Landmark Ruling by EU Court – Raising the Bar to Intervene in Mergers?

In a landmark ruling on 28 May 2020, the EU General Court annulled the European Commission’s decision to prohibit the acquisition of Telefónica’s UK mobile business by CK Hutchison.[1] The Court criticised the Commission for its analysis of competitive effects in merger review. The ruling can be seen as ground-breaking, as it involves, for the first time, the legal test concerning a “significant impediment to effective competition”, implying no need to find evidence of dominance or coordination on the market.

Background: In September 2015, CK Hutchison, operating under the brand Three, notified to the Commission its proposed acquisition of Telefónica’s UK mobile business under the brand o2 UK. In May 2016, following a thorough merger review, the Commission blocked the transaction because of alleged non-coordinated (unilateral) effects. Hutchison’s argument that combining its unit with Telefonica’s UK business would help the company invest more in new networks and technology was rejected. Instead, the Commission found that the merged company, with around 40% share of the retail market, would be able to unilaterally exercise market power and raise prices or reduce the quality of services. In addition, the Commission cited concerns that the deal would leave mobile virtual operators with less choice.

Landmark ruling: According to the EU General Court, the Commission had failed to demonstrate the three theories of harm presented in its decision. First, the Commission did not properly demonstrate that the effects of the concentration on the network-sharing agreements would have resulted in a significant impediment of competition. Second, the Commission did not prove that the deal would have removed an important competitive force from the market, meaning that the Commission’s application of the assessment criteria concerning unilateral (or non- coordinated) effects was insufficient. It had not been shown that the deal would have harmed rivals and customers in relation to effects on prices and quality of services. Third, the Commission did not present sufficient evidence that the transaction would have significantly impeded competition on the wholesale market.

Possible implications: As noted by the EU General Court, the mere effect of reducing competitive pressure on remaining competitors is not, in principle, sufficient in itself to demonstrate a significant impediment to effective competition. In the context of a theory of harm based on non-coordinated effects, it seems likely that the ruling will raise the bar by establishing a more stringent standard of proof for future interventions.

To block a transaction in the future, sufficient evidence will be needed to demonstrate that a proposed deal would significantly impede effective competition with a strong probability ─ “more than likely” will not be enough. In addition, the practical implications of the ruling may well be that the ability of competition enforcers to demand companies to submit remedies to get a deal through will be weakened.

Furthermore, as the general sentiment of EU merger enforcement has been negative towards attempts by European telecom operators to acquire competitors, often four-to-three national deals, it remains to be seen whether the ruling will trigger telecom operators to attempt new deals with direct rivals, leading towards consolidation in the fragmented European telecom market. This could have positive effects on investments and innovation with regard to the roll-out of network infrastructure in favour of both businesses and consumers.

Finally, the ruling of the EU General Court could still be appealed. If the parties decide to challenge the decision, the case will be moved to the European Court of Justice. Nonetheless, the present ruling carries an important message to competition enforcers on the need to credibly substantiate their competition concerns also concerning unilateral theories of harm in oligopolistic markets.

[1] T-399/16 - CK Telecoms UK Investments v Commission, Judgment of the General Court (First Chamber, Extended Composition) of 28 May 2020.