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Application of the ‘Priority Principle’

Posted in EC Developments, Mergers & Acquisitions

by Lionel Lesur

The EU Commission was notified of the Seagate/Samsung transaction and the Western Digital/Hitachi transactions – both mergers involving hard drive disk businesses – within days of each other. In its decision on the Seagate/Samsung transaction (published on May 10, 2012), the EU Commission explains its different treatment of the two mergers. 

The EU Commission explains that the ‘priority principle’ requires them to review a deal’s impact on competition according to the date the deal was notified. Therefore, because Seagate/Samsung was notified first, the EU Commission examined the deal based upon the competitive conditions existing at the time of notification and without considering the potential impact of a second deal which was notified only one day later.

Reminder of the facts

Seagate Technology had prenotification contacts with the Commission March 14, 2011 and publicly announced and notified its acquisition of Samsung’s hard disk drive business on April 19, 2011. After a Phase II investigation, the EU Commission unconditionally cleared the transaction on October 19, 2011, concluding that it would not significantly impede effective competition in the hard disk drive market because four competitors would remain.

Western Digital proposed to acquire Hitachi’s hard drive business and notified this transaction on April 20, 2011, after Seagate/Samung. Western Digital and Hitachi publicly announced the deal on March 7, 2011 and had prenotification contacts with the Commission on March 10, 2011 – both dates earlier than the same events for Seagate and Samsung. The Western Digital/Hitachi transaction was also cleared by the EU Commission after a Phase II investigation on November 23,  2011, but was subject to several significant remedies (and application of the ”up-front buyer" system) unlike Seagate/Samsung because the EU Commission carried out its competitive analysis on the basis that only three hard disk drive competitors would remain.

Explanation of the ‘priority principle’ applied by the EU Commission

In its decision concerning the Seagate/Samsung transaction, the EU Commission recognizes having assessed the transaction according to a “priority principle” ("first come, first served" approach), based on the date of notification. The EU Commission defended the application of this “priority principle” and noted that it had already been applied in several previous cases (most recently in TomTom/Tele Atlas, Commission Decision of May 14, 2008) but the EU Commission had not expressly explained its approach as they have in the present case.

According to the EU Commission, the relevant framework to evaluate the effects of a transaction is the competitive conditions existing at the time of notification ("It is neither necessary nor appropriate to take into account future changes to the market conditions resulting from subsequently notified transactions that require approval from the Commission."). The EU Commission states that the date of notification is a clear and objective criterion for applying the priority principle. It "takes the view that the priority principle, based on the date of notification, is the only one that ensures sufficient legal certainty, transparency and objectivity and respect the other provisions and aims of the Merger Regulation."

The EU Commission explains that the fact that the Western Digital/Hitachi transaction was notified only one day after the Seagate/Samsung transaction is irrelevant ("The principle of legal certainty requires that the same priority rule is applied irrespective of the various time-periods that may lie between the notifications of transactions affecting the same market.").

Criticism of the application of the ‘priority principle’ by the EU Commission and lessons to be learned

This ‘priority principle’ should be taken into account when working on a transaction that has to be notified to the EU Commission in a heavily concentrated economic sector if there are rumors of other possible transactions between or involving competitors, or even more so in case public announcements of other transactions have been made. In such a specific context, companies and their counsel should consider notifying the transaction to the EU Commission as soon as possible and reduce the duration of, or even remove, the pre-notification time period.

It remains to be seen what the EU Commission’s position would be if, during the course of two concurring transactions within a highly concentrated sector, one transaction is notified before the other, but the notification file for the second transaction is completed before the one for the first transaction (i.e., will the EU Commission give the priority to the first notified transaction or to the second one?). However, in light of the abovementioned cases, particular efforts should be made to file a complete notification file immediately in order to circumvent any risk deriving from this uncertainty.

Western Digital has challenged both (i) the EU Commission’s decision to apply the “priority principle” when deciding to open a Phase II (Case T-452/11), and (ii) the Commission’s final conditional clearance decision of the Western Digital/Hitachi transaction (Case T-60/12). For the time being, only limited information is available on these appeals, but we believe that the first appeal should be rejected/declared inadmissible because the EU Commission’s application of the “priority principle” when deciding to open a Phase II can be challenged under EU law.