International merger control: globalization or global failure?
"It has been said that arguing against globalization is like arguing the laws of gravity." (1) Like the inescapable force of gravity, the world today has succumbed to the force of economic globalization. With technological innovations such as the World Wide Web enabling instantaneous communication and transaction across the globe, companies and consumers have overcome the geographic barriers that once limited their reach. To sustain the needs of an expanding global market, companies must expand globally as well. Companies wanting to maximize the potential of an international market must take advantage of transnational synergies by merging with other companies in other areas of the world. The merger game hasn't changed; the playing field has just gotten larger.
In many areas of the world, domestic mergers face stringent regulations in order to prevent the formation of monopolies and to protect competition in a free market. International mergers are no different; however, conflicts often arise when more than one nation attempts to exert its laws and regulations on the same merger. International mergers are often the subject of disputes arising over which nation has jurisdiction to prescribe its laws, and, if multiple nations have jurisdiction, over which law prevails should the laws conflict. This Note focuses specifically on the conflicts of international merger control arising between the United States and the European Community. Part II of this Note provides a brief procedural history of the current merger regulations of both systems and their application extraterritorially. Part III identifies problems arising from the current system of dual regulation. A brief analysis of the Boeing-McDonnell Douglas merger illustrates the problems arising when political and economic incentives of two legal regimes conflict, even if the substantive law does not. Problems arising from a conflict in substantive law and its application by separate enforcement agencies are demonstrated in a brief analysis of the GE-Honeywell merger. Part IV suggests solutions to these problems, including possible steps for implementation and the likelihood of success, and Part V concludes.
II. CURRENT MERGER LAWS
Every state has its own legal system for handling merger control. While some systems may vary greatly based on the current governmental regime, many are very similar in both regulation and enforcement. This Note focuses specifically on the similarities and differences of the two major economies for international mergers: the United States and the European Community. In order to effectively analyze the effects and consequences of dual regulation of these authorities, it is important to first understand the legal procedures and the role of extraterritorial jurisdiction and comity in the application process.
A. U.S. Merger Regulation
The U.S. federal government has been controlling mergers for well over a hundred years, with laws dating back to the late 1800s. The primary U.S. legislation governing the competitive effects of mergers and acquisitions is section 7 of the Clayton Act. (2) Section 7 prohibits mergers and acquisitions that might substantially lessen competition or tend to create a monopoly. (3) Mergers may also be challenged under sections 1 or 2 of the Sherman Act as placing unreasonable restraints on trade or as creating a potential monopoly. (4) The tests of illegality under both Acts are complementary; the Sherman Act employs general language and broad approach to antitrust problems, while the Clayton Act seeks to reach certain specified practices which have been held by courts to be outside the ambit of the Sherman Act, but which Congress considered dangerous to free competition in trade and commerce. (5) Furthermore, the Federal Trade Commission (FTC), an enforcement agency, may challenge mergers as violations of section 5 of the Federal Trade Commission Act (FTCA), which prohibits unfair competition. (6)
In 1978 the FTC enacted the Pre-merger Notification Program, requiring parties to certain mergers or acquisitions to notify the FTC and the Department of Justice (DOJ) before consummating a proposed merger or acquisition. (7) The program was established to avoid the difficulties and expenses that these enforcement agencies encounter when they challenge anticompetitive mergers after they have occurred. (8) By reviewing the potential mergers before they occur, the FTC and DOJ are able to determine which mergers are likely to be anticompetitive and can challenge them at a time when remedial action is most effective. (9)
In order for parties to a proposed merger to be required to report a merger for review, relatively high minimum financial thresholds must be met. (10) These high standards ensure that only mergers involving substantial assets will be required to report. Given that the larger the merger, the more likely it is to have an effect on the market, this system of limiting the pool of mergers to be controlled is an efficient way for the enforcement agencies to direct their limited resources on the mergers most likely to have anticompetitive effects. In addition to simply reporting to the enforcement agencies, companies involved in a merger that meets the reporting standards are subjected to a significant filing fee. The filing fee associated with the reporting of a proposed merger ranges from $45,000 to $280,000, depending on the value of assets or voting securities to be held. (11)
Once the parties to the merger have filed their proposed merger with the enforcement agencies, the parties must then observe a statutory waiting period of either 15 or 30 days, depending on the type of transaction, during which time they may not continue with the merger. (12) If the parties fail to file prior notification of a merger or fail to wait until the expiration of the statutory waiting period, they may be subject to civil penalties of up to $11,000 per day for each day in violation of the Act. (13)
1. Extraterritorial Application of U.S. Laws
Requiring only that companies meet the prerequisite financial standards for merger regulations to apply suggests that both domestic and foreign parties can be subject to U.S. merger regulations. The U.S. applies its competition laws to mergers involving foreign parties based on an "effects test." This standard, established in 1945 by Judge Learned Hand in United States v. Aluminum Co. of America, allows antitrust laws to be applied extraterritorially if the acts in question (1) were intended to have an effect on the U.S., and (2) did have an effect on the U.S. (14) As U.S. commerce continued to expand globally, the effects test was attacked by foreign countries, which criticized the extraterritorial application of U.S. antitrust laws to activity within their territorial borders as infringements of their sovereignty. (15)
Perhaps in response to this criticism, the Ninth Circuit attempted to limit the effects test with the integration of international comity. (16) In Timberlane Lumber Co. v. Bank of America, the Ninth Circuit incorporated international comity into a new standard known as the "jurisdictional rule of reason," requiring a three part analysis: (1) does the activity have or intend to have a substantial effect on U.S. commerce; (2) is the activity of the magnitude to be covered by U.S. law; and (3) as a matter of international comity and fairness, should the extraterritorial jurisdiction of the court extend to cover the activity. (17) Under the theory of comity, the court must look at the interests of other jurisdictions to determine whether another's interest is so great that the court should refuse to apply jurisdiction. (18)
The U.S. Supreme Court has not yet decisively ruled on whether extraterritorial application should be restricted with a standard of reasonableness, however, it has considered the issue of extraterritorial application of U.S. antitrust laws in general. In Hartford Fire Ins. Co. v. California, British companies operating in the U.S. conspired with one another to obtain favorable terms on insurance premiums. (19) Because such collusion violated antitrust laws, 19 states joined to bring an antitrust action against the British companies. (20) The insurance companies argued that British law should control based on the idea of comity and that extraterritorial application of U.S. law created a conflict between the two countries' laws. (21) The Supreme Court did not rule on the application of a reasonableness standard, but instead held that the consideration of comity is required only when there is a true conflict between laws, which was not present in this case. (22) Such a conflict will exist only when the laws of two countries conflict such that the party cannot comply with both obligations. (23) Because a merger is never required by law, a firm can always comply with the obligations of both nations; therefore, the holding in Hartford implies that comity will not play a role in the judicial analysis of mergers. (24)
The standard of reasonableness has, however, been adopted by the Restatement (Third) of Foreign Relations. (25) In accordance with customary international law, the Restatement of Foreign Relations has codified the jurisdiction of the U.S. to prescribe its laws extraterritorially based on the "effects test," but limited by the "rule of reasonableness." (26) Although the term "comity" is not expressly used in the Restatements, some courts have applied this principle of reasonableness as a requirement of comity. (27)
Even without express language requiring it, comity is nonetheless a standard practice in the U.S. In an antitrust suit against a foreign party doing business in the U.S., traditional practice has allowed U.S. courts to refuse to exercise extraterritorial jurisdiction, or the government to decline to bring enforcement proceedings, based on issues of comity. (28)
2. Comity in Enforcement
The DOJ and FTC are the agencies primarily responsible for enforcement of U.S. antitrust laws, and these agencies have some freedom for evaluating jurisdictional factors. Using their prosecutorial discretion, the agencies consider the significant interests of other nations that may also have jurisdiction over transnational conduct and the degree of conflict with foreign law or articulated foreign economic policies when determining whether to challenge or approve international mergers. (29) The factors used by the U.S. enforcement agencies indicate that issues of comity are considered when determining whether jurisdiction over a given merger would be reasonable.
B. European Merger Regulation
In the European Community (EC), mergers were traditionally reviewed under the European Community Treaty. The Treaty, which established the EC, was intended to achieve one common market and the cohesion of the Member States by enabling the free flow of goods, services, capital, and people, as well as preventing distortions of competition that "stack the playing field." (30) While the European Community Treaty made no initial provisions dealing specifically with mergers, it did address competition law more generally in articles 81 and 82. (31) Article 81 prohibited all mergers which affected trade between Member States and which prevented, restricted, or distorted competition within the common market. (32) Article 82 prohibited mergers that created a dominant position within the common market, or in a substantial part of it, insofar as it affected trade between Member States. (33)
As the number of mergers that crossed EC and Member States' borders increased, it became necessary for the European Council to adopt some uniform system of merger review. (34) As a result, the European Council put into effect the Merger Regulation, which has the current authority to review mergers that come within EC jurisdiction. (35) Under the Merger Regulation, mergers must meet two criteria in order to be reviewed by the Commission: (1) they must have a "concentration," and (2) they must have a "Community dimension." (36) In order for a merger satisfy these requirements, and thus allowing its review by the Commission, it must meet relatively high minimum financial thresholds set by the Regulation. (37) Similar to that of the U.S., this standard limits the pre-merger notification to substantially large mergers, indicating that both the U.S. and the EC agree that financially larger mergers are more likely to have control of the market, and are therefore more likely to have anticompetitive effects. Limiting the prerequisites for reporting mergers to financial thresholds indicates that the EC intends for its laws to apply to foreign and domestic entities alike.
To be declared incompatible with the common market, a concentration under review must (1) create or strengthen a dominant position, and (2) result in effective competition being significantly impeded in the common market or in a substantial part of it. (38) The first step in determining whether this test is fulfilled is establishing the markets in which the merging firms compete. Once the market has been determined, the Commission must consider several factors to determine the firm's dominance or potential dominance in the market. (39) Under the Merger Regulation, when a merger creates or strengthens a dominant position in the market, resulting in a significant impediment to competition, the Commission must generally reject it. (40)
Once a concentration with a Community dimension is proposed, the concerned parties are required to notify the Commission within one week after the conclusion of the agreement, the announcement of the public bid, or the acquisition of a controlling interest. (41) Similar to the enforcement agencies in the U.S., the Commission requires pre-merger notification under the theory that it is better to intervene during the early stages of a merger than to dismantle a merger after it is fully operational. Failure to notify the Commission, whether intentionally or negligently, can result in fines of up to ECU 50,000. (42) The Commission then has one month to make an initial determination on the compatibility of the potential merger with the common market. (43)
The geographic location of the undertakings concerned has no impact on the issue of whether a concentration exists. So long as Community-wide turnover thresholds are satisfied, mergers between non-EC undertakings will be evaluated even though (1) the business of the merging companies is principally carried on outside the EC, (2) the merger is completed outside the EC, and (3) the merger may have been cleared in another jurisdiction. (44) By requiring that a merger need only meet certain financial requirements for jurisdiction to be effected, the Merger Regulation has essentially codified the same "effects test" as used in the United States.
Not only is the Merger Regulation consistent with the effects test, but it also implicitly reaffirms through silence that there is no requirement for the consideration of issues of comity. There are, however, indications that the EC will consider such issues. One such indication is the Treaty on Competition made between the Commission of the European Communities and the Government of the United States. (45) This treaty sets out that the Commission will consider the interests of the U.S. in deciding whether or not to accept jurisdiction. (46) In addition, the Commission negotiated and approved an agreement with the U.S. on the application of positive comity principles in the enforcement of the competition rules of the EC and of the U.S., encouraging cooperation between the two enforcement agencies. (47)
The procedures for application of merger control laws for the U.S. and EC are very similar in both application and enforcement. Both enforcement agencies require mergers to meet high financial thresholds for the regulations to apply, and both indicate the intent to apply their laws extraterritorially with the limit of comity and reasonableness.
III. PROBLEMS ARISING FROM DOUBLE REGULATION
Notwithstanding the striking similarities of procedural and extraterritorial application of merger regulation between the U.S. and the EC, problems arise when both authorities find it necessary to apply its regulations to the same merger. Exercise of jurisdiction by more than one state may be reasonable, for example, when one state exercises jurisdiction on the basis of territoriality or nationality and the other on the basis of the effect of that activity on its territory. Due to the global effects of mergers operating in international markets, it is possible, and very likely, that multiple states will apply their laws concurrently. Even if both states apply principles of comity in their application of merger regulations, each may be convinced that comity requires its laws to apply. States may also be tempted to apply their own laws in order to prevent or allow a merger based on individual economic incentives. While a specific merger may have substantial anticompetitive effects in the international arena, a state may still approve the merger if the inefficiencies that create losses for consumers can be externalized onto consumers in other countries, while the gains are internalized in that country, as illustrated in the Boeing-McDonnell Douglas merger.
Another problem with double regulation is the possibility of conflicting outcomes due to differing ideas of what constitutes anticompetitive activity. Although the standards of review and general antitrust regulations of the U.S. and the EC are very much the same, the underlying philosophical differences between the two authorities may lead to conflicting interpretations of the law. While the U.S. antitrust enforcement is designed to protect consumers, the European antitrust enforcement appears to be designed to protect competitors. (48) The different placing of importance by each authority can lead to differing interpretations of anticompetitive activity, and in turn lead to conflicting outcomes on a proposed merger, as was the case in the proposed merger between General Electric (GE) and Honeywell. The conflicts arising from the Boeing-McDonnell Douglas and GE-Honeywell mergers are analyzed below.
A. Boeing-McDonnell Douglas Merger
The Boeing-McDonnell Douglas merger united the first and third largest civil aircrafts companies in the world and was a hotly debated matter between the U.S. and the European Union. The merger drew attention to global antitrust issues and was a prime demonstration of the problems affecting international companies as they move into a global market and are forced to consider the antitrust laws not only of their home countries, but also of other countries competing in that market. (49)
The civil aircraft market surrounding the merger had traditionally been dominated by three major firms: Boeing, McDonnell Douglas, and Airbus Industrie (Airbus). (50) Entry into this market was, and still is, difficult given the high concentration among the major competitors and the requirements of large investments of capital over long periods of time. (51) Of these three firms, the largest was Boeing, a U.S. firm. Before the merger, Boeing controlled approximately sixty percent of the global market. (52) Airbus, a European consortium, was the next largest, controlling approximately thirty-five percent of the market. (53) McDonnell Douglas, a U.S. company which was suffering financially before the merger, controlled only five percent of the market. (54)
To appreciate the magnitude of the conflict regarding the Boeing-McDonnell Douglas merger, the atmosphere surrounding the merger must first be revealed. Boeing and Airbus have been competitive rivals in the civil aircraft industry for more than 30 years. (55) Both companies have been criticized for receiving financial support from their home countries, expanding the rivalry beyond the aircraft market into the respective political realms. (56) While efforts have been made by the U.S. and the European Union to force Boeing and Airbus to compete purely and without the aid of their respective governments through treaties and accords, these attempts were relatively unsuccessful and led to a showdown between the U.S. and the European Union over the merger of Boeing and McDonnell Douglas. (57)
Boeing announced its plan to acquire both the commercial and military divisions of its struggling U.S. rival McDonnell Douglas in December, 1996, after only two days of talks between the companies. (58) Boeing claimed that the merger would promote consolidation and efficiency in the U.S. defense industry and would preserve 14,000 jobs at McDonnell Douglas subsidiaries. (59) In reviewing the merger, the U.S. and the Commission agreed that: (1) Boeing had a 60% share of sales of large commercial aircraft and McDonnell Douglas had a 5% share, (2) Airbus was the only other significant competitor, and (3) barriers to market entry were high. (60)
2. U.S. Decision
On July 1, 1997, after an extensive investigation, FTC Chairman Robert Pitofsky announced in a statement that the FTC would not challenge the merger, concluding that McDonnell Douglas was no longer an effective competitor in the commercial aircraft market and the merger would not substantially lessen competition or tend to create a monopoly in either defense or commercial aircraft markets. (61) The FTC did express concern over three long-term exclusive contracts that Boeing signed with major airlines and stated that it would continue to monitor these agreements, approving the merger nonetheless. (62)
While the FTC cited McDonnell Douglas's poor financial position as the major factor affecting its decision to approve the merger, national security concerns likely also influenced the decision. (63) As the two largest defense contractors to the Department of Defense, the merger of Boeing and McDonnell Douglas would allow the Department of Defense to reap the benefits of efficiency and economies of scale. (64) McDonnell Douglas played an important role in the defense industry, and by deciding that it no longer constituted a "meaningful competitive force" in the commercial aircraft market, the FTC was able to bolster the company's financial position by allowing it to profit from Boeing's dominance in the world market. (65) Thus, in approving the merger, the U.S. created a dominant domestic company from which some of the benefits would fall only in the U.S., including increased tax revenues generated as Boeing earned more profits from its dominant worldwide position. (66) Because the consumers of airplanes are worldwide consumers and the benefits of the merger would extend mainly to the producing nation, the U.S. economy would benefit from approval of the merger. While the benefits of such a merger may be greater than the anticompetitive effects within the U.S., the merger may still be anticompetitive on a global scale and may create inefficiencies to the world market. (67) Although the U.S. enforcement agencies found otherwise, it is arguable that the Boeing-McDonnell Douglas merger was anticompetitive to the international market because of the closed nature of the aircraft market and dominant position created by the merger. A situation such as this, where a government approves an anticompetitive merger that is not beneficial to the world market, but provides gains for that state relative to the rest of the world, illustrates the negative consequences of political influence on the application of a state's merger regulations.
3. EC Decision
After initial rejection, the Commission approved the Boeing-McDonnell Douglas merger, but for reasons different than those of the U.S. Although both Boeing and McDonnell Douglas were both U.S. companies, they were required to notify the Commission of the proposed merger due to the effects of the merger in the EC (mainly against European competitor Airbus). The Commission determined that the proposed concentration fell within the scope of the Merger Regulation and accordingly initiated proceedings, with serious doubts as to the merger's compatibility with the common market. (68) After an investigation, the Commission initially rejected the merger, focusing its concerns on three main areas. First, Boeing's already dominant world position would increase, as would its customer base, and Boeing would be left with only one competitor in this market, Airbus. (69) The Commission feared that this dominance would give the new merged company more leverage to induce airlines to enter into long-term, exclusive agreements, thereby further foreclosing the market. (70)
Second, the Commission was concerned about the possibility of defense spillovers from the merger. (71) The large increase in its defense and space activities would give Boeing greater access to research and development (R&D), which is largely funded by the U.S. Government. (72) The increase in defense R&D could result in a number of competitive advantages for Boeing, mainly the possibility of transfer of technology developed under public funding to the commercial sector. (73)
The third concern of the Commission was that the merger would significantly enhance Boeing's capacity to enter into agreements such as those concluded with American, Delta and Continental. (74) These airlines are among the worlds largest and are essentially the only airlines with sufficient resources to commit themselves to entirely new aircraft models. (75) A long-term, exclusive agreement with Boeing would lock these commercial airlines into their respective agreements for an excessive period, even though a competing company's technology and price could be superior during that time, essentially blocking out the market for competitors. (76)
While the U.S. recognized the potential problems with these exclusive agreements, the U.S. enforcement agencies decided to approve the merger and simply monitor the agreements. The Merger Regulation, however, does not provide for post-monitoring of mergers. (77) Without such remedies available, the concerns regarding Boeing's exclusive contracts were likely to be a cause for rejection by the Commission.
As soon as it appeared that the Commission might reject the merger, the U.S. began lobbying the Commission, invoking the issue of comity and stressing the importance of the merger to the U.S. aircraft industry. (78) Although it was not expressly indicated in the Commission's Decision, it is very likely that U.S. political pressure influenced the Commission's final decision to approve the merger. The Commission's approval of the merger, however, came only after attaching hefty concessions and structural changes as contingencies. (79)
Although the Commission defended its position that its decision was based on purely competitive grounds, its own political factors likely played an important role in the decision to attach concessions as a prerequisite to approval. (80) The concerns raised by the Commission that a highly concentrated industry would become even more concentrated were legitimate, but another important factor in the decision was the Commission's desire to protect its domestic company Airbus. (81) Included in the concessions was Boeing's agreement to cancel the exclusive agreements with several major airlines and to license patents obtained under U.S. government funded contracts so that other companies outside the U.S. would have access to the patents, both of which directly benefit competitor Airbus, and in turn, the EC. (82) Again, individual economic incentives played an unfortunate and misplaced role in the decision to approve a merger operating in a world market.
The U.S. and the Commission applied almost the exact same laws to the same merger, but came to different conclusions based on individual political and economic incentives. Although both enforcement agencies approved the merger in the end, this scenario illustrates how, under the current system of regulation, two states using the same or similar regulations can come to different outcomes based on each state's own economic interest. In order to effectively operate an international market, mergers must be evaluated based on the effects on the world market, not the value or threat to individual nations or competitors. Allowing a state's political incentives to play a role in the approval of international mergers encourages anticompetitive activity of both companies and governments and poses a major threat to the integrity of international markets.
B. GE-Honeywell Merger
Other problems with the current system of dual regulation arise when the substantive laws of two nations differ, resulting in conflicting conclusions on the merger. The proposed merger between GE and Honeywell exemplified the problems caused by applying conflicting laws to the same merger.
The proposed merger between GE, the largest corporation in the world and the top producer of jet engines, and Honeywell, the largest worldwide supplier of non-engine aerospace equipment, would have been the largest industrial merger in history. (83) The merger was widely debated and drew attention to the differing views of the U.S. and the EC on conglomerate mergers and their anticompetitive effects.
Like Boeing and McDonnell Douglas, both GE and Honeywell are U.S. companies. GE manufactures, sells and services jet engines and offers financing to aircraft purchasers through its GE Capital Aviation Services (GECAS) subsidiary. (84) GE is the world's largest producer of large and small jet engines for commercial and military aircraft. (85) This engine market is highly concentrated with only a few competitors, the second and third largest producers being Pratt & Whitney and Rolls-Royce, respectively. (86) Honeywell is a leading producer of aerospace products. (87) In the aerospace equipment market, other major competitors include BF Goodrich, United Technologies Corporation, and Rockwell Collins. GE and Honeywell have virtually no overlapping product lines, but the combination of their complementary lines would have enabled the merged entity to offer a full range of products, essentially providing a "one-stop shop" for major aircraft purchasers. (88)
In February of 2001, GE and Honeywell notified the U.S. and EC authorities of the proposed merger. (89) GE Chief Executive Officer Jack Welch anticipated publicly that there would be no antitrust problems because the proposed merger would be conglomerate and would merely bring together complementary products that were component parts of large jet aircraft. (90)
This merger, if approved and completed, would be significant in size and effect due to the substantial earning power of both firms involved. (91) While the proposed merger raised several concerns for antitrust authorities in both the U.S. and the EC, these concerns were due to different factors and resulted in very different conclusions. (92)
2. U.S. Decision
On May 2, 2001, following a five-month investigation, the DOJ announced that it would allow the merger to proceed after the divestiture of Honeywell's helicopter engine business and the authorization of a new third-party service provider for particular Honeywell engines and auxiliary power units. (93) These contingencies essentially required a spin-off of the competitively overlapping engine assets. (94) The DOJ noted that without the divestiture of the helicopter engine business, the U.S. military would likely face higher prices, lower quality, and reduced innovation in the design, development, and production of the next generation of advanced U.S. military helicopter engines, demonstrating the intent of U.S. antitrust laws to protect the consumer. (95)
These two areas of horizontal overlap were the only two that the U.S. authorities considered serious enough to require divestiture. The U.S. did not identify any conglomerate effects of the merger that would negatively affect the market or hinder its approval. The U.S. authorities approved the deal upon completion of these divestures. (96)
3. EC Decision
After notification of the proposed merger, the Commission determined that the merger had a concentration and a community dimension, thus allowing its review. (97) On March 1, 2001, the Commission initiated proceedings for review, resulting in the rejection of the merger. (98)
The Commission identified horizontal overlap in three primary markets. The Commission found that in the large regional jet market, GE and Honeywell comprise one hundred percent of the supply of engines, thus the merged entity would be the only available engine suppler in that market, strengthening its already dominant position. (99) The U.S. authorities did not find this overlap significant because the jet categories it used to calculate the market share included additional markets, such as "large commercial jets" and "small regional jets," while the Commission considered only "large regional jets." (100) This difference of categorization produced a significant discrepancy in the determination of a dominant position between the U.S. and the Commission. The Commission also found horizontal overlap in the markets of corporate jet engines and small marine gas turbines, determining that the merger would create a dominant position for GE in both markets. (l01 The U.S. authorities did not view any overlap in these markets as harmful to competition.
In addition to horizontal overlaps, the Commission also identified significant conglomerate effects that lead to its rejection of the merger, including threats of increased dominant positions and bundling of services. A dominant position in a market is primarily a product of market share, but is also influenced by barriers to entry and strength of potential competitors. (102) The Commission found that GE possessed a dominant position in many markets of engine manufacturing and that Honeywell possessed a dominant position in avionics, non-avionics, and engine controls, thus the merged entity would maintain dominant positions across the board. (103) Bundling is a simple business arrangement whereby a number of products are combined in a package and sold for a single price, encouraging the "one-stop shop." (104) With dominant positions across several markets, the merged company would be able to drive out competition by bundling its products, thus essentially forcing the consumer to purchase several of the products from GE, regardless of the price and quality of competitors, in order to get the one product that they want. The Commission found these possibilities to be anticompetitive and determined that the proposed merger was not compatible with the EC, thus rejecting the merger.
4. Different Views on the Conglomerate Merger
The Commission saw the bundling of several products as anticompetitive, even though such offerings might be highly attractive to aircraft customers, because of the possibility of foreclosing competition. In making this decision, the Commission emphasized its belief that mergers leading to price reductions as a result of strategic behavior on the part of a dominant firms, the purpose of which is to eliminate or marginalize competitors, are likely to exploit customers in the medium term. (105) The U.S. authorities, having long abandoned the "big is bad" theory of antitrust, viewed the merger as pro-consumer because of the price reductions to be realized initially. (106) Under U.S. law, a transaction that will enable the merged entity to offer lower prices and better terms to its customers is considered pro-competitive, regardless of the ability of competitors to do the same.
While the U.S. and European authorities agreed that the merger would lead to lower prices, they came to different conclusions regarding its anticompetitive effects. The U.S. argued that the lower prices would be favorable to consumers and encourage competition. The Commission, on the other hand, argued that while prices may decrease in the short-term, prices would increase in the medium-term as the competitive structure weakened and competitors were forced out of the market. (107)
Skeptics might question both the U.S. view that the merger would be efficient and the Commission view that the merger would cause prices to rise. In the end, the proposed merger was dissolved because of the inability of the U.S. and Commission to reconcile their different approaches to merger regulation. As the conflict caused by this proposed merger settled with time, the warring authorities regained their optimistic cooperative stance. "Future clashes would be rare," they said. (108) While there have been no conflicts of this caliber since the proposed GE-Honeywell merger, the problem of conflicting merger laws between the two legal systems has yet to be resolved. The possibility of another spar between the U.S. and the EC over conglomerate mergers still looms, threatening companies who enter the global market.
C. Resulting Inefficiencies
As the Boeing-McDonnell Douglas and GE-Honeywell mergers revealed, the result of this overlap in application of merger regulation is that companies are subject to multiple national legal regimes. Companies involved in mergers which have an affect on multiple nations must often file pre-merger notifications with several different competition law authorities, imposing added compliance costs on the companies and depleting valuable administrative resources, even though the competition authorities in each jurisdiction will likely be addressing precisely the same issue. (109) Overlapping jurisdictions can sometimes lead to conflict even when the applicable laws are designed to achieve the same objective, because of conflicting political interests, as illustrated in the Boeing-McDonnell Douglas case. Problems also arise when the authorities have differing substantive laws on anticompetitive activity, as illustrated in the GE-Honeywell case. These mergers represent the problems confronting a world in which markets are global, but the law is national or regional.
These difficulties with multiple regulation authorities applying laws to the same merger has been premeditated, although perhaps minimally, in the formation of our current systems. In fact, the main reason behind the formation of the European Merger Regulation was to relieve companies from having to notify several Member States of the same transaction by limiting the extraterritorial reach of the merger control laws of the Member States, giving the Commission exclusive jurisdiction. (110) This idea of efficient, succinct regulation needs to be expanded globally as the markets expand globally. If two enforcement agencies from different nations, which follow similar antitrust laws and are influenced by similar cultures, reach conflicting conclusions on the same merger, then clearly some type of cooperation between the nations is needed. (111) While agreements on jurisdictional application and harmonization of competition laws between the EC and the U.S. are important, they are not enough to ensure efficient regulation of mergers, as demonstrated by the cases above. Global markets demand global law, but how do we get there from here?
A. International Code of Antitrust Law
One solution is the development of a complete international code of antitrust law. (112) Under this system, an international antitrust code would replace the national codes of antitrust enforcement. (113) This system would provide the advantage of uniformity and clarity and would remedy conflicting laws and interests between nations.
Such a system, while arguably desirable, would likely be attacked by many nations as conflicting with traditional principles of sovereignty and would prove almost impossible to create and implement. While countries may agree on the general goals of antitrust law, many of the fine points would be entirely unacceptable to many nations. (114) Drafting a single international code capable of serving the private interests of all member states, as well as the international community as a whole, would be a daunting task; and even if such a code could be developed, problems in the interpretation of such laws would inevitably arise. (115) So, while the idea of an international antitrust code sounds promising, implementation of such a system is unlikely.
B. Bilateral Agreements
Bilateral agreements are not a new idea and currently exist between several nations. Such agreements presently exist between the U.S. and the EC on the enforcement of competition laws and the application of positive comity. (116) These agreements are helpful in facilitating information exchange and cooperation between the national enforcement agencies and are a forward step in the direction of integrating national regulations. However, these agreements do not address the differences and conflicts in national antitrust laws. Furthermore, it is unlikely that countries will agree to support prosecution of activities that constitute an antitrust violation in one state but are completely legal in another state. (117) Thus, bilateral agreements, while an important step towards international cooperation, have so far proven to be an ineffective solution to efficient merger regulation.
An alternative to a detailed international code of antitrust law is the harmonization of national antitrust laws. (118) Under a harmonization system, each state would maintain its own antitrust provisions and control over antitrust law while cooperating on the international aspects of enforcement. (119) Information flow, conversation, and organized workshops could be used to bring existing national laws to near identity, leading to conformity of substantive, procedural, and enforcement principles. (12) This approach would be less dramatic then developing an international code and would not infringe on the sovereignty of the participating nations.
A flaw in this system, however, arises from the absence of a tribunal to decide the disputes between nations. Involving the World Trade Organization (WTO) in the dispute resolution would be one solution to this problem. (121) European Union and Japanese antitrust commentators have advocated greater WTO involvement in antitrust issues; however, this issue remains unresolved as nations, such as the United States, disfavor this idea, arguing that disparate antitrust regimes of nations would prevent the WTO from effectively resolving antitrust disputes. (122) Thus, enforcement disputes arising under a harmonization system prevent it from becoming a reality.
D. Joint Enforcement Body
Expanding upon the theory of harmonization is a final solution of creating a joint enforcement body, rather then relying on the WTO for enforcement. An independent board comprised of representatives from both the U.S. and EC would be able to eliminate national policy considerations and replace them with true competition policy. (123) This system would include principles of harmonization and would work to prevent mergers with international effects from being approved based purely on the individual economic incentives of one nation.
Such a system could be modeled after the current Commission of the EC, which has managed to apply competition policy consistently to the fifteen member states without one state's interests being disproportionately taken into account. (124) A board could be created, with equal members from the U.S. and the EC, to exercise jurisdiction over any merger that had substantial effects in either jurisdiction. (125) The enforcement board would make decisions based on competition policy alone, applying the same procedural and substantive approach that is now taken by EC and U.S. enforcement authorities. (126) A joint enforcement system would eliminate the inefficiencies of double regulation on mergers affecting both the U.S. and the EC.
A drawback to this solution is that it doesn't address the issue of global merger regulation. While this model could ideally be expanded to structure a global board for merger regulation, such a theory would be subject to hurdles similar to those of an international code, including the integration of conflicting national rules. Until such global issues can be resolved, however, a joint enforcement between two very similar and very powerful economies would be a good start toward improving the efficiency of U.S. and EC merger regulation.
While the problems with the current systems of merger regulation are real and apparent, there is hope for recovery. As the inescapable force of globalization forces markets and companies to expand globally, the enforcement agencies will be required to do the same or risk losing control of the markets they regulate. Time has shown us that the law is willing to evolve, and if a higher level of global law is required to keep up with the changing world, then the law will find its appropriate level. Change does not come easily, and the success of a solution, or combination of solutions, will require compromise and dedicated cooperation from all countries involved. Such international commitment to teamwork has already surfaced in online forums, such as the International Competition Network (ICN), which promotes efficient and effective antitrust enforcement worldwide by enhancing international convergence and cooperation. (127) In an attempt to bring international antitrust enforcement into the 21st century, the ICN provides an online network for antitrust agencies to address practical antitrust enforcement and policy issues. (128) It can only be hoped that ultimately all nations will come together to protect the efficiency of a free world market and to protect consumers who want to fly across the world, not on economic principle, but on a good old fashioned Boeing.
(1.) General Kofi Annan, ThinkExist.Com Quotations, at http://en.thinkexist.com/quotations/globalization/(last visited May 7, 2005). General Kofi Annan is the seventh Secretary-General of the United Nations, was a Ghanaian diplomat, and won the Nobel Peace Prize in 2001.
(2.) Clayton Act, ch. 323, [section] 7, 38 Stat. 730, 731-32 (1914) (current version at 15 U.S.C. [section] 18 (1994)).
(4.) Sherman Act, ch. 647, [section] 1, 2, 26 Stat. 209, 209 (1890) (current version at 15 U.S.C. [section] 1, 2 (2004)).
(5.) 15 U.S.C. [section] 1 dec. II(B)(33).
(6.) 15 U.S.C. [section] 45 (2005).
(7.) FEDERAL TRADE COMMISSION, INTRODUCTORY GUIDE I TO THE PREMERGER NOTIFICATION PROGRAM (2002), reprinted in WILLIAM C. HOLMES & DAWN E. HOLMES, ANTITRUST LAW SOURCEBOOK FOR THE UNITED STATES AND EUROPE 1-475 (2005).
(8.) Id. (emphasis added)
(10.) To be required to report, the following conditions must be met: (1) one person has sales or assets of at least $100 million; (2) the other person has sales or assets of at least $10 million; and (3) as a result of the transaction, the acquiring person will hold an aggregate amount of stock and assets of the acquired person valued at more than $50 million; or (4) as a result of the transaction the acquiring person will hold an aggregate amount of stock and assets of the acquired person valued at more than $200 million, regardless of the sales or assets of the acquiring and acquired persons. Id. at 1-477. (emphasis added) "Person" is defined as the ultimate parent entity of the buyer or seller or the entity that ultimately controls the buyer or seller, Id.
(11.) Id. at I-483.
(13.) Id. at I-489.
(14.) U.S. v. Aluminum Co. of Am., 148 F.2d 416, 444 (2nd Cir. 1945).
(15.) John A. Trenor, Jurisdiction and the Extraterritorial Application of Antitrust Laws After Hartford Fire, 62 U. CHI. L. REV. 1583, 1901 (1995).
(16.) David Snyder, Mergers and Aequisitions in the European Community and the United States: A Movement Toward a Uniform Enforcement Body, 29 LAW & POL'Y INT'L BUS. 115, 118 (1997).
(17.) Timberlane Lumber Co. v. Bank of Am., 549 F.2d 597, 615 (9th Cir. 1976). Comity is a principle of international law that requires a nation to consider, in fairness, moderating its enforcement jurisdiction in deference to what may be overriding interests of another nation. See 3-35 DOING BUSINESS IN THE UNITED STATES [section] 35.02(1) (2004).
(18.) Timberlane Lumber Co., 549 F.2d at 614-15.
(19.) Hariford Fire Ins. Co., v. California, 509 U.S. 764, 764 (1993).
(21.) Id. at 788-89.
(22.) Id. A true conflict would only be present in situations where the parties are unable to comply with the laws of both nations without violating one or the other. In this case, the insurance companies were able to comply with both U.S. and British law concurrently.
(24.) Snyder, supra note 16, at 119.
(25.) See RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW OF THE UNITED STATES [section] 403 (1987).
(26.) Id. [section] 402-03. The elements of the "effects test" have been relaxed from Judge Hand's two-tiered test. The new test allows the U.S. to prescribe its law with respect to conduct outside its territory that has or is intended to have substantial effect within its territory (emphasis added). Id. [section] 402(1)(c). A literal reading concludes that the effect does not have to actually be felt, just intended, in order for jurisdiction to be appropriate. Although cases involving intended but unrealized effects are rare, the U.S. is no longer precluded from jurisdiction in such instances. Id. [section] 402 cmt. d.
(27.) Several factors are used to determine whether jurisdiction to prescribe law extraterritorially is reasonable in a given case. While some U.S. courts have applied this principle of reasonableness as a requirement of comity, comity being understood as not merely an act of discretion and courtesy but as reflecting a sense of obligation among states, the Restatement of Foreign Relations indicates that, while comity is sometimes understood to include a requirement of reciprocity, the limitation of reasonableness is not conditional on a finding that the state affected by the regulation would exercise or limit its jurisdiction in the same circumstances or to the same extent. Thus, the Restatement differentiates between reasonableness and comity, requiring the former but not the latter. Id. [section] 403 cmt. a.
(28.) See 3-35 DOING BUSINESS IN THE UNITED STATES [section] 35.02(1) (2004).
(29.) The DOJ has set out six factors to consider before applying U.S. antitrust laws extraterritorially: The relative significance, to the violation alleged, of conduct within the U.S. as compared to conduct abroad; The nationality of the person involved in or affected by the conduct; The presence or absence of a purpose to affect U.S. consumers or competitors; The relative significance and foreseeability of the effects of the conduct of the U.S. as compared to the effects abroad; The existence of reasonable expectations that would be furthered or defeated by the action; The degree of conflict with foreign law or articulated foreign economic policies. Antitrust Guidelines for International Operations, 53 Fed. Reg. 21, 584-95 (June 8, 1988).
(30.) Eleanor M. Fox, Mergers in Global Markets: GE/Honeywell and the Future of Merger Control, 23 U. PA. J. INT'L ECON. L. 457, 459 (2002).
(31.) TREATY ESTABLISHING THE EUROPEAN COMMUNITY, Nov. 10, 1997, O.J. (C 340) 3 (1997) [hereinafter EC TREATY].
(32.) Id. art. 81.
(33.) Id. art. 82.
(34.) Lisa M. Renzi, The GE/Honeywell Merger." Catalyst in the Transnational Conglomerate Merger Debate, 37 NEW ENG. L. REV. 109, 113 (2002).
(35.) Council Regulation (EEC) 4064/89 of 21 December 1989 on the Control of Concentration Between Undertakings, art. 1, 1989 O.J. (L 395) 1, amended by Council Regulation (EC) 1310/97, 1997 O.J. (L 180) 1 [hereinafter Merger Regulation].
(36.) Id. [paragraph] 1. A concentration arises where: (1) two or more previously independent undertakings merge, or (2) one or more persons already controlling one or more undertakings acquires ... direct or indirect control of the whole or parts of one or more other undertakings. Id. [paragraph] 3(1).
(37.) A concentration has a Community dimension where: (1) the combined aggregate worldwide turnover of all the undertakings concerned is more than ECU 5,000 million and the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than ECU 250 million, unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State; (2) the combined aggregate worldwide turnover of all undertakings concerned is more than ECU 2,500 million; (3) in each of at lease three Member States, the combined aggregate turnover of all the undertakings concerned is more than ECU 100 million; (4) in each of at least three Member States from the previous point, the aggregate turnover of each of at least two of the undertakings concerned is more than ECU 25 million; (5) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than ECU 100 million. Id. [paragraph] 1(2)-(3). Turnover is defined as "the amount derived by the undertakings concerned in the previous financial year from the sale of products and provisions of services falling within the undertaking's ordinary activities." Id. [paragraph] 5(1).
(38.) Merger Regulation, supra note 35, [paragraph] 2(3).
(39.) Renzi, supra note 34, at 116.
(40.) Id. at 117.
(41.) Merger Regulation, supra note 35, [paragraph] 4(1).
(42.) Id. [paragraph] 14(1)(a).
(43.) Renzi, supra note 34, at 115.
(44.) ALISON JONES & BRENDA SUFRIN, EC COMPETITION LAW, TEXTS, CASES, AND MATERIALS 732 (2001).
(45.) Agreement Between the Government of the United States and the Commission of the European Communities Regarding the Application of their Competition Laws, Sept. 23, 1991, 30 I.L.M. 1487 [hereinafter U.S./EC Application Agreement].
(46.) Id. art. VI.
(47.) Agreement Between the European Communities and the Government of the United States of America on the Application of Positive Comity Principles in the Enforcement of their Competition Laws, June 4, 1998, 37 I.L.M. 1070 [hereinafter U.S./EC Positive Comity Agreement]. "Positive comity" calls for cooperation regarding anti-competitive activities occurring in the territory of one Party that adversely affect the interests of the other Party.
(48.) Renzi, supra note 34, at 110.
(49.) Kathleen Luz, The Boeing-McDonnell Douglas Merger: Competition Law, Parochialism, and the Need for a Globalized Antitrust System, 32 Geo. Wash. J. Int'l L. & Econ. 155, 157 (1999).
(52.) Ilene Knable Gotts & Phillip A. Proger, Multijurisdictional Review." A Societal Cost That Must Be Streamlined, THE M&A LAWYER, Oct. 2001, at 7.
(53.) Id. Airbus was established as a consortium of economic interests. The members include privately owned Daimler-Benz Aerospace Airbus of Germany (DASA) (37.9%) and British Aerospace (20%), government owned Aerospatiale of France (37.9%) and CASA of Spain (4.2%). Commission Decision 97/816/EC of 30 July 1997 Declaring a Concentration Compatible with the Common Market and the Functioning of the EEA Agreement, art. 24, 1997 O.J. (L 336) 19 [hereinafter Boeing-McDonnell Douglas Commission Decision].
(54.) Luz, supra note 49, at 157.
(55.) Peace in Our Time: Boeing v. Airbus, ECONOMIST, Jul. 26, 1997, at 59.
(57.) Luz, supra note 49, at 157.
(58.) Jeff Cole, Boeing Plan to Acquire McDonnell Douglas Bolster Consolidation, WALL ST. J., December 16, 1996, at A1.
(59.) Luz, supra note 49, at 158.
(60.) Gotts et al., supra note 52, at 7.
(61.) See Statement of Chairman Robert Pitofsky et al., In the Matter of Boeing Co./McDonnell Douglas Corp., File No. 971-0051 (July 1, 1997), available at http://www.ftc.gov/opa/1997/07/boeingsta.htm.
(62.) See Gotts et al., supra note 52.
(63.) Luz, supra note 49, at 163.
(65.) Id. at 164.
(66.) Snyder, supra note 16, at 138.
(68.) Boeing-McDonnell Douglas Commission Decision, supra note 53, [paragraph] 2.
(69.) Id. [paragraph] 54.
(70.) Id. [paragraph] 54(e).
(71.) Id. [paragraph] 83.
(73.) Id. [paragraph] 92.
(74.) Id. [paragraph] 68.
(76.) Id. [paragraph] 71.
(77.) Merger Control: Boeing Working Towards Accommodation with European Commission, EUR. REP., July 12, 1997, at 2240.
(78.) See Luz, supra note 49, at 158.
(79.) Id. at 167.
(80.) Id. at 168.
(81.) Snyder, supra note 16, at 139.
(82.) Luz, supra note 49, at 167.
(83.) Fox, supra note 30, at 457.
(84.) James Calder et al., 2003 Milton Handler Antitrust Review: Supplement to the 2003 Milton Handler Annual Antitrust Review Proceedings, 2004 COLUM. BUS. L. REV. 379, 388 (2004).
(85.) Fox, supra note 30, at 460.
(87.) Id. at 461.
(88.) Calder et al., supra note 84, at 388.
(89.) Commission Decision 2004/134/EC of 3 July 2001 Declaring a Concentration to be Incompatible with the Common Market and the EEA Agreement Case COMP/M.2220, 2004 O.J. (L 048) 1 [hereinafter GE-Honeywell Commission Decision].
(90.) Fox, supra note 30, at 457. When investigating a proposed merger, the merger must be categorized as either conglomerate, horizontal, or vertical. A conglomerate merger is a merger that does not involve the combination of competitors or suppliers and customers. A horizontal merger is a merger where similar companies in the same industries combine.
(91.) Renzi, supra note 34, at 126.
(93.) Associated Press, Justice Department Requires Divestitures in Merger Between General Electric and Honeywell (May 2, 2001), available at http://www.usdoj.gov/atr/public/press_releases/2001/8140.htm.
(94.) See Fox, supra note 30, at 461.
(97.) GE-Honeywell Commission Decision, supra note 89, [paragraph] [paragraph] 6, 7, 84.
(98.) Id. [paragraph] 2.
(99.) Id. [paragraph] 22.
(100.) Renzi, supra note 34, at 128-29.
(101.) GE-Honeywell Commission Decision, supra note 89, [paragraph] [paragraph] 88, 476-484.
(102.) Renzi, supra note 34, at 130.
(103.) See GE-Honeywell Commission Decision, supra note 89.
(104.) Id. [paragraph] 293.
(105.) Renzi, supra note 34, at 137.
(106.) Calder et al., supra note 84, at 389.
(107.) Fox, supra note 30, at 465.
(109.) Andre Fiebig, The Extraterritorial Application of the European Merger Control Regulation, 5 COLUM. J. EUR. L. 79, 93 (1999).
(111.) Luz, supra note 49, at 171.
(112.) Eleanor M. Fox, Toward World Antitrust and Market Access, AM. J. INT'L L., Jan. 1997, at 13.
(113.) Luz, supra note 49, at 171.
(114.) Fox, supranote 112, at 16.
(115.) See Luz, supra note 49, at 172.
(116.) See U.S./EC Application Agreement, supra note 45; see also U.S./EC Positive Comity Agreement, supra note 47.
(117.) Luz, supra note 49, at 173.
(118.) Fox, supra note 112, at 13.
(119.) Luz, supra note 49, at 174.
(122.) Id. at 175.
(123.) Snyder, supra note 16, at 143.
(124.) Id. at 143.
(126.) Id. at 144.
(127.) International Competition Network, at http://www.internationalcompetitionnetwork.org (last visited May 12, 2005).
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|Publication:||Denver Journal of International Law and Policy|
|Date:||Sep 22, 2006|
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