waste management), Directive 77/388 (value-added tax), Directive 79/409 (nature conservation) and Directive 79/7 (equal treatment of men and women).
EU Regulations and Directives both derive their existence from Article 249 of the Treaty.
Treaty Article 249 also sets forth the legal impact of EU Decisions, Recommendations and Opinions.
An EU Regulation “shall have general application. It shall be binding in its entirety and directly applicable in all member states” (Treaty Article 249(1)).
An EU Directive “shall be binding, as to the result to be achieved, upon each member state to which it is addressed, but shall leave to the national authorities the choice of form and methods” (Treaty Article 249(2)).
The European Parliament (acting jointly with the European Council), the European Council and the European Commission all have the power to make Regulations, issue Directives, take Decisions, make Recommendations and deliver Opinions, all in order to carry out their constitutional tasks in accordance with the Treaty. Please see Chart 3, below.
EU Regulations have been enacted regarding a vast number of individual subject matters, applying with ‘general application’ and thereby affecting most businesses in the EU: for example, antitrust and competition policy, company law, accounting, environmental law, telecommunications and transport. In terms of the number of overall Regulations, however, many of them cover only very specific subject matters and are not likely in practice to affect even all the member countries, let alone most businesses. For instance, EU Regulation 2680/1999 sets forth an approved system for the identification of bulls intended for sporting events. There are many more Directives, in number, that are relevant to most businesses, than there are such Regulations. More than 99 per cent of the relevant Directives have been transposed into national law, as required by the Treaty.
The French word ‘Directive’ is translated into most EU official languages by a word which openly corresponds to it (for example, Direktiivi (Finnish), Direktiva (Latvian), Dyrektywa (Polish), Direktiva (Slovenian). The respective terms in Czech (Smernice), Dutch (Richtlijn), Hungarian (Irányelve) and Slovakian (Smernica) capture somewhat better, perhaps, the sense of providing a ‘direction’ (guideline, guiding principle), as opposed to ‘Directive’, which may tend to sound slightly more mandatory (at least in English). Similarly with the French ‘Règlement’, which becomes, Regolamento (Italian), Regulamento (Portuguese), Regulament (Romanian), Reglamento (Spanish). In other EU official languages the term may be given in a local language equivalent Verordening (Dutch), Verordnung (German), Rendelet (Hungarian), Rozporzadzenie (Polish), whereas others prefer to spell out in some detail that what is meant is a Council (or Commission) Regulation (Finnish (Sääntelykomitea), Danish (Rådets forordning)).
A great deal has been written about the concepts of direct effect vs direct applicability; direct effect vs similar effect; direct effect vs ‘invocability’; unconditional and sufficiently precise; horizontal direct effect; inverse vertical direct effect; horizontal side effects of direct effect; indistinctly applicable effect … Suffice it to say here that, seen in the context of an overall EU evolutionary process during the past 50 years, these technical and highly non-intuitive terms (none is found thus in the Treaty) reflect steady, subtle and successful action by the EU to ‘federalise’ its legislation, using its Regulations and Directives, while studiously avoiding the word ‘law’, and while patiently completing major parts of the internal market, in a vastly expanded Union, that began on such a modest scale, 50 years ago.
If the European Constitution (as formulated in June 2003) is ratified and enters into force, Regulations will become known as European laws and Directives will become known as European framework laws. The ‘L’ word will be right out there in the open.
Sequencing. The numbering system of EU Regulations and Directives can be quite confusing. For instance, the 4th Company Law Directive was enacted before the 3rd Company Law Directive. The 10th Company Law Directive was proposed after the 13th Company Law Directive had already been enacted and, years later, is still pending. Sometimes, it is difficult to be sure whether the numbers refer to the year of enactment or to the number in sequence, for that year. Some Directives have multiple nicknames (thus, Directive 98/27 may be called the Injunctions Directive but may also be seen referred to as the Consumer Protection Directive), just as some similar Directives have similar nicknames (Seveso I and Seveso II) whereas others which are quite different in legal content have the same or similar nicknames (various ‘Service’ and ‘Services’ Directives). Thus, it can be confusing to know what is meant without the exact legislative numbers. It is often difficult and time consuming to locate similar or related Regulations and Directives, unless you know the correct Directory Classification Code (DCC) number(s) and these are often rather non-intuitive or overlapping.
Legal consequences. These are by no means clear from the ‘short titles’ of some EU Regulations and Directives. Thus, the Community Code for Human Medicinal Products and the Community Code for Veterinary Medicinal Products sound as if they would apply exactly the same throughout the EU, like Regulations, but they are actually Directives (2004/27 and 2004/28). The Community Customs Code, however, is a Regulation (Regulation 2913/92, as variously amended).
Amendments. Amendments are often confusing, overlapping and difficult to track. Some amendments are actually, in the main, merely reformulations of prior enactments. More often, the reader has to piece together what is current, what is amendment and what is repealed. Some concepts have to be searched for across more than one Directive: for example, insider dealing is addressed in Directive 2003/6 and in Directive 2003/124, but for conflicts of interest you also need to look at Directive 2003/125. Special accounting rules for WEEE (Directive 2002/96, waste electrical and electronic equipment) are ‘buried’ within Regulation 108/2006. With increasingly effective and user-friendly electronic means now available, the task of tracking new and pending EU legislation has improved, but there is still ample room for improvement in this regard.
The EU arranges every Regulation and Directive under one or more general, or sub-classified, DCC numbers (Directory Classification Codes). DCC numbers, in turn, are arranged within a 20-part general format, with about 380 sub-classifications under the main DCC numbers. Thus, for example, DCC 02 is the general overall classification for the EU customs union and the free movement of goods. DCC sub-classification 02.40.20.30 covers ‘free zones and bonded warehouses’. The DCC sub-classification number, or the multiple DCC sub-classification numbers, of any particular EU Regulation or Directive are often a good guide as to its position in the overall evolutionary framework and its intended legislative goals.
As one would expect, the WEEE Directive 2002/96 is sub-classified under 15.10.30.30 (environment, consumers and health protection; waste management and clean technology). Directive 2002/65 (distance selling of financial services) is sub-classified, more broadly, under both DCC 06.20.20 (right of establishment in the context of services activities) and DCC 15.20.40 (protection of economic interests of consumers). Directive 2003/54 (common rules for internal market in electricity) is sub-classified, even more broadly, under both DCC 12.30.00.00 (electricity) and 13.30.99.00 (approximation of laws).
By contrast, the somewhat older Directive 98/30 (common rules for internal market in natural gas) has only DCC number 12.50.30 (measures relating to oil and gas). Increasingly, there is a tendency to assign multiple DCC numbers to EU Regulations and Directives which involve complex accommodations between competing interests, such as businesses vs consumers or member country national law vs approximate uniform law in all EU countries. Other DCC sub-classifications (such as 06.20.20.25, stock exchanges and other securities markets) are sufficiently pan-EU by their very nature that they are the sole DCC number assigned to more than 20 major Directives in this field, since 1979, and to one Regulation in 2003 (Regulation 2273/2003).
Thus, quite tellingly, after considerable legislative wrangling about the final text, the EU Services Directive 2006/123 (enacted 12 December 2006) was assigned DCC sub-classifications 06.10.00.00 (right of establishment and freedom to provide services; principles and conditions) and 13.30.05.00 (industrial policy and internal market; internal market: approximation of laws; general, programmes).
In other words, DCC sub-classifications are a useful way of understanding where a given EU Regulation or Directive is intended to fit, overall, and in evaluating whether a particular Regulation or Directive is likely to be a comprehensive treatment of the subject matters described in the DCC sub-classifications. Therefore, these ‘codes’ also provide their own practical decoding method when affected businesses are planning for potential relevant amendments and related new legislation and collateral documents.
Assuming that the Regulations and Directives having an impact on businesses, per se, are fairly uniformly interspersed under each DCC category, the approximate breakdown is shown in Chart 1.
It would be quite logical to assume that a given Regulation or Directive derived from a specific Treaty provision, would have the same DCC number, regarding the same subject matter, as another Regulation or Directive on the same subject matter, whether derived from the same Treaty authority or not. This is sometimes the case and sometimes not. Matters involving EU Regulations and Directives are often not what they are expected to be or initially seem to be.
However, as will be seen quite clearly (numbers in bold type, in column Three, Chart 1, above), the EU Regulations and Directives within the ‘400 Club’ in certain areas of business have an importance which is significantly disproportionate to their population numbers. They are the main ones to understand.
Whether the goal is further integration of the internal market or enhancement of the EU four freedoms, in particular, or of EU social policy, in general, or involves matters relating to EU justice and home affairs, the EU has a variety of legislative strategies and techniques at its disposal.
Accretion vs big leaps
The EU is willing to be very patient. Thus, Directive 2004/25 (takeover bids) required a legislative gestation period of 15 years. So did Directive 2006/25 (worker protection from artificial optical radiation).
The current group of Regulations and Directives in the field of bank and insurance company insolvency and those regarding the regulation of stock markets and the public offering of securities each took about 25 years to build up to their current form and the process is not completed. The current state of EU Regulations and Directives in the area of public procurement has taken about 35 years to develop, starting with Directive 71/305 (co-ordination of procedures for award of public works contracts). The areas of insurance and re-insurance regulation have been growing by steady accretion for more than 40 years, starting with Directive 64/225 (reinsurance).
However, the EU can also move in big leaps, such as in the case of REACH and the various Regulations mandating the use of International Accounting Standards.
Unitary approach
Some matters are approached, at least initially, by Regulation only, or by Directive only. Examples of matters introduced by Regulation only were the ‘.eu’ domain name (Regulations 733/2002 and 874/2004) and the ‘Community Design Right’ (Regulation 6/2002) and, well before them, the Community Customs Code (Regulation 2913/92). Such matters tended, by their inherent cross-border nature, to require EU-wide uniformity and, hence, a Regulation.
By contrast, matters relating to the various working relationships between employers and employees are almost exclusively covered by Directives, most recently Directive 2006/123 (dated 12 December 2006) relating to employment services in the internal market.
Binary approach
There are many situations in which the EU has approached the same or a very similar subject matter by adopting both a Regulation and a Directive, thereby combining the pan-EU direct applicability of the one with the national flexibility of the other. Thus, regarding chemicals, there is Regulation 1907/2006 (REACH) and Directive 2006/121 (regarding REACH implementation). Similarly, in the field of company accounts, there is Regulation 1910/2005 (accounting standards for international companies) but Directive 2006/43 (statutory audit of annual accounts and consolidated accounts). In the regulatory field affecting the environment about 85 per cent of the EU laws are in the form of Directives but the other 15 per cent, in the form of Regulations, have no less impact and importance.
Consolidations, adjustments, co-ordinations and experiments
Quite a few EU Regulations and Directives are, in the main, restated or consolidated versions of pre-existing ones. For example, Directive 2000/12 (consolidated banking directive and business of credit institutions) and Directive 2001/34 (securities consolidation directive: stock exchange listings) as well as, notably, Regulation 883/2004 on the national co-ordination of social security systems and repealing Regulations 1408/71 and 574/72 (which, in turn, can trace their own statutory lineage directly back to the Community’s earliest business regulations, in September and December 1958 (Regulations 3/58 and 4/58, establishing detailed rules regarding social security for migrant workers)). Sometimes, only national co-ordination is the stated aim or effect, such as in Directive 2004/17 (co-ordinating procurement procedures of entities operating in the water, energy, transport and postal services sectors). Some Regulations and Directives are legislative adjustments in the light of experience with prior Regulations and Directives that are no longer in effect or have needed specific amendment: for example, Directive 2001/37 (sale and presentation of tobacco products). Still others represent fairly novel legislation, such as Directive 2001/55 (minimum standards for giving temporary protection in the event of a mass influx of displaced persons) and Directives 93/7 and 2001/38 (on the return of cultural objects).
Mutual recognition, new approach, harmonisation, frameworks
Certain ECJ cases in the 1970s (for example, Reyners v Belgium, free movement of services, decided in 1974) and Cassis de Dijon (free movement of goods and the principle of mutual recognition, decided in 1979) evolved alongside an early example of a mutual recognition Directive (Directive 75/318 on mutual recognition regarding innovative pharmaceuticals – and please see Chart 4, under ‘Pharmaceuticals’, for the already enacted Directive 65/65 (marketing of medicinal products)). The concepts of mutual recognition and freedom of movement converged with and evolved further alongside an intergovernmental consensus-based re-launch of internal market integration (‘White Paper on Completing the Internal Market’, (COM (85) 310, aka the ‘Cockfield White Paper’) and the negotiations leading up to the Single European Act Treaty (1986)). The processes were complex but, for the sake of simplicity, the results were approximately as follows: there were additional mutual recognition Directives (such as Directives 87/345 and 90/211 (respectively, on the mutual recognition of prospectuses and stock exchange listing particulars)). There was to be less reliance upon law harmonisation per se and more on ‘new approaches’ and ‘frameworks’; for example, setting critical minimum health, safety and technical requirements (such as Directive 88/378 on toy safety and Directive 89/392 on machinery safety) and a great number of Directives relating to the CE marking. These new legislative concepts would soon be expanded and adapted to include Framework Directives such as Directive 90/387 (open network provisions, regarding telecommunications) and, later, Directive 2000/31 (e-commerce Directive for the electronic single market) and Directive 2000/78 (equal treatment in employment and occupation).
In addition, the White Paper proposed that a number of designated business sectors (including financial services, therein described as financial ‘products’ [‘goods’]) be addressed not through Regulations or even through detailed regulatory-style ‘top down’ Directives but through ‘sectoral’, ‘harmonising’ or ‘co-ordinating’ Directives which promoted the mutual recognition of certain matters in all EU member countries, if certain specified standards are met, or Directives which ensured the removal and prevention of barriers, with the ‘unified internal market’ being the ‘essential and logical’ consideration, rather than the specific legislative approach adopted or vocabulary employed. For example, the words ‘harmonisation’, ‘approximation’, ‘equivalence’, ‘equalisation’ and ‘liberalisation’ are often used in ways that make any actual legal distinctions among them less than clear. In any case, there have been many such Directives, including many in the areas of mutual recognition of academic diplomas and professional qualifications, lawyers included (Directives 77/249 and 98/5), which derive their heritage more from Reyners than from Cassis de Dijon or the White Paper. This ‘European passport’ approach to ‘services’ is also important in the areas of banking and financial conglomerates (Directive 2000/12) and sectoral progress is currently underway in the areas of insurance and re-insurance. Please see Chart 4, under ‘Freedom of establishment and to provide services’ (Directive 64/225 (reinsurance), which may be deemed the ancestor provision regarding services, just as Directive 65/65 may be considered one for goods).
In the area of criminal law, the EU is also moving towards mutual recognition rather than direct law harmonisation, let alone equivalence. This may lead to ‘soft law’ harmonisation (approximation) across the various EU member countries but this would need to evolve from a greater national impetus towards broadening legal equivalence rather than towards the politically far less likely imposition of regulatory power to effectuate top-down legal equalisation. As at 1 January 2007, for example, there was a general lack of such national enthusiasm, hence the less than equal introduction of the European Arrest Warrant = 2002/584/JHA (an EU Framework Decision, not a Directive, let alone a Regulation).
Treaty correlations and signposts
It can also be instructive to know which Treaty article is the stated legislative basis for a given EU Regulation or Directive.
Company law (Treaty Articles 44(1), 44(2)(g) and 48) and intellectual property law (Articles 33 and 133(5)) are among the few specific industry sectors to be singled out for individual treatment in the Treaty.
After a slow start (for example, Directive 63/21 and occasional company law Directives thereafter), there are now many EU Directives which harmonise company law, almost all of which cite Article 44 as their sole Treaty basis, although some cite Article 44 and Article 95 (approximation of EU member country laws, aimed at the establishment and functioning of the EU internal market).
Notwithstanding Treaty references of Articles 33 and 133(5), the first community law harmonisation adopted in the patent field (Regulation 1768/92, protection certificates for medicinal products) was actually based only upon Article 95 of the Treaty. Increasingly, especially after 1986, a broad array of other measures in numerous business fields (including data retention, product liability, consumer injunctions, clinical trials, chemical registration (REACH), distance contracts, stock market manipulation and insider dealing), are attributed to legislative authority solely under Article 95. This is interesting, among other things, because, in one of the few cases in which the ECJ has invalidated a major EU law (Directive 98/43 on tobacco advertising), it did so on the basis that reliance upon Article 95 in enacting that Directive was misplaced: Germany v European Parliament et al (decided 5 October 2000). The offending Directive was amended (Directives 2001/37, 2003/33), thereby opening up the supposition that the EU has found innovative and successful ways to fit many diverse laws into Article 95, laws which prior to 2000 might have been deemed to require far more specific Treaty authority than the very broad ‘approximation of internal market laws’.
Indeed, some Regulations and Directives derive their statutory authority solely from Treaty Article 308 (a catch-all clause for cases where the Treaty has not otherwise specified the ‘necessary powers’). Among such Regulations and Directives affecting business are Regulation 2137/85 (European Economic Interest Grouping), Regulation 2157/2001 (European Company Statute) and Directive 2001/86 (European Company Statute, supplements on employee involvement). The Regulation establishing the European Company Statute had been moving very slowly through the EU legislative process (dating back to 1966, please see Chart 4), mainly due to national objections regarding employee participation. Hence, the solution was a binary approach and reliance upon Article 308, for the Regulation and even for the Directive. By contrast, Directive 94/45 (European Works Council Directive) is based solely upon Treaty Article 2(2) (broad social policy principles); and Directive 2002/14 (employee information and consultation) is based solely upon Treaty Article 137(2) (social policy measures via Directives).
Treaty correlation sequences can be informative in other ways. For example, as shown in Chart 2: Article 2(2) = equality between men and women, Article 13 = combating discrimination based upon gender, Article 94 = approximation of laws, Article 308 = catch-all clause.
Readers familiar with US constitutional law may recognise something evolving here akin to the enormously important federal ‘incorporation doctrine’ by which the first Eight Amendments to the US Constitution are deemed to include numerous limits upon individual states’ legislative powers by virtue of the 14th Amendment.
Multiple legislative modalities
It is useful to recall that, at any one time, as some Regulations and Directives are coming into being or are being amended or consolidated, others are passing away. Chart 3 below, adapted from the 2006 General Report on the Activities of the European Union (covering the year 2005), is a representative summary of the situation and a reminder that the EU has three different enacting institutions by which EU legislation can be created, either as Regulations, Directives or both, using any of the techniques mentioned above. The data in the chart was compiled from CELEX (now EUR-Lex), the inter-institutional computerised documentation system on Community law, excluding Acts not published in the Official Journal and routine ‘management Acts’ only valid for a limited period.
Among other things, the substantial legislative role of the European Commission is apparent. However, each Regulation and Directive must be evaluated on its own footing. For example, the new Services Directive (Directive 2006/123) and REACH (Regulation 1907/2006, Directive 2006/121) were all enacted by the European Parliament and the Council, not by the Commission acting alone.
Chart 4 overleaf gives a representative overview of selected EU legislative activities, of whatever pattern and technique, affecting business from 1957-1967 and at the outset of 2007, with the ancestral legislative activities (Regulations, Directives, etc) in column two and their more familiar modern legislative descendants in column four. The reference ‘Treaty only’ in column two means that only a provision of the Treaty then in effect was operable with respect to that subject matter (as opposed to a specific Regulation or Directive).
All the descendants and all the collateral descendants are within the ‘400 Club’ of the most important EU Regulations and Directives since 1957.
Please note, for example, the development of industry sector Directives (prior to 1967) into much wider ranging ones later and the interplay among transport and the various freedoms with respect to the creation and enhancement of the internal market.
Even a selective and condensed chart like this would need to be about 50 times larger to cover each subsequent 10-year period after 1967 in detail. However, the basic evolutionary pattern was established at the outset, in 1957 and 1958, and was much aided by a series of ‘federalising’ decisions from the European Court of Justice, confirming the supremacy of EU law, such as van Gend en Loos (1963) and Costa v ENEL (1964), and many ECJ and national court cases thereafter. Those two ECJ cases alone assured that EU Regulations and Directives would have a long and prosperous career, as well as a wide reaching and prolifically creative one.
Somewhat predictably, in their Declaration annexed to the Single European Act (1986) regarding what is now Article 95 of the EC Treaty, the member countries expressed their preference that Directives should be used for legal harmonisation rather than Regulations.
Some years later, the ‘Sutherland Report’ (The Internal Market After 1992) advocated a three-stage process: enact Directives first, wait for substantial harmonisation, then replace the Directives with Regulations (Recommendation No 11 (28 October 1992) (SEC (92) 2044, page 8). At its Edinburgh Summit (11-12 December 1992), the European Council declared, consistent with the EU principles of subsidiarity and proportionality (Treaty Article 5), that ‘[o]ther things being equal, Directives should be preferred to Regulations and Framework Directives [preferred] to detailed measures’ (Bull. EC 12-1992 (paragraph I.19)). This view was still endorsed in the White Paper on European Governance COM (2001) 428 (pages 20-21) (Brussels, 25 July 2001), but with suggestions that Regulations should be given greater initial attention regarding internal market matters and that more creative ways should be found for using Framework Directives in the context of enhanced ‘co-regulation’ (namely, more effective interaction between national legislatures and the affected industries prior to the adoption of new laws). For more background please see the ‘Molitor Report’ (Report of Independent Experts on Legislative and Administrative Simplification), Proposals 1, 8 and 15-16 (21 June 1995) (COM (95) 288), the Report of the Commission on Simplifying and Improving the Regulatory Environment (COM (2001) 726) (6 December 2002) and numerous other EU studies and reports regarding proposed legislative and regulatory simplification.
Notwithstanding delays in some cases regarding their proper transposition into national law, Directives remain the preferred and the principal means, to date, of EU law harmonisation. Given the background since 1986, it is more understandable why the proposed EU Constitution contemplated that Directives would become known as ‘framework laws’, whereas Regulations would become ‘European laws’ or non-legislative ‘European regulations’ (combining certain features of old-style Regulations and Directives), (Proposed Constitutional Treaty (20 June 2003), paragraph 32).
Even if the EU legislative clock had stopped ticking on 1 January 2007, its achievement in its first 50 years would have been very impressive. However, it has not stopped ticking. There are numerous other projects well underway, some very far-reaching - such as a proposed European Patent and others which are important in many diverse and particular fields, such as proposed reforms of the rules regarding the export of dual-use technology items (European Commission meeting on 26 January 2007). Other ongoing projects involve, for example, the Action Plans for company law modernisation (particularly regarding freedom to move the corporate seat and regarding shareholder voting rights) and further harmonisation in the financial services and insurance sectors. There are also moves toward further harmonisation of contractual obligations (the proposed ‘Rome I’ Regulation), of non-contractual obligations (the ‘Rome II’ Regulation, approved by the European Parliament on 18 January 2007), and a proposal for more uniform statutes of limitations in cases involving death and personal injury. This is just a small sampling of the agenda.There will be much to report on, in the European Lawyer 2008 Yearbook.
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The law, regulation and policy relating to products that are wholly or partly composed of nanomaterial are the subject of debate and consideration in the EU and indeed the rest of the world. This article explains what is meant by nanotechnology and summarises the issues currently being considered concerning nanotechnology law, regulation and policy in the EU. In this context it then describes the new chemicals legislation (REACH)1 and addresses whether nanomaterial would be subject to REACH. It ends with an indication of actions which those corporations that manufacture, supply or use nanomaterial need to take in 2007.
It is a prefix representing one billionth of a unit, which is 10-9, although is sometimes simply used to refer to something ‘very small’. The ubiquitous Nano iPod is an example of a product that helps to familiarise millions of people with the terminology. Yet the actual size of these devices compares to a nanoparticle, as a football field compares to a Nano iPod! However, ‘nano’ when used in the term ‘nanotechnology’ means much more than a reduction in size. The term generally defines the beyond conventional ability to manufacture, manipulate and utilise nanometre-size (10-9m) materials and structures resulting in new physico-chemical properties and functions.
Nanotechnology is said to be a technology that is disruptive, in that it will replace older technologies; enabling, insofar as it will have a broad and often unanticipated impact; and interdisciplinary, because, it brings together science and scientists from traditionally separate academic groups. According to BCC Research, the global market for nanotechnology products was valued at just over €8 billion in 2006. The National Science Foundation in the USA estimates that the value of the global market will be up to €750 billion by 2015. The number of patents tripled in the last few years (especially in the US and Japan) and the annual worldwide investment into nanotechnology research is currently €7 billion. In the EU, the Sixth Framework Programme set the scene by allocating funding for nanotechnologies and nanosciences2 and this has now been followed by the Seventh Framework Programme’s more than €3.5 billion budget which invests in both basic research and the development of new nanomaterial and products.
About 300 nano-technology-enabled consumer products are already on the market and about 600 nanotech-nology raw materials, intermediates and industrial equipment are used today. Nanoparticles can be found as catalysts, membranes in fuel cells, solar cells, photonic crystals, sensors, self-cleaning surfaces, anti-friction surfaces, thin-film transistors and data storage devices. They can be used in medical applications in drug encapsulation/drug delivery, medical imaging, lab-on-chip devices and biosensors. There is unanimous consensus among polled representatives of European industry, public and private research organisations, and academia that nanotechnology will direct much future technological development and the trend of economic growth.
While nanotechnology was first anticipated in 1959 and lots of research activities followed, it is only in the last few years that politicians, policy makers and lawmakers have seriously begun to address the regulatory issues. There are open questions regarding health, safety and the environment, and even ethical and moral issues must be considered along with the many probable benefits that nanotechnology will bring to society.
What is the regulatory debate?
As indicated above, nanotechnology is likely to have an impact on all areas of our lives. Consequently, in terms of EU issues raised by nanotechnology and without being exhaustive, nanotechnology may raise issues in relation to: the internal market; agriculture; the common commercial policy; public health; workers; consumer protection; research and development; and the environment. The EU has powers under the EC Treaty to legislate in all of these areas. For nanotechnology, the choices available are: (i) do nothing; (ii) ban nanotechnology commercialisation and R&D; (iii) produce a comprehensive regulatory regime; or (iv) design an incremental process relying on voluntary measures and on the existing regulatory environment, and amend as considered appropriate, depending upon the outcomes of a continued evaluation of developments.
What is the regulatory model to apply?
Article 152 of the EC Treaty states: “A high level of human health protection shall be ensured in the definition and implementation of all Community policies and activities.” In addition, in relation to the environment, nanotechnology would be subject to Article 174(2) namely that: “Community policy on the environment … shall be based on the precautionary principle and on the principles that preventive action should be taken … .” These Treaty obligations may mean the European Commission has to take a pro-active policy and legislative position. Consumer welfare groups, as was the case for GM food products, may also drive the EU to such a position, so option (i) – to do nothing – is not feasible.
The reference in Article 152 of the EC Treaty (see above) to a ‘high level of protection’ raises two issues. Firstly, what does a high level of protection mean in relation to nanomaterial, which is arguably a novel product? The European Court of Justice, which is the ultimate arbiter on interpreting the EC Treaty, has given the European Commission and the other EU institutions a large degree of discretion concerning its meaning, particularly in the area of public health, which involves political, economic and social choices requiring the undertaking of complex assessments.3
Secondly, does regulation prejudice the economic health of the EU? One economic issue is that in a global market, it is increasingly recognised that from a regulatory perspective there may be what might be referred to as ‘first mover disadvantage’. The first to regulate might stimulate the relevant industry to move to non-regulated countries of the world and might thus deprive consumers of benefits, as well as negatively affecting industry and commerce. The European Commission is aware of this issue. For example, despite the announcement on 10 January 2007 by the European Commission of an integrated energy and climate change package to cut emissions for the 21st Century by up to 30 per cent, the Commission made it clear that this will only come about if and when an international agreement is reached on the post-2012 framework. So option (ii) concerning an outright ban of the technology until further knowledge is gathered does not seem to be a viable option either.
The European Parliament sought a comprehensive regulatory regime for nanoparticles by seeking its uniform inclusion in the REACH regime. The proposed amendments included in the last Parliament version of the draft legislation seem to lack proper understanding of the underlying science and do not appear in the adopted regulation. Interestingly, the justification offered by the European Parliament for the inclusion of nanoparticles was not by express reference to the EC Treaty articles cited. Rather, it referred to: (i) the hypothecated concern of nanoparticles’ effects on the human body; and (ii) the minimal level of knowledge of such effects, as identified in an article in the journal Science.4 This might suggest that the precautionary principle, as it exists in Article 174 of the EC Treaty (see above) applies and that regulation seeking to prevent harm to the environment should be put in place. However, the GM food products story in the EU is likely to have made the European Commission sensitive to pre-emptive regulation, so probably a consensus was reached to not follow option (iii) above to propose an overall authorisation for all nanoparticles, and as such discriminate against the whole industry on the EU market.
So finally option (iv), the incremental process – at least at first and perhaps by default rather than design – appears the most attractive and realistic approach and this does seem to be the way the EU, and indeed the US, is going.5 In this regard, and continuing to note the EC Treaty obligation of the precautionary principle, it has been argued that the precautionary principle is irrelevant to nanoparticles, or at least is a misplaced and misapplied concept,6 and that the precautionary principle should be considered as a cost-benefit analysis. Were this controversial view to be taken, the European Commission could commence placing nanotechnology regulation in its next legislative work programme, which would require an impact assessment to be undertaken. An impact assessment would begin to collect the inputs that legislators need in order to be informed when taking policy decisions, to place them in a simple form of cost-benefit analysis.
What has the EU done so far?
Among the EU institutions, the European Commission’s DG Research was the first formally to address nanotechnology, through the inclusion of nanotechnology as a field of funding under the Sixth Framework Programme (2002-2006). DG Health and Consumer Protection ran a workshop and produced a report in 2004.7 DG Enterprise has also been engaged to consider nanotechnology. The European Commission issued a paper in June 2005 entitled: ‘Nanosciences and Nanotechnologies: An action plan for Europe 2005-2009.’8
The EC Scientific Committee on Emerging and Newly Identified Health Risks (SCENIHR) adopted an opinion on 10 March 2006 on the appropriateness of existing methodologies to assess the potential risks associated with engineered and adventitious products of nanotechnologies.9 In essence, SCENIHR’s opinion is that there are regulatory and risk management implications, for example in toxicological testing guidelines, the setting of occupational and environmental quality standards, and in the classification and labelling of products. The opinion also stated that standardisation including the availability of reference materials or particles is the key issue to come to a mutual understanding in terms of risk assessment for the use of nanotechnology. The opinion indicated that international co-operation is needed to address the multiple issues in nanotechnology.
Thankfully, there is a form of international co-operation concerning the policy and regulatory issues for nanomaterial. The Organization for Economic Co-operation and Development (OECD) is proceeding at an aggressive pace to address fundamental questions about nanomaterial. OECD member countries agreed to work on several projects. Australia offered to develop a global internet portal with information from around the world on published research and research underway on environmental health and safety concerns about nanotechnologies. Germany took the lead in developing a list of research needs shared by the OECD members and strategies to address those needs. The United States, with the European Union as a possible co-chair, agreed to identify a core set of nanomaterials, such as carbon nanotubes and quantum dots, which would be studied with the goal of identifying what intrinsic properties could make them more or less hazardous and more or less likely to move through the environment. As the core materials are tested, investigators would strive to determine which OECD-approved toxicity tests work for nanomaterial, whether some adjustments are needed, and whether new tests are needed. Canada offered to identify regulatory and voluntary nanomaterial programmes to determine whether they are gathering similar or different information and whether they have common approaches. And the United Kingdom said it is going to evaluate the approaches that countries are taking to assessing the risks of nanomaterial.
The European Commission is performing a regulatory inventory, covering EU regulatory frameworks that are applicable to nanomaterial (chemicals, worker protection, environmental legislation, product specific legislation and the like). The purpose of this inventory is to “examine and, where appropriate, propose adaptations of EU regulations in relevant sectors” as expressed in Action 6(d) of the Commission Action Plan.10 Preliminary findings indicate that the regulatory frameworks in principle give good coverage; different aspects of production and products are at the same time subject to various Community provisions. However, many of the knowledge gaps (toxicity thresholds, test schemes and the like) will need to be addressed to ensure implementation. Those knowledge gaps are in line with the ones earlier identified by the European Commission and others, and reported to the OECD.
In the interests of economy, this article does not address the following areas where nanomaterial is or is likely to exist and raises issues for consideration: medicines; medicinal products; cosmetics; worker protection and industrial safety more generally. Nor does it address the relevance of the general requirement that producers are obliged to place only safe products on the market under the General Product Safety Directive (2001/95/EC). What is addressed below is the chemicals regulatory area because, for nanomaterials, this is the relevant regulatory regime upon which most people have focused.
The currently enforced chemicals legislation, led by Directive 67/548/EEC on the classification, packaging and labelling of dangerous substances (DSD) covers all chemicals placed on the EU market, with exemptions under the scope of other EU approval schemes. The chemical substances are treated differently if they are considered to be: (i) existing chemicals (chemicals already on the EU market before 18 September 1981); or (ii) new chemicals. Existing chemicals are listed on the Community inventory list, EINECS, and can be freely used by everybody. New chemicals need to be notified in order to get listed on the Community list of permitted new substances, ELINCS, which is proprietary; that is, the listings are company-specific.
In the chemicals regulatory area, the EU competent authorities (CAs) have decided11 that:
a. The decisive criterion whether a nanomaterial is a new or existing substance is the same as for all other substances as to whether or not the substance is in EINECS. When a nanomaterial is derived from an existing substance, Article 7.1 of the Existing Substances Regulation 793/93 (ESR) on the updating of reported information applies;
b. Nanomaterials having specific properties may require a different classification and labelling compared to the bulk material;
c. They will invite industry to provide a number of dossiers on different representative nanomaterials to show what kind of data is available, how risk assessment is being performed and how the risks are controlled; and
d. For the longer term, a review of the applicability of testing methods and risk assessment methods should be carried out. This should be done at international level (for example within the OECD chemicals programme) with active input from industry and contributions from
the EU.
As indicated above, nanoparticles are not expressly dealt with in the REACH regime, which enters into force on 1 June 2007. However, they are not expressly excluded. Indeed, nanoparticles, being chemical substances, are not out of REACH. However, the open point is whether nanoparticles will be treated differently. For example, is nanoparticle silver to be treated as silver, or as a special case? Given the importance of REACH, a brief description of the Regulation is provided below.
The objective of REACH is clearly stated: to increase the protection of human health and the environment from chemicals, while ensuring the competitiveness of the EU chemical industry. This objective is to be achieved by requiring industry to obtain data on all chemical substances produced in and/or imported into the EU and to ensure that the risks from them are adequately controlled via the proposed registration. Over a period of 11 years, this process aims to fill information gaps on the hazards of some 30,000 chemical substances used today. The burden of proof will be on the industry to generate the necessary data in order to identify appropriate risk management measures to ensure their safe use.
Specifically, manufacturers or importers will be required to register all chemical substances manufactured in or imported into the EU, as such or in preparation, above one tonne per year. Registration involves the submission of a technical dossier by the producer/ importer including necessary data and identified downstream uses. The information requirement depends on the manufactured/ imported volumes; the higher the tonnage bands, the more are the data requirements. Exemptions from registration exist for some substances as specified in the Regulation, such as polymers. Importantly, use of substances in articles, if not already registered, may also require registration if they are intended to be released during normal or foreseeable conditions of use and are present in quantities of one tonne or more per article producer or importer each year.
Further, substances in articles may require notification if they are identified by the new European Chemicals Agency (ECHA) as being of very high concern, if they are present in articles in concentrations above 0.1 per cent w/w (weight for weight) and if they are present in quantities of one tonne or more each year per article producer or importer.
The registration process is designed to provide transitional arrangements for the so-called phase-in substances, that is, EINECS listed substances that are currently being manufactured or imported and are no longer polymers. These substances can be pre-registered during the period of 1 June to 1 December 2008 and can be subsequently registered only later, within three-and-a-half, six or eleven years depending on the level of concern and/or volume of substances in question. The different tasks associated with the management of these requirements will be carried out by the Agency, which will be established in Helsinki.
As mentioned above, the registration also involves identifying the different applications and the corresponding downstream users (DU), who have to consider the safety of the substances they use on the basis of information communicated by their supplier in the form of safety data sheets with attached exposure scenarios. The DUs are responsible for implementing the risk management measures recommended by the supplier and to pass on other information relevant to safety, up and down the supply chain. If a DU decides not to make its own use known to the manufacturers/importers for confidentiality reasons so that their use is not covered by the exposure scenario prepared by their supplier, they will have to make this assessment and identify and apply risk reduction measures themselves.
About 5 per cent of the registrations will be subject to Evaluation (compliance checks) by the ECHA, with priority being given to registrations for non-phase-in substances, for concern substances and for substances for which data was submitted separately. The ECHA may also examine testing proposals, with priority given to ‘dangerous’ substances above 100 tonnes per year. Substance evaluation can lead to decisions to carry out additional tests or eventually the launch of the authorisation restriction processes under REACH.
The use of ‘substances of very high concern’ will be subject to Authorisation within a given timeframe. Ultimately, this process aims at the substitution of substances of very high concern: substances that are category 1 and 2 carcinogens, mutagens; toxic to the reproductive system; substances that are persistent, bioaccumulative and toxic or very persistent and very bioaccumulative; and substances such as endocrine disrupters which are demonstrated, on a case-by-case basis, to be of equivalent concern. The first list of substances subject to authorisation should be proposed by 1 June 2009 and a candidate list (which will also be the reference list for notification purposes) is expected before that date.
Authorisation is granted if the operator can demonstrate that the risks related to the use of the substance are adequately controlled, unless it is impossible to determine a threshold for risk. If not, authorisation can still be granted if the risk is outweighed by socio-economic benefits and no alternative substances are available. Even when authorisation is granted where risks exist, the authorisation system will encourage companies, over time, to switch to safer alternatives. To this end all applications for an authorisation need to include an analysis of safer alternatives and a substitution plan where a suitable alternative exists.
Finally, any substance on its own, in a preparation or in an article may be subject to Community-wide Restrictions if an established risk needs to be addressed. Restriction decisions are based on a scientific dossier prepared by a Member State or the European Commission, demonstrating the need to address a risk at Community level and exploring the options for managing that risk. REACH will take over the current restrictions under Directive 76/769/EEC in a recast version.
The fact that nanoparticles as such are not specifically mentioned in the Regulation means that, for the moment, the same rules apply for them as for their existing bulk analogues.
We might adopt the assumption that all stakeholders seek within the EU a permissive environment for the development and commercialisation of nanotechnologies, subject to appropriate regulation and review, to enable the benefits of nanotechnology while guarding against any possible harm. However, there are those at both ends of the risk-reward spectrum that would not agree with this assumption. Consequently, our view is that corporations and institutions which do concur with this assumption will need to engage in the current reviews and considerations, both in the EU and elsewhere.
Outside of REACH, there are fast-pace developments in many different jurisdictions which can offer guidance to industry on appropriate conduct and approaches to regulatory authorities. For example, a recent decision by the USA’s Environment Protection Agency (EPA) is of help in relation to the use of nanoscale silver. At first the EPA decided that a washing machine marketed by Samsung, which uses nanoscale silver to kill bacteria in clothing, was a ‘device’ that was exempt from pesticide regulations. However, it recently reversed its decision and has determined that Samsung and other companies that use nanoscale silver and make pesticidal claims will have to register their products or seek an exemption from federal pesticide rules.
As for REACH, companies need to get ready now to fulfil their duties according to the very strict time limits required by the legislation. Manufacturers and importers need to verify whether their substances qualify for pre-registration and need to get their data ready for discussions/negotiations within the Substance Information Exchange Fora (SIEF).12 Downstream users need to ensure that their suppliers register their substances for their intended uses. Importers of substances or preparations may review whether they themselves have registration obligations for the imported substances.
It will be a formative and important year for nanotechnology for all concerned.
1 Regulation (EC) No 1907/2006; Official Journal of the European Union 30 December 2006.
2 Council Decision 2002/835/EC of 30 September 2002, adopting a specific programme for research, technological development and demonstration: ‘Structuring the European Research Area’.3
Judgment of the Court of 14 December 2004 in Case C-434/02 Arnold André GmbH & Co. KG/Landrat des Kreises Herford, paras 44-46.
4 European Parliament, Recommendation for Second Reading, Final A6-0352/2006; page 51/108, amendment 79.
5 For example, in the US the National Institute for Occupational Safety and Health released in July 2006 a second edition of its best practices document for working with nanomaterials: ‘Approaches to Safe Nanotechnology: An Information Exchange with NIOSH.’ In the UK, the Department for the Environment, Food and Rural Affairs released in September 2006 a ‘UK Voluntary Reporting Scheme for engineered nanoscale materials’.
6 Nanotechnologies: A Preliminary Risk Analysis on the Basis of a Workshop Organised in Brussels on 1-2 March 2004 by the Health and Consumer Protection Directorate General of the European Commission; Part 2; Section 1; ‘Complexity and Uncertainty. A prudential approach to nanotechnology’, Jean-Pierre Dupuy.
7 Nanotechnologies: A preliminary risk analysis on the basis of a workshop organised in Brussels (March 2004).
8 COM(2005) 243 final.
9 SCENIHR/002/05.
10 Supra, footnote 8.
11 OECD; Environment Directorate Joint Meeting of the Chemicals Committee and the Working Party on Chemicals, Pesticides and Biotechnology; Current Developments/Activities on the Safety of Manufactured Nanomaterials ENV/JM/MONO(2006)35; p 39.
12 Mayer Brown Rowe & Maw LLP’s Brussels office is proud to have led a consortium that has been awarded an important contract by the European Commission to develop guidelines on data sharing/consortium building and management in the framework of REACH. The contract awarded is one of the REACH Implementation Projects (RIP 3.4). It consists of drafting detailed process description, addressing hurdles to data sharing, and developing industry guidelines on cost sharing, participation in the REACH Substance Information Exchange Forum (SIEF), consortium forming and management, and opt out from joint registration.
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In a ‘questions and answers’ document relating to competition law enforcement of December 2006, the European Commission provides the reader with a set of key figures regarding its recent cartel decisions. These figures show that 2006 has seen yet another increase in competition fining decisions in terms of number of decisions and of amounts of fines imposed per cartel and per individual undertaking involved. According to these Commission figures, in 2006 the Commission adopted seven fining decisions on cartels, which is the highest number imposed in one year since 2002. More interestingly, out of the Commission’s all-time top ten cartel decisions in terms of amounts of total fines imposed on the companies involved, five of these were adopted in 2006. Looking at the fines imposed on individual undertakings for their involvement in a cartel, again, of the ten highest fines ever imposed by the Commission, five were imposed in 2006.
The tendency towards ever higher fines has reached a new peak during the first two months of 2007. On 24 January 2007, the European Commission fined eleven groups of undertakings a total of €750,712,500 for participating in a cartel for gas insulated switchgear projects. The fines imposed in this case represented the highest total fines in a single cartel and included a fine of €396,562,500 on Siemens, the highest fine that the Commission had imposed on a single company for a single cartel infringement until then. However, this new record did not even last one month as, on 21 February 2007, the Commission imposed another set of record fines on the manufacturers of lifts and escalators, Otis, KONE, Schindler and ThyssenKrupp. The total of the fines imposed amounts to €992 million. The fines imposed on the ThyssenKrupp companies were increased by 50 per cent for repeated offences and, at €479,669,850, reached a new all-time high for a cartel infringement in the EC against one group of undertakings.
Although the Commission adopted all its recent fining decisions under the 1998 Guidelines on Fine Setting, the clear tendency towards higher fines cannot be overlooked. It is widely agreed that the new Commission Guidelines on Fine Setting, which came into force in September 2006, will lead to even higher fines than have been imposed under the 1998 guidelines. Apparently, the Commission believes it must increase fines even further in order to provide sufficient deterrence. This need arises from the fact that the Commission does not have other means at hand, such as penalties on individual company personnel, be it monetary fines or imprisonment. Despite this need for deterrence, many practitioners believe the level of fines imposed has reached the limit of what is acceptable as an administrative fine.
In 2006 the Commission adopted seven fining decisions for cartels, imposing fines of approximately €1.85 billion in total on 47 undertakings. Within the first two months of 2007, the Commission adopted two further cartel decisions imposing more than €1.7 billion on the undertakings involved.
Apart from the alloy surcharge decision and the steel beams decision, which were re-adoptions of past decisions, all decisions were based on investigations that had been triggered by applications for immunity under the Commission’s Leniency Programme. Accordingly, in every decision there was one undertaking that received a zero fine.
2006 saw a large number of European Court of First Instance (CFI) judgments following appeals brought by addressees of cartel decisions. It has become a common exercise to appeal Commission cartel decisions, hoping that the CFI will annul or at least appreciably reduce the fine imposed by the Commission. The claimants usually produce in their appeals an extensive list of alleged breaches of their procedural rights or of principles of EC law contained in the contested Commission decision. The chances are that the CFI will accept one or two of the arguments presented by the claimants and will reduce the fine accordingly.
It is less common that undertakings, after having unsuccessfully appealed against a Commission decision to the CFI, take this negative CFI judgment further to the European Court of Justice (ECJ). On 18 May 2006, the ECJ dismissed in its entirety an appeal brought by food and energy company Archer Daniels Midland against a CFI judgment that had upheld to a large degree the Commission decision against ADM in the Lysine case.
On 29 June 2006, following an appeal lodged by the Commission against a CFI judgment that had reduced the Commission fine imposed on the undertaking SGL Carbon AG in the graphite electrodes cartel, the ECJ increased the fine, albeit setting it at a lower level than the original Commission decision. On the same day, the ECJ dismissed the appeals of both SGL Carbon and another undertaking involved in the graphite electrodes cartel (Showa Denko) against the fines as established by the CFI.
Recidivism has been of major importance when fining undertakings involved in cartels. It was seen as an aggravating circumstance and regularly resulted in a 50 per cent increase of the fine. As discussed below, with the new guidelines on fine setting, the situation has become even more severe for repeat offenders. Here, the question of how long past infringements can still be of relevance when fining undertakings arises. This question surfaced in the Danone appeal against the Belgian brewers cartel decision. There, the Commission increased the fine for Danone, as the company had been subject to cartel decisions already in 1984 and in 1974. The suggestion that the Commission is increasing fines for recidivism due to infringements that occurred almost 30 years earlier goes too far, particularly since the infringements under investigation occurred in the 1990s in that case. Nonetheless, it would be desirable to have more precise guidance as to how long past infringements can be relevant. On 16 November 2006, Advocate General Maduro delivered his opinion stating that there are no precise limitation periods. He noted that undertakings can have reasonable expectations that past infringements no longer play a role but that each case must be considered individually. The Advocate General concluded that the CFI had been correct in finding that as far as Danone was concerned “each time a relatively limited period separated one infringement from the next”. The ECJ, in its judgment of 5 February 2007, confirmed the position taken by the Commission against Danone.
On 13 July 2006 the ECJ clarified in Manfredi – a preliminary ruling concerning a private enforcement case in Italy – a series of issues in relation to private damages claims. It found that individuals can claim compensation for the damage caused by agreements or practices in breach of Article 81 of the EC Treaty. The Court also clarified that, in the absence of specific Community provisions, the precise procedure as to how to claim damages falls under the applicable rules of the member state in question, subject to certain principles that safeguard equivalence and effectiveness. These national rules govern, for example, the question of causality between the breach and the damage, the designation of the competent court and the precise court procedure, limitation periods and the extent of the damage to be awarded in the court procedure. In addition, the ECJ made it clear that, under EC law, punitive damages and compensation for loss of profit (including interest) can be awarded.
On 1 September 2006 the Commission published its latest Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation 1/2003 in the Official Journal. These replace the previous guidelines that had been applied since 1998 in all cases where a Statement of Objections (SO) was not issued before 1 September 2006.
The legal maximum amount of fines is stipulated in Regulation 1/2003 and therefore remains at 10 per cent of the worldwide turnover of the undertaking participating in the infringement in the preceding business year. Yet, in addition to certain adjustments, the new guidelines bring about two major changes compared to the 1998 guidelines, which will in most cases lead to significantly higher fines than has been the case under the 1998 guidelines. First, fines will relate to a certain share of value of the undertaking’s sales of goods or services to which the infringement relates in the European Economic Area (EEA); secondly, the duration of an undertaking’s participation in the infringement will be of much greater relevance than was the case under the 1998 guidelines. While this is certainly bad news for undertakings that will be addressees of future fining decisions, at least under the new guidelines the anticipated fines will be more predictable than has been the case in the past, where sometimes it has appeared that the Commission first determined an appropriate fine and only subsequently tried to present a calculation of that fine under its existing guidelines.
Under the new guidelines, the Commission will calculate fines in a two-stage procedure: first, it will determine a basic amount, which will, in a second stage, be adjusted upwards and/or downwards.
The starting point for the fine, depending on the gravity of the infringements, is an amount of up to 30 per cent of the value of the yearly sales of goods and services to which the infringement relates in the EEA. The Commission says that so-called ‘hard core’ cartels will be fined at the higher end of that scale.
The starting point will be multiplied by the number of years of participation in the infringement. This means a 100 per cent increase per year and is a major change compared to the 1998 guidelines, where each year of infringement only led to a 10 per cent increase of the starting point.
A further novelty compared to the 1998 guidelines that will play a great role, especially in cartels having a rather short duration, is the so-called ‘entry fee’. The Commission will include in the basic amount a sum of between 15 per cent and 25 per cent of the value of sales, as defined above. The intention is to deter undertakings from entering into hard core cartels. According to the guidelines, the entry fee will be applied in all hard core infringements but is only optional as regards other infringements.
As has been the case under the 1998 guidelines, the Commission will adjust the basic amount upwards and/or downwards with reference to a series of aggravating and mitigating circumstances.
It is an aggravating factor where the undertaking concerned continues or repeats the same or similar infringements for which it had already been found to be in breach of Article 81 or 82 of the EC Treaty (even when such a breach has not been subject to a fine) by the Commission or a national competition authority. The guidelines provide for a mandatory 100 per cent increase of the basic amount, which is also a major change compared to the Commission’s previous practice, under which a 50 per cent increase applied. Moreover, the Commission refuses to give any precise guidance for how many years an undertaking would be perceived to be a repeat offender under the guidelines.
Other aggravating circumstances are refusal to co-operate with or obstruction of the Commission when carrying out its investigations and having played a particularly vicious role in the cartel, eg by being a leader or instigator, by coercing others to participate and/or by retaliating against other cartel members.
The guidelines also contain a list of mitigating circumstances that reduce the basic amount, which are very similar to those that applied under the 1998 guidelines. The basic amount may be reduced, inter alia, where an undertaking provides evidence that it terminated the infringement as soon as the Commission intervened (though this does not apply to cartels); that the infringement was a result of negligence; or that its involvement in the infringement was limited ie by demonstrating that it avoided applying the agreements reached but adopted competitive conduct in the market.
Other mitigating factors include effective co-operation with the Commission outside the scope of the Leniency Notice and beyond the legal obligation to do so and the fact that the anti-competitive conduct had been authorised or encouraged by public authorities or by legislation.
It has been suggested that the new guidelines will lead to increased transparency and predictability of the fines imposed by the Commission. A major drawback in this respect is the fact that the Commission can apply specific increases for deterrence. Fines may be increased if the Commission finds that undertakings have a particularly large turnover beyond the sales of goods or services to which the infringement related. The Commission may also increase the fine in order to exceed the amount of gains improperly made through the infringement.
In relation to predictability, almost at the end the new guidelines note that “the particularities of a given case or the need to achieve deterrence in a particular case may justify departing from such methodology or from the limits [relating to a maximum 30 per cent of the value of sales]”. Hence, while in most cases, under the new guidelines, it will be easier to predict the likely level of fines to be imposed, the Commission still retains a large degree of discretion to depart from the new methodology. In any event, it is more reasonable to base a fine for a cartel infringement on the company’s individual sales affected by the cartel (new guidelines) rather than on a standard amount based on the per se gravity of the infringement (1998 guidelines).
As has been noted, the level of fines will rise significantly under the new guidelines, in particular for infringements of a long duration. Therefore, it can be expected that the 10 per cent ceiling contained in Regulation 1/2003 will be applied more often than has been the case under the 1998 guidelines. Indeed, some believe that the Commission has a strong interest in raising fines up to a level that is no longer manageable for the undertakings involved, so that they are more willing to enter into plea-bargaining agreements with the Commission. While it is true that the Commission does not at this stage have a plea-bargaining policy, it is no secret that the institution is currently working on developing one.
On 8 December 2006 the Commission published its new Leniency Notice setting out the current framework for granting immunity and reducing fines in cartel cases. This new notice replaces the Commission’s Leniency Notice of 2002, which had already been an improvement compared to the first Leniency Notice of 1996. Nevertheless, there were a series of issues that required improvement or at least clarification. The new Leniency Notice primarily clarifies the type and extent of information to be provided by leniency applicants in order to qualify. It also describes in more detail the practice of oral leniency applications – and access by other parties thereto – in order to protect such applications from discovery in litigation. Finally, the new Leniency Notice introduces a marker system.
Only one undertaking can obtain immunity from fines. There are two ways to obtain immunity: an undertaking must be the first to submit information and evidence which, in the Commission’s view, will enable it (i) to carry out a targeted inspection in connection with the alleged cartel; or (ii) to find an infringement of Article 81 of the EC Treaty in connection with the alleged cartel.
In both cases, the application must be accompanied by an extremely detailed corporate statement containing, inter alia:
A detailed description of the aims and the functioning of the alleged cartel, including a description of the products and geographic scope, the duration and the estimated market volumes, specific dates, locations, content of and participants in alleged cartel contracts. In addition, pieces of evidence need to be explained in detail.
The name and address of the immunity applicant, as well as the names and addresses of all the other undertakings that participate(d) in the alleged cartel. This relates also to detailed information on the individuals participating in the cartel, including their home addresses.
It follows that an immunity applicant must essentially establish for the Commission the facts of the cartel case in order to qualify for immunity.
Leniency applicants enabling the Commission to establish an infringement of Article 81 of the EC Treaty (the second option) must also be the first to provide contemporaneous, incriminating evidence of the alleged cartel.
There are a few further conditions to be met in order to qualify for immunity. When contemplating making its application to the Commission, the undertaking must not have destroyed, falsified, or concealed evidence of the alleged cartel nor made known to anyone, except to other competition authorities, its intended application. The applicant must have also ended its involvement in the alleged cartel immediately following its application, unless otherwise requested by the Commission.
After having applied for immunity, the applicants must continue to co-operate genuinely, fully, on a continuous basis and expeditiously with the Commission. Such co-operation includes, inter alia:
- Making current (and, if possible, former) employees and directors available for interviews;
- Not destroying, falsifying, or concealing relevant information or evidence relating to the alleged cartel; and
- Not disclosing the fact or any of the content of its application before the Commission has issued an SO in the case, unless otherwise agreed with the Commission.
Undertakings that cannot achieve immunity can still qualify for a reduction of the fine. The respective percentage bands depending on the place of the leniency applicant in the queue remain unchanged compared to the 2002 Leniency Notice, ie, the Commission grants a reduction of 30-50 per cent to the first undertakings meeting the criteria for reduction of the fine; the second company is granted a reduction of 20-30 per cent; subsequent companies are granted reductions of up to 20 per cent.
The Commission also explains the concept of significant added-value in more detail: it makes clear that direct contemporaneous evidence will generally be more valuable than other information. This clarification can only be welcomed. The Commission should view corporate statements made at the time of the leniency application with much more suspicion than sometimes was the case in the past.
In relation only to immunity applications, the Commission introduces a marker system in order to enable applicants to save their first place in the queue of other applicants while finalising the leniency application. It should be noted that the Commission will decide on a case-by-case basis how long the marker will remain valid.
The Commission also introduces the possibility of submitting a leniency application on hypothetical terms in order for the applicant to obtain information as to whether or not immunity can still be granted in a particular case. Here, all evidence necessary has to be submitted in the hypothetical immunity application, albeit in edited form so as to mask sensitive parts, such as the identity of the undertakings concerned.
In the new Leniency Notice, the Commission sets out in writing the system of oral leniency applications already accepted for some time, where the leniency applicant feared that the application could be subject to discovery in court proceedings.
The Commission may accept oral applications if the applicant has not yet disclosed the content of the statement to third parties. Oral corporate statements will be recorded and transcribed at the Commission’s premises. In order to be granted immunity or reduction of the fine, the applicant must approve of the recordings at the Commission’s premises and check the accuracy of the transcript.
Only the addressees of the SO and no other interested parties will be granted access to the oral leniency application. Access will be granted on the Commission’s premises and neither the parties having access to the file nor their legal counsel are allowed to take mechanical or electronic copies of the applications.
The Commission goes even further in order to protect oral statements from disclosure. As the Commission has already said in its Notice on Access to the File and in Regulation 773/2004, documents obtained from the Commission’s file may only be used for the purpose of judicial or administrative proceedings for the application of the Community competition rules at issue in the related administrative proceedings. The Notice on Access to the File goes further in that it says that it will report outside counsel who breach that provision to their local bar. With respect to leniency applicants, the new Leniency Notice adds that such use of the information obtained will be seen as a lack of co-operation. Should the leniency applicant misuse the information obtained after the Commission already adopted its decision, the Commission will ask the Community courts in subsequent proceedings to increase the fine imposed.
Since the start of the decentralisation of the application of EC competition law, it has been one of the main points of criticism that immunity applicants may have to submit a large number of leniency applications to the Commission and to various National Competition Authorities (NCAs) at the same time, as sometimes it is unclear which authority will ultimately deal with the case. Accordingly, many practitioners asked for a one-stop-shop for leniency applications. Yet it was clear that such a system would not be established within a short period of time.
However, the ECN on 29 September 2006 launched its ‘Model Leniency Programme’ in order to provide for soft harmonisation of the various leniency programmes and also introduced a model for a uniform summary application procedure for cases concerning applications in more than three EU member states. The summary application will be accepted by the NCAs as a kind of marker. The difference from a usual marker system is that the summary application need not be completed unless requested by the respective NCA. Also, on 29 September, the ECN published a list of 13 NCAs that accept summary leniency applications.
While the desired one-stop-shop has not been established, the effort made by the ECN to simplify and streamline the various national leniency programmes facilitates the work of leniency applicants significantly. This applies, in particular, to the introduction of summary leniency applications and even more so if the NCAs accept summary applications in languages other than their respective official tongues.
The new Leniency Notice clarifies a series of issues that have arisen during the period of application of the 2002 Leniency Notice. It is very positive that the Commission introduced a marker system. Nevertheless, the requirements for applicants to obtain immunity are extremely burdensome.
It is, of course, not an easy task for the Commission to strike the right balance between the necessity to grant the other undertakings involved access to the Commission’s file and the protection of leniency applicants against disclosure of their applications. It remains to be seen whether potential leniency applicants will accept that their oral leniency applications are sufficiently protected or whether the risk of uncontrollable disclosure will be deemed too high with the result that, in the future, fewer undertakings will apply for leniency.
In December 2005, having identified a lack of efficient private antitrust enforcement, the Commission published its Green Paper on Damages Actions for Breach of EC Antitrust Rules. In its Green Paper, the Commission presented a series of options in order to facilitate private actions for damages. Stakeholders were invited to comment on the Green Paper until 21 April 2006 and, indeed, the Commission received a large number of responses.
The key issues in the Green Paper are:
- Access to evidence: especially in stand-alone cases, the evidence is mostly held by the defendant. Stricter discovery rules could facilitate the claimant’s burden. The Commission has already made it clear that documents provided in the context of a leniency application should not be discoverable;
- Damages: for example, how should damages be quantified and should a system of double damages be introduced?
- Passing-on defence and legal standing of indirect purchasers;
- Collective actions: since the individual purchaser and very often the final consumer will have no incentive to pursue small claims, the Commission proposes a system of claims to be brought by consumer associations and representatives of other purchasers;
- Costs of actions: should there be special provisions to limit the cost risk for the claimant, such as limiting the claimant’s risk to pay the costs only for unreasonable claims?
- Co-ordination of public and private enforcement: the Commission is aware that the fostering of private enforcements can have a detrimental effect on leniency programmes. The Commission proposes to introduce certain advantages for leniency applicants, in order to maintain the attractiveness of its programmes.
It is apparent that the Commission identified these issues after an analysis of the private antitrust enforcement system in the US and that the Commission tries to benefit from the positive experience of private enforcement there while, at the same time, trying to avoid the excesses of the US.
In an intervention made before the European Parliament’s Economic and Monetary Affairs Committee on 25 October 2006, and in another speech given in January 2007, Commissioner Neelie Kroes said that the Commission will present a White Paper on this subject in 2007.
In the meantime it is interesting to note that, when adopting cartel decisions, the Commission explicitly encourages private antitrust enforcement in its accompanying press releases.
2006 saw a large number of Commission cartel decisions and particularly high fines. With the two latest decisions adopted during the first two months of 2007, the Commission has already almost reached the total amount of fines imposed in 2006.
Major developments included the Commission's Green Paper on Damages Actions (which the Commission will probably follow up during the course of 2007), the new Leniency Notice, which clarifies certain issues and introduces new tools such as a marker system. Finally, the new Commission Guidelines on Fine Setting for breaches of Articles 81 and 82 of the EC Treaty, which are placed on a new methodological basis, pave the way for further fine increases. These new guidelines should be considered in tandem with the possibility of entering into plea-bargaining arrangements, which are expected to become available in the not too distant future.
Avenue Louise 140, 1050 Brussels, Belgium
Tel.: +32 (0)2 646 2000
Fax: +32 (0)2 646 2040
g.williamson@heuking.de
c.vennemann@heuking.de
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Mergers, acquisitions and certain joint ventures involving companies with worldwide and EU sales exceeding certain thresholds are subject to review by the European Commission under the EC Merger Regulation (ECMR). Transactions falling within the scope of the ECMR will not require separate filings in any of the (currently) 30 countries – the 27 EU member states plus Norway, Iceland and Liechtenstein – that comprise the European Economic Area (EEA). In this sense, the ECMR provides for the possibility of a ‘one-stop shop’: one notification and one review of the transaction for the whole of the EEA.
The one-stop shop aims to eliminate the risk of conflicting decisions resulting from the concurrent assessment of the same transaction by multiple national competition authorities within Europe. Furthermore, making a single notification for the whole of the EEA should translate into both cost and time savings for the merging parties, compared to making multiple national filings.
A transaction notified under the ECMR will be approved provided it does not ‘significantly impede effective competition’ within the EU or a substantial part of it. When applying this test, the Commission will consider a variety of factors in order to determine whether a position of single-firm or collective dominance is created or strengthened as a result of the merger, or whether effective competition is significantly impeded despite no such dominance, due to horizontal, vertical or conglomerate effects. In the case of joint ventures falling within the scope of the ECMR, the risk of co-ordination between the parent companies outside the joint venture may also be examined.
This article is intended to serve as a general introduction to some of the most salient features of EC merger control likely to be of interest to companies doing business in Europe. These key aspects are considered under three separate headings: jurisdiction, substantive review and procedure.
Concentrations with a Community dimension
The ECMR applies to concentrations (mergers, acquisitions and certain joint ventures1) with a ‘Community dimension’. Whether a concentration has a Community dimension depends on the worldwide and the EU-wide sales (turnover) of the parties. Among other things, at least two of the parties must each have an EU turnover of more than €100 million and together the parties must have a combined worldwide turnover of more than €2.5 billion2. The ECMR turnover thresholds are applied without regard to the nationality of the parties, the country where the transaction is to take place, the law applicable to the transaction, or the nature of the goods or services involved. Such a straightforward turnover-based approach has the advantage of legal predictability but also means that transactions with little or no EU connection other than EU sales may require notification to the Commission. Indeed, some of the most high profile EC merger decisions have involved non-European companies. Transactions notified to the Commission under the ECMR may not be implemented until approval has been granted.
Exceptions to the one-stop shop principle
Although the basic rule is that the ECMR will apply to all concentrations with a Community dimension, and only to such concentrations, there are some key exceptions. For example, the parties may in certain circumstances request the referral of their case either: (i) from the Commission to one or more member states, where the concentration has a Community dimension (an article 4(4) referral), or (ii) from three or more member states to the Commission, where the concentration lacks a Community dimension (an article 4(5) referral). article 4(5) in particular is a key provision insofar as it aims to optimise case allocation and lessen the burden of multiple filings. However, as explained below, the usefulness of article 4(5) is somewhat undermined by the burdensome procedure by which a referral to the Commission must be made. In this respect, it is lamentable that the Commission’s 2004 proposal for automatic referral to the Commission where three or more member states would otherwise have jurisdiction was ultimately rejected.
Both article 4(4) and article 4(5) referral requests must be made by the parties during the pre-notification stage. However, reallocation of jurisdiction may also occur post-notification and independent of any request by the parties. Indeed, a member state may in certain circumstances request to review all or part of a concentration that has a Community dimension (under article 9 ECMR) or may refer review of a concentration that does not have a Community dimension to the Commission (under article 22 ECMR). In practice, article 9 referrals are far more common than article 22 referrals.
The substantive test
Under the ECMR, a notified concentration is assessed to determine whether it will “significantly impede effective competition… in particular as a result of the creation or strengthening of a dominant position”. Thus, the creation or strengthening of a dominant position is a sufficient, but not necessary, condition to prohibiting a notified concentration.
It is well established that the notion of dominance covers not only cases of single-firm dominance but also cases of joint or collective dominance3 (ie, where two or more companies, each with significant market shares, can be expected, based on market conditions, to co-ordinate tacitly with one another instead of competing). Such ‘co-ordinated effects’ of a transaction are particularly likely to be found in highly concentrated, transparent markets, where: (i) each of the co-ordinating companies is able to monitor whether the terms of tacit co-ordination are being adhered to; (ii) there is a credible deterrent to prevent deviation from the terms of co-ordination; and (iii) the competitive behaviour of third parties not participating in the co-ordination is insufficient to jeopardise the results of the co-ordination4.
In addition, the substantive test of the ECMR allows for the prohibition of mergers that neither result in single-firm dominance nor in a likelihood of tacit co-ordination between market leaders. In particular, problematic ‘unilateral’ or ‘non-co-ordinated’ effects may occur where, for example, the company to be acquired has a greater influence on the conditions of competition in the market than its market share would suggest, as a result of which its acquisition would remove a significant competitive constraint from the market.
Horizontal mergers
The Commission’s primary focus in merger control is on ‘horizontal’ mergers (ie, mergers between competitors active on the same market(s)). According to the Commission’s Horizontal Merger Guidelines5, a horizontal merger is likely to raise competition concerns if it eliminates important competitive constraints on companies, which would consequently enjoy increased market power, to the detriment of competition. In making this determination, the Commission may consider various factors, including the market shares of the merging firms, the degree to which the merging firms compete, the ability of customers to switch suppliers, etc. In addition, and as explained above, a horizontal merger may also raise competition concerns where the merger facilitates tacit collusion between the members of an oligopoly.
Vertical and conglomerate mergers
Companies should not conclude from the above explanation that the Commission is only concerned with horizontal mergers. Indeed, the Commission will also consider the effects of mergers between companies in so-called vertical or conglomerate relationships (also knows as ‘non-horizontal mergers’). These types of mergers are a hot topic at present as a result of the launch, in February 2007, of the Commission’s draft non-horizontal merger guidelines and the ongoing public consultation6.
Essentially, a vertical merger involves parties that operate on different levels of the supply chain (eg, where a company acquires one of its suppliers or customers). A ‘conglomerate’ merger occurs between parties that are not in a purely horizontal or vertical relationship but are active in closely related markets. Depending on the markets in which the parties are active, mergers may have a combination of horizontal, vertical and/or conglomerate effects.
The draft non-horizontal guidelines acknowledge that non-horizontal mergers are generally less likely to create competition concerns than horizontal mergers. However, such mergers may nonetheless be problematic in certain circumstances. For example, in a vertical merger, if the parties have substantial market power in one or more markets along the supply chain, the vertically integrated firm may be able to foreclose rivals from access to either an upstream market for the supply of inputs or a downstream market for distribution or sales.
Likewise, a ‘conglomerate’ merger may raise competition concerns where the products of the acquired business are complementary to the buyer’s own products, insofar as the respective products are likely to have common customers. In such a case, depending on the parties’ market shares, it is conceivable that the merged company may, by virtue of the transaction, obtain significant ‘portfolio power’, such that competitors offering a much more limited product range have difficulty competing effectively with the merged company, resulting in higher prices charged by the merged company and, ultimately, harm to consumers. For example, in GE/Honeywell7, the Commission found that the combination of GE’s and Honeywell’s complementary strengths would have allowed the merged company to leverage its existing dominant position in engines to enhance its position in avionics. On appeal, the particular argument of ‘conglomerate’ effects was rejected by the European Court of First Instance (CFI) as being too speculative8. Nonetheless, the CFI did not deny that, with sufficient evidence, a merger could be blocked on conglomerate grounds. The draft non-horizontal guidelines echo this approach.
Efficiencies
Whether horizontal, vertical or conglomerate, mergers may result in significant efficiencies that are capable of benefiting consumers. Until recently, the Commission had taken a sceptical view of efficiencies, as being a factor that may make a company’s dominant position even less assailable. Although the Commission now recognises that efficiencies may be pro-competitive and indeed a factor in favour of clearing a merger, there remain relatively few examples of cases where efficiencies have been successfully asserted. Indeed, the burden of proving efficiencies is steep, as parties must be able to quantify the expected efficiencies and must show that these efficiencies are both merger-specific (ie, that they will result from the transaction) and likely to benefit consumers. As a result, in practice, companies still opt in many cases not to mention efficiencies even where they exist.
Risk of co-ordination between the parents of a joint venture
Full-function joint ventures are subject to a two-part test under the ECMR. The concentrative aspects of such joint ventures are assessed under the same ‘significant impediment to effective competition’ test to which all concentrations notified under the ECMR are subject. In addition, the Commission will examine whether the joint venture has as its object or effect the co-ordination of the competitive behaviour of the parent companies, which remain independent from one another, on a market that is the same, similar or related to the market of the joint venture. If this is the case, such ‘spill-over’ effects are subject to review within the scope and time periods set out in the ECMR, but are assessed in light of the criteria set out in Article 81 of the EC Treaty, which deals with restrictive agreements between independent companies.
When assessing the ‘co-ordinative’ effects of a joint venture, the Commission will in particular consider the extent of the activities retained by the parties in the potential co-ordination markets and whether any expected co-ordination between the parent companies would be the direct consequence of the creation of the joint venture (ie, whether there is a causal link).
Merger filing assessment
As a first step in relation to any merger, a determination will need to be made of each jurisdiction in which a filing is required. If the EU thresholds are not met, the parties should assess whether a filing is needed in any member states. If a filing is required in three or more member states, the parties must decide whether to proceed with multiple national filings, or to request an article 4(5) referral of the case to the Commission. In principle, article 4(5) is intended to allow parties to avoid making multiple national notifications, with the costs and delays that such filings inevitably involve. However, experience has shown that the procedure for requesting the referral of a case from three or more member states to the Commission is sufficiently onerous as to make national filings preferable in some cases.
Indeed, in order to make an article 4(5) referral, the parties must prepare and submit a reasoned submission to the Commission containing very detailed information on the transaction and the markets at issue. This will include market share data for the territories of each Member State capable of reviewing the transaction, even if the relevant geographic market is clearly wider. Even in the simplest cases, it may take several weeks to prepare the referral request and will take three more weeks once the request is submitted before the results are known. Assuming the request is approved and jurisdiction is transferred to the Commission, a merger notification to the Commission must still be made. Thus, when all is said and done, it can easily take several months between filing a referral request and receiving the Commission’s final approval decision. In many cases, making the required national filings and obtaining the approvals of the relevant national authorities could have taken less time.
Filing a Form CO
Whether one is dealing with a concentration with a Community dimension or one without a Community dimension that has successfully been referred to the Commission, the process of making an EU-level merger filing (ie, completing a ‘Form CO’) can be long and arduous. EU merger filings invariably require the parties to provide a thorough analysis of the relevant antitrust markets, detailed sales and market share figures of the parties and their competitors, and contact details of key suppliers, customers and competitors. In more complex cases, EU merger filings can easily exceed 100 pages, excluding annexes and supporting documents. It will typically take several months from first contact with European counsel until the Commission issues its final decision, even in the most straightforward of cases. As such, European merger approvals are often the number one gating item for merging companies.
Pre-notification contacts with the Commission, although not mandatory, are strongly encouraged and have, over time, become standard practice. Such pre-notification contacts may include, for example, face-to-face meetings with the Commission and/or the submission of a draft filing for the Commission to review. Such contacts are generally mutually beneficial. They allow the Commission to prepare to receive the formal filing (ie, to assemble a case team and manage internal resources effectively) and provide a forum for the parties and the case team to agree on the level of information to be provided in Form CO, thereby reducing the risk that the formal notification will be rejected as incomplete. Furthermore, pre-notification consultations can allow the Commission to do some of the preparatory work and thinking on a case before a formal filing is made. This can pay dividends for the parties, as the additional time may allow the Commission more easily to resolve any potential concerns.
The standard notification and review process and timeline
The first phase of an EU merger filing lasts 25 working days (approximately five weeks). During this time, the Commission will, among other things, verify the essential facts contained in the notification and request further information from the parties themselves, as well as from interested third parties (ie, competitors, suppliers and customers). If it appears that the Commission has serious competition concerns, the parties may choose to propose commitments in the first phase to remedy these concerns. Offering commitments will have the effect of extending the duration of the first phase from 25 to 35 working days.
At the end of the first phase, the Commission will either approve the transaction (with or without conditions) or open a second phase investigation. Second phase proceedings involve a detailed in-depth investigation which generally lasts for 90 working days, although this may be extended in certain circumstances. In addition to ongoing information gathering, second phase proceedings involve a number of formal steps. In particular, before taking any final decision other than an unconditional clearance decision, the Commission will issue a Statement of Objections, which informs the parties of its concerns about the concentration. The parties will then have a period of around two weeks within which they must respond to these concerns. The Commission is under a formal obligation to grant the parties access to the Commission’s case file at this time.
Merging parties in a second phase investigation also have the right to request an oral hearing, which usually takes place shortly after they have submitted their written response to the Statement of Objections. If they wish to do so, merging parties (again) have the option of proposing remedies in order to eliminate any competition concerns the Commission may have.
Following second phase proceedings, the Commission will either approve the transaction (often subject to conditions), or prohibit it.
Remedies
As mentioned above, in cases where the Commission finds that a concentration raises competition concerns, the parties may seek to modify the concentration in order to resolve these concerns and thereby obtain clearance of the merger. Although the Commission has a clear preference for structural remedies (eg, divestiture of a business), as these do not require any monitoring to ensure they are complied with, behavioural remedies (eg, a commitment not to discriminate against a customer who is also a competitor) may in some cases be accepted, either alone or as part of a package that also includes structural remedies.
Parties should be aware that responsibility for formulating and offering commitments rests exclusively with them. The commitments must entirely eliminate the competition concerns raised by the Commission and must also be capable of being implemented effectively.
Finally, although Commission merger decisions are subject to judicial review by the European Courts, it is worth noting that the appeals process can take several years. A fast-track procedure was introduced in 2001 with the aim of significantly shortening the length of judicial review of certain types of Commission decisions, including merger decisions. Nonetheless, experience has shown that the length of the appeals process, even under the expedited procedure, is often incompatible with the ultimate completion of a prohibited transaction. Even if the Commission’s prohibition decision is eventually annulled, there seems to be little likelihood of a merger going forward after such a delay.
As indicated above, obtaining European merger control approval is often the number one gating item for merging companies. Although most companies appreciate that complying with the merger control rules is simply a cost of doing business in Europe, the fact remains that such compliance is a very significant and time-consuming exercise and, it is fair to point out, one that has not become appreciably easier in the greater than 16 year history of EC merger control.
Indeed, companies whose transactions meet the thresholds of the ECMR face having to complete one of the most comprehensive and detailed merger notification forms of any jurisdiction worldwide. Such companies can assume that the entire process, from first contact with European counsel to a final decision by the Commission, will likely take several months in the simplest of cases and potentially much longer in cases raising significant competition concerns. In addition to preparin
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