As part of our response to the European Commission’s consultation on possible reforms to its merger control guidelines,[1] we provided our views on Topic C – Innovation And Other Dynamic Elements In Merger Control.
We proposed four modernizations to align EU merger control with the EU’s strategic focus on enhancing competitiveness and home-grown innovation.
A. Innovation and Investment Framework
Today, innovation and investment-related benefits are rarely taken into account in merger reviews. When the Commission has considered innovation, it has largely focused on potential anti-competitive effects arising from overlaps in R&D. Moreover, the legal standard for efficiencies set out in the Horizontal Merger Guidelines (“HMG”) is poorly suited to capture such benefits: it places the burden of proving pro-competitive effects to the parties while (i) requiring precise quantification, (ii) considering only a short time horizon, and (iii) excluding out-of-market benefits. This may lead to overenforcement and deter mergers that could in fact be pro-competitive.
Mergers can, however, generate substantial positive effects on innovation and investment, in particular:
- By expanding demand, enabling the merged firm to capture higher returns from R&D;
- By enabling the merged firm to internalise R&D spillovers, thus avoiding duplicating costly projects and ensuring that the full benefits of each research effort are captured internally;
- By combining complementary R&D capabilities and coordinating research activities, while freeing up additional investment resources.
These benefits can extend beyond individual product markets, creating cross-market value across adjacent markets or even giving rise to new market segments.[2]
Our proposal:
We propose two principal improvements:
- First, in markets where the Commission identifies potential concerns in innovation competition, it should be required to assess and balance a transaction’s potential pro- and anti-competitive effects on innovation – notably weighing short-term effects against longer-term developments in innovation. A significant impediment to effective competition (“SIEC”) should be found – at least as it relates to innovation competition – only if the Commission can demonstrate that the overall balance of effects on innovation is negative.
- Second, more generally, where the parties provide plausible evidence of a transaction’s pro-competitive impact on innovation or investment, even where there are no potential innovation concerns, the Commission should weigh these positive effects against other potential anti-competitive effects (such as potential short-term pricing increases) when conducting its SIEC assessment. This may include weighing longer term or out-of-market innovation efficiencies against short-term potential price effects within a given market.
B. Unified Potential Competition Assessment
On the assessment of potential competition, the HMG suffer from two important shortcomings, creating legal uncertainty and an asymmetry which is not supported by economic evidence:
- They lack a precise analytical framework for assessing whether and when a potential competitor is likely to exercise a significant constraint; and
- They suggest different standards for assessing potential competition when considering an acquisition of a potential competitor, and when considering whether a third-party potential competitor is likely to serve as a ‘significant’[3] or ‘sufficient’[4] competitive constraint on the merged entity going forward.
Our proposal:
We propose establishing a unified analytical framework for assessing potential competition using a ‘more likely than not’ standard of proof, applied consistently whether raised as a theory of harm or used as an argument by merging parties.[5]
C. Reformed Failing Firm Framework
The HMG criteria for a failing firm defense are almost impossible to meet,[6] making the legal framework unfit for purpose. Since the Guidelines’ adoption over 20 years ago, only one case has been cleared based on a failing firm defense.[7]
Yet, acquisitions of financially distressed companies can be highly procompetitive by preserving productive assets, enabling economies of scale, and allowing more efficient firms to deploy resources that would otherwise exit the market.
Our proposal:
We propose a unified two-stage counterfactual analysis which would address these issues by:
- Assessing evidence for the most likely counterfactual scenarios; and
- Comparing merger outcomes against those scenarios.
This approach would eliminate the current ‘inevitability’ standard[8] that departs from the established balance of probabilities test, allow proper consideration of flailing firms’ diminished competitive constraints, and prevent the creation of artificial barriers to exit.
D. Predictable Assessment Timeframes
The Guidelines do not provide sufficient guidance on appropriate timeframes for evaluating future market developments.
Our proposal:
In order to shift merger control from a short-term focus on price to a forward-looking assessment of innovation and investment, we proposed:
- Preserving the established evidentiary standards,[9] without lowering the burden for cases involving ‘more significant’ but ‘more distant’ future effects, as doing otherwise would create legal uncertainty and could deter M&A and investment;
- Ensuring that assessment timeframes do not exceed periods over which events can be predicted ‘with a sufficient degree of certainty;’[10]
- Assessment periods that reflect industry-specific characteristics. Longer timeframes may be justified in sectors with established investment cycles (e.g., infrastructure telecommunications companies), while shorter-term predictions may be more appropriate in fast-moving technology sectors where market dynamics evolve rapidly.
In sum, these four modernizations would shift EU merger control from its current short-term focus to a more balanced, forward-looking assessment that properly accounts for innovation and investment. By doing so while maintaining rigorous competition standards, these reforms would ensure that EU merger control fully supports European innovation and growth. Interested in reading our full response? Please find it here.
[1] See our September 5 alert EU Merger Guideline Consultation – Our Views on Possible Reforms, available on the Cleary Antitrust Watch here.
[2] For example, a pharmaceutical company’s acquisition of a biotech firm may yield breakthroughs not only in the target therapeutic area but also in adjacent disease categories through shared research platforms. Similarly, a technology merger might combine AI capabilities with the acquirer’s expertise to create innovations spanning multiple industrial applications.
[3] HMG, ¶60.
[4] HMG, ¶68.
[5] Commission v. CK Telecoms UK Investments (Case C-376/20 P) EU:C:2023:561(“CK Telecoms”), ¶¶86–87.
[6] The three-limb test requires merging parties to prove that: (i) the allegedly failing firm would “in the near future” be forced out of the market because of financial difficulties if not taken over by another undertaking; (ii) there is “no less anti-competitive alternative purchase than the notified merger”; and (iii) in the absence of a merger, the assets of the failing firm would “inevitably” exit the market. HMG, ¶90.
[7] Aegean/Olympic II (Case COMP/M.6796), decision of October 9, 2013, ¶833.
[8] HMG, ¶90.
[9] CK Telecoms (¶¶86-87, ¶111), Commission v. Tetra Laval (Case C-12/03 P) EU:C:2005:87, ¶¶27, 39, 41, and 45, France v. Commission (Joined Cases C-68/94 and C-30/95) EU:C:1998:148, ¶228.
[10] EVH v. Commission (Case T‑312/20) EU:T:2023:252, ¶¶233–234.