18/19, P. Lundstrom, ‘Remedial Issues in the Volvo/Scania Case’

Author: Patrik Lundstrom

 

1)  Introduction

Background

The European Commision (EC) decision to decline the proposed merger between the Swedish heavy vehicle manufacturers Volvo and Scania was both legally and politically controversial. Several high profile Swedish trade union leaders and incumbent Prime Minister Persson criticised the Commission’s decision, claiming it would harm Nordic industry, limit the companies’ ability to effectively compete and opening them up for foreign ownership.[1] Indeed, today the biggest owners in both companies are foreign entities, with a majority of Scania’s shares held by Volkswagen (both directly and indirectly)[2] and the largest shareholder (though not a majority) in Volvo AB (the owner of Volvo Trucks) is the Chinese company Geely[3]. The EC, under the leadership of Commissioner Mario Monti, maintained that the merger would establish dominant positions in Scandinavia, even if not the EU as a whole, which it believed was enough to declare it incompatible with the common market.[4] Giving the relevant market a narrow definition in the interest of protecting the consumer did weaken the companies’ positions, giving rise to another counter-argument. This was formulated as a misstep by critics, as the EC seemed to forego its own definition of a ”combined” European internal market, in favour of limiting the relevant geographic markets to individual member states, making it difficult for companies to perceive the rules of conduct.[5] Monti himself dismissed these claims,

 

The EC:s decision was not unexpected, and the acquiring party (Volvo) made several sets of proposals to attempt to alleviate the EC:s concerns.

Research Question

The aim of this essay is to examine the law on remedies in cases where a narrow geographic market definition results in significant competition concerns. Another objective is to identify Volvos potential success in taking their remedial concerns to the General Court.

Limitations

The most obvious limitation is the single analytical focus on the proposed remedies, as opposed to the entire case. The main point of analysis will be on the EC:s decision itself, as well as on other more generalised cases involving remedies. The legal context given will thus be that of both modern merger law in general, with specifics of the older rules being discussed as and if needed. The other subjects under merger control (namely the relevant markets) will not be further addressed than necessary to shed light on the essays main subjects discussed herein.

Methodology[6]

The method used to answer the questions at hand will primarily be the dogmatic European legal method. This legal method focuses on the goals of the EU legal system as a whole, as well as its complicated relationship with the national legal systems of its member states. The EU legal system is firmly based in the authority laid out in the treaties established by the member states to dictate the form and function of their cooperation within the Unions framework. The individual member states have ceded authority to the EU and its institutions in several areas deemed to be required for this cooperation to function correctly. As opposed to the Swedish dogmatic method, the application of law often falls to the discretion of the Courts. Using the principles laid out in the treaties, the Courts are a strong driving force for the development of EU law, instead of being mere interpreters of the will of the lawmaker. As such, case law is more important in solving legal problems. Thus, one of the primary analytical tools will be other cases, in order to better understand the framework. A secondary source will be the EC:s own notice on merger remedies. There were some changes to primary law since Volvo/Scania was decided, although not as many on the subject of remedies. Comparative analysis will be kept to a minimum.

Outline

Section 2 will deal with mergers in general, first with a description based in the Merger Regulation, then some further concepts are shortly explained through case law. Section 3 will summarize the remedies question in the Volvo/Scania case, discussing the Commission’s viewpoints. Section 4 will finish the essay with any conclusions made.

 

2)  Legal Context

An overview of remedies[7]

Article 8 (2) of the Merger Regulation (EUMR) enables the merging parties to offer commitments to modify their proposed concentration in order to make it compatible with the common market and authorises the EC to accept these. The remedies may be proposed in either the first or second phase of the investigation, although in practice the majority of proposals are adopted at the end of the phase I investigation. This enables the EC to clear the transaction pursuant to the commitments agreed upon. The EUMR recital 30 further states tha the commitments proposed should be proportional to, as well as being able to eliminate, the competition concern.

 

The EC:s Notice on Remedies aims to explain the reasoning behind the acceptance of certain commitments and the declining of others during the course of their investigations. At the end of the first phase, remedies are supposed to offer a direct answer to to the competition concern and to remove any grounds of doubt. Failure to do so will trigger the second phase of investigation. In Phase II, any proposed commitments instead need to ”remove the competition concerns identified by the Commission”. In the notice the EC lays out its criteria for assessing remedies: The type, scale and scope of the remedy should be proportional to the competetiron concerns. To ensure an effective remedy, the commitment should be capable of being implemented in full within a short timeframe. And finally the Commission will only accept remedial commitments that require further monitoring post-implementation in exceptional circumstances.

 

In the notice, a distinction is made between remedies which are based on divestitures, ”structural remedies”, and ”other remedies” with the EC indicating a clear preference towards structural remedies, but they will consider alternatives like terminating contractual agreements, remedies facilitating market entry and the like.

Examples from case law

Case M.6570 UPS/TNT ”fix-it-first”

In this case, the EC declined a proposed concentration between two shipping companies, with the high market concentration as a primary justification. UPS offered a commitment involving a series of divestitures, but the assets being divested required a buyer with specific resources of which few were available. To alleviate these concerns the Commission required that potential buyers were identified beforehand. This ”fix-it-first” remedy would serve to make the proposed divestiture viable in the eye of the EC.

 

Case T-210/01 General Electric v Commission ”Structural and Behavioural remedies”

General Electrics (GE) proposed takeover was rejected on the grounds that the strong positions of the merging parties in the two markets would impede competition. GE also proposed divestiture, but the EC held that the commitments were hefted with practical problems, that they themselves did not adequately resolve. The General Court held that the EC could reject commitments which held no practical value and those that were hypothetical. Structural commitments could be accepted only if the commission is able to ascertain that it will be possible to enact them effectively. If the applicant cannot produce any evidence to this effect, the EC:s rejections would stand firm.

 

In this judgment, as well as in the notice, it is laid out that the EC has to explain the reasoning behind any competitive impediments identified in its investigation, in order to enable the parties to lay out their proposed remedies to solve these problems. The remedies then has to eliminate the raised competition concerns entirely, and in the manner outlined above. The Commission can only act within the framework of the proposed commitments and cannot propose any of their own, which is why their only alternative when commitments doesn’t fulfill these goals is to prohibit the merger altogether.

 

Case T-87/05 EDP v Commission ”Late submissions”

Like in Volvo/Scania, this case featured a late submission of a commitment proposal. There is no obligation for the Commission to accept any proposals submitted after the deadline, however, as is noted in the notice itself, they may take into account proposals submitted after the deadline if two cumulative conditions are fulfilled.[8] The first is that the commitments could be clearly determined by the commission that they, when implemented, would resolve the identified competition concerns entirely. Secondly, that there is sufficient time to consult with concerned Member States on these commitments.[9]

 

3)  Case No COMP/M.1672 – Volvo/Scania – The remedial issues

In order to better understand the following segment, the nature of the competitive concerns will be summarized here, before entering the question of the proposed remedies. The main problem identified by the commission was that the merger would create dominant positions in several of the geographic markets identified by the Commission. These dominant positions along with the lack of any serious competitors were concerns to competition so large that the merger was deemed incompatible with the common market. The author is of the opinion that the case was decided by the definitions of the relevant markets, that subject will be further developed by one of my colleagues however.

Proposed remedies

As shown in para 332 of the decision, Volvo proposed the following commitments:

“A. Heavy trucks

  1. Opening up of Volvo and Scania’s dealer and service networks in Sweden,

Finland, Denmark and Norway, as well as the Volvo network in Ireland,

  1. Divestiture of Volvo’s 37% stake in Bilia AB (a distributor in the Nordic

countries),

  1. Best efforts to ensure abolition of Swedish cab crash test,
  2. A two-year temporary suspension of the Scania brand name in Sweden, Finland and Norway.

B. Coaches, city- and inter-city buses

  1. Same opening of sales and service network and suspension of Scania brand as

for heavy trucks (1 and 4 above)

  1. Divestiture of three bus and coach bodybuilding plants (2 in Denmark, 1 in

Sweden)

  1. Access to body-building capacity in Finland”

 

The above is a mix of structural and other remedies, as can be seen. The commitments are split between the two product markets as defined in the decision.

 

The Commission’s response to the proposed remedies

The EC, leaning upon market tests, stated that the proposals if implemented could yield some competitive benefits, but that they were insufficient to eliminate the competition concerns. They found that Volvo had no ability to remove the special crash tests, as that was up to the national Government. The proposal to not use the Scania-brand in Scandinavia was deemed of too limited scope and substance to be of use, it would not combat any of the identified concerns. The divestiture of the distributor Bilia would be weakened by its continued dependence on Volvo, even if the vertical ties were cut. The most likely buyer, Ford, owns Volvo’s car division and are not active on the market for heavy trucks. The divestiture was thus weakened by the lack of a suitable buyer.[10]

 

The opening up of dealership and service networks will be discussed for both markets together. At first, the EC:s market tests state that the opening up of the Scania network would have a small effect, as the proposal strikes very few dealers.[11] The dealers were also already able to take on competing suppliers. The economic incentive for the network participants to take on another brand is not big enough either, since most of the profits were derived from ”rolling stock” rather than new sales, and the risk that ”New Volvo” would opt to use its owned network instead. The market tests confirmed that few competing suppliers would be able to construct and utilise a network of sufficient capacity to compete with New Volvo on this market, with the limited opening of existing network. The measure was thus incomplete and could not achieve its stated goals.

 

As for the divestiture of the manufacturing plants, the market tests, as well as data from the parties themselves, were sufficient to determine that this commitment would be insufficient to fix any competition concerns. Although structural in nature, this divestiture would not enable any competitors to enter the market in force and was insufficient as well.

Later proposals by Volvo

Volvo also made proposals later in the procedure, after the deadline had passed. Several proposals (To divest its share in Bilia and to not use the Scania brand for two years) were dropped, and several were added. As per the publication of the decision used in the writing of this essay, some of the newer proposals were covered by business secrecy. The new proposals covered a provision regarding distribution networks (mot probably not structural in nature) and a further provision to the divestiture of some of the manufacturing plants. As demonstrated above, any late proposals are held to a very high (even exceptional) standard to even be considered by the Commission, no such circumstances were raised by Volvo at this time. The EC held, and this author agrees, that there was nothing in this later proposal that could not have been submitted along with the first. They were also burdened by procedural difficulties, while both the EC and the Court continuously stress the importance of effectiveness while designing functional remedies.

 

FöreningsSparbanken/SEB – Discussion[12]

This case was also notable for the way the (probable) geographic market definitions, when narrowed to national markets, struck hard at Nordic companies. It is also notable as the merging parties withdrew their request during phase II of the investigation. There was a high probability that the EC would see competitive concerns (dominant positions, as in above) on the identified markets, requiring remedial commitments in order to accept the merger. According to Göran Collert, the Chairman of the Board of FöreningsSparbanken, the Commission had stated that they would have accepted remedial commitments aimed at reducing the merged entities market share from 55 to 45 %. This would, according to him, neutralize the benefits for the merger in the first place. As per the conclusions drawn in the refered document, the EC:s demands would effectively restructure the banking market in Sweden, based on what was judged to be a static perspective on the market. Like Volvo/Scania, the EC once again ruled out the possibility of EU corporations competing with the national incumbents on their home markets. While the mergers themselves were, most probably, proposed as a response to the threat that European market integration could pose to larger corporations in smaller nations in the long term, as opposed to the short term view still espoused by the Commission.

 

Having established that the short term viewpoint of the EC stretches into the remedial territory, it is the opinion of this author that Volvo was unable to offer the Commission commitments that it could accept. Since the market definition was narrowly defined and competition concerns defined accordingly, I myself can not see an outcome any different than in the case above, namely that the remedies themselves would eliminate the purpose of the merger.

 

4)  Summation and conclusions

The author believes that the possibility for Volvo to effect a favourable outcome to the merger investigation using remedies was low. In my opinion, the framework set by the EC in determining the relevant market and the then identified competition concerns in itself created a barrier too high to overcome using effective remedies, since any remedies judged effective and proportional by the Courts and the EC would most likely eliminate the purpose of the merger.[13]  This relationship between the market definition, the resulting concerns and the remedies to rectify them remains unchanged today. Remedies still remains an instrument for companies that are able to tip the balance of the arisen concerns in their favour while still maintaining the purpose of the merger.

 

I agree with the Commission’s statements on Volvos proposals in this case, as they, to me, seem clearly insufficient to alleviate the concerns posed. The only structural remedies proposed barely dents the merged entities dominant position and there is no sign that the other remedies proposed would lower the barriers to entry enough to invite sufficient competition. Under these circumstances, I would not have recommended Volvo to take the case to the General Court to settle the remedies issue; other factors decided this case.

 

 

5)  Bibliography

Primary Law

Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.

Cases

Case M.6570 UPS/TNT

Case T-210/01 General Electric v Commission

Case T-87/05 EDP v Commission

Case No COMP/M.1672 – Volvo/Scania

Books

Nääv, M., & Zamboni, M. (2018). Juridisk metodlära (2nd ed., Chapter 5).

Ezrachi, A. (2018). EU Competition Law (6th ed., p. 421). Oxford: Hart publishing.

 

Articles and Working Documents

Bernitz, U. (2003). Företagsförvärv inom EU: Rättsliga problem för stora företag med liten hemmamarknad (pp. 42-44). Svenska Institutet för Europapolitiska Studier.

European Commission: Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 (the Remedies Notice)

Websites

EU stoppar samgåendet mellan Volvo och Scania. (2000). Wwwc.aftonbladet.se. Retrieved 19 December 2018, from http://wwwc.aftonbladet.se/nyheter/0003/14/stopp.html

Financial history, Scania Group (2018). Retrieved 28 December 2018, from https://www.scania.com/group/en/financial-history/

Ownership information (2018). Volvogroup.com. Retrieved 28 December 2018, from https://www.volvogroup.com/en-en/investors/the-volvo-share/ownership-information.html

Graff, J. (2000). The internal market. http://www.time.com. Retrieved 28 December 2018, from http://content.time.com/time/world/article/0,8599,2056268,00.html

[1] EU stoppar samgåendet mellan Volvo och Scania. (2000). Wwwc.aftonbladet.se. Retrieved 19 December 2018, from http://wwwc.aftonbladet.se/nyheter/0003/14/stopp.html

[2]Financial history, Scania Group (2018). Retrieved 28 December 2018, from https://www.scania.com/group/en/financial-history/

[3] Ownership information | Volvo Group. (2018). Volvogroup.com. Retrieved 28 December 2018, from https://www.volvogroup.com/en-en/investors/the-volvo-share/ownership-information.html

[4] COMP/M.1672 Volvo/Scania

[5]Graff, J. (2000). The internal market. Retrieved 28 December 2018, from http://content.time.com/time/world/article/0,8599,2056268,00.html

[6] Nääv, M., & Zamboni, M. (2018). Juridisk metodlära (2nd ed., Chapter 5).

[7] Ezrachi, A. (2018). EU Competition Law (6th ed., p. 421).

[8] Ezrachi, A. (2018). EU Competition Law (6th ed., p. 511)

[9] Remedies Notice, paras 161-3

[10] Compare to the UPS case above.

[11] A raised suggestion in the decision was to instead try to divest wholly owned dealers.

[12] Bernitz, U. (2003). Företagsförvärv inom EU: Rättsliga problem för stora företag med liten hemmamarknad (pp. 42-44). Svenska Institutet för Europapolitiska Studier, details of the decision itself not published.

[13] See the above cases, in particular, General Electric.

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