Merging Green – Key take-aways from the European Commission’s thinking on green mergers

From time to time, the Commission summarizes old and new thinking in its Competition Merger Briefs. The latest issue focuses on sustainability issues in EU merger control. We explain what’s in it and which insights companies should glean from the Commission’s thinking.

A fine (green) line: Consider consumer preferences when defining markets 

The Commission clearly recognises the need to take into account consumer preferences for green products. Such preferences will be a differentiating factor in general and in market definition in particular.

In its case practice, the Commission has already taken into account consumer preferences for sustainable products in many decisions. This has led, for example, to the differentiation of fair-trade organic coffee from conventional coffee, or of sustainably farmed salmon from conventionally farmed salmon. Environmental regulations can also lead to market differentiation, either from a production perspective or from a demand perspective. Furthermore, sustainability may also play a role in geographic market definition, for example, where customers seek to avoid long-distance transportation in order to minimize the associated CO2 emissions. 

The Commission's case law will also be taken into account in the review of the Market Definition Notice. The current draft specifically mentions sustainability as one of the non-price parameters of competition.

Two green thumbs might be one too many – or: Why to stay green also after the merger

We all want businesses to keep innovating. So does the Commission. It will therefore carefully examine whether the merging parties are close competitors in terms of their R&D efforts. The Commission has already followed such approach in its decision-making practice, e.g. in basic industries, chemicals or shipbuilding. It has assessed whether the merging parties are both active in green R&D, which is considered important to address sustainability challenges. Where both parties are important innovators in the same product market, the challenges to merger clearance are greater. When analysing the feasibility of a merger, companies should therefore not only assess whether their product offerings overlap upstream or downstream but also to what extent they engage in similar R&D initiatives. Of course, such due diligence should be conducted with the appropriate antitrust safeguards in place.

Similarly, where a merger may harm innovation in green(er) technologies, products or services, the Commission intends to use innovation theories of harm as a means to prevent the loss of "green innovation". This may be particularly relevant for industries with long innovation cycles. Companies should be mindful of the fact that during a merger review they may have to counter allegations that they might discontinue the development of environmentally friendly technologies, innovation efforts or capabilities post-merger – and that they will be hard-pressed to do so if their internal documents suggest anything to the contrary.

Merging for efficiencies - but only within the affected market 

The Commission states that it is prepared to take social and environmental benefits into account when assessing mergers. Benefits may arise, for example, from a reduction of waste in production or the use of fewer raw materials. Efficiencies may also lead to the development of green(er) technologies. In line with the Horizontal Merger Guidelines, the Commission will accept as merger efficiencies those that benefit consumers, are merger-specific and verifiable.

Those following the ESG debate in antitrust (regarding the pitfalls of competitor cooperation) know that this gives rise to a crucial question: Does this mean that out-of-market efficiencies will be recognized? And they also know the answer: A resounding (and disappointing) “no”.

Similar to the discussion about a greener antitrust law with regard to the enforcement of the ban of cartels (Article 101 TFEU), there is a discussion about whether or not to allow out-of-market efficiencies in mergers. The Commission states that it is bound by the important Mastercard case. It will hence only take into account efficiencies that occur within the affected market or where the benefits extend to essentially the same customers that would otherwise be harmed by the merger. In that regard, it holds course and follows the line of thinking established in its Horizontal Guidelines on Article 101 TFEU.

Merging firms should therefore be prepared and able to argue that the efficiencies they claim are verifiable, transaction-specific, in the same market, and timely and that they as such will at least highly likely materialize. In any event, the mere possibility of efficiencies eventually materializing is not sufficient.

And it’s important to understand that this rationale also applies to remedies. While “green remedies” seeking, for instance, to mitigate the environmental impact of production can be superb, they can only play a role in EU merger control if (i) they are offered by the merging parties and (ii) specifically address the competitive harm identified. In other words: remedies can be "green" where the threat to competition is also (at least partly) "green", e.g., where the merging parties are close competitors in green R&D. However, where the competitive harm is "old fashioned" (i.e. not related to concerns around sustainability or environment-related consumer preferences, products or R&D), the Commission cannot accept or impose remedies simply because they would mitigate potential environmental harm in the markets concerned (let alone other markets). And contrary to the (understandable) desires of some ESG proponents, the Commission does not have a mandate to simply accept the greenest remedy among several alternatives – let alone to look itself for such alternative.

Thinking about killing a green innovator? Some flowers should not be plucked. 

Similar to scenarios which have been alleged numerous times in digital industries, “killer acquisitions” may also be(come) a thing in relation to green technology. If nascent innovators threaten incumbents with greener technology, those incumbents might be incentivized to simply acquire such innovators and discontinue their efforts (i.e., “kill” the innovation).

The Commission therefore underscores that it is keen to remain vigilant against green killer acquisitions, especially given the fact that green innovation is often carried out by smaller players. The turnover of such small players is often so low (or even virtually non-existent in early stages) that turnover-based merger control thresholds are not exceeded – meaning that a potential “killer acquisition” would likely not have to be notified to any competition authority.

However, the Commission points out that any potential enforcement gap might be bridged by its recalibrated approach to the referral mechanism set out by Article 22 EUMR. Under that new approach, the Commission accepts referrals of mergers from Member States (and even proactively encourages Member States to do so) if it becomes aware of a transaction that can affect trade between Member States and threatens to significantly impede competition in at least one Member State – even if the transaction in question is not legally notifiable based on any merger control thresholds at EU or national level.

The Commission has already accepted referrals in three such cases (albeit un-related to any green technologies) and Commission officials have suggested publicly that several dozen candidate cases have been assessed internally. In other words: The Commission is actively exploring that avenue, with more to follow. Moreover, when a dominant incumbent acquires a smaller competitor, the CJEU's Towercast ruling has recently reminded everyone that this can, under certain conditions, be prosecuted as an abuse of dominance – without the procedural shackles of merger control rules.

Key takeaways and next steps

Understanding the Commission’s analytical framework in merger control is crucial – and becomes even more important with regard to “green” products and technologies and sustainability issues more broadly, as companies undergo significant changes to advance the sustainability goals set by both themselves and the political agenda at EU and member state level.

Key takeaways:

•  A fine (green) line: Market definition may become more complex than ever. As consumer preferences shift to greener products, new product markets will emerge – and the Commission will take that into consideration. Carefully considering shifting demand patterns will be crucial for analysing merger cases and their prospects of eventual clearance.
• Two green thumbs might be one too many. Check carefully whether your potential merger partner might be active in the same kind of R&D. And be mindful of relevant antitrust protections when conducting due diligence to assess that question. The Commission is now more mindful than ever of innovation theories of harm – and the seeds of such theories may often be green.
• Merging for efficiencies - but only within the affected market. If a merger would harm competition in one market, environmental benefits will not be considered to neutralize that harm if they occur in another market. The same applies to remedies.
• Some flowers should not be plucked. The Commission's recalibrated referral mechanism as set out by Article 22 EUMR may result in mergers being reviewed even if the merger thresholds are not exceeded. Carefully consider if your merger might be perceived as a “green killer acquisition”.

Authored by Dr. Elena Wiese.