By Aurélien CONDOMINES
Avocat à la Cour

The law relating to New Economic Regulations (NRE law), which was adopted on May 2, 2002, has significantly modified the French rules governing merger control. First, the NRE law has introduced a system of mandatory notification similar to that of most European countries, under which transactions which meet certain jurisdictional thresholds must be filed (whereas before the NRE law, the notification was optional). In addition, the French system is now clearly inspired by that of the European Community (for example as concerns joint ventures). Lastly, one of the significant difficulties met by lawyers in the past - the jurisdictional market share threshold - has been abandoned. The new jurisdictional thresholds, which are based exclusively on turnover figures, are relatively low, and will thus trigger an obligation to file transactions much more often than in the past.

The reform will enter into force when the governmental decree designed to enforce the NRE law with respect to merger control will have been adopted (i.e. in may 2002).

1/ What is a concentration?

As under European Community law the word “concentration” designates transactions which may be subject to control by the relevant competition authorities. A transaction should be considered a concentration in the following situations (article L 430-1 c.com):

- a merger between two or more companies ;
- the acquisition by one or more companies of the control over the whole or parts of one
or more other companies (“takeover”);
- the creation of a joint venture which accomplishes in a durable way all the functions of an autonomous economic entity ("full function joint venture").

Competition law is pragmatic. Thus, the acquisition of control over a company can result from all circumstances which are likely to confer a decisive influence on the commercial strategy of such company. For example, the acquisition of a minority shareholding could constitute a takeover (i) if other shareholders hold only very small shares of the target company and/or (ii) if the minority shareholder has a de facto or de jure veto on the marketing strategy of the target company because of the existence of a shareholder agreement or of a significant and long-term contractual relationship with the target company.

One of the major innovations of the NRE law is the official introduction of the full function joint-venture concept (a concept inspired by European Community law) into French law. After a long controversy and contradicting precedents on this subject, the Minister of the Economy and the French Competition Council very recently ruled in a similar manner that joint ventures are subject to merger control only if (i) they are controlled jointly by two independent parent companies (or groups) and if (ii) they have sufficient financial, human and material resources to carry on an economic activity independently from their parent companies. The new law confirms this approach. For example, the creation of a joint venture, the only function of which would be to manufacture or to sell the products of its parent companies, should not be considered a concentration.

Certain uncertainties remain: why does the law mention only "the creation" of joint ventures? Under European Community law, modifications made to the control of an existing joint-venture (for example the replacement of a shareholder by another) are considered as being concentrations. It seems likely that, notwithstanding the law’s ambiguous wording, the Minister of the Economy will adopt a similar approach.

2/ Which concentrations must be filed ?

Concentrations must be filed with the French Minister of the Economy only if they meet the following jurisdictional thresholds (article l.430-2 c.com):

- the total world-wide turnover (net of tax) of the whole of the companies or groups which are parties to the concentration must exceed 150 million euros; and
- the total turnover (net of tax) generated in France by at least two of the companies, groups or entities concerned must exceed 15 million euros (although the law is ambiguous on this point, it seems that the turnover which should be taken into consideration is the turnover generated individually by each party); and
-  the transaction does not fall under the scope of European Community merger control (except in certain exceptional situations, where the French government has successfully asked for a reference of the matter by the European Commission).

These new turnover thresholds are quite simple and significantly improve the visibility of the system for companies. The threshold based on market shares, which used to trigger many difficulties in the past (because it supposed that the relevant markets be defined correctly from the outset), has been abandoned.

Certain uncertainties remain with respect to the exact turnover figures which have to be taken into consideration, and in particular: which companies have to be taken into account for the concept of “group”? Which turnover should be taken into account in the event of partial acquisitions? Which turnover figures should be used with respect to joint ventures? It is likely that the answer to these questions - which will hopefully be contained in the governmental decree to come - will be inspired by European Community law. Indeed, the European Commission has adopted clear guidelines with respect to the calculation of its own jurisdictional thresholds.

For example, in the event of partial acquisitions, only the turnover generated by the acquired assets or by the acquired company is taken into account by the European Commission (and not the turnover of the whole of the selling group). Thus, if A buys a assets from B, only the turnover generated by group A and the turnover generated by the assets acquired from B are taken into consideration for the calculation of jurisdictional threshold by the European Commission (and not the turnover of group A and group B). It appears likely that the French thresholds will be construed in a similar fashion by the Minister of the Economy - although one should consider the fact that the previous thresholds have not always be interpreted in a consistent manner in the past.

3/ How and when to file ?

Once that it has been determined that a filing is required, the companies concerned should prepare a notification form. This form must be filed with the French Minister of the Economy
(i) either by all the parties to the transaction, in the event of a merger or of a joint venture, (ii) or only by the party which acquires control of another entity, in the case of a takeover. The contents of the notification form will be specified in the governmental decree to come.

The law is ambiguous as to when the notification should be made. One could interpret the law as providing for an obligation to file immediately after the parties have entered into the final agreement of acquisition or merger or, as the case may be, immediately after the publication of a tender offer: under article L.430-3 the French commercial code, the filing must be made "when the companies concerned are irrevocably committed". Perhaps the governmental decree will set forth a more precise time frame for the filing. In addition, it should be noted that the law does not mention the possibility of notifying a transaction which is only contemplated.

In practice, the relevant authorities (a department of the Ministry of the Economy known as the “DGCCRF”) are often approached unofficially before the filing, in order to make sure that the notification form is complete. In the future, this could possibly also be an opportunity for discussing the time frame of a filing (as it is usually done, for example, before the European Commission).

The transaction cannot be implemented before having obtained approval from the Minister of the Economy. Violations of this rule may trigger significant fines. Therefore, the agreements supporting the merger or acquisition will have to contain a condition precedent in this respect. An exceptional derogation may be obtained from the Minister (for example with respect to tender offers, which must be implemented quickly).

4/ Procedure and duration

The new French merger control procedure comprises two phases:

- Phase I: (5 to 8 weeks)

The Minister for Economy bases his assessment of the transaction on the notification form and on further information provided by the parties and by third parties (such as clients and competitors). He must then decide, (i) either that the transaction does not fall under his jurisdiction, (ii) or that the transaction should be approved, possibly subject to the implementation of certain undertakings submitted by the parties (e.g. the divestment of certain activities), (iii) or that the transaction is likely to harm competition (this triggers the second phase of the procedure, see below). The decision to approve a transaction is, as the case may be, adopted jointly with the Ministers who are in charge of the branch of industry concerned.

This first phase of the procedure should not last longer than 5 weeks from the reception of a complete notification form by the DGCCRF. If the parties have submitted undertakings in order to obtain the approval of the transaction (such as the divestment of certain activities, see below) more than two weeks after the filing, Phase I is extended by three weeks starting from the date on which such undertakings have been submitted. If no formal decision has been adopted within the aforementioned time limit, the transaction is deemed to have been approved.

 - Phase II: (16 to 19 weeks)

If the Minister decides to enter into phase II, he must request a formal opinion from the Competition Council. The Competition Council must render a formal opinion on the transaction’s competitive impact within three months (for the sake of simplicity, details of the procedure before the Council are not explained here). The Minister of the Economy, and – as the case may be - the Ministers in charge of the branch of industry concerned by the transaction, must then adopt one of the following decisions within 4 weeks: (i) either to prohibit the transaction, (ii) or to approve the transaction (this decision can contain injunctions aiming at preserving competition in certain markets, or be subject to the implementation of undertakings submitted by the parties).

If the parties have submitted undertakings in order to obtain approval of the transaction (see below) more than one week after the date at which the Competition Council’s opinion was transmitted to the Minister, the deadline for the Ministers’ final decision is extended by three weeks starting from the date on which such undertakings have been submitted. If the Ministers have not adopted any formal decision within the aforementioned time limit, they are deemed to have approved the transaction.

Throughout the procedure, the relevant department of the Ministry of the Economy (DGCCRF) as well as the Competition Council, have relatively significant powers of investigation. Any omission or false statement made in this context may trigger significant fines.

Lastly, it should be noted that - as was already the case before the NRE law - the Minister(s) are not bound by the opinions of the Competition Council. Although in a majority of cases the final decision of the Minister essentially reiterates the Council’s formal opinion, there are some precedents in which the Minister did not follow the analysis or the solutions suggested by the Council.

The decision of the Minister(s) can be appealed before the Conseil d’Etat (French supreme court for public matters).

5/ Criteria for the prohibition or the approval of a given transaction

A transaction may be prohibited because it is likely to harm competition, in particular by creating or strengthening a dominant position, or by increasing a company’s purchase power in such way as to put suppliers in a position of economic dependency (article L.430-6 c.com).

As a general rule, the competitive analysis operated by the Minister(s) and by the Competition Council for the assessment of a transaction’s potential to harm competition, resembles the practice of others competition authorities in Europe and in the United States. The French authorities take into account market shares as well as other particular circumstances in each relevant market, such as the importance of barriers to entry, the structure of competition, the vertical integration of the parties, their aptitude to offer a full range of products, the potential effects of an oligopolistic market structure (collective dominance), etc. In a recent opinion, the Competition Council even used the US econometric method known as the "Herfindahl-Hirshman Index" (HHI), which is used to measure the impact of a transaction on the market structure.

A (theoretically) major difference between the French system and the method applied by the European Commission under European Community law is the fact that the French authorities must take into consideration the possible contribution of a transaction to economic progress, and assess whether such contribution is sufficient to compensate for the anti-competitive effects of the transaction. In practice however, this possibility (which resembles the taking into account of mergers’ efficiencies in the United States) does not have the same importance in France than in the United States. Efficiencies may not currently allow obtaining approval of a genuinely anti-competitive transaction in France.

As previously indicated, the parties can submit undertakings to the Minister of the Economy, designed to avoid potential anticompetitive effects of a given transaction. The parties can do this during phase I as well as during phase II of the procedure. Undertakings, which will sometimes be the only way to obtain approval of a transaction, usually consist in divestments of certain activities. Indeed, although the Minister of the Economy has sometimes accepted behavioral undertakings, structural undertakings such as divestments are considered the most effective remedy and are more easily accepted by the Minister – notably because the control of their implementation is less constraining for the administration.

(August 2001)

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