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Jurisdictional nexus in merger control regimes- Speaking points by Jean-Yves Art - Microsoft - June 2016 OECD discussion

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These speaking points by Jean-Yves Art - Microsoft cover a presentation made during a roundtable discussion on Jurisdictional nexus in merger control regimes held at the 123rd meeting of the Working Party No. 3 on Co-operation and Enforcement on 15 June 2014. More papers, presentations and contributions from delegations on the topic can be found out at www.oecd.org/daf/competition/jurisdictional-nexus-in-merger-control-regimes.htm

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Jurisdictional nexus in merger control regimes- Speaking points by Jean-Yves Art - Microsoft - June 2016 OECD discussion

  1. 1. OECD COMPETITION COMMITTEE Working Party No. 3 on Co-operation and Enforcement All documentation related to this discussion can be found at: http://www.oecd.org/daf/competition/jurisdictional-nexus-in-merger-control-regimes.htm ROUNDTABLE ON LOCAL NEXUS AND JURISDICTIONAL THRESHOLDS IN MERGER CONTROL 15 June 2016 Speaking points by Jean-Yves Art Microsoft • The final paragraph of the Background Paper prepared by the Secretariat very rightfully emphasizes the importance of the local nexus requirement in the light of the recent evolution of international merger control, in particular the significant increase in the number of jurisdictions with a compulsory merger review system. • The local nexus criteria and local nexus thresholds are intended to identify - and submit to merger control - those merger transactions that are likely to have a significant impact on competition in the jurisdiction concerned. General principles of law, sound administrative practices and enforcement effectiveness require that notification criteria and thresholds be clear, objective and predictable. • We believe that the local turnover of the companies concerned is a criterion that can achieve those goals. Admittedly, the local turnover relates to the company’s weight in the economy (not in any relevant competition market) but taking into account the above-mentioned requirements of certainty, objectivity and predictability, it seems to be an appropriate proxy for the potential impact of the merger transaction on competition in the jurisdiction concerned. • The “local turnover” criterion calls for three main comments – all closely related to the goals of the “local nexus” requirements. • The first relates to the identification of the companies whose local turnover should be taken into account. Since the objective is to filter merger transactions that are likely to have a significant impact on competition, merger review should as a rule be triggered by at least each of two participating undertakings (for instance, in the case of an asset sale, the acquirer and the assets being acquired) meeting the relevant local turnover threshold. If the local turnover of only one participating undertaking could trigger merger notification irrespective of whether another participating undertaking has any activities in the jurisdiction concerned, a large number of mergers that have no or insignificant effect on competition would be subject to merger review, with all the downsides of over-inclusiveness in terms of poor allocation of resources by companies and agencies. In the same vein, in those jurisdictions where merger control applies to the creation and/or modification of joint ventures, merger control should trigger only if the current or foreseeable turnover of the joint venture – not only that of its parent companies – in the jurisdiction concerned exceeds the local turnover threshold. In our experience, several jurisdictions require notification of joint venture transactions on the basis of the local turnover of the parent companies, irrespective of whether the JV has (or plans to have) any activity in the country concerned. With respect, we doubt whether this approach is consistent with sound merger review policy.
  2. 2. All documentation related to this discussion can be found at: http://www.oecd.org/daf/competition/jurisdictional-nexus-in-merger-control-regimes.htm • Our second comment about local turnover as the local nexus criterion relates to the turnover threshold, that is, the turnover figure that triggers notification. As appears from the very complete and useful Annex II to the Background Paper, the local turnover threshold set by the laws of those jurisdictions which use that notification criterion varies significantly from one jurisdiction to the other. That is not surprising in view of the difference in the size of the economies concerned in GDP terms. However, turnover thresholds also vary significantly relative to the size of these economies. Indeed, a quick look at the “turnover threshold to GDP” ratio reveals major differences from one country to the other, with some of them being very low compared to others. There may be no optimal “turnover threshold to GDP” ratio. However, we believe that it is worth looking closely at that ratio across jurisdictions and compare it to the ratio of notified concentrations raising competition concerns to the total number of notified concentrations in the same jurisdictions. The data may provide some interesting perspective on the issue of the appropriate turnover threshold. • Our third comment about local turnover as the local nexus criterion concerns mergers that involve companies with no or little turnover but a large value potential. For instance, the Facebook / WhatsApp merger was valued at $19 billion although WhatsApp’s turnover amounted to only $10 million worldwide in the preceding fiscal year. Due to that low turnover, the transaction did not reach the EU notification threshold and it would not have been subject to review at EU level, had it not been for some EU countries’ joint decision to refer the matter to the European Commission. Such a situation is problematic in Europe and also at a global scale because it means that mergers that have significant economic, and perhaps competition, effects might not be subject to review at least in those countries that use turnover as the notification criterion. There are various ways to address this issue: • One could be a residual criterion catching all merger transactions that have substantial, direct and foreseeable effects on the local market. Instead of a limiting criterion – as it is used in some countries such as Germany or Austria – this test would be used to broaden the scope of national merger rules. To be implementable by parties, we believe that two conditions should be fulfilled. Firstly, there should be clear and practical guidelines defining parameters of substantial, direct and foreseeable effects from the agency concerned. Secondly, the parties to the transaction should have an opportunity to engage in meaningful pre-notification discussions with the agency concerned to ascertain whether the proposed merger meets the “effects” test as applied by that agency. • Another approach is to design specific “turnover” or “turnover-like” criteria. As explained in Box 3 of the Background Paper, “it is (…) common for jurisdictions to have specific turnover thresholds, or specific rules regarding their calculation, for companies active in specific sectors such as banks, insurance or media.” To cover transactions such as Facebook / WhatsApp in which one or both companies achieve a low turnover, one could combine two notification criteria based respectively on the value of the transaction and the number of local customers served by the parties. The number of local customers may provide a good understanding of the undertaking’s local footprint. Indeed, in some digital businesses, market shares are based on the number of customers or some variation thereof such as “reach,” “unique users” or “monthly active users.” Although an approach based on the number of local customers supplied by the parties is not perfect (for instance, depending on the precise metric the number of customers may not say much about the customers’ actual engagement), it would ensure that the transaction subject to merger control has a sufficient local nexus, and would meet the requirements of clarity, objectivity and predictability that are mentioned above. This criterion may not be appropriate in all industries but it may be worth considering to address shortcomings of the revenue criterion in some of them.

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