EU Commission's Role in Cross-Border Mergers and Acquisitions

Introduction 

In its context, the European Union commission plays a vital role in protecting competition and consumer interests with respect to cross-border mergers and acquisitions. The commission has well established competition policies, which aim at preventing and punishing anticompetitive behaviors. Whenever companies resolve to join forces, commonly referred to as mergers and acquisition, they do so in a bid to expand markets and benefit the economies of affected nations (Steve & Barnard, 2014). In some cases, cross-border mergers and acquisition help to minimize competition. Whenever two companies decide to merge, they manage to reduce distribution costs, and improve production. Following the increased efficiency, consumers benefit by getting high quality products at lower prices, besides enhancing competition in the markets. While some cross-border mergers and acquisition are appropriate, some end up reducing market competition. By so doing, a single dominant player is created. The consumers suffer from high prices, and limited choices. 

In often cases, cross border mergers and acquisitions are facilitated by numerous factors among them globalization, and the single European market dominated by competition. Indeed, such establishments are encouraged because they do not hinder competition, and are capable of maximizing competitiveness within the European industry. In addition, they are significant in improving growth conditions, besides improving the living standards of individuals in Europe (Steve & Barnard, 2014). In fact, the European commission is focused on examining the cross border mergers in a bid to avoid harmful impacts on competition. The European Commission has to review any form of merger and acquisition that goes beyond individual nation borders. Organizations doing business in different EU member states have a mandate of getting clearance for any form of merger and acquisition. 

Regulatory and Compliance Framework Laws 

When it comes to cross-border mergers and acquisitions, the European Commission has powers under Article 102 TFEU, to regulate the firms, to prevent them from engaging in behaviors likely to abuse the market. Article 102 of the Treaty on the Functioning of the European Union (TFEU) governs any form of dominance in the European Union. According to the Merger Regulation (EC) No 139/2004, it is clear that, mergers assume a community dimension, and as such, all takeovers, acquisitions, and mergers have to be approved by the European commission (Steve & Barnard, 2014). In terms of legal framework, the European Council Regulation No. 1/2003 has the procedures to follow in applying TFEU articles 102 and 101. The foregoing is complemented by guidance papers, notices and implementing regulations. However, for purposes of regulating dominance, the commission relies on the Enforcement Priorities in a bid to apply Article 102 of the Abusive Exclusionary Conduct by Dominant Undertakings (the Guidance Paper). 

In order to apply article 102 TFEU, four conditions have to be met. The merger and acquisition must have impact on member states; the conduct of the undertaking must reduce competition anti-competitively; the undertaking comprises of a dominant position on the market, and the conduct has to constitute an ‘undertaking’. Article 102 does not define dominance, but the same is captured in the EU Court judgments, Guidance Paper and in the Commission decisions (Steve & Barnard, 2014). According to the three, dominance is an economic strength position that a company assumes. It amounts to behaving independently over customers, competitors, and the consumers. Notably, the major reason for EU Commission to have legislation is purely for economic purposes. Legislation does not cover sociopolitical matters. The major goal of Article 102 is to offer consumer protection. The aim is mainly to protect the competitive processes, as opposed to individual competitors (Steve & Barnard, 2014). 

In its context, the EU Commission law on competition does not consider dominant position unlawful. An organization is liable for infringing article 102 whenever its dominance is abused and aimed at restricting competition. Article 102 does not capture the aspect of abuse, but focuses on the four classes of abusive behaviors (Steve & Barnard, 2014). The article is against limiting production, and development of market to the prejudice of consumers. In the same vein, article 102 is against acts of imposing direct or indirect unfair purchase prices or other unscrupulous trading conditions. The article prohibits application of dissimilar conditions with other trading associates, subjecting them to competitive disadvantage. The abusive behaviors are mainly exclusionary and exploitative abuses. 

When it comes to establishing a European company through cross border mergers, there is additional legal basis governing the same at the EU level (Papadopoulos, 2011). The foregoing legal provision preceded the directive on cross borders. The legal basis is referred to as the European Company (Societas Europaea-SE) Statute (Papadopoulos, 2011). In view of Art 2(1) of the SE Statute, any public limited-liability companies established under the Member State law, and have head offices and registered offices in the Union, are permitted by law to form SE through merger (Papadopoulos, 2011). This can only happen provided the law of the two Member States guides both. In case where the parent company intends to merge through acquisition with a 90-100% subsidiary with an intention of forming a European company, a simplified process is provided for within the Art 31 of SE Statute (Papadopoulos, 2011). By coordinating laws both at home and in host States, cross-merger restructuring enables the formation of a common legal provision for SE formation. Corporate restructuring through cross-border has numerous benefits among them the continuity of business operations, and combining business with a company located in another jurisdiction among others (Papadopoulos, 2011). 

Factually, whenever cross-borders are taking place, they are simply geared towards corporate restructuring. In that regard, the 2000 Lisbon Council announced that, once it completed the internal capital market and financial services, the European Union would manage to become one of the most competitive globalized economies in the world (Papadopoulos, 2011). Notably, the EU is embracing cross-border mergers, and the trend is geared towards increasing productivity (Papadopoulos, 2011). The 10 th Company Law Directive on Cross Border Mergers, alongside the 13 th Company Law Directive on Takeover Bids, the 14 th Company Law Directive played a major role during the Lisbon Agenda. Arguably, the rights of owners and other involved parties in any organization are to select the most effective legal framework (Papadopoulos, 2011). Whenever mergers take place, it simply means a given company, alongside another one has agreed to re-arrange their business and have simply opted to have a fitting legal and organizational framework (Papadopoulos, 2011). In that regard, whenever company owners determine to re-organize their operations, the transactions guiding the restructuring should be protected under Art 49 TFEU (Papadopoulos, 2011). Art 49 TFEU is supposed to not only cover the freedom of a given firm to expand business operations on a community-wide approach, but also the freedom of the owners to restructure companies as provided for in Art 49 TFEU. The Act states that, ‘Freedom of establishment shall include the right…to set up and manage undertakings, in particular companies or firms… (Papadopoulos, 2011). ’ 

The law allows the European legislature to make an intervention and impose a mandatory decision only when the market fails or it has failed to realize an efficient organizational framework. Art 50 TFEU has a law on harmonization, which delves on coordination of protecting the interests of others and members (Papadopoulos, 2011). It aims at protecting interests, owing to the lack of effective organizational framework within companies (Papadopoulos, 2011). When it comes to allocation of resources, any organization mode and reshaping of organizational structures are protected by the law under freedom of establishment, given that, each company is permitted to enjoy continuum of its economic activities within the EU Law (Papadopoulos, 2011). The law recognizes that, an organization could determine the extent it will penetrate in a given market, based on the provision of goods and services, and proceed with establishing subsidiaries and branches, and shifting the company’s administration and all its activities in the host nation (Papadopoulos, 2011). 

Cases Challenged 

Although the European Union Commission has been in the forefront to ensure all cross-borders and acquisition done just as the law allows, some cases have been challenged (Papadopoulos, 2011). For instance, in the case of SEVIC, a company in Germany, there was an intention to merge with Luxembourgish Company called Security Vision SA, and the former wanted to absorb the latter (Papadopoulos, 2011). Expectedly, all the assets owned by Security Vision were to be taken by SEVIC without option of liquidation, and that mean the end of Security Vision (Papadopoulos, 2011). The case was presented before the European Court of Justice (ECJ), considering that the German law permits domestic mergers to take place and prohibits any cross-border mergers (Papadopoulos, 2011). In that case, there was no way SEVIC was going to merge with Security Vision given that cross-border mergers were illegal in Germany (Papadopoulos, 2011). The ECJ ruled based on Art 49 and 54 TFEU, which disallows member state from registering in the commercial resister of former merger, in the case where one of the two is established in another member state (Papadopoulos, 2011). 

Notably, SEVIC was dealing with the issue of prohibiting cross-border merger by Member State of one of the interested companies (Papadopoulos, 2011). On its part, ECJ labored on the need for mergers as a way of corporate restructuring and as a means of exercising freedom of establishment (Papadopoulos, 2011). It maintained that, mergers operate from a perspective of ingle operation, and should aim at pursuing certain activities in new forms without being interrupted. This ensures that complications and costs involved are minimized. In the case facing SEVIC, it was established by ECJ that cross-border mergers are simply corporate restructuring, mainly associated with establishment freedom (Papadopoulos, 2011). 

Apart from cases being challenges, the European Union has been faced with conflicts revolving around competition and antitrust laws. Owing to the transnational transactions, the conflict must be solved in order to avoid failures and delays in trade. Specifically, there have been instances touching on the conflicts regarding approval of proposed mergers. Some of the two famous cases that were challenged were between the merger of Boeing/McDonell Douglass and GE/Honeywell. A close look at the merger shows disparity between the European Union and United States outcome. The two entities gave conflicting conclusions regarding consumers and competitors. Each body reviewed the merger differently. 

The US companies namely Boeing and McDonnell Douglass Corporation pursued a merger started in 1997. The merger aimed at enhancing competition, in addition to strengthening the US defense industry. Following the review, the FTC was quick to approve the merger arguing that it would help to reduce competition, considering Boeing was already dominant in the market. In its context, the European Union observed that the merger was within the financial threshold and the commission had the jurisdiction to review the merger (Steve & Barnard, 2014). The commission reviewed the aircraft industry market, and ignored the defense aspect. According to the Commission, the merger would simply enable Boeing to position itself appropriately in the global market. At the time the merger took place, Boeing was enjoying 64% share in the market, and MDC had 6% (Steve & Barnard, 2014). In that sense, the proposed merger was simply going to see the company take 70% of the market worldwide. Considering all other factors such as capital needed and market-entry barriers, the merger was simply going to occupy a dominant position in the market. Owing to the market structure, the Commission concluded that, the merger was likely to harm competition and destroy the European Common Market (Steve & Barnard, 2014). Conclusively, the Commission opposed the merger based on three factors: market share expansion, exclusive supply contracts, and Boeing access to public funds that would end up harming commercial aircraft. Boeing made effort to try to appease the Commission to reduce the possibility of blocking the merger. Considering Boeing was committed to make changes that would make the merger appropriate, the Commission opted not to block it. 

However, in 2000, the General Electric Company was interested in buying the Honeywell International Inc. the company was determined to change Honeywell into wholly owned subsidiary. The merger was likely to become the largest in the world history. It was approved by DOJ, following adjustments of few issues. However, the European Union Commission disallowed the merger. This was the first time the Commission was refusing a merger to take place. The Commission cited that, the merger would bring unfair competition. Although the merger involved two American companies, the Commission observed it had a role owing to the financial requirements involved (Steve & Barnard, 2014). Mostly, the Commission was focused on the aerospace and industrial systems markets. It observed that, the aerospace was likely to face anti-competitive effects owing to the aircrafts engines that GE Company used. Following analysis of merger and determining that several markets would end up being dominated, the European Union commission disallowed the merger. 

Challenge Sustained by the EU Commission 

In view of the European Union Commission, it would be difficult to discuss its regulation and control of cross-border merger and acquisition, without necessarily highlighting major challenges it has sustained. The Union has numerous challenges among the inadequate resources to conduct its mandate. Controlling and regulating cross-border mergers and acquisitions is a very resource intensive process (Whitaker, 2016). Most departments within the EU carrying out this mandate have been faced with inadequate financial and human resources. There is a challenge of sufficient personnel to carry out tasks on economics and law. Secondly, the EU Commission continues to experience inadequate legal framework. Although the Commission has numerous legal provisions in place, they are still not perfect. An effective body regulating and controlling cross-border mergers requires having a detailed mechanism for carrying out the regulations. Currently, the Commission has basic legal provisions, which denies it a competitive edge in controlling mergers (Steve & Barnard, 2014). 

In addition, the Commission is faced with challenge of implementing the laws and regulation. Notably, the process of implementing a merger control unit within an expansive region is slow and takes time. This is especially the case of the Commission has not ranked the law highly on its agenda. At the same time, the Commission has to deal with industrial policies. Industrial policies have to be given consideration by the European Union Commission and they mostly involve policy-formulating procedures and economic decision-making (Whitaker, 2016). In that sense, there is a possibility that the merger control can end up being overshadowed. Finally, it is difficult to transition into a market-based economy. Competition is only meaningful with a market-based economy. 

Challenge Overcame by Companies 

In view of cross border mergers and acquisitions, companies often face numerous challenges, and they manage to overcome them. The procedure of merging is marred with complex procedures and if properly handled, can lead to challenges. Failure to follow the rules governing cross-border mergers and acquisition make expose the involved companies into facing consequences. For instance, in July 2014, the European Commission ended up fining Marine Harvest ASA €20 million when it failed to notify its intention to acquire Morpol ASA based on the regulation governing EU Merger (Whitaker, 2016). In addition, the company went ahead to finalize the transaction without getting the approval of the European Commission. The case became the first for the Commission to impose a fine in connection with the two-step transaction of blocking sale of shares. The fine simply serves as a reminder for organizations to abide with EU Merger Regulation, failure to which it can lead to reputational and financial consequences. The case attracted a lot of public concern, especially because it served as a demonstration that the Commission is ready to apply the EUMR stand still obligation. In dealing with this challenge, Marine Harvest decided to make an appeal. However, the outcome of the appeal is yet to be made public (Whitaker, 2016). 

However, in Liberty Global/Ziggo merger, the companies involved managed to overcome the challenge when the Dutch rival KPN made a claim that the Commission was unable to conduct a proper assessment of the impact the transaction would have on the market for pay-TV sports channels (Whitaker, 2016). When the Commission refused to overturn its decision, KPN sort the help of the General Court, which ended up annulling the decision to stop the merger between TNT and UPS following an infringement of the rights of the latter. In that regard, companies facing challenges of inadequate competitive assessment can end up seeking intervention from the European Court of Justice. 

The Extent to Which Common Good is protected 

The European Commission has demonstrated its commitment towards ensuring that, the EU economy remains healthy and companies within the region continues to flourish and can operate with ease. In that sense, it has taken steps to ensure that the common good is well protected and safeguarded. The Commission acknowledges that, the companies contribute towards economic growth, they create jobs, and they continue to attract investment in the European Union (Whitaker, 2016). With their input, the member’s states of EU have continued to enjoy greater economic and social value within the society. In order to realize the afore-outlined, companies have to operate within an environment suitable for growth and capable of adapting with the social and economic challenges in the globalized and digital world. In that same spirit, the companies have to ensure they pursue legitimate interests among them protecting employees, minority shareholders, creditors, besides ensuring they prevent fraud and abuse from taking place (Steve & Barnard, 2014). 

To protect the common good, the European Union Commission came up with a proposal geared towards amending the Directive (EU) 2017/1132 regarding the digital tools and processes touching in company law- a detailed set of measures for guiding EU in modern company laws (Whitaker, 2016). This move will ensure a Single Market is created, with an aim of ensuring corporate entities pursue economic activities in Member States on a stable basis. To facilitate the cross-border mobility of organizations within the EU, it becomes vital to take into account their needs and characteristics. Notably, the EU has over 24 million companies and out of that, 80% are limited liability companies and almost all of them are SMEs (Steve & Barnard, 2014). However, there are difficulties when it comes to establishment of the companies. One major reason causing the difficulty is the fact that, company law is not adapted sufficiently to facilitating cross-border mobility within EU. There lacks a clear legal system that can offer guidance towards economic activities, as it is supposed to be. 

Restructuring companies, and other transformations such as cross-border conversions, and mergers are part of life cycle and they represent appropriate way for organizations to grow, adapt to changing environment, and explore opportunities in the new markets. At the same time, creditors, shareholders, and employees are all affected whenever mergers and acquisitions are taking place (Steve & Barnard, 2014). In that regard, the Commission identifies the need to protect the shareholders and remain in line with the dynamic changes within the corporate world. Currently, there is legal uncertainty, candid rules governing the cross-border operations and partial inadequacy simply means there lacks a proper mechanism of protecting the stakeholders. In such circumstances, the European Union Commission has to come in play to offer sufficient and effective protection. To establish a Single Market and ensure abuse is prohibited, a legal environment is the only solution available (Whitaker, 2016). In that regard, the Commission has to move an extra mile ahead to protect the common good by breaking the barriers to cross-border trade, facilitate market access, stimulating competition and increasing confidence while offering proportionate and effective protection to stakeholders. The European Union Commission has gone great length to come up with a proposal for protecting the common good of all (Whitaker, 2016). The proposal provides comprehensive and specific procedures to follow whenever cross border conversion is taking place; mergers, and divisions to enhance the cross-border mobility within EU, while offering adequate protection to stakeholders to ensure fairness of the Single Market. 

As mentioned before, the European Union Commission is committed towards safeguarding the common good. One of the suitable ways it has employed is through cross-border conversions. In its context, cross-border conversion provides an efficient solution for most organizations that have intentions of moving to another Member State without having to re-consider their business contracts and losing their legal personality (Whitaker, 2016). Mostly, conversion appeals to small companies that lack the financial resources to seek exorbitant legal advice and carry out a cross-border merger. The Court of Justice within the European Union (ECJ) has recognized the freedom for companies to proceed with cross-border conversions without having to lose their legal personality (Whitaker, 2016). Going by the most recent judgment, the ECJ approved the right for organizations to conduct cross-border conversions based on establishment freedom. According to ECJ, a company has freedom to ensure only the registered office is transferred to Member State, without having to move the company headquarter. In fact, Article 49 TFEU does not recognize such a precondition for company to start operations (Steve & Barnard, 2014). 

Currently, organizations that wish to move their registered offices across the border must rely on laws within Member States. Such laws, wherever they operate, are in often cases difficult to integrate with each other. In addition, over 50% of member states do not provide any special rules that permit cross-border conversions (Whitaker, 2016). In fact, SMEs are always affected negatively, considering they lack adequate resources to carry out cross-border procedures through complicated and costly alternative means. In that sense, it becomes difficult to offer protection to significant parties such as creditors, suppliers, shareholders and employees due to the existence of contradicting laws. In the absence of harmonized safeguards, companies are likely to take advantage of cross-border conversions to abandon workers (Whitaker, 2016). At the same time, organizations may exploit the absence of harmonized rules to carry out fraudulent activities. In some cases, companies may end up hiding and see a chance to launder crime proceeds. In view of the foregoing concerns, the EU has established two harmonized rules for governing cross border conversions that include enabling companies to undergo cross-border in an efficient and orderly manner, and offering protection to the most affected parties such as creditors and employees. 

In its wisdom, the European Union Commission decided to introduce the Cross-Border Merger Directive, all in efforts to ensure the protection of common good. The directive is geared towards ensuring there is harmonized procedure for EU limited companies. The directive led to a massive increased in cross-border mergers activities within the European Union. Reports indicate that, cross-border mergers went up with 173% in years between 2008 and 2012 (Whitaker, 2016). This serves as a confirmation that, the directive enabled cross-border activities to increase. The stakeholders such as trade unions, law firms, and business registers that were interviewed in 2013 confirmed that the Directive brought new procedures, led to lower costs, shorter timeframes and the procedure was simplified (Steve & Barnard, 2014). 

The Recent Developments 

Currently, global trends have shown that, the market leaders prefer fast action in terms of implementing expansion strategies, and cross-border mergers and acquisitions are increasingly becoming the option preferred. According to economic experts, the trend is a clear indication that, merger and acquisition is favored method of restructuring (Steve & Barnard, 2014). Most European companies have found solution to major strategic challenges in terms of enhancing managerial effectiveness, economies of scope, economies of scale, horizontal and vertical integration, appropriate investment of surplus funds and developing complimentary resources (Whitaker, 2016). In that sense, it leaves little doubt on why the recent past has seen an increase in cross-border mergers and acquisitions in Europe, as opposed to other options such as expansion strategy and corporate restructuring. Reports show that, in 2016 alone, world witnessed mergers and acquisitions of markets totaling to $3.9 trillion (Whitaker, 2016). In the case of Europe, the access to new geographic markets was identified as the major driver behind the acquisition plans, closely followed by the need to build scale (Whitaker, 2016). 

However, cross-border merger and acquisition in Europe slowed down in 2016 while compared to the past years. Notably, the confidence level and subsequent level of cross-border merger and acquisition have been marred by political and economic instability especially in Western Europe and UK. In central Europe such as in Czech Republic and Poland, have witnessed M&A activities in high numbers. In the first quarter of 2017, cross-border mergers and acquisitions witnessed a downward trend of almost 12%, compared to the previous year (Whitaker, 2016). The year witnessed 3,710 deals. Reports have indicated that, Europe trends in M&A coincide with that of the US. In 2016, technology, telecommunications, and media contributed the highest (21%) of the developments in this sector. However, it is estimated that, growth is likely to occur in this area in the near future owing to the high growth in production techniques, manufacturing technology, market demand, and new product development (Steve & Barnard, 2014). 

Conclusion 

In overall, the European Union Commission has been playing a major role in regulating and controlling cross-border mergers and acquisition. To conduct this role effectively, the Commission has established legal frameworks and provisions that govern mergers and acquisitions between companies. However, the role has not been without challenges that include inadequate finances, weak legal frameworks, and court battles among others. In a bid to ensure the overall good is protected, the Commission has made progress in establishing frameworks for protecting stakeholders such as creditors, employees, and shareholders. Recent developments indicate that, companies across the globe have embraced cross-border mergers and acquisitions as way of restructuring. 

References 

Kermally, S. (2016). Marketing & Economics: An integrative approach to making effective business decisions in the global marketing world. Series in Business and Finance. New York, NY: Vernon Press 

Papadopoulos, T. (2011). EU Regulatory Approaches to Cross-Border Mergers: Exercising the Right of Establishment. European law review 36(1) · 

Whitaker, S. C. (2016). Cross-Border Mergers and Acquisitions. Hoboken, New Jersey: John Wiley & Sons 

Steve, P. & Barnard, C. (2014). European Union Law. ‎Oxford, England: Oxford University Press