EU merger law governs when some large companies can work together and even set up new companies. This case concerns two currently rival companies that now want to work together in just one Member State, Austria. However, the two rivals also want to do so under the auspices of one existing company, which is currently owned by just one of them. Since the Austrian road-building market is a market currently ruled as a duopoly by these two rivals, there is a risk that this co-operation could result in a monopoly. The issue perplexing the Austrian judges is: how does EU merger law apply?
Anonymised as ‘S’ by the referring Austrian court, S is one of the world’s largest construction companies. It has an Austrian subsidiary, which trades as Austria Asphalt. Both companies build roads.
However, Austrian Asphalt has a legal problem because it wants to work together with another Austrian company known as ‘M’. This company is an Austrian company that supplies tarmac to the Austrian road building industry.
The difficulty is that this Austrian company ‘M’ is owned by one of S’s major rivals, the ‘P-Group’. More precisely, M is owned indirectly by the P-Group because M is owned by another company, ‘TA’. In turn, TA is owned by a sole-shareholder ‘P’. And P in turn is part of the P-Group. The P-Group is also one of the world’s largest construction companies, and it too engages in road-building.
Against this backdrop, is it possible for Austrian Asphalt and M to build a company together under Austrian law, and then merge.
Both S and P are commercially-powerful, rival companies. In 2014, their combined global turnover was more than 5 billion euro. In that year, both S and P each turned a profit of more than 250 million euro in the EU alone. In Austria, M’s owner ‘TA’ also turned a profit of 3 million euro.
Both Austrian Asphalt and M are intending to work together under the auspices of a hybrid corporate form known as a Gesellschaft mbH and a Kommanditgesellschaft. This new company would have shareholders coming from the two rival corporate groups, and any decision taken by the shareholders would need the unanimous approval of the shareholders from both parent groups.
However, the newly purposed company ‘M’ would also officially become a subsidiary of TA (which belongs to the P-Group). Admittedly, TA currently has but one sole shareholder ‘P’, but it was also envisaged that that set up would change whereby P would be allowed to continue to participate in TA’s activities but on the basis of working with them as a joint venture.
Both Austria Asphalt and M thought that the effect of this new company would represent a merger so in 2015 they decided to give notice of their intention to the Austrian competition authority, the Bundeswettbewerbshörde.
At the Bundeswettbewerbshörde
The Austrian authority looked at EU Merger law. It understood the law coming from the EU Commission as requiring any new company set up in such circumstances to be ‘fully-functioning’. If the merged company could not operate as a properly functioning company, then there would be no concentration for the purposes of Article 3 of the merger regulation (otherwise known as the Council Regulation (EC) No 139/2004 […] of 20 January 2004 on the control of concentrations between undertakings).
The Austrian Authority decided to block the proposed merger. The two corporate groups were too powerful, and the profit thresholds exceeded the limits under Article 3(1)(b) of the Merger Regulation.
The Austrian Authority was concerned by the fact that here was a situation that was currently a duopoly – both S and P ruled the Austrian road-building market. If the merger was approved, then a duopoly situation might be substituted by a monopoly situation because if the subsidiary company was unable to act as a proper functioning company, there was a risk it would play second fiddle to the wishes of the parent P-Group.
The decision of the Austrian authority did not satisfy Austrian Asphalt, who appealed it to the Austrian Oberster Gerichtshof.
At the Austrian Oberster Gerichtshof
Sitting as the highest Austrian court in competition law, the Austrian Supreme Court recalled the various paragraphs of reasoning in the EU Commission’s merger regulation, and several of the EU Commission’s merger decisions (including COMP/M. 3097 – Maersk Transportation Data/Eurogate Solutions, Kooperativa Kommission IT/Global COMP/JV.45 – Bertelsmann/Förbundet (KF)/BOLNordic COMP/M.3798 – NYK/LauritzenCool/LauCool and JV).
However, the judges at the Austrian Supreme Court noted that the text of the Merger Regulation provided no clear answer to the problem of whether this was a concentration that needed to be notified to the authorities, or whether it should be blocked. There was also no case law to guide the Austrian court.
Another problem was that legal commentary was split on what the Merger Regulation might mean. Beside the split in the German-language literature, the English-language commentary was also divided on the specific issue of the ‘full-functionality’ requirement.
On the one hand, there was an article by Radicati di Brozolo and Gustafsson, “Full-function Joint Ventures under the Merger Regulation: The Need for Clarification”, that was published in the 2003 European Competition Law Review p.574, at pp. 576-577.
On the other, there was an article by Rudolf and Leupold “Joint Ventures – The Relevance of the Full Functionality Criterion under the EU Merger Regulation”, an article that was published in the Journal of European Competition Law & Practice 439, 446 (the year of publication is not mentioned in the Austrian court’s referring order). Rudolf and Leupold’s article made plain that the Commission had discussed the full-functionality requirement in 19 Decisions but there were a further 24 Decisions in which the Commission had completely failed to make any mention of the requirement.
Further English-language commentary came in the form of Zlatan Balta’s masters dissertation entitled ‘Application of the full-function criteria to joint ventures under the EU Merger Regulation [Master thesis, Lund University 2012]). The study showed that the EU Commission’s recent decisions were highly inconsistent.
On balance, the Austrian judges felt that none of this literature was particularly convincing as to how the Merger Regulation should be applied in this situation; consequently, it decided to make a preliminary reference to the CJEU.
According to the EU’s Official Journal (C260/34), the Austrian Oberster Gerichtshof has asked:
Must Article 3(1)(b) and Article 3(4) of Council Regulation (EC) No 139/2004 […] of 20 January 2004 on the control of concentrations between undertakings (‘the Merger Regulation’) be interpreted to mean that a move from sole control to joint control of an existing undertaking, in circumstances where the undertaking previously having sole control becomes an undertaking exercising joint control, constitutes a concentration only where the controlled undertaking has on a lasting basis all the functions of an autonomous entity?
Update – 19 February 2017
The Fifth Chamber is due to hear this case on 22 March 207.