In a ruling with important implications for EU merger control enforcement, the Court of Justice of the European Union (CJEU) has held that the General Court committed serious legal errors in annulling the European Commission’s (Commission) decision to prohibit the £10.3 billion acquisition of Telefónica Europe (O2) by Hutchison 3G UK Investments (Three).[1]

The Commission had appealed the judgment of the General Court for encroaching on its margin of discretion and making it much harder to intervene against oligopolistic mergers, particularly in so-called "gap cases" where a merger falls short of creating or strengthening a dominant position. The key issues in the appeal concerned the standard of proof in these cases, and the conditions for establishing a "significant impediment to effective competition" (SIEC), the legal threshold for prohibiting mergers under the European Merger Regulation (EUMR). The Commission argued that the General Court had erred in its assessment of those conditions and in requiring a SIEC to be established with a "strong probability". According to the Commission, this set the bar too high and threatened to undermine effective merger control enforcement in the EU.  

The CJEU sided with the Commission on the key points at issue. It found that the General Court had incorrectly interpreted the SIEC test and mischaracterised the standard of proof, vindicating the approach adopted by the Commission in the case at issue, and more broadly confirming the broad scope of the Commission’s mandate to prohibit oligopolistic mergers under the EUMR.

Background

In 2016, the Commission prohibited the acquisition of O2 by Three.[2] At the time, four mobile network operators – O2, Three, EE and Vodafone – competed in the UK mobile telecoms market. The acquisition of Three by O2, which formed part of a larger wave of consolidation across the telecoms sector, would have created a new market leader and reduced the number of competitors in the UK from four to three.

The Commission had cleared several similar telecoms mergers in other Member States, albeit subject to remedies.[3] However, on this occasion the Commission toughened its position and prohibited the transaction; although the merger would not have led to the creation of a dominant position in the UK mobile telecoms market, the Commission found that it would have eliminated the competitive constraints that O2 and Three previously exercised on each other (including because the parties were "close competitors" and Three was an "important competitive force") and would also have diminished the competitive pressure on the other mobile network operators (EE and Vodafone).  

The parties appealed, creating the first opportunity for judicial scrutiny over the Commission’s power to prohibit mergers in gap cases that do not create or strengthen a dominant position. It was, therefore, a significant setback for the Commission when the General Court annulled the prohibition decision. It did so on the basis that the Commission needed to demonstrate with a "strong probability" that the merger would result in a SIEC, which it had failed to do.

The General Court also found that the Commission had stretched the SIEC test beyond its proper legal boundaries and had erred in its assessment that the merging parties were "close competitors" and that Three was an "important competitive force" in the market. In particular, the General Court found the following. 

• A SIEC can only be established in gap cases if two cumulative conditions are satisfied: the merger would eliminate an important competitive constraint that the merging parties previously exerted upon each other; and the merger would reduce the competitive pressure on the remaining competitors.
• In an oligopolistic market all operators are, by definition, close competitors to a greater or lesser extent. Accordingly, the Commission cannot find a SIEC simply because the merging parties are close competitors; otherwise any four-to-three merger in an oligopolistic market could be prohibited. Something extra is needed and the Commission should have established that O2 and Three were not just close competitors but "particularly close" competitors.  
• In addition, the Commission could not treat Three as an important competitive force without establishing that it competed particularly aggressively on price and/or pursued a pricing policy which could significantly alter the competitive dynamics on the market (which the Commission had failed to do).
• All mergers produce efficiencies due to the rationalisation and integration of production and distribution processes. These efficiencies were, however, absent from the Commission’s quantitative analysis of the merging parties pricing incentives. The analysis was therefore flawed since by ignoring those efficiencies, the Commission had failed to consider the impact those efficiencies could have on future pricing incentives.  

The ruling of the CJEU

The CJEU rejected the General Court’s analysis at almost every level. It disagreed that the framework of analysis used by the Commission in its assessment of the merger had been defective and referred the case back to the General Court for re-examination based on what it described as "the breadth, nature and scope of the errors made by the General Court". 

The following key principles can be distilled from the CJEU ruling. 

• Standard of proof. The Commission is not obliged to demonstrate a "strong probability" of a SIEC. The Commission must frequently conduct complex prospective economic assessments and predict how mergers will alter the parameters of competition in the market. It cannot therefore be required to meet a particularly high standard of proof to establish a SIEC. It is only required to demonstrate, based on a sufficiently cogent and consistent body of evidence, that a merger is more likely than not to result in a SIEC. In short, the standard of proof is a balance of probability standard, and this standard applies to both prohibition and authorisation decisions. This standard is also the same for all types of transactions, regardless of the theory of harm pursued by the Commission, whose complexity is only relevant as regards the quality of the evidence needed to discharge the standard of proof.  
• The “SIEC” test. The Commission does not need to both demonstrate that a merger will eliminate an important competitive constraint that the merging parties previously exerted upon each other, and reduce the competitive pressure on the remaining competitors.[4] These are not cumulative conditions since this would defeat the objective of the EUMR which is to establish an effective system of merger control enforcement and therefore to capture all transactions capable of significantly impeding effective competition. The General Court should therefore have found that a SIEC can in oligopolistic markets result from the mere elimination of an important competitive constraint that the merging parties previously exercised on each other.
• Important competitive force and closeness of competition. The CJEU criticised what it regarded as the General Court’s unduly restrictive interpretation of these concepts. It found that the Commission was not required to demonstrate that Three competed particularly aggressively on price or pursued a pricing policy that could significantly alter the competitive dynamics on the market. The Commission was only required to demonstrate that Three had more influence on the competitive process than its market share would suggest. This was enough to characterise Three as an important competitive force. Consistent with the Commission’s Horizontal Merger Guidelines, the CJEU confirmed that the elimination of such a competitive force from an already concentrated market could give rise to a SIEC.[5] Moreover, the Commission was not also required to establish that the parties were particularly close competitors because even a merger between parties who are not particularly close competitors in a concentrated market can result in a SIEC.  
• Efficiencies. The General Court had criticised the Commission’s treatment of claims by the parties that the deal would have led to pro-competitive efficiencies, including on the basis that nearly every merger would give rise to some efficiencies and that such “standard efficiencies” are a relevant part to quantitative modelling work. The CJEU found no support for such a proposition and held that efficiencies cannot be presumed but must be demonstrated by the merging parties (a notoriously difficult task in practice) before they can be considered by the Commission.  

Conclusions 

The ruling of the CJEU is a serious demolition of the General Court’s judgment. The CJEU opposed the introduction of a higher standard of proof for oligopolistic mergers and refused to endorse the boundaries which the General Court attempted to draw around the SIEC test. This was in part unsurprising, including because several elements of the General Court’s judgment, particularly as regards the standard of proof imposed on the Commission, were manifestly in tension with earlier case law.

However, the attempt by the General Court to draw these boundaries reflected a concern that the Commission’s framework leaves it with an almost unfettered discretion to prohibit deals in oligopolistic markets. According to the General Court, something over and above a mere reduction in the number of competitors present in the market was necessary in order to establish a SIEC.

Since the limiting principles which the General Court had sought to articulate have been rejected by the CJEU, the question arises whether the Commission’s power to prohibit mergers in oligopolistic markets is subject to any meaningful substantive materiality threshold – i.e. a threshold below which the mere reduction in the number of rivals will not be deemed sufficient to block a deal. While limiting principles could still emerge from future case law (including the ThyssenKrupp[6] case currently pending before the CJEU) that possibility would seem to have become more remote. The CJEU ruling instead suggests that the Commission will enjoy significant discretion in shaping the future direction of EU merger control enforcement policy and in deciding where to set the threshold for intervention.

[1] Case‑376/20 P, Commission v. CK Telecoms, judgment of 13 July 2023.
[2] Case COMP/M.7612 – Hutchison 3G UK/Telefónica UK, decision of 11 May 2016.
[3] See for example Case M.6992 – Hutchison 3G UK/ Telefónica Ireland, decision of 28 May 2014 and Case M.7018 – Telefónica Deutschland/E-Plus, decision of 2 July 2014.
[4] Paragraph 114 of the judgment.
[5] Paragraph 167 of the judgment, which echoes paragraph 37 of the Horizontal Merger Guidelines.
[6] Case C-581/22 P, ThyssenKrupp v Commission, judgment yet to come.