The European Court of First Instance (CFI) has upheld the hugely controversial prohibition of a proposed merger between the aircraft companies GE and Honeywell. The EU’s competition directorate-general heaved a collective sigh of relief at the news.
The 2001 prohibition
The ban, when it was handed down in July 2001 by the previous Commission team under Commissioner Mario Monti caused uproar. Huge sums of money were involved, the Americans were involved and in the view of many lawyers the grounds for the ban were highly dubious.
Commentators have speculated that the controversy surrounding this case and the overturning by the court of three previous merger prohibitions in 2002 was one of the factors that drove the recasting of the European Merger Regulation in 2004.
Both General Electric and Honeywell are US based but the EU had parallel jurisdiction because of the amount of business done in Europe. The proposed merger was approved by US authorities and the consequent American affront at such an important merger being blocked by Brussels was considerable.
The CFI’s judgement
Skilfully, the court has come up with a judgement to please everyone. By upholding the merger prohibition, the court has avoided any major embarrassment for the Commission. But, in attacking the commission’s reasoning, it has effectively buried some of the more worrying legal arguments.
The detail (for the technically-minded)
The Commission can ban a merger on the grounds that it would produce a dominant position. In the GE case, the commission sought to prove dominance in a number of different ways and some of its reasoning rested on the doctrine of ‘conglomerate effects’. This theory, used to show dominance in overlapping markets, has two aspects:
- vertical integration: this theory seeks to establish the dominance of a merged entity by arguing that market strength held by company A in one market can be used to ‘leverage’ market strength of company B in another market. The problem with this argument is that it involves guesswork on the part of the commission as to what the merged company may or may not do in the future and how markets will evolve.
- bundling: here the argument is that after the merger, the company could make the sale of a product produced by company A dependent on the buying of a related company B product – producing dominance.
It was in its use of these theories that the court found “manifest errors of assessment” on the part of the commission. While not in so many words saying that the theories are wrong, the judgement renders their future use most improbable. (The theory of leveraging has already been criticised in another merger appeal in February this year concerning drinks packaging firm Tetra Laval.)
The Commission has welcomed the court's ruling as it upholds the finding that competition would be adversely affected by the merger. Spokesperson Jonathan Todd said the Commission "took note of the fact that the court had criticised some of the commission's reasoning". He also said that the judgement would be carefully analysed and taken into account in the work on the doctrine of conglomerate effects which had already begun after the Tetra Laval decision in February 2005.
General Electric are pleased with the judgement, particularly at the court's rejection of the theory of conglomerate effects. A statement issued by GE states, "GE did not appeal to overturn the Commission’s decision but to challenge certain theories in the decision, which we believed were erroneous."
By a decision of 14 December 2005, the CFI has upheld the European Commission's ban of the merger between the two US aircraft giants on the grounds that, overall, a dominant position would have been created. However, the Commission's reasoning was marred by legal errors. In the words of the court, the decision was 'vitiated by illegalities'.
EU official documents
- RAPID:Commission welcomes upholding of the Commission’s decision in GE/Honeywell case(14 Dec 2005)
- European Court of Justice:The Court of First Instance upholds the prohibition of General Electric's acquisition of Honeywell(14 Dec 2005)
- DG Competition:General Electric/ Honeywell prohibition decision(3 July 2005) [FR] [FR] [DE]
- RAPID:The Commission prohibits GE's acquisition of Honeywell(3 July 2005) [FR] [FR] [DE]
EU Actors positions
- General Electric:GE statement on Honeywell court ruling(14 Dec 2005)
- Reuters:EU court upholds ban on GE-Honeywell deal(14 Dec 2005)
- International Herald Tribune:Merger case could limit European antitrust powers(14 Dec 2005)
- Nouvel Observateur:La fusion GE-Honeywell était bien anticoncurrentielle(14 Dec 2005)
- Le Monde:Le veto de Bruxelles à la fusion de Honeywell et de GE est confirmé(14 Dec 2005)
- Frankfurter Allgemeine Zeitung:EuGeI hält Fusionsverbot GE/Honeywell(14 Dec 2005)