CONCEPTUAL FRAMEWORK FORMERGER REMEDIES

A RESEARCH PAPER SUBMITTED TO GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY IN PARTIAL FULFILMENT OF

REQUIREMENTS IN THE NINTH SEMESTER OF B.B. A. LLB(H)

Supervisor: Submitted by:Mr. Anuj KumarVaksha Parth SemwalAssistant Professor of Law 01116503509USLLS, GGSIPU. USLLS,GGSIPU.

UNIVERSITY SCHOOL OF LAW AND LEGAL STUDIESGURU GOBIND SINGH INDRAPRASTHA UNIVERSITYSECTOR 16-C, DWARKA, NEW DELHI-110078, INDIA

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DISCLAIMER

This research paperhas beenpreparedbytheauthor, as a IX Semester student at USLLS, GGSIPU,

undertheguidance of Mr. Anuj Kumar Vaksha,foracademicpurposesonly.Theviewsexpressedinthe

reportarepersonaltotheauthoranddonotnecessarilyreflecttheviews

oftheUniversityinanymanner.This

paperistheintellectualpropertyofGGSIPUandthesameoranypartthereof maynotbeusedinany

manner,whatsoever, withoutexpress permissionofGGSIPU in writing.

Parth Semwal.

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ACKNOWLEDGEMENT

This research paper is an effort made by me with the astute guidance of my mentor, Mr. Anuj

Kumar Vaksha. Without his able guidance, this project would have been incomplete. His valuable

inputs and constant encouragement has inspired me to carry out this research fruitfully. He gave

me his valuable time to discuss the facets of this topic and guided me towards an enlightening and

holistic research. Last but not the least, I would like to thank my parents and friends who helped

me a lot in gathering different information, collecting data and guiding me from time to time in

completing this project. Despite their busy schedules, they gave me different ideas to help make

this project unique.

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TABLE OF CONTENTS

INTRODUCTION

Merger Control Merger Remedies Sanctions and Remedies Goals of Remedies

DIFFERENT TYPES OF REMEDIES

Structural Remedies Kinds of Structural Remedies Case Studies Behavioural Remedies Kinds of Behavioural Remedies Circumstances where behavioural remedies may be appropriate Case Studies

PRINCIPLES FOR DESIGNING ANDIMPLEMENTATION OF REMEDIES

Structural vs. Behavioural Remedy Horizontal vs. Vertical mergers View of third party Effectiveness of Remedy Optimal remedy Principle of proportionality Impact Of Potential Remedy Cost Assessment Transparency & Consistency Japan & Mauritius

CHALLENGES IN DESIGNING AND IMPLEMENTING AN EFFECTIVE REMEDY

The Legal Framework Market Reality Lack of Awareness Access to Information & Compliance With Commitments Jurisdiction Issues Communication & Co-ordination Facilitate Co-operation

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The Legal and Economic Assessment Capacities of the Competition Authority Internal Factors

MONITORING THE IMPLEMENTATION OF REMEDIES

Oversight of Authority & Third Party Assistance Consultation & Reporting Clarity Continuity of Staffing Periodic assessment of practice Arbitration & Dispute Resolution Appointment of Trustee Functions of Trustee Monitoring the Implementation

INDIAN EXPERIENCE

Case I - Strides-Arcolab Deal Case II - Orchid-Hospira Deal Case III - Gujarat Gas Company-GSPC Gas Company Limited Deal

CONCLUSION

Essentials of a Remedy Necessity of a Remedy Behavioural Remedies Divestiture Trustee Co-ordination & Co-operation

BIBLIOGRAPHY

CHAPTER-I

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INTRODUCTION

MERGER CONTROL

A law governing merger control is an essential instrument in any competition policy armory. For a

market economy to function optimally, and to the benefit of all of society's citizenry, it is generally

acknowledged that rules are required which prevent anti-competitive arrangements between

competitors and abuse of market power. Likewise, a legal instrument is also needed which is

capable of dealing with the adverse effects on competition which some mergers can give rise to.

By providing for a system of ex ante control of industrial concentration, merger laws should have

the primary role of seeking to prevent the creation of market structures that would be likely to

impede the incentives for enterprises to compete in those markets.

Merger control is about protecting the competitive process in the market and aims at ensuring

consumers a sufficient choice of products at competitive prices. By preventing a merger from

creating a dominant position in a small country the Commission protects the customers who live

there. It is the job of the competition authorities that consumers in all countries regardless of their

size enjoy a high degree of protection from dominant suppliers. If we were to do otherwise this

could in effect lead to discrimination between consumers in small countries and those in larger

countries.

For that reason, central to any system of merger control should be a competition-based standard of

review. It is worth stressing that most contemplated transactions do not pose a threat to

competition, and indeed that some such transactions may result in efficiencies and enhanced

economic performance generally. A minority of proposed mergers, however, may give rise to

concerns about likely prospective anti-competitive effects. In those circumstances, merger control

is required in order to ensure the remedy or, if necessary, the prohibition of such transactions.

Preserving competition, in merger control, as in all areas of competition policy, is not, however, an

end in itself. The ultimate policy goal is the promotion of economic performance, and in particular

the protection of consumer welfare. By seeking to preserve the competitive process, merger control

plays an important role in guaranteeing efficiency in production, in preserving the incentive for

enterprises to innovate, and in ensuring the optimal allocation of resources within the economy.

The consumers are the beneficiaries of a properly conducted enforcement policy, enjoying lower

prices and a wider choice of products and services as a result.

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Many countries worldwide have recognised the centrality of competition policy, including the need

to provide for merger control laws, to the proper functioning of a market economy. And many of

these are countries whose economies are still developing, or which have only recently adopted

market-based economic systems. In particular, the pursuit of a robust competition policy by

developing countries is, in my view, a key ingredient in any market-driven reforms: it encourages

industrial competitiveness by rewarding efficiency and innovation, thereby fostering investment,

raising incomes and creating wealth in the process.

Merger Control Under Indian Competition Law

Article 38 of the Constitution provides for the Directive Principles of State Policy. These

Directive Principles mandate upon the States to secure a social order for the promotion ofwelfare

of the people. This provision recognised the need to eliminate and minimise theinequalities in

income, which applied not only to the individuals but also to the groups indifferent areas59. Article

39 takes a step further and states that, the States shall strive to securethat the operation of the

economic system does not result in the concentration of wealth andmeans of production to the

common detriment60. The preamble to the Monopolies and RestrictiveTrade Practices Act (MRTP

Act) resounds this very principle of the Constitution of India.

The MRTP Act came into existence on 27th December 1969. The preamble to this

enactmentprovided it to be An Act to provide that the operation of the economic system does not

result inthe concentration of the economic power to the common detriment, for the control

ofmonopolies, for the prohibition of monopolistic and restrictive trade practices and for

mattersconnected therewith or incidental thereto. Therefore, the MRTP Act, 1969 aimed at

preventingeconomic power concentration in a few hands, with the intention of ushering economic

equalityto reduce the colossal disparities within the Indian economic setup. This Act came to be

enactedafter the Monopolies Inquiry Committee formed in 1964, reported that there was

highconcentration of economic power in over 85% of industries in India at that point in time.

While the MRTP Act was useful in many ways, a view was that the Act had become obsolete

incertain respects and there was a need to shift the focus from curbing monopolies to

promotingcompetition. A high level committee (Raghavan Committee) was appointed in 1999 to

suggest amodern competition law in line with international developments to suit Indian conditions.

Thecommittee recommended enactment of a new competition law, called the Competition Act,

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andthe establishment of a competition authority, the Competition Commission of India, along

withthe repealing of the MRTP Act and the winding up of the MRTP Commission. It

alsorecommended further reforms in government policies as the foundation over which the edifice

ofthe competition policy and law would be built.

After a long and troubled gestation, India’s competition law and Competition Commission came

into existence. The Competition Act, 2002 came into existence in January 2003 and the

Competition Commission of India was established in October 2003. The Act

prohibitsanticompetitive agreements (section 3), abuse of dominant position (section 4) and

regulatesmergers, amalgamations and acquisitions (sections 5 & 6). The law regulating mergers

can befound under Sections 5 and 6 of the Competition Act. Mergers have been grouped along

withAmalgamations and Acquisitions under the wider category of combinations. The

provisionsrelating to combinations however, came into force only on 1st June 2011.

The Commission also notified the implementing regulation titled “The Competition Commissionof

India (procedure in regard to the transaction of business relating to combinations) Regulations,

2011 (Merger Regulations) and as per the notification issued on 11th May 2011, theCommission

can now scrutinize large mergers and acquisitions above a certain threshold andapprove or reject

them after its assessment.

These much-awaited regulations, which encompass within them every large merger andacquisition

deal regulate all acquisition of shares, voting rights, control, merger oramalgamation, which cause

or are likely to cause an appreciable adverse effect on competitionin the relevant market in India.

Therefore, all the big-ticket mergers above a certain thresholdprovided in section 5 of the

Competition Act will require prior approval of the CCI.

The gradual succession from the MRTP Act of 1969 to the Competition Act of 2002 is one of

themost important milestones as far as economic reforms in the field of competition laws in

thecountry are concerned. By shifting the focus from the stage of merely „curbing monopolies‟ in

the domestic market to promoting competition‟, the competition regime in India has attainted

recognition for its progressive ways. Since June 2011, the Commission has scrutinized

andapproved fifteen combinations. Competition law in India can thus be successfully classified as

ameans to achieve the end, rather than just an end in itself.

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MERGER REMEDIES

Remedies are modifications or restrictive conditions imposed by competition authorities or

proposed by the parties themselves, in order to address any competition concerns that may arise

from a proposed merger.

The authorities as a way of remedy may attach restrictive conditions to reduce the negative impact

on competition in the relevant market brought by a concentration of business operators. Remedies

are an essential element of merger control system because they allow for the modification of

transactions that would negatively alter market structures. Remedies allow for the approval of

mergers that would otherwise have been prohibited, by eliminating the risks that a given

transaction may pose to competition. As such, they play an essential role in the merger review

process, and their careful crafting is of the utmost importance to the competition agencies carrying

out the review. Consequently such transactions can be cleared and companies can proceed with

their business plans.

The business community attaches much importance to “remedies” as a tool allowing certain

mergers to be cleared, notwithstanding the fact that those mergers initially raised the concern that

they would significantly impede effective competition.

SANCTIONS AND REMEDIES

Sanctions and remedies complement each other regarding the realisation of the principal

competition law objective, i.e. protection of the competitive process, since they aim at

safeguarding or restoring competition in cases where companies have distorted or are about to

distort competition.

However, their nature and their way of functioning are fundamentally different. Under chapter XI

of the UNCTAD Model Law, sanctions are meant to deter unlawful conduct in the future, to force

violators to disgorge their illegal gains and compensate victims. They serve the purposes of

punishing past and present illegal behaviour and deterring from infringing the law. Deterrence

aims at preventing recidivism of individual offenders, as well as at setting an example to other

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potential offenders. According to a number of surveys, the objective of deterrence outweighs the

punishment aspect in the field of competition law. In contrast, remedies that aim at maintaining or

restoring competition in the future are not punitive in nature. Their main scope of application is the

field of merger control. Typically, remedies are offered by the parties to a proposed merger in

order to eliminate competition concerns and to obtain clearance by the competition authority in

charge. As opposed to sanctions, which are unilaterally imposed upon a competition law offender,

remedies are usually negotiated between the concerned party and the competition authority.

Exploring the topic of appropriate sanctions and remedies not only requires an assessment of

sanctions and remedies and their implementation in practice. Some thought also needs to be spent

on the question of what the term “appropriate” means in this context. The appropriateness of

sanctions and remedies implies a balancing decision. The objectives pursued by such measures

need to be assessed in light of the restrictions of rights and freedoms, which they cause. The

principle of proportionality comes into play.

GOALS OF REMEDIES

Competition law remedies are adopted with the aim to maintain/restore competition in the market.

This includes (a) the “micro” goals of putting the infringement to an end, compensating the

victims, and curing the particular problem to competition; but also (b) the “macro goal” of putting

incentives in place so as to minimize the recurrence of just such anti-competitive conduct, so that it

may not occur again in the future, that is to say, remedies are imposed with the idea of future

situations in mind and are forward looking.

Depending on the legal framework, competition authorities may impose remedies unilaterally or

they may negotiate them with the parties concerned upon a proposal made by the latter (so-called

undertakingsor commitments). It is true that undertakings or commitments are sometimes

considered as sanctions. However, taking into account that they primarily seek to reinstall

competition where it has been distorted by an anti-competitive practice, undertakings or

commitments are classified as remedies.

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CHAPTER-II

DIFFERENT TYPES OF REMEDIES

Remedies are conventionally classified as either structural or behavioural. Structural remedies are

generally one-off remedies that intend to restore the competitive structure of the market.

Behavioural remedies are generally ongoing remedies that are designed to modify or constrain the

behaviour of firms (behavioral remedies may also be called as “conduct remedies” in some

jurisdictions). Some remedies, such as those relating to access to intellectual property rights, are

particularly difficult to categorize on this basis. An effective package of remedies may contain

both structural and behavioural remedies.

STRUCTURAL REMEDIES

They require firms to divest assets they hold. In this regard, divestiture remedies restructure the

concerned entity into two or more companies, or require it to sell some of its assets to another firm.

Structural remedies may include both the sale of a physical part of a business or the transfer or

licensing of intellectual property rights They are generally considered to be the most drastic type of

remedy. They also have the virtue of being able to eliminate market power rapidly while creating

or invigorating competitors. In addition, they require less oversight by courts and agencies than

other remedies do. On the other hand, some structural remedies may initially be more disruptive to

the defendant’s business than other remedies are, and they sometimes create immediate

inefficiencies.

Mandatory licensing is also considered as structural remedy, given its capability to alter market

structure by introducing new competitors. Compulsory licensing is in some respects an attractive

tool for competition agencies, particularly when they are dealing with a dominant firm.

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KINDS OF STRUCTURAL REMEDIES:

Divestiture

Divestiture is the most common form of structural remedy. In essence, a divestiture seeks to

preserve competition in a relevant market following merger by either creating a new source of

competition through sale of a business or set of assets to a new market participant or strengthening

an existing source of competition through sale to an existing market participant independent of the

merging parties. To be effective, a divestiture will require the sale of an appropriate divestiture

package to a suitable purchaser through an effective divestiture process. These three key elements

may be subject to significant constraints in individual merger cases. The effect of these on the

suitability and design of divestitures is explored below.

i.i) Scope of Divestiture

The key elements of a divestiture, namely the scope of the divestiture package, the purchaser and

the disposal process, may be subject to significant risks:

- Composition risks – the scope of the divestiture package may not be appropriately configured to

attract a suitable purchaser or allow a suitable purchaser to operate effectively.

- Purchaser risks – a suitable purchaser may not be available or the merging firms may wish to

dispose to a weak or otherwise inappropriate purchaser.

- Asset risks – the competitive capability of a divestiture package may deteriorate significantly

prior to completion of a divestment, for example through loss of customers or key members of

staff. It should be noted that merging firms may have significant incentives to undermine the future

competitive impact of divestitures, thus increasing potential risks. The nature of the perceived risks

in an individual case will affect the design of the divestiture and the extent to which protective

measures are adopted such as the appointment of monitoring trustees and “up front” buyers which

are outlined below. Setting the appropriate time period for a divestiture is also critical to

minimizing any potential risks.

The scope of a divestiture package should be sufficient to address the expected competitive

detriments and to enable the purchaser to compete effectively in the longer term. In general a

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suitable divestiture package may be defined as the smallest operating unit of a business (eg a

subsidiary or a division) that contains all the relevant operations pertinent to the area of

competitive overlap and that can compete successfully on a standalone basis. Following discussion

with the merger parties, competition authorities may permit the scope of the package to be

modified provided the modified package appropriately addresses the detriments. In certain

restricted circumstances, for example where speed of divestiture is critical, some authorities may

define a broader, more readily divested group of assets (a so-called ‘crown jewels’ divestiture

package) to be divested in the event that an initially approved package is not disposed of within a

specified period. Other authorities do not favour the use of ‘crown jewels’ and rely on other

methods (for example, the use of a selling trustee) to expedite a divestiture, where necessary.

i.ii) Standalone Business vs. Collection of Assets

The divestiture of an existing business operating on a standalone basis is generally preferred over

the divestiture of a collection of assets or a part of a business as this will normally entail a much

lower composition risk. If it is decided that divestiture of a collection of assets will satisfy

competitive concerns, it is preferable that all the divested assets come from one or other of the

merging parties because a mixture of assets from both parties (a so called “mix and match”

solution) may increase composition risk. If it is necessary to divest a collection of assets or part of

a business then the capabilities and assets of a purchaser become more important in determining

the likely viability of the divestiture (i.e. there is increased purchaser risk) than in divestiture of a

standalone business.

In particular circumstances, such as in some cases in the energy sector, divestiture might involve

divestment of production capacity for a given period rather than divestment of assets, where this

would be sufficient to remedy the competitive detriment. In the Nuon/reliant Energy case study it

is seen that this is a hybrid form of remedy containing structural elements of divestiture but

supplemented by ongoing behavioural commitments.

i.iii) Approvals

A competition authority will generally require the right to approve the purchaser as well as the

assets to be divested. A suitable purchaser should generally have no significant connection post

merger, such as any financial ties, to the acquiring parties. However, it is recognized that

purchasers may sometimes require access to key inputs on appropriate terms from the merger

parties for an interim period. The purchaser should have the necessary resources and expertise to

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be an effective competitor and should not itself be subject to significant competitive concerns if the

divestiture proceeds. A competition authority will also wish to satisfy itself that the purchaser has

appropriate business plans and incentives for competing in the relevant markets before approving

disposal to the specified purchaser.

Where there is perceived to be significant purchaser or composition risk some agencies require the

merging firms to identify a suitable purchaser that is contractually committed to the purchase

before the merger may proceed, i.e. an “up front buyer”. In certain cases, the divestiture is

accomplished before the merger proceeds; a so-called “fix-it-first” solution.

i.iv) Full and Partial Divestiture

In some jurisdictions, there is a strong presumption in favour of full rather than partial equity

divestiture. This is because retention of equity in the divested business may reduce the incentive of

a firm to compete with that divested business. It is for the merger parties to provide convincing

arguments as to why they should be allowed to retain equity in the divested business, why the

proposed holding does not create a direct or indirect influence, and why the proposed holding does

not damage the incentive to compete. They should not be permitted to retain a controlling interest.

If a partial equity interest is allowed to be held post-merger, then it is common to require

behavioural remedies, such as preventing access to sensitive and confidential competitive

information.

i.v) Protection Against Risk

In order to protect a divestiture against likely asset risk, it may be necessary to require the

divestiture package to be held and managed separately from the retained business pending

divestiture. Appointment of an independent monitoring trustee may be desirable to ensure that

these “hold separate” conditions are complied with and that the divestiture package is not allowed

to deteriorate. The use of trustees is discussed in the following paragraphs and is also illustrated in

the CVRD/CAEMI Case and the General Electric/InVision Case. The GE/InVision case has been

analyzed at the end of this chapter.

ii.)Structural Remedies – Intellectual Property

The divestiture or licensing of intellectual property (IP), may also be considered as a structural

remedy and may be viewed, generally, as a specialized form of asset divestiture. However, in

certain cases, the terms of a license may contain ongoing behavioural elements such that the

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remedy is a structural/behavioural hybrid. The key element is the extent to which, if at all, any

material link between licensor and licensee will exist post-license. A remedy that requires an

assignment or license of an IP right that is exclusive, irrevocable, and non-terminable with no

ongoing royalties will effectively be structural and call for no or very little behavioural

commitments, whereas a license that requires a licensee to rely on the licensor for upgrades,

supplies, etc. will most likely result in some form of behavioural hybrid remedy.

IP rights generally enable the remuneration of investment in innovation by granting time-limited

exclusivity. In considering the design and scope of IP remedies it is therefore particularly

important to strike an appropriate balance between preserving incentives for innovation and

addressing competitive detriments.

ii.i) Design

The appropriate design of an IP remedy may be influenced by a number of case specific factors

such as:-

- The form and jurisdiction of the relevant IP (e.g. patent, exclusive license, trade mark etc.) The

appropriate IP to be divested to enable a purchaser to compete may sometimes include less easily

transferable “know how” as well as formal license rights, as illustrated by the Shell/BASF case

The relative specialisation of the IP. This may impose particular constraints on selecting a suitably

competent purchaser or licensee. A competition authority may need suitable independent technical

advice for insight on this and other technical aspects of an IP case. For those jurisdictions that lack

the ability to revise or amend the terms of a commitment post-remedy to take into account actual

experience, the relative specialisation needed to suit individual licensee requirements may create

additional burdens or risks in crafting a suitable remedy.

- The rate of innovation expected in the relevant market. A high rate of innovation may imply a

shorter required duration for a licensing remedy than in a more stable market.

- The effect of forms of payment for IP. The form of payment (e.g. one off payment, royalties,

profit shares) may have an effect on competitive incentives.

Mergers critically dependant on IP rights may have international repercussions due, for instance, to

international filing and licensing of patent rights. International cooperation amongst competition

authorities is therefore often particularly relevant in these cases as illustrated by the Shell/BASF

case.

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CASE STUDIES

Case-I

European Union: Mitsui/CVRD

SummaryUnder the terms of the proposed transaction, Companhia Vale do Rio Doce (CVRD) (Brazil) and

Mitsui & Co. Ltd (Mitsui) (Japan) would acquire joint control of CaemiMineração e Metalurgia

SA (Caemi). Caemi's assets principally consist of Brazilian iron ore mining company

MineraçãoBrasilierasReunidas (MBR) and a 50-percent stake in Canadian iron ore producer

Quebec Cartier Mining Company (QCM). Mitsui already held 40% of the voting shares of Caemi.

The deal was notified for clearance in June 2001 in the European Economic Area. The

Commission decided to launch an in-depth investigation, which has shown that the proposed

transaction would lead to the creation, if not the strengthening, of a dominant position in the

seaborne supply of iron ore pellets. The investigation revealed that the remaining competitors,

principally Rio Tinto and BHP, as well as the smaller Swedish company LKAB, would not be

likely to be able to effectively constrain Mitsui/CVRD/Caemi's market behaviour. For similar

reasons, the Commission concluded that the operation would also lead to the creation or

strengthening of a dominant position in the seaborne market for direct reduction iron ore.

Remedies : The European Commission has approved the proposed acquisition after the parties

offered to divest Caemi's 50% interest in QCM, thereby eliminating the "overlap" between

CVRD's and Caemi's production of iron ore pellets. As a result, the commitment removed the

Commission's competition concerns in relation to the supply of these products, and in relation to

the supply of direct reduction ore. This conclusion has been borne out by market enquiries -

addressed to competitors and customers of the merging iron ore companies - regarding both the

future viability of QCM and regarding its ability to provide effective competition in the markets

concerned.

Analysis

The case is interesting because, although the deal could have effects in Europe, the substantial

matters are confined to Brazil (with equity ramifications in Japan, Canada, and Australia). CVRD

is a diversified mining company with its headquarters in Rio de Janeiro, Brazil. It is the world´s

largest iron ore producer and the leading supplier of iron ore to Europe. CVRD also has significant

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interests in related commercial transport infrastructure, including railways and port operations.

With the acquisition of Caemi, CVRD will control all Brazilian mining companies exporting iron

ore. Mitsui, based in Tokyo, is a Japanese trading concern. It has worldwide trading activities in

various commodities including iron ore. Mitsui holds minority stakes in a number of iron ore

mining companies, including a significant stake in the world´s second largest individual iron ore

mine, Robe River in Australia. It also has a controlling stake in a small Indian iron ore producer.

Caemi is the world´s fourth largest iron ore producer and holds equity investments in a number of

Brazilian and Canadian mines producing iron ore as well as other metals and minerals.

The merger will have an impact on worldwide competition in the supply of iron ore, which is used

almost exclusively in steel making. Iron ore transported by ship represents about 45% of all traded

iron ore, and the main sources of seaborne supply are located in Brazil and Australia. Participation

in the seaborne trade depends on some significant barriers to entry, as this activity requires access

to specific infrastructure such as dedicated railways suitable for the transportation of very large

tonnages and deep-water harbours. The competitive impact of the merger would therefore have a

likely impact on numerous steel producers worldwide that do not have sufficient local supplies of

iron ore and are dependent on "seaborne" iron ore.

Case- II

Germany: General Electric / InVision

Theme – Preserving an effective divestiture package – international cooperation – Nomination of a security trustee to prevent potentially conflicting provisions

Summary

In April 2004 the merging parties filed the planned acquisition of InVision Technologies, Inc.

(InVision) by General Electric Company (GE) with the Bundeskartellamt. GE is a widely

diversified technology, media and financial services company with a worldwide turnover of about

120 bn Euro.

GE’s products and services include aircraft engines, power generation turbines, financial services,

medical imaging, television programming and plastics. InVision was active in two business areas:

explosive detection systems and x-ray systems for non-destructive testing (NDT) and achieved a

worldwide turnover of approximately 370 Mio Euro. GE was also active in both InVision business

areas.

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The project was also examined by other competition authorities in Europe and America and was

dealt with by the Bundeskartellamt in close cooperation with the US Federal Trade Commission

(FTC) in particular. In the course of both the US and the German merger review proceedings, the

parties offered to sell the respective InVision subsidiaries, which were active in NDT systems in

order to accommodate the competition concerns. In close cooperation, the Bundeskartellamt and

the FTC reached an agreement not only on the respective obligations and time limits but also on

the nomination of a security trustee to prevent potentially conflicting provisions from the start.

It was also in the interest of the undertakings concerned to ensure smooth negotiations between the

competition authorities leading to an agreement on the clearance conditions. Therefore they

decisively supported this process by waiving their confidentiality rights at an early stage to ensure

a smooth exchange of documents and other information between the Bundeskartellamt and the

FTC.

The findings on competitive detriments were that the merger affected two sets of relevant markets:

Explosives detection systems and non-destructive testing systems (NDT systems). NDT systems

are used to detect material defects in all kinds of different products without destroying the product

or reducing its quality.

Where the merging firms fail to procure divestiture to a suitable purchaser within a required

period, an independent divestiture trustee may be mandated by a competition authority to dispose

of the package to a suitable purchaser at an unrestricted price.

BEHAVIOURAL REMEDIES

Behavioural remedies (also called “conduct remedies”) obligate a company either to do something

or to stop doing something. Behavioural remedies, as distinguished from structural remedies, are

always forward looking in that they consist of limits on future business behaviour or an obligation

to perform a specific prescribed conduct for a given, sometimes considerable, period of time

following the consummation of the merger. They often consist of non-discrimination obligations,

firewall provisions or non-retaliation or transparency provisions or contracting limitations.

Behavioural remedies may take various forms and more unpredictable, such that a general

provision will allow the parties involved more flexibility in coming up with different forms of

remedy proposals.

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This type of remedy requires that the competition law violator stop engaging in the conduct that

was found to be unlawful. Such remedies directly serve the competition law enforcement objective

of putting an end to the anti-competitive behaviour that motivated the case. Sometimes, they may

be sufficient to restore the pre-violation level of competition in the market, as well, but not always.

Behavioural remedies that impose an affirmative obligation to take certain actions on the

competition law violator could, for instance, take the form of a requirement that it sells its products

on a non-discriminatory basis. It is important for competition authorities to have affirmative

remedies in their toolkit because in some cases, simply terminating the unlawful conduct may be

insufficient to restore competition in the affected market, and divestiture may not be appropriate or

feasible for one reason or another.

Furthermore, conduct remedies are advantageous in that they usually can be tailored to individual

firms and market circumstances so as to help achieve the desired results. This distinguishes them

from divestitures, which often cannot be so meticulously moulded to fit the contours of each

situation and which therefore tend to have more of a blunt effect on firms and markets.

KINDS OF BEHAVIOURAL REMEDIES

Behavioural remedies cover a wide range of potential applications but require a substantial amount

of monitoring and enforcement. Moreover, behavioural remedies have significant disadvantages in

terms of cost, effectiveness and market distortion. Nonetheless, some jurisdictions use behavioural

remedies, where, typically, structural alternatives may not be viable or in multi-jurisdictional

transactions where a behavioural remedy could be more easily tailored to the identified

competitive harm

Behavioural remedies aimed at overcoming obstacles to competition can be considered in some

distinct forms:

i) Measures Facilitating Horizontal Rivalry.

These comprise three broad types of remedies:

i.i) Measures, which prevent a firm from using its horizontal market position to foreclose the

market and lessen competition. Such remedies may include prohibition of tying or bundling,

restraints on predatory pricing and preventing the use of exclusive and/or long-term contracts.

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i.ii) Measures that prevent a firm from using its vertical relationship or extent of integration to

distort or limit horizontal rivalry. This may occur for example, where a merged entity controls

access to key inputs or facilities that other firms need to compete with it. Measures may include

mandating access to key inputs and regulating the price, terms and conditions of that access.

ii) Modifying Relationships With End Customers:

This could prevent the merged entity from foreclosing the market to its competitors by

preventing for example: -

ii.i) Use of long term and/or exclusive contracts;

ii.ii) Creation of switching costs for customers (e.g. long contractual notice periods, switching

penalties);

ii.iii) Pricing below cost as a predatory measure;

ii.iv) Tying or bundling (e.g. by prohibiting tying or bundling altogether or by reference to the

price of the bundle, or by reference to the incremental prices of the elements within the bundle).

iii) Restricting Effect Of Vertical Relationships:

iii.i)Where a merged entity controls supplies of key inputs (including access to facilities or

networks) that other firms would need in order to compete with it, remedies could include:

iii.i.i) Controls on the price of the input;

iiii.i.ii) Commitment to supply the input;

iiii.i.iii) Restriction of access to confidential information (“firewall provisions”) e.g. preventing

access to information on competitors’ orders to a fellow group company.

iii.ii) Commitment that the merged entity will not discriminate (with respect to price or non-price

factors) in the supply of key inputs as between itself and its competitors.

iii.iii) Even where the merged entity does not itself supply a key input, it might be sufficiently

powerful to influence the provision by others of key inputs to its competitors. It might then be

appropriate to include:

iii.iii.i) Prohibition of exclusive supply arrangements;

iii.iii.ii) Prohibition of exclusive distribution arrangements.

iv) Facilitating Changes In Buyers’ Behaviour:

iv.i) This could include facilitating changes in buyers’ behaviour to enable competition, such as:

iv.i.i) Use of open tender processes;

iv.i.ii) Requirement for a minimum number of suppliers to be contacted in procurement process.

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iv.ii) Could include facilitating changes in buyers’ behaviour to maximise any countervailing

buyer power, such as:

iv.ii.i) Collective purchasing arrangements;

iv.ii.ii) More effective purchasing processes.

v) Controlling outcomes

These comprise measures to control market outcomes to address competitive detriments. These

generally have significant disadvantages in terms of cost, effectiveness and market distortion, and

should therefore normally only be used for relatively short durations and/or in the absence of

effective alternatives.

vi) Price Controls:

Involves controlling prices of products affected by the merger, usually by means of a cap. Prices

can be controlled individually or in a (weighted) basket and are generally set by reference to some

standard (e.g. general measures of inflation, prices of related products). Compliance with the

control is assessed at specified intervals (e.g. every six months, every year,). Depending on the

duration of the price control, it might be necessary to provide for some review at which the

ongoing appropriateness of the control could be assessed. It could be accompanied by commitment

not to discriminate on price (or quality of service).

vii) Supply Commitments:

These are commitments to continue to supply a product or set of products in the market affected by

the merger. The commitment to supply might be absolute (e.g. commitment to continue to supply a

specified product or set of products); by reference to products supplied elsewhere; by reference to

functionality (e.g. commitment to supply products with the same or greater functionality as

particular product(s) supplied pre-merger). In whichever way the commitment is specified, care

needs to be taken so that it cannot be evaded by superficial changes, e.g. to the product name.

Depending on the length of time the supply commitment will operate, it might be necessary to

make provision for some products to be withdrawn and new products to take their place in the

supply commitment.

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viii) Service Level Agreements:

Commitment from the merged entity to provide particular standards of service in markets affects

by the merger. Could include commitments on quality of product; timeliness of supply.

Commitments given should be measurable and observable by those responsible for monitoring.

CIRCUMSTANCES WHERE BEHAVIOURAL REMEDIES MAY BE APPROPRIATE

Despite the presumption in many jurisdictions in favour of structural relief, behavioural remedies

may be appropriate where, for example:

• A divestiture is not feasible or subject to unacceptable risks (eg absence of suitable buyers) and

prohibition is also not feasible (eg. due to multijurisdictional constraints) or

ii) The competitive detriments are expected to be limited in duration owing to fast changing

technology or other factors or

iii) The benefits of the merger are significant as, for example, in some vertical mergers the

jurisdiction permits these benefits to be taken into account, and behavioural remedies are

substantially more effective than divestitures in preserving these benefits in the relevant case.

However, in each of these cases it will be necessary to ensure that monitoring is feasible and

enforcement is a practical proposition. It will also be necessary to ensure that the significant

remedy impact and operating costs that may ensue from implementing behavioural remedies are

fully taken into account before deciding to proceed with a behavioural package. The

Valio/AitoMaito case and the Dräger/Air-Shields case illustrate circumstances where divestiture or

prohibitions were not considered to be practical and therefore behavioural alternatives were

required. Behavioural remedies may sometimes be commonly employed to provide interim

protection until structural measures are fully operative as illustrated by the Val Morgan case.

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CASE STUDIES

Valio/Kainuu,   Maito-Pirkka,   Aito   Maito Case

Theme: This case from the Finnish Competition Authority’s practice, provides an example of the situation where divestitures may not be a feasible solution because of the difficulty of finding a suitable purchaser that has no significant connection to the merging parties yet possesses sufficient resources, expertise, and incentives to operate the divestiture package as an effective competitor.

Summary: The case concerned the acquisition by a major Finnish dairy processor, Valio, of the

dairy and marketing businesses of the co-operatives Maito-Pirkka and Kainuu and that of the

company AitoMaito Fin Oy.

The Finnish Competition Authority assessed the effects of the acquisition in more than 20 product

markets and found that the concentration would have resulted in the creation or strengthening of a

dominant position in several of them. In the assessment of whether the concentration could be

accepted, the central issue was how the purchase of raw material (raw milk) by Valio’s competitors

could be ensured.

The Finnish Competition Authority cleared the merger subject to an extensive package of remedies

consisting primarily of behavioural remedies such as Valio’s obligations to 1) sell to competitors

annually a set amount of raw milk at prices equal to the average purchase price of Valio’s own

dairy industry, 2) make export purchases of raw milk as referred to in point 1 on the basis of

market prices and reasonably non-discriminatory export costs, 3) offer logistics services to

competitors and dairy processing and packaging services for the products referred to in point 1,

and 4) sell to domestic customers all of the usual domestic milk powder brands manufactured by

Valio at the market prices prevailing in the EU area. In addition, Valio was to sell some of the

acquired brands and offer the production plants or the related equipment for sale without any

restrictions on use. An independent expert was appointed to monitor compliance with the

commitments.

Because of the special features of the Finnish dairy market, divestitures of the brands and

production plants alone would not have remedied the decrease in competition caused by the

merger. The main impediment to competition encountered by Valio was the availability of raw

milk and not production capacity, since Valio obtained the raw milk from cooperatives, which, in

turn, purchased the raw milk from their producer members. As the co-operatives and producers

were not parties to the acquisition, it was not possible to oblige them to deliver milk to Valio’s

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competitors. In the event of prohibition of the transaction, the milk producers would have likely

switched their supplies to Valio in due course and this would have created an even greater shortage

in milk deliveries for the co-operatives to be acquired.

It appeared later that the few structural remedies attached to the merger did not produce the desired

outcomes, as no competitor was interested in acquiring the brands or businesses to be

divested. However, the competitive concerns could be dealt with by means of the behavioural

remedies — the transfer of raw milk to Valio’s competitors was ensured with Valio’s commitment

to sell raw milk at Valio’s own purchase price to the actual and potential competitors in the

domestic market. Hence, Valio’s competitors were able to balance out the decreased competition

caused by the acquisition in the liquid milk market.

Thus, in the circumstances of limited availability of structural remedies, behavioural remedies can

prove invaluable tools for securing positive effects for otherwise anticompetitive mergers.

Dräger/Air-Shields case

Theme: Where appropriate, it is desirable to use behavioural remedies that facilitate competition,

rather than controlling outcomes, for example improving information to buyers, reducing

switching costs and opening up tender processes. These remedies may take time to be effective and

a competition authority might wish to combine these remedies with some temporary safeguards (eg

price caps, supply commitments) to protect customers.

Summary: In the Dräger/Air-Shields case for example, a temporary price cap was needed to

provide protection to customers until purchasing reforms were fully developed. However, it must

be recognised that the temporary safeguards might themselves militate against competitive entry or

expansion, eg capping prices at or close to the competitive level removes an incentive for entry. If

the primary purpose of the competition authority’s remedy is to facilitate horizontal rivalry, it

should ensure that any temporary safeguards are clearly time-limited and do not harm the prospects

for competition.

Analysis: In general, behavioural remedies that control market outcomes tend to be burdensome to

operate and monitor, lack effectiveness and are likely to create increasing market distortions over

time. These are therefore unlikely to be appropriate other than for a relatively limited duration

unless there is no practical alternative to a continuing regulatory solution.

It will be necessary to consider the appropriate duration for any package of behavioural remedies.

A package of remedies can remain in place for a given number of years, specified at the outset,

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after which they fall away. Alternatively, they can be subject to review after a specified number of

years, with the option that, on the basis of the review, they may be kept, removed or adjusted in

some way. In general, it is not desirable to put a particular package of behavioural remedies in

place indefinitely. This is because as time elapses there is an increasing risk that the behavioural

remedy will not be appropriate to the conditions of the market and will create undesirable side

effects.

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CHAPTER-III

PRINCIPLES FOR DESIGNING & IMPLEMENTATION OF REMEDIES

STRUCTURAL VS. BEHAVIORAL REMEDY

Both structural and behavioral types of remedies have their benefits and drawbacks. While the

decision as to which type to use must be first and foremost guided by its suitability to address the

competition risk at hand, the advantages and disadvantages of structural versus behavioural

remedies must be carefully weighed as well.

Generally, the benefits of structural remedies are of a one-off nature (which eliminates the need for

subsequent long-term monitoring) and of relatively straightforward character. Especially in merger

cases, the preferability of structural over behavioural remedies is that they do not require long term

monitoring. Their drawbacks, on the other hand, include high costs to the merging parties,

potential disruption to relationship with customers, and their irreversibility (given the fact that

some of the feared competitive risks are transitory).

Behavioural remedies pose their own challenges. Often difficult to craft in order to capture all

possible eventualities, they also require monitoring in order to ensure that the merged entity is

adhering to them in the months and years following the consummation of the merger. Long lasting

oversight of a company’s behaviour is something competition agencies typically are neither well

equipped nor entrusted to do. On the other hand, behavioural remedies offer clear advantages in

vertical and conglomerate mergers, where structural remedies typically offer little help. In

addition, they avoid the substantial disruption to the merging parties' businesses that a divestiture

would cause.

HORIZONTAL VS. VERTICAL MERGERS

Broadly speaking, horizontal and vertical (or conglomerate) transactions lead to different

competition concerns and present different risks to the competitive process. Horizontal mergers

often involve risks resulting from the increase in market power while vertical mergers lead to

concerns about the possibility of upstream or downstream foreclosure.

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These competition risks are generally amenable to different types of remedies, and therefore,

competition agencies have traditionally tended to use structural remedies for horizontal mergers

and behavioural remedies for vertical mergers. However, while this is often the case, there are

some notable exceptions. Austria, for example, has imposed mainly behavioural remedies. In New

Zealand, on the other hand, the competition authority may impose only structural remedies, which

has so far not caused any problems.

Since horizontal and vertical transactions generally involve different competitive concerns, these

differences must be taken into account when crafting an appropriate remedy. Frequently, a

structural remedy can best resolve competitive concerns in horizontal mergers, while vertical

mergers lend themselves to behavioural remedies or a combination of both. While such

generalizations may be a useful starting point, each transaction should be evaluated based on its

own merits. In crafting remedies, competition agencies often seek the views of third parties in

order to ensure that an optimal remedy is found.

.

VIEW OF PARTIES

Taking into account that the parties to a proposed merger are primarily responsible for shaping the

transaction, it is advisable that the competition authorities rely upon the parties to design an

appropriate remedy in dialogue with the competition authority. However, the competition

authorities do contact third parties, in particular suppliers, customers and competitors, and

regularly market-test the proposed remedies to better understand the competitive structure of

markets. Third parties can be equally helpful in ensuring that the remedies designed by the

authorities will be effective at combating the competitive concerns raised by the merger. For

example, in the case of a divestiture, third parties may be in the best position to know which assets

will enable the divested entity to compete effectively. The German delegation noted that the

duration of lease contracts and necessary permits are examples of hidden risks brought to light by

third parties. However, it cautioned that getting meaningful input in time to design and impose the

remedy may prove challenging. It also warned that third parties’ views may be tainted by their

commercial interests which may not necessarily be aligned with the general market interests.

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EFFECTIVENESS OF REMEDY

Through remedies we seek to restore or maintain competition while permitting the realisation of

relevant merger efficiencies and other benefits. In order to achieve these objectives, potential

remedies should be assessed in relation to their effectiveness in dealing with competitive

detriments and their burden of operation in terms of costs incurred and merger benefits foregone.

As noted by ICN Recommended Remedies Practice C, “Procedures and practices should be

established to ensure that remedies are effective and easily administrable”.

Individual jurisdictions will differ in how this assessment of effectiveness and burden on the

competition agency and the merging parties is undertaken. The assessment will be influenced by

such factors as the nature of the competitive test and the extent to which the jurisdiction is

permitted to take into account relevant merger benefits

If a merger were to result in competitive detriments to which there were no effective remedies, the

merger would normally be prohibited. In cases where effective remedies are possible, the merging

parties will normally have strong incentives to propose acceptable remedies and in many instances,

the responsibility for proposing effective remedies should thus fall mainly on these parties. In

order for merging parties to propose an effective remedy in a timely manner, it is common for

agencies to communicate at the earliest date practicable to the parties the potential nature and

scope of the perceived competitive issues.

The competition authorities focus on the overall effectiveness of remedies rather than the type of

remedy. Competition agencies have been increasingly looking at what makes a remedy successful

in dealing with the relevant competition risk, rather than at whether the remedy can be

characterized as structural or behavioural. This move is evidenced, for example, by the recent

update of the US Department of Justice Merger Remedies Guide and was attested by a number of

other jurisdictions during the roundtable discussion. Competition agencies thus increasingly focus

on the effectiveness of a remedy, often crafting remedies that combine structural and behavioural

elements in order to achieve the optimal and most cost-effective elimination of all relevant

competition risks.

OPTIMAL REMEDY

The design of optimal remedies requires a clear identification of the competition law problem that

the antitrust remedy is attempting to address. A number of general suggestions can help agencies to

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design and implement effective remedies. First, it is helpful to spend time early in the investigative

process defining the remedial objectives and developing a plan for attaining them. Otherwise,

agencies may wind up expending the resources necessary to win the case, only to find that they

have not given sufficient thought to the all important issues of what an effective remedy would be

and how it could be implemented. Second, having a thorough understanding of the relevant

industry and how it is likely to evolve under various remedial scenarios is also extremely helpful.

Other suggestions include making adjustments in case of competition law violators with a history

of misconduct, anticipating strategic response of the parties, to a remedy, identifying and trying to

minimize negative side effects, and developing a practical implementation framework, finally,

competition authorities and agencies should bear in mind that remedies are not tools of industrial

planning and are generally ill-suited to achieve aims wider than addressing the competitive

detriments. In assessing remedies in merger cases, competition authorities seek to restore or

maintain competition while permitting the realization of relevant merger efficiency and other

benefits. In order to achieve this objective, potential remedies should be assessed in relation to

their effectiveness, e.g. by interviewing players of the affected market.

PRINCIPLE OF PROPORTIONALITY

Competition authorities normally seek to implement the least burdensome remedy, or package of

remedies, that will be fully effective in eliminating the specific competitive detriments expected

from a merger. Some competition authorities, however, apply a principle of proportionality,

whereby they might decide to permit the merger with no remedies if even the least burdensome

effective remedy will be disproportionate compared to the degree of the competitive detriment.

This might occur, for example, where the merger concerns a very small market. However, it is

recognized that other jurisdictions do not believe it appropriate to apply a concept of

proportionality in designing remedies once a finding of competitive detriment has been made in

any relevant market.

IMPACT OF POTENTIAL REMEDY

- Comprehensive Impact. The remedy should seek to deal with all the competitive detriments

expected from the merger.

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- Acceptable Risk. The eventual impact of any remedy, is to some extent, uncertain. Competition

authorities will seek to implement effective remedies that generally have low levels of risk of not

adequately addressing competitive detriments. This is particularly important where a competition

authority is restricted in its ability to modify a remedy in the event of it failing to perform as

anticipated.

- Practicality. An effective remedy should be capable of practical implementation, monitoring and

enforcement within the jurisdiction of the relevant competition authority. This will also imply that

the implementation and operation of the remedy should be clearly expressed.

- Appropriate Duration and Timing. It is desirable for remedies to address the competitive

detriments effectively over their expected duration. Remedies that act quickly in addressing

competitive concerns are preferable to remedies that are expected to have an effect only in the

longer term or where the timing of the effect is uncertain.

COST ASSESSMENT

The potential burden or cost of using remedies is another element, which should be taken into

account. Costs may arise in a variety of areas:-

- Remedy impact costs. Remedies may result in distortions or inefficiencies in market outcomes.

This is more likely to be the case in instances where behavioural remedies are used which

intervene directly in market outcomes, especially over a long period. For example, price caps may

discourage market entry by creating doubt concerning the ability to recoup investment or to

maintain profitability. Similarly, non-price restraints may adversely affect investment decisions.

- Remedy operating costs. For those authorities that impose or directly seek remedies, these

comprise the directly attributable costs of implementing and, if necessary, monitoring and

enforcing remedies eg employing trustees, collecting monitoring information etc.

- Merger efficiencies or other benefits foregone. A frequent advantage of remedies is that they

enable the realisation of at least some efficiency or other benefits expected from a merger that

would otherwise be lost through prohibition. Particular benefits expected from a merger may

include lower prices, higher quality, a greater choice of products or a greater rate of innovation.

Jurisdictions differ significantly in how merger efficiencies and other benefits are defined and

assessed. However, for those that will consider efficiencies claims, these benefits are only

generally considered relevant to the extent that they arise from the merger and would not have

occurred otherwise. In addition, many require that any expected efficiencies to be gained by the

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merging parties are only likely to be considered relevant if they are expected to result in significant

benefits to customers. Moreover, the merging parties will normally bear the burden of

demonstrating that relevant merger benefits are likely. A competition authority will generally seek

to modify the choice or design of a remedy to minimise the impact on these efficiencies or other

relevant benefits. But the competition authority will still wish to ensure that the remedy is effective

in addressing the competitive detriments.

TRANSPARENCY AND CONSISTENCY

In choosing, designing and implementing remedies, transparency and consistency are desirable

principles in their own right in producing just decisions and conferring legitimacy on the

outcomes. However, these principles are also important in optimizing the effectiveness of

remedies.

As noted by ICN Recommended Remedies Practice B, “The merger review system should provide

a transparent framework for the proposal, discussion, and adoption of remedies”. Transparency

implies that the principles and major issues in determining remedies in individual cases are visible

and intelligible to the merging firms, and, where deemed appropriate, their competitors and

customers. The specific application of these principles to an individual case should be clearly

explained during the merger review process. As appropriate, agencies should consult third parties

and customers on the effectiveness of the remedy. This process should improve the overall

robustness of the outcome as illustrated in the Nuon/Reliant Energy case where consultation with

parties active in the market resulted in significant modifications in the final proposal. Transparency

should not imply disclosure of confidential information.

Consistency of remedy practice is desirable to provide a reliable basis for corporate decisions and

expectations. However, consistency will normally be tempered by the need to deal with each case

on its merits.

Consistency of remedy practice between national agencies is especially desirable in the case of

multinational mergers. In these cases it is desirable for competition authorities to coordinate their

approaches to avoid inconsistent or divergent remedies being imposed on a merging entity by a

number of jurisdictions.

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MERGER REMEDY PROCESS IN JAPAN & MAURITIUS

In Japan, in many cases, the parties voluntarily hold prior consultations with the Japanese Fair

Trade Commission (JFTC) in advance of prior notifications. The JFTC carries out inspections in

such a prior consultation stage, and in the case that it reaches the conclusion that the transaction is

problematic; the JFTC indicates the competition concerns to the parties. Then the parties propose a

remedial measure on a voluntary basis, the effectiveness of which is assessed by the JFTC. Thanks

to this procedure, the JFTC seldom imposes remedies in merger and acquisition cases as a formal

action (cease and desist order).

In selecting a remedy in a merger case, the Competition Commission of Mauritius (CCM) will

consider effectiveness, timeliness and proportionality of implementation costs of the remedy

compared to its expected benefits. Remedies must, therefore, be specific to the identified

competition concern caused by the proposed merger. The CCM cannot accept as a remedy an offer

by an enterprise to take some action in one relevant market (to the benefit of consumers) to offset a

loss of competition in another relevant market. It may well be appropriate for the CCM to apply a

temporary remedy aimed at mitigating the effects of mergers that reduce competition, if it expects

competition to develop over time (whether because of pre-existing trends and anticipated

developments, or other remedies that form part of a package). For example, tying and bundling

might be prohibited after a vertical merger until sufficient competition develops in the market

where the enterprise has market power.

In addition, it would not be sensible to impose remedies if the costs of those remedies are out of

proportion to any benefits that can be expected to emerge from them. The CCM will therefore

consider the proportionality of the costs of any remedy it imposes to the benefits it expects to result

from the operation of that remedy.

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CHAPTER IV

CHALLENGES IN DESIGNING AND IMPLEMENTING AN EFFECTIVE

REMEDY

THE LEGAL FRAMEWORK

As to the challenges resulting from the applicable legal framework, we can take the example of the

Zambian competition authority, which reports that the Zambian Competition Act does not clearly

provide what remedies may be awarded for violations of the Act. Therefore, inference is drawn

from the Section of the Zambian Competition Act that stipulates that the Commission may give

orders or directives and may make requirements as remedies where no penalty is provided by law

for a specific violation. The Commission has thus relied on this section in awarding remedies in

the form of cease and desist orders, orders for refunds or replacements in the case of sale of

defective products or imposing conditions to certain authorized mergers.

THE MARKET REALITY

Regarding difficulties relating to the market conditions under which the remedy needs to produce

the desired effects, it first needs to be mentioned that market size and number of players on the

relevant market are somewhat limited in a number of developing countries. Therefore, it might be

difficult to find an appropriate acquirer in the case of structural remedies consisting of divestment.

In this context, the Kenyan Competition Authority points out as per the OECD roundtable in 2011,

that the potential lack of appropriate buyers of company assets to be divested may lead to a

lowering of the price for the assets in question and therefore to an economic loss for the merging

parties. Furthermore, according to the view of the Kenyan competition authority, drastic remedies

may also negatively affect the foreign investment climate.

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LACK OF AWARENESS

Another challenge in countries with a young competition law regime stems from the fact that the

business community is often not yet aware of obligations under the newly introduced competition

law. Without a widespread competition culture, companies are less willing to comply with

remedies formulated by the competition authority. It is suggested that advocacy programmes may

address this issue.

ACCESS TO INFORMATION & COMPLIANCE WITH COMMITMENTS

Some obstacles to remedy enforcement arise when the mergers are cross-border. First, an authority

may find it difficult to obtain access to necessary information to determine whether the parties are

complying with the commitments.

JURISDICTION ISSUES

Also, the decisions of one national authority may lack coercive effect in another jurisdiction. In

other words, it may not be legally possible to force a sale or demand certain conduct in a foreign

jurisdiction in case of non-compliance.

The selection and design of remedy options will also reflect the constraints of national

jurisdictions. Particular difficulties will occur where a competition authority has jurisdiction over

only a small part of a supra-national merger. In such circumstances, the competition authority may

find itself lacking effective powers to prohibit the merger. It may therefore have to rely on

remedies to address the competitive detriment in its country from a weak negotiating position. In

general, even though an authority may seek structural relief outside its jurisdiction to address

domestic competition concerns, there will be a preference for remedies which can be enforced

within the jurisdiction of the competition authority, These constraints may also limit choice not

only of structural remedies but also of behavioural remedies because of the possible difficulty of

enforcing them extra-territorially. The Tirlemontaise/Roosevelt case and the Dräger/Air-Shields

case illustrate the constraints imposed by international mergers.

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COMMUNICATION & CO-ORDINATION

Competition authorities explore the best means of co-operation when handling remedies in cross-

border mergers. Effective communication has been used to assist in the negotiation, design and

enforcement of remedies to the benefit of the authorities, the merging parties and customers.

Mergers are increasingly multinational and more countries have developed sophisticated merger

control regimes. As a result, communication and co-ordination between competition authorities are

paramount to ensuring each authority’s general goal of promoting fair competition in its territory.

One reason why such co-operation is imperative is that one authority’s remedy may have

extraterritorial effects on other jurisdictions, which could render one remedy ineffective or

exacerbate anti-competitive conditions in another jurisdiction. Apart from the obvious ease on

administrative costs for the authorities and the parties, co-operation also benefits customers and

local markets. Through successful co-operation, authorities are more likely to understand the

competitive structure at play and thus be able to design an effective remedy, which addresses the

competitive concerns of stakeholders.

In the implementation and enforcement of a remedy, co-ordination can also prove useful. Aligning

timelines can save costs to the parties, in some cases by allowing them to use a common trustee. If

a divestiture is called for, authorities will need to agree on a purchaser for the assets. These are the

kinds of issues that arise in cross-border mergers and which call for co-operation between the

relevant authorities.

FACILITATE CO-OPERATION

The means and timing of communication were also discussed during the OECD roundtable. The

EU delegation suggested the possibility of an early-warning mechanism and regular calls between

regulators as practical means to facilitate co-operation. The Secretariat highlighted the possibility

of work-sharing arrangements whereby the authorities jointly negotiate with the merging parties or

designate a lead jurisdiction to negotiate remedies. Even without a formal work sharing

arrangement, communication can reduce the time spent in learning about a market. Many

delegations pointed to regular formal and informal contacts with other competition authorities on

specific merger cases.

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THE LEGAL AND ECONOMIC ASSESSMENT CAPACITIES OF THE COMPETITION

AUTHORITY

i) Internal Factors

Challenges in designing and implementing effective remedies may, however, also relate to factors

internal to the competition authority. This is not only due to the fact that competition authorities’

may lack the required resources and experiences to design an effective remedy (as reported by

Burkina Faso), but also to the fact that the nature of remedy design and enforcement is highly

complex, given that it is based on a prognosis of the future development of the competitive

structure in the affected market.

According to the experience of the German Federal Cartel Office, the formulation of cease and

desist orders proves to be particularly challenging in cases where it is necessary to combine them

with the obligation to grant access for a competitor – e.g., in essential facility cases.

In merger proceedings, particular challenges can be encountered with regard to the design of

appropriate conditions and/or obligations. For example, conditions for a merger clearance can

generally be formulated as conditions precedent or as conditions subsequent. Both scenarios can

require detailed rulings e.g. regarding hold separate provisions, nomination of trustees, etc. Should

a merger be cleared subject to a condition subsequent, particular problems can arise when the

relevant conditions are not met because the relevant undertaking would then have to divest certain

assets they have acquired in the course of the transaction.

The selection and design of remedies will generally reflect the principles outlined in “Designing of

Remedies” chapter above and the circumstances of each case, in particular, the expected

competitive detriments and merger benefits. It is normally preferable to begin consideration of the

choice and design of acceptable remedies as soon as the likely competitive detriments become

apparent in order to provide sufficient time for refining and market testing the remedies proposals.

However, care should be taken to ensure that consideration of remedy options does not distort or

displace consideration of findings on the competitive detriments.

Co-operation with competition authorities in other jurisdictions is desirable where each is

considering aspects of the same merger, for instance, in the Shell/BASF case and the General

Electric/InVision case, examples of circumstances favouring cooperation between competition

authorities can be seen. This helps to avoid inconsistency of approach in applying remedies and is

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normally also in the merger parties’ best interests. Such co-operation should take place early

enough to be effective but should not affect each jurisdiction’s assessment of competitive

detriment. It should preferably be with the consent of the merging parties as otherwise restrictions

on disclosure may prevent sharing of relevant information.

Clarity of design is a key virtue in assisting rapid and effective implementation. Conceptual

complexity may often lead to a multiplicity of exceptions and consequences not foreseen at the

design stage when implementing the remedy. However, the need for clarity may sometimes require

significant detail in order to provide the appropriate level of precision.

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CHAPTER-V

MONITORING & IMPLEMENTATION OF REMEDIES

After an appropriate remedy is designed, authorities must determine the best means of monitoring

its implementation by the parties. Competition authorities have employed trustees and third party

stakeholders to assist in ensuring compliance with merger remedies.

Several factors may assist in facilitating effective implementation and ongoing administration of

remedies: -

OVERSIGHT OF AUTHORITY & THIRD PARTY ASSISTANCE

Whether the remedies chosen are structural, behavioural or a combination of the two, the authority

must provide a certain level of oversight to ensure that the remedies are implemented effectively.

To that end and to alleviate some of the authority's burden, third parties are often called upon to

assist in the implementation process.

CONSULTATION AND REPORTING

Active consultation with the merging firms and other appropriate parties, during the

implementation process, helps to identify unforeseen consequences and improves the achievement

of the desired outcome. Periodic reporting is also a useful mechanism for effective implementation

CLARITY

It must be clear what the remedy is, how it will operate and what constitutes compliance. It must

also be clear how the remedy binds the parties and what steps are available to the competition

authority to enforce compliance. As complexity of design may increase the problems of

implementation and monitoring may also escalate.

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CONTINUITY OF STAFFING

It is beneficial for a competition authority to provide continuity of staffing between the stages of

choosing/designing remedies and their implementation. Continuity helps to ensure that familiarity

with the circumstances of a merger is applied to implementation and also assists in anticipating

implementation issues when evaluating remedies.

PERIODIC ASSESSMENT OF PRACTICE

It is helpful for competition authorities to conduct a periodic review of their remedies practice to

identify learning points for improving impact and effectiveness.

As noted in ICN Recommended Remedies Practice D, “Appropriate means should be provided to

ensure implementation, monitoring of compliance, and enforcement of the remedy”.

ARBITRATION AND DISPUTE RESOLUTION

To alleviate the cost of monitoring the implementation of remedies, some authorities have made

use of arbitration clauses, whereby the merged entity must submit any disputes related to the

implementation of the remedies for arbitration. The use of arbitration is particularly useful when

the crafted remedy is designed to give rights to third parties, such as access to a facility or

infrastructure controlled by the merged entity. The arbitration panel is empowered to grant the

aggrieved party private law remedies, while the authority maintains the power to impose traditional

public law sanctions such as fines. In Korea, the authority can simply assign the task of monitoring

compliance and effectiveness to a committee comprised of interested third parties such as

competitors and customers.

Access to arbitration may be an appropriate means of providing flexibility in a proposed package

of remedies. Arbitration may, for instance, be used to settle matters that are not appropriately

determined when the remedies are initially decided on, e.g. access pricing. A dispute resolution

procedure may also be needed to resolve disputes between parties under the terms of a remedy e.g.

preventing contractual discrimination. The Val Morgan case provides a detailed example of such a

procedure.

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APPOINTMENT OF TRUSTEE

A competition authority may appoint, or approve the appointment of, a experienced,

knowledgeable and impartial trustee to assist in various aspects of implementation such as

monitoring or divestment, as noted in the case of divestitures. The trustee may be an investment

bank or consulting firm.

FUNCTIONS OF TRUSTEE

They help in facilitating the ongoing monitoring of behavioural commitments such as rights of

competitive access or interpreting the application of on-going commitments, as in the

Valio/AitoMaito case, or providing non-binding views to an authority concerning implementation

or effectiveness. The case law has already been explained earlier under ‘Types of Remedies’.

The trustee can help the merging parties locate interested buyers and arrange for a sale that will

maintain the value of the assets. Sometimes the appointment of a trustee comes only at a later stage

if merging parties do not complete the divestiture in time themselves. When remedies are

behavioural or conduct-based, a monitoring trustee is often used to carry out the oversight role.

The trustee should be managed by the competition authority and acts on behalf of the competition

authority in circumstances where the authority lacks the resources or expertise.

Trustees should be independent of the merging firms, have appropriate qualifications for the task

and should not be subject to conflicts of interest. The importance of appointing a suitably qualified

trustee is illustrated in the CVRD/CAEMI case. The trustee’s responsibilities will be specified

clearly in the trustee mandate, which will be approved or specified by the competition authority.

The trustee will carry out the instructions of the competition authority in accordance with the

mandate and cannot accept instructions or be dismissed by the merging firms.

Remuneration: The merging firms will generally remunerate the trustee. The trustee’s

remuneration contract should not compromise its independence and should be subject to approval

by the competition authority.

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MONITORING THE IMPLEMENTATION

Effective monitoring is critical to the effectiveness of a remedy – a firm’s incentive to comply with

a remedy decreases the less effective it perceives the monitoring of its compliance to be. It is

necessary to ensure effective monitoring throughout the lifetime of the remedy.

Market Participants: In certain cases, market participants may have an interest in ensuring

compliance with a remedy, and where appropriate, they should be involved.

It is easier to involve market participants, such as customers and competitors, in monitoring where

they are relatively well informed and well resourced, or are intended beneficiaries of a remedy.

Reliance on market participants, however, may complicate the process, and cause other problems,

because they may seek to advance their individual interests. Nonetheless, if their assistance is to be

encouraged, these third parties must be given clear information as to the nature of the remedy and

what the firm must do to comply. They must also know how and to whom they should complain.

Working: The competition authority should be pro-active in its monitoring; it should not rely solely

on complaints. As noted in the previous section, appointment of a trustee or monitoring agent

accountable to the competition authority may be necessary to enable the authority to have

appropriate resources to carry out monitoring effectively. In general, it is preferable to set up

monitoring points throughout the lifetime of a remedy at which the competition authority will

assess the firm’s compliance.

Reporting Periods: These typically can range from monthly, to once per year, depending upon the

nature of the remedy, and the intensity or frequency of the commitments undertaken.

Information Access: The competition authority should make clear in its remedy what information

the firm will be required to produce at any monitoring points and, if possible, should include a

general provision requiring access to information that the authority considers necessary to monitor

compliance.

POST IMPLEMENTATION MODIFICATION

It is desirable for a competition authority as well as parties to have some means of seeking

modification of a remedy either to reflect changes in circumstances or problems in the initial

design of the remedy. This is illustrated in the Tirlemontoise/Rooseevelt case where it was

necessary to change the nominated purchaser for a divestiture. The importance of such a

mechanism increases with the duration of the remedy.

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CHAPTER-VI

INDIAN EXPERIENCE

CASE – I

STRIDES ARCOLAB-MYLAN DEAL

On 1st April, 2013 Mylan Inc. (Mylan) filed a notice under Section 6(2) of the Competition Act,

2002 pursuant to the execution of a Sale and Purchase Agreement (SPA) between Mylan, Strides

Arcolab Limited (Strides) and certain shareholders of Strides. Under the proposed combination,

Strides agreed to sell the entire issued and outstanding share capital of Agila Specialties Private

Limited (a wholly owned subsidiary of Strides) (Agila India) to Mylan.

Mylan is a company incorporated in Pennsylvania, USA and is stated to be actively present in

India through its three Indian subsidiaries, major among them being Mylan Laboratories Limited.

In India, Mylan manufactures and supplies high quality Active Pharmaceutical Ingredients (APIs)

for use in the manufacture of Mylan’s own pharmaceutical products, as well as for use by third

parties, in a wide range of therapeutic categories. It plays a significant role in supplying APIs for

the manufacture of anti-retroviral (ARV) drugs, which are utilized in the treatment of HIV/AIDS.

Agila India is involved in the development, manufacturing and supply of injectable products

mainly for the export market. Agila India has six plants in India which are capable of

manufacturing various injectable formats under different product categories including oncology,

penicillin, cephalosporin and general injectables. Agila India has one wholly owned subsidiary i.e.

Onco Therapies Limited, whose core business is research, development and manufacturing of

oncology related pharmaceutical products (Agila India and Onco Therapies Limited are

collectively referred to as “Target Enterprises”).

CCI observed that Agila India and its subsidiary primarily caters to the export market and their

sales in the domestic market in India (excluding intra group sales) contributed less than 5 per cent

to their consolidated sales for the financial year ended 31st December 2012. Similarly, Mylan also

had limited presence in the domestic market in India as more than 80 per cent of the consolidated

sales of Mylan in India were driven from exports.

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CCI also noted that the products offered by Mylan and the Target Enterprises in the domestic

market in India belong to different therapeutic categories, except for a few products, which are

entirely different in terms of their characteristics and intended use.

Further, majority of the domestic sales of Mylan relate to the sales of APIs (which are used for

manufacturing the final product i.e. formulation) whereas the entire domestic sales of the Target

Enterprises relate to injectable formulations. However, the APIs manufactured and sold by Mylan

in the domestic market in India are mostly non-sterile APIs, which cannot be used for developing

injectable formulations. Thus, the proposed combination is also not likely to result in any vertical

integration of the acquirer i.e. Mylan and the Target Enterprises in the domestic market in India.

It was noted that parties have also entered into a Restrictive Covenant Agreement (RCA) and as

per the SPA & the RCA, Strides, its promoters and any of the group company of strides shall not

engage in the business of developing, manufacturing, distributing, marketing or selling any

injectable, parenteral, ophthalmic or oncology pharmaceutical products for human use, anywhere

in the world including India, for a period of six years.

The Commission in its Order dated 21stDecember 2012 in the notice-bearing Comb. Reg. No. C-

2012/09/79 had observed that “non-compete obligations, if deemed necessary to be incorporated,

should be reasonable particularly in respect of (a) the duration over which such restraint is

enforceable; and (b) the business activities, geographical areas and person(s) subject to such

restraint, so as to ensure that such obligations do not result in an appreciable adverse effect on

competition.”

In the present case, it was noted that the non-compete covenant sought to impose a blanket

restriction covering all products in injectables, parenterals, oncology and ophthalmic categories

even though there are products under these categories, which are currently not being manufactured

by the Target Enterprises. In this regard, the Commission observed that the scope of the non-

compete covenant should cover only those products, which are either being presently

manufactured/sold or are under development, by the Target Enterprises. The acquirer was,

therefore, required to provide a detailed justification for the duration as well as scope of business

activities restricted under the non-compete covenant. In their response, the parties offered the

following modification(s) in the non-compete covenant, under the provisions of Regulation 19(2)

of the Combination Regulations:

Reducing the duration of the non-compete obligations under the SPA and the RCA as applicable to

the Indian market only to a period of four (4) years;

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Restricting the scope of the non-compete as applicable to the Indian market only to the products

that each of the Target Enterprises currently manufactures and to pipeline products in

development.

Permitting the promoters of Agila India and their group companies to conduct research,

development and testing on such new APIs/molecules, which would result in development of new

APIs/molecules for injectable formulations, which are currently non-existent, worldwide.

The Commission accepted the modifications offered by the parties and approved the proposed

combination under Section 31(1) of the Act. The Commission also directed the parties to make

necessary amendments in the SPA and the RCA to incorporate the said modifications.

CASE- II

ORCHID-HOSPIRA DEAL : NON–COMPETE CLAUSE IN COMBINATIONS HAS TO

BE REASONABLE

Orchid Chemicals and Pharmaceuticals Limited (Orchid) and Hospira Healthcare India Private

Limited (Hospira) filed a notice under Section 6(2) of the Competition Act, 2002 pursuant to the

execution of a Business Transfer Agreement (BTA).

Orchid, a 100 per cent Export Oriented Unit (EOU), is engaged in the manufacturing of Active

Pharmaceutical Ingredients (APIs) and oral formulations in Cephalosporin, Penem (including

Carbapenem), Penicillin and NPNC (Non-Penicillin and Non- Cephalosporin) verticals. Hospira,

also a 100 per cent EOU, is engaged in the business of manufacture and export of various

injectable formulations in Cephalosporin, Penicillin and Penem verticals.

Under the proposed combination, Orchid has agreed to sell its Betalactum (Penems including

Carbapenems and Penicillins) API business, manufacturing facilities for the said API business and

the NPNC API manufacturing facility together with the associated process R&D facility in

Chennai to Hospira.

CCI observed that both Hospira and Orchid sell only a few similar injectable formulations in

Carbapenem, Penicillin and Cephalosporin verticals. However, these products manufactured by

Hospira, except Meropenem, are exported and sold in the regulated markets outside India. The

value of the domestic sales of Meropenem by Orchid and Hospira is also negligible. Therefore, the

horizontal overlap between the products offered by Orchid and Hospira in the domestic market in

India is insignificant. CCI also noted that Hospira is the primary customer of Orchid in respect of

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transferred business and the value of sales from this business of Orchid to other customers in India

is negligible. Orchid has a negligible presence in the domestic market of Penems including

Carbapenems, Penicillin and NPNC APIs in India. Therefore, the resulting vertical integration by

Hospira in the manufacture of injectable formulations is not likely to result in foreclosure in any

domestic market.

Further, CCI noted that the BTA contains a non-compete clause, which stipulates that Orchid and

its promoter cannot undertake certain business activities pertaining to the transferred business, for

a period of eight years and five years respectively. The said non-compete obligation also restricts

research, development and testing of Penem (including Carbapenem) and Penicillin APIs for

injectable formulations. The Commission expressed its opinion that non- compete obligations, if

deemed necessary to be incorporated, should be reasonable, particularly in respect of (a) the

duration over which such restraint is enforceable; and (b) the business activities, geographical

areas and person(s) subject to such restraint, so as to ensure that such obligations do not result in

an appreciable adverse effect on competition. The parties to the combination were accordingly

required to provide justification regarding the duration of the non-compete obligation and

restricting the said activities. In

Non-compete obligations, if deemed necessary to be incorporated, should be reasonable,

particularly in respect of (a) the duration over which such restraint is enforceable; and (b) the

business activities, geographical areas and person(s) subject to such restraint, so as to ensure that

such obligations do not result in an appreciable adverse effect on competition.

Response, the parties offered the following modifications under the provisions of Regulation 19 (2)

of the Combination Regulations:

(a) To limit the duration of non- compete obligation to four years in relation to domestic market in

India; and

(b) To provide in the BTA that Orchid shall be allowed to conduct research, development and

testing on such new molecules, which would result in the development of new Penem (including

Carbapenem) and Penicillin APIs for injectable formulations, which are currently not existent

worldwide.

The Commission accepted the modifications offered by the parties and approved the proposed

combination under Section 31(1) of the Act. The Commission also directed the parties to make

necessary amendments in the BTA to incorporate the said modifications.

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CASE – III

ACQUISITION OF MAJORITY STAKE IN GUJARAT GAS COMPANY BY GSPC GAS

COMPANY LIMITED

GSPC Distribution Networks Limited (GDNL/Acquirer) and Gujarat Gas Company Limited

(GGCL) jointly filed notice for the acquisition of 65.12 per cent of the equity share capital of

GGCL by GDNL for Rs. 2,463.8 crore. GDNL is a wholly owned subsidiary of GSPC Gas

Company Limited (GSPC Gas), jointly promoted by Gujarat State Petroleum Corp (GSPC) and

Gujarat State Petronet Ltd (GSPL). GDNL, being a recently incorporated company, is not engaged

in any business activity. GSPC Gas is engaged in the business

of distribution of natural gas to customers in the form of Compressed Natural Gas (CNG) and

Piped Natural Gas (PNG) via its City Gas Distribution (CGD) network in ten districts in Gujarat.

GSPC, the ultimate holding company of the GSPC Group, has presence across the entire energy

value chain including oil and gas exploration, development & production, gas trading, gas

transmission & distribution and power generation. GGCL, a subsidiary of BG Group plc, is

primarily engaged in the distribution of natural gas in the form of PNG and CNG in three districts

in Gujarat. GGCL also operates a 73.2 km transmission pipeline network from Hazira to

Ankleshwar in Gujarat.

As regards the market for transmission of natural gas in Gujarat, CCI observed that GGCL has

only 73.2 km transmission

Pipeline, which is primarily being used for supplying gas to its own CGD network; whereas, GSPL

operates 2,065 km transmission pipeline network on an open access basis, providing access to

various customers in Gujarat. Further, (as per the publicly available information on November 30,

2011) the capacity utilization of GSPL’s transmission pipelines was only 44 percent and therefore,

Regulations, 2011 provides that the capacity in a CGD network for open access on cumulative

basis shall be 20 per cent of the capacity of the CGD network or the quantity of the gas flowing in

the CGD network, whichever is higher. CCI observed that both GSPC Gas and GGCL, which are

engaged in the distribution of natural gas in the state of Gujarat, operate in different geographical

areas.

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Post-merger, GSPC Gas and GGCL will together create India's largest CGD venture with over

seven lakh customers and close to eight MMSCMD of gas market. It will be much bigger than the

total strength of Delhi Indraprastha Gas Limited and Mumbai's Mahanagar Gas Limited. Further,

the acquirer

has given an undertaking under Regulation 19 of the Combination Regulations that it will review

the contracts entered into between GGCL and its customers to ensure that such contracts are in

compliance with the provisions of the Competition Act and the Petroleum and Natural Gas

Regulatory Board (PNGRB) Act, 2006 and submit a compliance report to the Commission within

six months after consummation of the said combination.

CCI approved the combination under Section 31(1) of the Act as the deal is unlikely to have any

adverse impact on competition in the natural gas distribution market in Gujarat.

Sufficient pipeline capacity was available on the GSPL network for utilization by the third parties

on an open access basis.

As regards the market for the distribution of natural gas in Gujarat, CCI observed that the CGD

entities have monopoly in their respective geographical areas by virtue of the exclusivity granted

under the PNGRB Act. However, post-exclusivity, that CGD entity would be under an obligation

to allow third party access on a non- discriminatory basis to any entity in its CGD network, at

network tariff determined by the PNGRB, as specified in the relevant regulations. Further, PNGRB

(Access Code for City or Local Natural Gas Distribution Networks)

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CHAPTER-VII

CONCLUSION

ESSENTIALS OF A REMEDY

Upon analyzing the whole analytical framework of merger remedies, their types, features, selection

and determination of remedies, their application in various cases, we see that some of the basic

guiding principles which the authorities must keep in mind before applying remedies are:

i) Competition authorities should consider remedies only if a threat to competition has been

identified;

(ii) Remedies should be the least restrictive means to effectively eliminate competition concerns;

(iii) Remedies should address only competition concerns, and should not be used for industrial

planning or other non-competition purposes; and

(iv) Competition authorities should be flexible and creative in devising remedies.

NECESSITY OF REMEDIES

Merger remedies should be considered only if they are demonstrably necessary, i.e., when the

competition authority has determined that a merger is in fact a threat to competition.

Examining Risks

The competition authorities and the merging parties sometimes may agree to strict remedies just in

order to meet deadlines that the merger requires for any reason that may be suitable to the merging

parties. The parties may agree to imposition of remedies that err on the overtly strict side if they

are worried about the timing or publicity of their merger. Investigative work must be carried out

and only then the remedies to be analyzed and imposed accordingly as without investigation the

authorities may want to impose remedies which turn out to be detrimental for the consumers at the

end of the day by virtue of being unnecessarily strict Procedural arrangements, such as the

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involvement of a specialized remedies unit, solicitation of third party comments, or a more flexible

timeframe during remedies negotiations, can provide additional safeguards.

The aim of the competition authorities should be to provide such remedies that maintain

competition at pre merger levels or restoring of competition to pre merger levels in case of

transactions which have been consummated.. Substantial lessening of competition and creation of

dominant position are also aspects of a merger that are looked into, in some countries while

imposing remedies. Even if a merger reduces competition it could be allowed but remedies must

ensure the abovementioned two conditions, that there is no substantial lessening of competition

and also no creation of dominant position.

Competition authorities should not use remedies as a tool of industrial planning or to ‘improve’

deals that are not upto the level of violation or even to make the competitive landscape better than

it was before the transaction, because it would be unfair to the merging parties if the Competition

Authority misuses its powers to unfairly apply remedies to transactions which don’t demand a

remedy. It should not matter whether such unfair act of the competition authority creates a more

desirable competition landscape in the country Fact based analysis is helpful in devising

appropriate and effective remedies just like in the scenario of merger review where fact-based

analysis is heavily relied on for identifying possible threats to competition.

USEFULNESS OF BEHAVIORAL REMEDIES

The competition authorities’ even though prefer structural remedies in the form of divestitures but

they do acknowledge the usefulness of behavioral remedies in some situations to complement

structural remedies.

Since mergers bring about permanent structural changes, therefore essentially, structural remedies

are preferred in the form of divestitures in case of mergers raising competition concerns. Structural

remedies are more effective and easier to administer because they do not require ongoing

monitoring by authorities like in the case of behavioral remedies. Sometimes it can be a little

difficult to see what branch a remedy would lie under, either structural or behavioural since the

difference is not always clear-cut. This can be seen by the fact that irrevocable licenses in

intellectual property rights may have effects that are very similar to the effects of structural,

divestiture type remedy. Also not all competition authorities find structural remedies in the form

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of divestitures to be the most effective and efficient as they may be costlier than behavioral

remedies. It needs to be made sure that the divestiture should be practicable and not

disproportionate to the remedy the adverse effects arising from a merger. Thus in mergers

especially those with vertical elements and in quickly developing markets where it is difficult to

anticipate the future developments, behavioral remedies may be preferred as they are better suited

to preserve potential efficiencies of a merger while preventing foreclosure risks.

Also in the high tech industries, which are rapidly evolving, and IP intensive markets, behavioral

remedies may be more appropriate as they provide more flexible solutions that can be tailored to

unusual fact situations.

Also, especially in smaller economies behavioral remedies are easier to implement than the

structural remedies. A combination or mix of structural and behavioural remedies might be used in

certain cases to address the competition concerns raised by a merger. Behavioural remedies in

conjunction with divestitures can help in ensuring the viability of the divested business. Such

behavioural remedies can include supply obligations, measures such as waivers of long-term

contracts and pro rate refunds to facilitate switching of customers, and the obligation to provide

the buyer of divested assets technical assistance and training.

Reviewing of behavioral remedies is important and they should not be imposed for an indefinite

period of time as their relevance must be ensured and it should be checked whether they are an

undue restriction on competition.

DIVESTITURE

In case of structural remedies, the divestiture of an autonomous ongoing business in the market

creates fewer risks for the effectiveness of the remedy than the divestiture of a collection of

unrelated assets (mix and match divestiture).

Entire ongoing businesses are preferable over a collection of unrelated assets when it comes to

divestiture of business, as effectiveness is less likely in the case of latter kind of remedy. When

divesting an ongoing business, the competition authority does not have to make assumptions about

the competitiveness and viability of a collection of assets as the ongoing business has already

proven to be a viable, competitive force and its divestiture closely reflects how markets function.

Therefore, risks of making wrong assumptions about future competitions are substantially reduced.

But divesting an ongoing business may not be important in cases where the Competition Authority

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has good experience in reviewing transactions in certain industries and has good knowledge of

how markets function.

A single buyer is preferred over a collection of independent buyers for preserving pre-merger

levels of competition.. Smaller competitors are sometimes excluded from acquiring parts of a

divested business. But these concerns are typically not considered a convincing argument for a sale

to several buyers, where sale of divested business as a single entity is deemed necessary to address

the adverse effects of the merger.

Sometimes assets used in markets not negatively affected by the merger may have to be divested,

for ensuring the divestiture of a viable ongoing business. There may be requirement of divestiture

of wider package to ensure divested business can independently compete and is not dependent on

the seller’s continued goodwill and co-operation.

Some ‘ancillary’ tools may be used in divestiture remedies for ensuring viability of assets to be

divested, their timely sale and their most effective use to maintain pre-merger levels of

competition. Interim measures such as holding separate order or monitoring trustees prevent assets

from deteriorating till the divestiture happens. Also measures like ‘fix-it first remedies’, upfront

buyer requirements and crown jewel provisions which mitigate the risk that a divestiture package

might turn out to be not workable and divestiture trustees who can complete a divestiture if the

underlying transaction is allowed to proceed, but the parties fail to timely meet their divestiture

obligations..

There are a number of reasons why competition authorities may wish to adopt "ancillary" measures

to protect against the risk that a divestiture remedy may ultimately fail. By using the ancillary

measures for protecting against risk of divestiture failing, the merging parties will have incentives

to select a buyer that seems the least likely to be a serious competitive threat and to engage in a

variety of strategic behaviour to undermine the success of the buyer. Also the buyers may lack

information to operate the business acquired, lack the bargaining power to negotiate acceptable

terms with sellers, or have incentives that are not the same or identical with the intentions of the

competition authority. Acquired assets may be sought to be used by buyers in markets other than

those where the authority has raised competition concerns. It is difficult to assess the viability of

those assets as a competitive force, at the time when the remedy is being negotiated, where the

parties propose the divestiture of limited assets. When it comes to a divestiture of a collection of

assets rather than an ongoing business, in that case, up-front buyer requirements and crown jewel

provisions can be particularly important. In these circumstances, it frequently will be uncertain

whether the divested assets will be viable and/or whether a suitable purchaser can be found. The

50

competition authority is enabled by the upfront buyer requirements in the sense that reviewing the

proposed remedy and the proposed buyer is possible before allowing the merger to proceed. This

helps in ensuring the suitability of the buyer and whether the proposed buyer is interested in

acquiring the assets which have been divested. Also this enable the competition authority to

require the inclusion of additional assets in the divestiture package. Also even if this approach of

upfront buyer is not used, the competition authority must insist on the right to approve the buyer of

divested assets.

After the consummation of a transaction, where the up-front buyer approach is not feasible and

there is substantial risk of failure of proposed divestiture, crown jewel provisions may be used.

This enables the Competition authority to require that the merging parties divest a more attractive

package than initially proposed, thus creating a more divestible package of assets. Problems with

crown jewel provision may be as follows: (i) They may lead to a divestiture that is wider than

necessary to address the competition concerns of the underlying transaction, (ii) Uncertainty (iii)

Delaying of integration of assets (iv) Delay if realization of efficiencies of the underlying

transaction.

TRUSTEE

If a trustee is appointed for selling the divested assets, he would not be required to involve parties

of the merger, for their suggestion on suitability and selection of buyer and also no minimum price

is set at which the trustee is required to sell those assets. This fact acts as an incentive for the

parties to meet the divestiture obligations in a timely manner. But the competition authorities that

regularly use divestiture trustee provisions report that, these provisions should rarely be used,

because parties typically meet their obligations.

Deterioration of assets while the divestiture is going on ,can be a problem that authorities have to

deal with. Holding separate orders for removing control of divested assets from merging parties’

control and remains viable prior to divestiture. Monitor trustees can be appointed for this job to

ensure parties’ compliance with interim order and preventing them from behaving strategically

undermining divestitures.

CO-ORDINATION AND COOPERATION

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Co-ordination and cooperation is important in cases where several competition authorities consider

remedies in the same transaction. This helps in ensuring consistency between remedial solutions.

Even though there might be differences in substantive tests and procedures but such co-operation

and co-ordination has been successful in an increasing number of transactional mergers. .

To illustrate the importance of co-operation of competition authorities, it is important to see the

precedent in the case of Alcoa/Reynolds merge in Australia. Brief summary has been provided

below.

Alcoa/Reynolds merger

Theme: Importance of co-operation between competition authorities for streamlining outcomes

Brief Summary: Alcoa (USA) and Reynolds Metals (USA) are major international aluminium

producers, with operations covering bauxite mining, alumina refining, aluminium smelting and

processed aluminium products. In Australia, Alcoa operates three alumina refineries in Western

Australia while Reynolds had a controlling stake in the Worsley alumina refinery, also in Western

Australia. The ACCC conducted extensive market inquiries and these revealed that the merged

entity would have controlled almost 50% of the worldwide trade in untied alumina sales.

In considering the proposed merger the ACCC liaised with European and American authorities in

trying to reach an effective outcome. The Australian Competition and Consumer Commission has

decided not to intervene in the proposed global merger between Alcoa and Reynolds Metals,

based on the fact that Alcoa has offered undertakings to the American and European authorities to

divest itself of the interest in the Worsley alumina refinery and these undertakings are sufficient to

allay the concerns of the ACCC.

Analysis: The case is relevant because it highlights the benefits of international cooperation

between competition authorities in merger review investigations. Such a level of concentration

stemming from the Alcoa/Reynolds merger raised concerns not just for the ACCC but also for

other competition authorities worldwide. The ACCC's decision to recognise undertakings given to

other competition authorities as an effective remedy shows that cooperation between competition

authorities can lead to streamlined outcomes and eliminates the risk of over-regulating the merger

process. As more and more global mergers occur, such cooperation will enhance the way in which

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competition issues are resolved, streamlining the investigation process and minimizing the costs

incurred by companies involved in mergers.

Thus we see that cooperation and coordination among competition authorities with respect to

remedies have proven useful not only in mergers where markets are global. Competition

authorities have found it particularly important to coordinate their efforts in designing and

implementing remedial solutions and to take account of each other's concerns where markets and

competition concerns are different in reviewing jurisdictions, and/or where the parties hold

significantly different competitive positions. These efforts are essential to ensure that a remedies

package meets the competition concerns of all authorities involved, and leaves the parties with a

set of non-conflicting obligations. To be fully effective, cooperation and coordination should cover

both the designing stage and the implementation stage of remedies.

Continuing convergence in both procedures and substantive assessment of mergers will facilitate

coordination and reduce the risk of inconsistent remedial solutions.

There is a risk that parties engage in strategic gaming and attempt to play off one competition

authority against another by reaching a settlement with one authority and trying to use that

commitment as leverage in settlement negotiations with other authorities. Competition authorities

can limit this risk by maintaining close and frequent contacts, and by making the parties aware that

such regular contacts occur.

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BIBLIOGRAPHY

http://www.oecd.org/daf/competition/RemediesinMergerCases2011.pdf

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