Upfront Buyer and Fix It First Remedies Part

Up-front Buyer and Fix It First Remedies Part A – European Commission Part B – UK Competition Commission Chris Bright BIICL Merger Control Conference 13 November 2008

Part A – European Commission 2

EU framework • New Remedies Notice – Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004, 22 October 2008, OJ [2008] C 267/01 • Specific provisions dealing with up-front buyer / fix it first / crown jewels – paras 50 -57 and 44 -46 • • Up-front buyer concerns cases involving considerable obstacles for divestiture, e. g. third party rights or uncertainties as to finding suitable purchaser, or cases causing considerable risks of preserving competitiveness and saleability of divestiture business in interim period Fix it first concerns, in particular, cases where identity of purchaser crucial for effectiveness of proposed remedy Crown jewel alternative where implementation of preferred divestiture option uncertain in view of, e. g. third parties’ pre-emption rights or uncertainty as to transferability of key contracts, IP rights, or uncertainty of finding suitable purchaser Model Text for Divestiture Commitments – “The proposed concentration shall not be implemented unless and until [X] or the Divestiture Trustee has entered into a final binding sales and purchase agreement… and the Commission has approved the purchaser and the terms of sale…” (Section B. 1) • Form RM – “Acquisition by a suitable purchaser: Explain the reasons why, in your view, the business will be acquired by a suitable purchaser in the time-frame proposed in the commitments offered. ” 3 (para 5. 13)

EU history of up-front buyer • Commission has always had this power • First used in Case No COMP/M. 2060 Bosch / Rexroth (3 May 2000) • Used relatively infrequently • 6 times out of 87 published Phase II conditional clearance decisions (75 of which involving divestitures) 4

EU history of up-front buyer (cont. ) Name Date Decision Type Issue Crown Jewel Alternative? (Y/N) M. 3796 Omya / Huber 19/07/06 Art 8(2) Identity of purchaser (industrial not financial). Needed speedy divestiture. N M. 3431 Sonoco / Ahlstom / JV 06/10/04 Art 8(2) Financial viability of divested business (plant in isolated geographic position). N M. 2972 DSM / Roche / Vitamins 23/07/03 Art 8(2) Viability and independence of divested business. Needed immediate restoration of effective competition. N M. 2947 Verbund / Energie Allianz 11/06/03 Art 8(2) Purchaser needed to provide an important counterweight to the parties' market power. N M. 2544 Masterfoods / Royal Canin 15/02/02 Art 6(2) Viability of divested business (being composed of assets from both parties which were located in several Member States). Needed purchaser with proven expertise in relevant market. N M. 2337 Nestlé / Ralston Purina 27/07/01 Art 6(2) Viability of divested business. The purchaser needed the necessary financial resources to maintain the business as an effective competitor. Y – First time upfront buyer solution coupled with “crown jewels” remedy. M. 1915 The Post Office / TPG / SPPL 13/03/01 Art 8(2) Viability and competitiveness of divested business (which would quickly have lost its customer base). N M. 2060 Bosch / Rexroth 14/12/00 Art 8(2) Viability and instant competitiveness of divested business (to prevent Bosch regaining market share lost by sale by selling to “weak” business). N 5

EU history of fix it first • • Used even less frequently than up-front buyer 4 times out of total 87 published Phase II conditional clearance decisions (75 of which involving divestitures) Name Date Decision Type Issue Crown Jewel alternative? (Y/N) M. 4187 Metso / Aker Kvaerner 12/12/06 Art 8(2) Only one purchaser suitable for acquiring divestiture business (only one with necessary know-how and presence in neighbouring markets). N M. 4000 Inco / Falconbridge 04/07/06 Art 8(2) Divestiture of a nickel processing business could only take place to a competitor vertically integrated into the supply of nickel. N M. 3916 T-Mobile Austria / tele. ring 26/04/06 Art 8(2) Divestiture of certain mobile telephony sites and frequencies, not constituting viable business, could only take place to similar competitor. N M. 3436 Continental / Phoenix 26/10/04 Art 8(2) Only the partner in the distribution joint venture was able to render the divested business viable. N M. 3136 GE / AGFA NDT 05/12/03 Art 6(1)(b) Identified purchaser was independent, already active in market and had necessary expertise to operate the divested business. N M. 1878 Pfizer / Warner Lambert 22/05/00 Art 6(1)(b) Identified purchaser of divested “Cognex” assets was a viable and independent competitor in the relevant market. N M. 1137 Exxon / Shell 08/07/98 Art 6(1)(b) Purchaser was an independent and viable competitor with the financial resources and expertise to act as a competitive force in competition with the JV and other competitors. N 6

Areas for use • Where: – asset package only viable in particular circumstances – few acceptable purchasers – third party consents required – difficulties in financing purchase 7

Practical issues • For notifying party – Little time to run competitive process (although potential for parallel negotiations) – Any crown jewel must be held separate in addition to preferred package - can’t implement any synergies in respect of either package – Both crown jewel and preferred package have to be maintained as competitive businesses – Neither up-front nor fix it first remedies are much use when there may not be any suitable purchasers at all • For potential purchaser – Potential deal now - reduced risk of resurgent competitors during a later auction process – Greater negotiating strength for purchaser, as against time constrained notifying party – Increased time pressure to conduct due diligence and deal negotiation – Risk of being frozen out in favour of another competitor – Risk of notifying party running parallel processes – Potentially less generous package if notifying party points to purchaser’s ability to fill in the gaps 8 – Risk of spin-off / de-merger

Part B – UK Competition Commission 9

Competition Commission Guidelines • Merger Remedies: Competition Commission Guidelines Consultation Draft May 2008 – Where CC is in doubt as to viability or attractiveness to purchasers of proposed divestiture package (i. e. composition risk) or believes there may be only limited pool of suitable purchasers (i. e. purchaser risk), it may require parties to obtain suitable purchaser that is contractually committed to transaction before permitting proposed merger to proceed or completed merger to progress with integration – Where CC considers that competitive capability of divestiture package may deteriorate pending the divestiture (i. e. asset risk) or completion of divestiture may be prolonged, it may also require that up-front buyer completes acquisition before merger may proceed or, in case of completed merger, before merger parties may progress with integration (para 3. 19) 10

CC history of up-front buyer • • • Few cases Note number of completed mergers referred which limits scope Kemira Grow. How/Terra Industries merger inquiry (2007) – CC insisted on up-front buyer where divestiture business was ‘carved out’ of existing business as, given structure of deal, there were doubts that suitable purchaser would be found – CC noted that pool of suitable purchasers would probably be restricted to established companies in the UK chemical distribution industry Somerfield v Competition Commission (Competition Appeals Tribunal, 2006) – CC ordered Somerfield to divest certain acquired Morrisons supermarkets – CC excluded Limited Assortment Discounters from ‘competitor set’ of permitted divestees, on basis that they were insufficiently close competitors to conventional supermarkets and thus would not be sufficiently committed to relevant market – Somerfield appealed unsuccessfully to CAT Hamsard 2786/Academy Music Holdings (2007) – CC ordered parties to divest specific indoor live music venues in London – CC insisted on up-front buyer due to concerns about attractiveness of divestiture package to purchasers and doubts about whethere were suitable purchasers – Remedy provided incentive to quickly reach agreement with suitable purchaser and so reduced the risk of possible degradation of assets 11