A year ago, we took a look at the first two years (2017-2018) under the new leadership of the merger control unit of the Finnish Competition and Consumer Authority (the FCCA), witnessing major changes in the enforcement. As the past year has been at least as interesting, we decided to update our review to reflect the most recent developments and trends. These include the FCCA reaching out to private practitioners to instruct them about its new praxis in handling merger control cases, the number of Phase II cases remaining high, conditional clearances being on the rise, the FCCA continuing to resort to declarations of incomplete notifications and requests to the Market Court for extending the Phase II review period, and a really rare prohibition proposal being submitted to the Market Court. Companies are well advised to take into account the increased risk and decreased predictability of longer review periods when planning their next transactions.
Summary of the rules on review periods
After receiving a complete notification of a concentration from the notifying party (or parties), the FCCA has 23 working days at the so-called initial stage (“Phase I”) of its investigation to decide that the concentration does not fall under the Competition Act, to approve the concentration with or without commitments, or to decide that the concentration raises significant competition concerns and warrants in-depth scrutiny during a further investigation stage (“Phase II”). Phase II extends over a period of max. 69 working days, which can exceptionally be further extended by up to 46 working days by the Market Court. These review periods were changed to working days by an amendment of the Competition Act in June 2019, slightly extending the previous month-based review periods. At the end of Phase II, the FCCA must either approve the concentration with or without commitments, or request the Market Court to prohibit it. If the FCCA has submitted its prohibition proposal to the Market Court, the Market Court has a three-month period (not yet changed to working days) to clear the concentration with or without commitments or to prohibit it. A decision issued by the Market Court may be appealed to the Supreme Administrative Court within 30 days. The length of such appeal proceedings in the Supreme Administrative Court is not set in law.
The FCCA’s new expectations on pre-notification phase
In spring 2019, the FCCA organized a seminar for legal advisors on its enforcement practices e.g. in merger control. In the event, the FCCA emphasized the importance of the pre-notification phase and early contacts with the FCCA in order to ensure a smooth merger control process. In addition, the FCCA presented that it expects to receive a draft notification for its review and comments before the parties formally file the notification, a change to the previous practice. This more formal pre-notification procedure resembles the European Commission’s practice but is not based on law or other regulations in Finland. In practice, failing to submit a draft notification or formally notifying before receiving green light from the FCCA increases the risk of the FCCA asking for more information or even the notification being deemed incomplete. In order to ensure smooth processing and potentially save time, the parties are well advised to consider submitting a draft notification even in clearly unproblematic cases.
Additionally, the FCCA has stated that the current notification form ā set out in a decree ā is outdated in that it does not ask for all the relevant data needed to conduct an economic impact assessment. In some recent cases, the FCCA has requested in the pre-notification phase that clearly more information than required in the notification form must be submitted in the actual notification. However, it is debatable just how much the FCCA can reasonably request new documents or data to be produced by the notifying party and/or its external advisers, especially as it may be very costly (e.g. reports by economists).
The number of Phase II cases still high
Unlike the European Commission, the FCCA does not provide merger control statistics. However, we have compiled and kept up-to-date detailed statistics on Finnish merger control cases since the entry into force of merger control rules in Finland in autumn 1998. According to the statistical review we have conducted, the substantial increase in the number of Phase II investigations in Finland continued in 2019. While there were 45 Phase II cases in the 18 years between autumn 1998 and the end of 2016, there were 17 Phase II cases in 2017-2019. Approximately 16 per cent of the cases notified in 2017 and more than 21 per cent of the cases notified in 2018 were taken to Phase II, which is a significant increase of Phase II cases compared to years prior to that. In 2014-2016, Phase II was initiated in less than 8 per cent of cases. The total number of cases notified to the FCCA in 2017-2019 was 102, maintaining approximately the same level as in 2014-2016 (93). While the ratio of cases taken to Phase II to the total number of notifications in 2019 dropped closer to the 2014-2016 levels, the absolute number of cases taken to Phase II (3) remained relatively high.
The reasons behind the increased number of Phase II investigations are not entirely clear. The Competition Act does not set out specific criteria under which an investigation can be extended to Phase II. However, it is typically considered that an investigation can be extended to Phase II if the FCCA finds in Phase I that the notified concentration may raise serious competition concerns. Several of the Phase II cases in 2017-2018 were approved unconditionally in the end; whereas none of the Phase II cases decided in 2019 received an unconditional clearance. The general rule is that the FCCA’s investigations should not delay the execution of a transaction longer than is necessary to appraise the transaction’s effects on competition. Although the duration of an investigation may be affected by e.g. a relatively short Phase I review period as well as an at times heavy workload, they are not in themselves grounds for initiating Phase II investigations. Also complex and time consuming investigative tools, such as consumer surveys and the analysis thereof, should be proportionate to the case and time at hand.
More conditionally cleared cases
While six of the 13 cases that were taken to Phase II in 2017-2018 were eventually approved without conditions, so far none of the cases taken to Phase II in 2019 has received an unconditional clearance (one case still pending in the FCCA and one in the Market Court). Hence, with its four conditional clearances, 2019 only strengthens the view that the number of conditionally cleared cases seems to be on the rise. In 2017-2019, nine cases were approved with conditions (and, as said, one Phase II case is still pending in the FCCA and one in the Market Court), while in the 10-year period before that there was on average less than one conditional clearance per year.
The remedies in recent cases are mostly structural (divestments) or combinations of structural and behavioural commitments. However, in as much as three cases the commitments were purely behavioural, though none of these cases were horizontal mergers. There were no conditional clearances in Phase I in 2017-2019, which is not surprising.
The fourth ever proposal to prohibit a concentration
In November 2019, only the fourth ever proposal to prohibit a concentration was submitted to the Market Court when the FCCA considered that the concentration between Kesko Oyj and Heinon Tukku Oy would significantly impede effective competition in the sale of daily consumer goods to foodservice customers. Heinon Tukku is a daily consumer goods wholesaler whose main customers are active in the foodservice sector, and the acquirer, Kesko ā through its Kespro business unit ā provides services for foodservice customers and is engaged in wholesale trade of daily consumer goods. The FCCA found in its investigation that the transaction would lead to a dominant position in the market for broadline distributors and therefore to a significant impediment of effective competition ā the test applied in Finland ā and as a consequence should be prohibited.
The main difference between the views of the notifying party and the FCCA seems to lie in the definition of the relevant markets, i.e. whether the specialist suppliers and companies manufacturing daily consumer goods belong to the same market with the broadline distributors when considering the sale of daily consumer goods to foodservice customers. According to the FCCA, the remedies submitted by Kesko were not sufficient to address the competition concerns and, therefore, the proposal to prohibit the transaction was the only option available. The FCCA is not itself empowered to prohibit concentrations.
The case is pending in the Market Court. The deadline of the Market Court to hand down its judgment is 18 February 2020. It will be interesting to see whether this concentration will become the first ever prohibited by the Market Court in Finland. Either way, it is very likely that the judgment will be appealed to the Supreme Administrative Court.
Incomplete notifications as part of standard toolkit
As we reported last year, there was a rather surprising rise in the number of incomplete notifications in 2018. While there were no incomplete notifications in 2017 and only very few ever before that, there were as many as six incomplete notifications in 2018 alone. This represents incredible 16 per cent of all notifications submitted in 2018. Deeming notifications incomplete seems to have gained a stable foothold as part of the FCCA’s standard toolkit, even though in 2019 just two notifications were deemed incomplete. Still, the eight incomplete notifications in 2018-2019 represent no less than 11 per cent of all notifications submitted during that period.
Incompleteness of a notification can significantly delay a merger control process, as according to the Competition Act the review period does not begin in the first place if the notification is significantly incomplete. In one case, the clearance was ultimately given only in October 2018 although the case was first notified in January 2018, because the notification was deemed incomplete as late as close to the end of Phase II investigation. After a new notification was filed, the case was investigated again for a full Phase I and Phase II review period.
According to the documents in the case files, the main reasons for finding the notifications incomplete in these recent cases were insufficient information concerning the markets, incorrect market definitions, inconsistencies in the parties’ market shares and sales figures, and/or inconsistencies between the notification itself and the appendices or other background material provided by the notifying parties. This emphasizes the importance of a thorough and well-grounded market evaluation process by the notifying party before submitting a notification. Also, the documents reveal that to have avoided the declaration of incompleteness, a notifying party should have presented to the FCCA a single consistent and justified view of the markets and market shares of the parties (and other market players), even though the parties to the transaction may have had different views on these.
The later the declaration of incompleteness is given, the more problematic it naturally is for the parties to the concentration as they are eager to close the transaction swiftly. As mentioned, the FCCA has recently considered notifications incomplete even as late as close to the end of Phase II. The wording of the Competition Act does not explicitly specify the timeframe within which the notification can be declared incomplete. In our view, it can, however, be inferred from the systematics of the relevant section/paragraph and the preparatory works that the legislative intention was not to allow it as late as in Phase II, not to mention close to the end of Phase II. Although it is not explicitly dealt with in law or in the preparatory works, our understanding of the structure of the relevant section and the reading of the language used in it and in the preparatory works, as well as having a separate initial review phase in the first place, is that declaration of incompleteness is a tool intended by the legislator to be used only during Phase I. However, the FCCA has explicitly stated that according to its view, there is no deadline during the investigation to declaring a notification incomplete.
Requests to extend Phase II review period have become common
As mentioned above, the Phase II review period may exceptionally be extended by up to 46 working days by the Market Court. To our understanding, so far an extension has been granted each time the FCCA has asked for one. Between the entry into force of the Finnish merger control rules in autumn 1998 and the end of 2016, the extension was granted only three times. However, in 2017-2019 the Market Court granted extensions in six separate cases; in one of them in 2019, Kesko/Heinon Tukku (see above), such an extension was granted even twice (within the maximum extension). In two of the cases, the notifying party asked the FCCA to request an extension, as it is formally always the FCCA that requests an extension from the Court. In Kesko/Heinon Tukku, Kesko asked the FCCA to request the first extension, but objected the second extension.
If the notifying party objects to the extension of the review period, according to the preparatory works the extension may only be granted if there are weighty reasons for doing so. As mentioned, in Kesko/Heinon Tukku Kesko objected the latter extension. Although the arguments presented by the FCCA differed clearly from the examples of weighty reasons given in the preparatory works, the Market Court accepted them as weighty reasons in this case and granted the second extension despite the objection by the notifying party. The FCCA argued that the notifying party had not submitted certain reports which were agreed upon with the FCCA, and on the other hand, that the notifying party had submitted other reports that were not agreed upon beforehand, the review of which by the FCCA required more time.
Further concerns in the pipeline?
The FCCA has continued to advocate for a right to investigate, on its own initiative, any concentrations in which it identifies potential detrimental effects to competition and consumers. According to the FCCA, the current turnover thresholds defining the cases that have to be notified for a merger control clearance are too high for an economy the size of Finland. We believe that such an ex officio right to investigate concentrations should only be granted, if any, within the boundaries of legitimate expectations, and should therefore not extend to concentrations below certain (turnover) thresholds and/or should be clearly limited in time. Otherwise, such a right would build up the risk of uncertainty with regard to e.g. whether and when the parties may proceed with their transaction.
The FCCA has also mentioned another legislative measure: lowering the turnover thresholds. This would increase the FCCA’s chances to intervene in problematic mergers but simultaneously it is likely to increase the amount of notifiable mergers significantly.
As can be seen, several recent trends seem to contribute to longer merger control review periods and growing uncertainty with regard to the review process. At the same time, the predictability with regard to all this has decreased. However, the overall situation is not that gloomy. A clear majority of cases are still approved in Phase I and many even before the end of it; and for example, D&I has during this “new era” of merger control obtained an unconditional clearance for a transaction between competitors in less than two weeks from the notification. Also, during the over 20 years of Finnish merger control there have so far been only four proposals to the Market Court to prohibit a transaction, and ā not knowing the outcome in the ongoing case ā none have so far been prohibited. Although the FCCA is probing more closely into the notified transactions, the parties to a transaction and their advisors can also contribute to the fluency of the merger control process.
As the FCCA has increasingly emphasized, the parties can mitigate the risks of longer review periods by engaging in pre-notification discussions with the FCCA early on. Pre-notification discussions are crucial especially in cases where the parties are competitors, where alternative market definitions may be presented, or where there are other reasons to believe that competition concerns might arise. A thorough and well-grounded market evaluation process by the notifying party before submitting a notification also seems to be critical in light of the recent cases, as the notifying party must be able to defend its view of the case through the whole merger control process.