Mergers and competition law

The health crisis resulting from the pandemic caused by the Covid-19 virus has made it necessary for companies in many sectors to evaluate their efficiency in a multitude of production and organisational processes which, until recently, were considered consolidated and adapted to the reality of economic traffic.
It is well known that practically all sectors of activity, with the exception of a few, have been highly disrupted by the economic crisis that has followed the health sector, so that their rapid and inorganic growth is either necessary to return to the path of viability and efficiency or is a good opportunity to expand their market share and strength in a context of destruction of the business fabric and a correlative reduction in competition.

In either case, both those companies that need to restructure their organisation by pooling resources -union is strength- and those that individually enjoyed a consolidated position in a given market, see mergers and acquisitions as an ideal formula for strengthening and repositioning themselves in their respective sectors in this new context that has arisen. In short, if companies compete in the market under their own efficiency, it is logical to think that many of them are facing an interesting and necessary restructuring of their structures, processes and systems for marketing products and services, where competition law can and should be the vector or element to be taken into account in relevant decision-making.

From this perspective, the different procedures of merger, acquisition or purchase of a company are phenomena of the same type: that of economic concentrations. Economic concentrations are viewed with caution by Competition Law, given that in certain markets they can give rise to inefficiencies and undesirable positions of dominance. For this reason, our Law establishes a system of control and evaluation of certain business concentrations, not an absolute prohibition, which, if not followed, can give rise to significant economic and legal consequences for the actors involved.

Therefore, prior to the decision to undertake a business concentration process, where it will be customary – not to say mandatory – to carry out an audit and verification process of all the necessary information, known as Due Diligence, the company wishing to restructure its size through the purchase or acquisition, merger or takeover of its business with a competitor and with respect to a given market must know as accurately as possible the relevant market affected, its market share and that of its competitors in that market, as well as the threshold it would reach in a merger context, since it may be required to notify the competent competition authority of the initiation of a merger process, failing which it may be subject to heavy penalties and the prohibition of the implementation of the desired merger.

The purpose of this brief article is, therefore, to warn our clients and any business management body of the cases in which they should examine, at national level and prior to signing any commitment and carrying out the corresponding verification audits, whether or not the planned concentration operation should be undertaken taking into consideration the processes and limitations regulated in our Law on the Defence of Competition (LDC), this does not apply to those operations that, due to the market affected, i.e. beyond the national market and with an impact on the Community market, the merger operation must be assessed from the perspective of the regulations set out in Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.

Pursuant to Article 7 of the LDC, an economic concentration shall be deemed to take place when there is a stable change of control of all or part of one or several undertakings as a result of:

1. The merger of two or more previously independent companies, or
2. The acquisition by a company of control over all or part of one or more other companies
3. The creation of a joint venture and, in general, the acquisition of joint control over one or more undertakings, where these undertakings perform on a permanent basis the functions of an autonomous economic entity.

An economic concentration is subject to control by the Comisión Nacional del Mercado de la Competencia (CNMC), the competent authority for the control and supervision of the national market, and within this for each of its defined or relevant markets. Given that a merger per se does not necessarily constitute a potentially distortive element of competition in a given market, the LDC only requires that certain mergers be notified prior to their implementation when at least one of the following two circumstances apply:

• As a result of the concentration, a share equal to or greater than 30% of the relevant product or service market at national level or in a defined geographic market within that market is acquired or increased.
• The overall turnover in Spain of all the venturers as a whole exceeds EUR 240 million in the last accounting year, provided that at least two of the venturers individually achieve a turnover in Spain of more than EUR 60 million.

To calculate the market share and turnover, in order to know whether, eventually and with the execution of the operation, the market share threshold or the minimum turnover foreseen for mandatory recourse to the notification procedure will be exceeded, the parameters offered by articles 4 and 5 of Royal Decree 261/2008, of 22 February, which approves the Regulation on the Defence of Competition, will be of help, having to previously identify the relevant market affected, which is not a simple matter and for which we advise preventive and complete advice by specialists in the matter.

If there is any doubt as to whether the transaction is a concentration provided for in the Law, it is possible to make a prior consultation with the authority itself in order to reach a decision on (a) whether a given transaction is a concentration as provided for in the LDC; or (b) whether a given concentration exceeds the minimum thresholds for compulsory notification provided for in article 8.

The obligation to notify the concentration shall be for: (a) jointly the parties to a merger, the creation of a joint venture or the acquisition of joint control over the whole or part of one or more undertakings; or (b) individually, the party acquiring sole control over the whole or part of one or more undertakings.

The procedure for the control of economic concentrations shall be initiated once the notification of the concentration has been received in accordance with the form of notification established by regulations, and may be carried out as soon as the concentration project or agreement exists. For these purposes, the plan or agreement shall be deemed to exist:

1. In the case of acquisition of control, a merger plan or agreement exists from the moment that the participants agree to carry out the transaction giving rise to the merger, and determine the form, term and conditions under which it is to be implemented. Where the participants are companies, the agreement shall be deemed to exist when it has been adopted by the board of directors, even where the application of legal or statutory provisions requires its subsequent adoption or ratification by another body of the company.
2. In the case of a takeover bid, provided that there is a resolution of the board of directors of the bidders and their intention to make such a bid has been publicly announced.
3. In the case of mergers of companies, a merger plan or agreement shall be deemed to exist when the provisions of corporate law are complied with.

It is important to note that the existence of clauses that in any way condition the future formalisation or execution of such agreements does not exempt from the duty to notify.

Awareness should be raised of the fact that notification of the merger operation, in due form and time, when one of the two cases provided for in the regulation is met, is an essential element of the legal strategy to be followed by the company, since otherwise the LDC itself sanctions inaction with a fine of up to a maximum of 1% of the total turnover of the offending company in the financial year immediately prior to the imposition of the fine.

For its part, it should be noted that the implementation of the concentration subject to control in accordance with the provisions of the LDC before it has been notified to the National Competition Commission, or before an express or tacit resolution authorising it has been passed and is enforceable without the lifting of the suspension having been agreed, will lead to the classification of the conduct as serious and the imposition of a fine of up to a maximum of 5% of the total turnover of the offending company in the financial year immediately prior to that in which the fine is imposed. Once the CNMC has been notified of the intention to implement the concentration, the CNMC, in a first or second phase (depending on the complexity of the transaction and the need for further analysis of the proposed transaction), will authorise, or not, the concentration in question, taking into account, inter alia, the following elements:

• The structure of the relevant markets.
• The market position of the undertakings concerned, their economic and financial strength.
• Actual or potential competition from undertakings located inside or outside the national territory.
• The choice of suppliers and consumers, their access to supply sources or markets.
• The existence of constraints on access to these markets.
• The evolution of supply and demand for the products and services in question,
• The bargaining power of supply or demand and their ability to offset the market position of the undertakings involved.
• The economic efficiencies arising from the merger and, in particular, the contribution that the merger may make to the improvement of production or marketing systems, as well as to business competitiveness, and the extent to which these efficiencies are passed on to intermediate and final consumers, namely in the form of increased or improved choice and lower prices.

Execution of the concentration in breach of the CNMC’s decision could lead to fines of up to 10% of the total turnover of the offending company in the financial year immediately preceding the year in which the fine is imposed.

In addition to these amounts, fines of up to €60,000 may be imposed on each of the legal representatives or members of the management bodies involved in the implementation of the decision.

Cani Fernandez, the new President of the CNMC, has recently stated that she expects many business mergers as a result of the effects of the virus, and that the CNMC will intensify its control and monitoring of these operations.

AddVANTE offers all our advice, dedication and experience on M&A transactions, and specifically on mergers from the standpoint of competition law.