Activity

B.5.Training for Trainers

Birgit Schwabl-DrobirAnastasios Xeniadis

Table of Content

A. Introduction..................................................................................................9

B. Assessment of cartel agreements...............................................................10

1. Art 5 Competition Act..................................................................................10

2. An overview - Key elements of the prohibition of anti-competitive

agreements..........................................................................................................11

2.1. General remarks on Art 5 Competition Act..............................................11

2.2. Analytical Framework..............................................................................12

2.3. Requirements of Article 5 (1) Competition Act........................................13

2.3.1. Collusive Behaviour: Agreements, Decisions and Concerted Practices 13

2.3.2. Undertakings or Associations of Undertakings.....................................13

2.3.3. Restriction of Competition (by Object or Effect)...................................13

2.3.4. Appreciability........................................................................................14

3. What is an undertaking?.............................................................................14

3.1. The concept of undertaking.....................................................................14

3.2. Single enterprise doctrine........................................................................15

3.3. Parental liability.......................................................................................16

4. Definition of Agreement, Concerted Practice, Decision of Association of

Undertaking..........................................................................................................16

4.1. Agreements.............................................................................................17

4.2. Concerted practices.................................................................................17

4.3. Decision of Association of Undertakings..................................................17

5. Restriction of competition by object or effect.............................................18

5.1. Introductory remarks...............................................................................18

5.2. Object restrictions...................................................................................19

5.2.1. General remarks...................................................................................19

5.2.2. Per se restrictions of competition.........................................................19

5.2.3. Typology of cartel arrangements..........................................................20

5.3. Restrictions by effects.............................................................................21

5.3.1. Assessment of restrictive effects..........................................................21

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5.3.2. Common types of horizontal agreements.............................................23

C. Guidelines regarding vertical agreements..................................................24

1. Preamble - General Rules for the Assessment of Vertical Restraints:.........24

2. Definitions Used in these Guidelines:..........................................................26

2.1. vertical agreement..................................................................................26

2.2. contract goods.........................................................................................26

2.3. agreement on exclusive supply (distribution)..........................................27

2.4. agreement on selective distribution........................................................27

2.5. non-compete obligation...........................................................................27

2.6. intellectual property rights......................................................................27

2.7. supplier....................................................................................................27

2.8. purchaser.................................................................................................27

2.9. customer of the purchaser/buyer............................................................28

2.10. active sale...............................................................................................28

2.11. passive sale.............................................................................................28

2.12. end user...................................................................................................28

2.13. agreement on reciprocal distribution.......................................................28

2.14. hard core restrictions of competition.......................................................28

2.15. resale price maintenance (RPM)..............................................................29

2.16. parallel import.........................................................................................29

2.17. genuine agent..........................................................................................29

3. Exemption Rule...........................................................................................29

4. Market Share Threshold..............................................................................29

5. Hardcore Restrictions of Competitions........................................................30

5.1. Hard-core Restrictions in General............................................................30

5.2. Prohibition................................................................................................31

6. Non-hardcore Vertical Restrictions.............................................................33

6.1. Assignment of Intellectual Property Rights..............................................33

6.2. Non-compete Obligation..........................................................................33

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6.2.1. Non-compete Obligation in General......................................................33

6.2.2. Prohibition............................................................................................34

6.2.3. Exemptions from Article 6.2.2..............................................................34

7. Agreements between Competing Undertakings..........................................35

8. Withdrawal of Exemption............................................................................35

9. Procedural Issues........................................................................................36

10. Formal Notification Procedure.....................................................................36

D. Guidance paper on verticals.......................................................................36

E. Merger Control...............................................................................................39

F. Undertakings Concerned................................................................................39

1. Mergers.......................................................................................................40

1.1. Acquisition of sole control........................................................................40

1.1.1. Acquisition of sole control of the whole company.................................40

1.1.2. Acquisition of sole control of part of a company...................................40

1.1.3. Acquisition of sole control after reduction or enlargement of the target

company 41

1.1.4. Acquisition of sole control through a subsidiary of a group..................41

1.2. Acquisition of joint control.......................................................................42

1.2.1. Acquisition of joint control of a newly-created company......................42

1.2.2. Acquisition of joint control of a pre-existing company..........................42

1.2.3. Acquisition of joint control with a view to immediate partition of assets

42

1.3. Acquisition of control by a joint venture..................................................43

1.4. Change from joint control to sole control.................................................44

1.5. Change in the shareholding in cases of joint control of an existing joint

venture44

1.5.1. Reduction in the number of shareholders leading to a change from joint

to sole control......................................................................................................45

1.5.2. Reduction in the number of shareholders not leading to a change from

joint to sole control...............................................................................................45

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1.5.3. Any other changes in the composition of the shareholding..................46

1.6. ‘Demergers’ and the break-up of companies...........................................47

1.7. Exchange of Assets..................................................................................47

1.8. Acquisitions of control by individual persons...........................................48

1.9. Management buy-outs.............................................................................48

1.10. Acquisition of control by a state-owned company...................................49

G. Market Delineation......................................................................................49

1. The product market.......................................................................................50

1.1. The demand side.....................................................................................50

1.2. The supply side........................................................................................52

2. The geographic market...............................................................................53

2.1. The demand side.....................................................................................54

2.2. The supply side........................................................................................54

3. The competitive versus the current price...................................................55

H. Calculation of Turnovers.............................................................................55

1. ‘Net’ turnover.................................................................................................57

2. Adjustment of turnover calculation rules for the different types of

operations............................................................................................................58

2.1. The general rule.......................................................................................58

2.2. Acquisitions of parts of companies..........................................................59

2.3. Staggered operations..............................................................................59

2.4. Turnover of groups..................................................................................59

2.5. Turnover of State-owned companies.......................................................62

3. Credit and other financial institutions and insurance undertakings............63

3.1. Calculation of turnover............................................................................64

3.2. Insurance undertakings...........................................................................65

I. Developing and Assessing a Theory of Harm in Merger Control....................65

J. Assessment of Possible Merger Remedies.....................................................66

1. Principles of remedies.................................................................................66

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1.1. Effectiveness...........................................................................................66

1.2. Potential remedy burdens and costs........................................................67

1.3. Merger efficiencies or other benefits foregone........................................69

1.4. Transparency and consistency................................................................69

2. General rules..............................................................................................70

3. Basic conditions for acceptable commitments............................................71

4. Types of mergers........................................................................................72

5. Types of remedies......................................................................................73

5.1. Procedure................................................................................................77

5.1.1. Operating and monitoring trustees.......................................................78

5.1.2. Monitoring............................................................................................79

5.1.3. Divestiture process...............................................................................79

5.1.4. Proposed purchaser approval...............................................................80

5.1.5. Obligations of the parties in the interim period....................................82

K. Dominance..................................................................................................84

1. Assessment of Dominant Position...............................................................84

1.1. The interface between market definition and dominance assessment....84

1.2. Market shares and market concentration................................................86

1.2.1. Market Shares.......................................................................................86

1.2.2. Market concentration............................................................................89

1.3. Barriers to entry and expansion..............................................................91

1.3.1. Entry barriers........................................................................................91

1.3.2. Barriers to expansion............................................................................95

1.3.3. Assessment of entry barriers................................................................95

1.4. Other barriers to entry.............................................................................96

1.4.1. Economies of scale and scope..............................................................96

1.4.2. Network effects....................................................................................98

1.4.3. Deterrence strategies...........................................................................98

1.5. Buyer Power.............................................................................................99

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1.6. Collective dominance.............................................................................100

1.7. Assessing dominance in aftermarkets...................................................101

2. Abuse of Dominant Position......................................................................103

L. Investigative methods and tools..................................................................104

1. Investigation Decision...............................................................................104

1.1. Introduction...........................................................................................104

1.2. Examples of Types of Investigated Behaviour.......................................105

1.2.1. Price fixing..........................................................................................105

1.2.2. Market allocation................................................................................106

1.2.3. Bid rigging..........................................................................................106

1.3. How a cartel operates............................................................................107

1.4. Determination of evidence required......................................................107

1.5. Investigative strategy............................................................................108

1.5.1. Investigation tools and resources.......................................................109

1.5.4. Cooperation with foreign anti-cartel enforcement agencies...............110

1.6. Time constraints....................................................................................110

1.7. Selecting voluntary and/or compulsory tools.........................................111

1.8. Types and characteristics of the methods of collection of information..112

2. Legal aspects of the right of defence in investigation of competition cases

112

2.1. The right to confidentiality in communication between lawyer and their

client 112

2.2. The right against self-incrimination.......................................................117

3. The main principles for operations with electronic evidence....................118

3.1. Receiving the information stored in electronic format...........................118

3.2. Processing the information stored in electronic format.........................119

3.3. Storage of information received in electronic format............................120

M. Leniency program.....................................................................................120

1. Scope of leniency......................................................................................120

2. Thresholds for immunity...........................................................................121

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3. Excluded applicants..................................................................................121

4. Thresholds for the reduction of fines........................................................122

5. Partial immunity........................................................................................125

6. Conditions attached to leniency................................................................126

7. Procedure..................................................................................................128

7.1. Full application system..........................................................................128

7.2. Hypothetical/Anonymous applications...................................................129

7.3. Conditional immunity notification..........................................................129

7.4. Notifying the company on whether significant added value has been

provided.............................................................................................................130

7.5. Oral applications....................................................................................131

8. Miscellaneous...........................................................................................131

8.1. Leniency for individuals.........................................................................131

8.2. Personal scope of the corporate leniency program................................132

N. Fining........................................................................................................132

1. General Notions........................................................................................132

2. Fines in the Context of the General Legal Framework..............................133

3. Fining Principles in the EU.........................................................................134

4. Fine Calculations in Moldova.....................................................................135

Literature............................................................................................................137

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A.Introduction

9

B.Assessment of cartel agreements

The purpose of this document is to provide practical guidance on the respective

elements of the substantive provision of the prohibition of anti-competitive

agreements pursuant to Art 5 Competition Act with view to the most serious

infringements of competition law, that is, cartels. In the context of its application

regard must be had to the Art 101 TFEU. To that effect, this document, whenever

necessary and appropriate, refers to the relevant case law of the Court of Justice

of the European Union in order to evaluate the single elements of Art 5

Competition Act. Although this document focuses on horizontal issues, the

considerations in it are also useful for vertical agreements which are covered in a

separate document.

1. Art 5 Competition Act

(1) The following shall be prohibited, no prior decision to the effect being

required: all agreements between undertakings or associations of

undertakings, decisions by associations of undertakings and concerted

practices (hereinafter agreements) which have as their object or effect the

prevention, restriction or distorting of competition.

(2) The agreements prohibited under the present article shall be automatically

void.

(3) Anticompetitive agreements, without limiting to these, are deemed to be

those which:

a) directly or indirectly fix purchase or selling prices or any other trading

conditions;

a) limit or control production, commercialization, technical development,

or investment;

b) share markets or sources of supply;

c) bids rigging or any other forms of competitive tendering;

d) Eliminate other undertakings from the market, limiting or preventing

access to the market and the free exercise of competition between

other undertakings, as well as agreements not to buy or sell without

reasonable justification.

e) apply dissimilar conditions to equivalent transactions with other trading

parties, thereby placing them at a competitive disadvantage;

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f) Make the conclusion of contracts subject to acceptance by the other

parties of supplementary obligations which, by their nature or according

to commercial practice, have no connection with the subject of such

contracts.

(4) Agreements concluded between undertakings, which are not independent

of each other do not qualify as anticompetitive agreements.

(5) Where it was established that an agreement has competition restriction or

distortion as its object, the Competition Council shall not proved the

existence of anticompetitive effects in order to establish any competition

restriction in the meaning of present law.

2. An overview - Key elements of the prohibition of

anti-competitive agreements

2.1. General remarks on Art 5 Competition Act

It is submitted that the objective of Art 5 (1) Competition Act is to preserve

effective competition, that is to say, the process of rivalry between independent

economic operators when they strive for the patronage of customers.1 It is well

recognised that competition between companies is a means of enhancing

consumer welfare and of ensuring an efficient allocation of resources.

The commercial independence and freedom of choice of economic operators are

essential conditions for the existence of effective competition on the market.2 To

that effect, the terms "prevention, restriction or distortion of competition" may be

used collectively as a comprehensive description of the anti-competitive effects

of an agreement3 on the "normal" conditions of competition on a market.

1 Scherer and Ross, Industrial Market Structure and Economic Performance, (3rd edn 1990).2 See French inland waterway charter traffic: EATE levy, OJ 1985 L 219/35, 42, [1988] 4 CMLR 698. 3 The prohibition rule of Art 5 (1) applies to restrictive agreements, concerted practices between undertakings, and decisions by associations of undertakings. In the following, the term “agreement” is meant to be understood as to also include "concerted practices" and "decisions by associations of undertakings".

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2.2. Analytical Framework

Art 5 Competition Act contains a prohibition of anticompetitive collusive

behaviour (hereinafter collectively referred to as agreements).4 The first step is

thus to assess whether the conduct under scrutiny fulfills the conditions under Art

5 (1) Competition Act as detailed below, in particular whether it has an

anticompetitive object or effect.

Unless the agreements at issue do not constitute horizontal hardcore cartels

within the meaning of Art 7 Competition Act, the second step is to assess

whether there the conditions for an exemption under Art 6 Competition Act are

satisfied, by balancing anti-competitive and pro-competitive effects.

In practice, in order to determine whether an agreement prevents, restricts or

distorts competition two main considerations are of essence: First, it is inherent

in the concept of undistorted competition that the economic operators on a given

market independently determine the policy they intend to adopt on the market.

This does not prevent them from adapting themselves intelligently to the existing

and anticipated conduct of their competitors. However, it strictly precludes any

direct or indirect contacts between them, the effect or object of which is either to

influence the conduct on the market of an actual or potential competitor or to

disclose to such a competitor the course of conduct which is contemplated.5

Secondly, it is necessary to consider the competition that would have taken place

in the absence of the agreement. As regards hardcore cartels pursuant to Art 7

Competition Act, it must be stressed that they are per se restrictions of

competition and do not require an detailed analysis of the anticompetitive

effects.

Whereas the NAPC is required to proof that all conditions of the prohibition rule in

Art 5 (1) Competition Act are met, the burden of proof as regards the conditions

for an exemption under Art 6 (1) Competition Act is with the undertakings or

association of undertakings concerned.

4 Generally, the prohibition rule of Art 5 (1) Competition Act applies to both horizontal and

vertical restrictions of competition. However, it is to be stressed that the guidelines deals

primarily with horizontal issues. Horizontal agreements are deemed to be worse from a

competition viewpoint than vertical agreemens.5 See joined Cases 40-48, 50, 54-56, 111 and 113-114/73, Suiker Unie and Others v Commission [1975] ECR 1663, paras 173 and 174.

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2.3. Requirements of Article 5 (1) Competition Act

2.3.1. Collusive Behaviour: Agreements, Decisions and Concerted Practices

There are three categories of collusive conduct falling within the scope of the

prohibition: Agreements – concerted practice - decisions of associations of

undertakings. All of these notions are defined in Art 4 Competition Act and are

elaborated further in chapter 4 of the guidelines. The dividing line between these

types of collusive behaviour is difficult to draw and overlaps may occur. Taken

together, this notions however draw a critical dividing line between illegal

collusive practices and lawful independent (albeit) parallel behaviour. The terms

are to be interpreted broadly with the aim to have all forms of co-ordination and

collusion between independent undertakings embraced by the prohibition rule.6

2.3.2. Undertakings or Associations of Undertakings

The collusive behaviour has to involve two or more independent undertakings.

Behaviour within a single economic entity (e.g. parent company and subsidiary,

where the latter may not autonomously determine its market conduct; principle

and agent) is excluded.

Both categories of actors to which the prohibition rule applies, undertaking and

association of undertaking, are defined in Article 4 Competition Act and

elaborated further in chapter 3.

2.3.3. Restriction of Competition (by Object or Effect)

An agreement is only prohibited by Art 5 (1) Competition Act if its object or

effect is to restrict competition. Art 5 (1) Competition Act distinguishes between

agreements that have a restriction of competition as their object and those

agreements that have a restriction of competition by their effect. Restrictions by

object are those that by their very nature have the potential of restricting

competition (in detail see below chapter 5.2), whereas in all other cases the

actual or potential anticompetitive effects of the agreement need to be examined

(compare chapter 5.3).

6 Compare ECJ Case C-49/92 P, Commission v Anic Partecipazioni [1999] ECR I-4125, para 112.

13

Consequently, the distinction between restriction by object and effect is very

important for the NAPC’s assessment of a case: Once it has been established that

an agreement has as its object the restriction of competition, the NAPC is not

required to prove concrete anti-competitive effects. This is explicitly stated in Art

5 (5) Competition Act.

The qualification as restrictions by object furthermore has important implications

on the applicability of the exemption rule in Art 6 Competition Act and the

prohibition of agreements of minor importance as laid down in Art 9 Competition

Act.

It is also submitted that Art 5 (1) Competition Act applies not only to restrictions

of actual competition but also to potential competition.

2.3.4. Appreciability

In order to be caught by the prohibition as set out by Art 5 Competition Act, an

agreement needs to have an appreciable impact on competition. Art 8

Competition Act determines this requirement by explicitly excluding

anticompetitive agreements of minor importance on the basis of market shares

and exempting these from the application of Art 5 Competition Act (except the

kind of agreements referred to in Art 9 Competition Act).

3. What is an undertaking?

3.1. The concept of undertaking

A legal definition of the term “undertaking” is provided in Art 4 Competition Act:

"Undertaking- any private legal person, including individual entrepreneurs and

their associations involved in economic activity consisting in offering/purchasing

products on a market, regardless of its legal status and the way of financing,

including persons who practice free professional activity and their associations."

It is submitted that the term “undertaking” applies to every form of activity of an

economic or commercial nature, quite irrespective of whether its purpose is to

14

make a profit or not. The specific legal form under which the undertaking is run is

immaterial. What is important, however, is that some form of economic or

commercial activity is involved. Limited companies, partnerships, sole

proprietorships, non profit-making organisations and associations of undertakings

(e.g. trade association) are all to be understood as undertakings. Activities in the

public sector may potentially fall into this category.

In this context, regard should be had to the interpretation of the European Court

of Justice (hereafter referred to as ECJ) which provides further guidance on what

can be regarded as an “undertaking”. According to the CJFU, “every entity

engaged in an economic activity, regardless of the legal status of the entity and

the way in which it is financed” may be regarded as an undertaking.

Against this background, it is submitted that the economic entity, in order to be

regarded an "undertaking", must offer goods or services on a given market und

does not have a purely social goal. Yet, no specific intention to earn profits is

required. The focus is on the entity’s economic activity, rather than on the entity

as such. One entity may constitute an undertaking in respect of certain activities,

but not in respect to others. Also, undertakings may either be legal persons or

natural persons.

3.2. Single enterprise doctrine

Art 5 Competition Act does not apply to agreements between entities which

belong to the same single economic unit (i.e., group of undertakings). To that

effect, agreements between a parent and its subsidiary company, or between two

companies which are under the control of a third, will not be an agreement

between undertakings, if the subsidiary has no real freedom to determine its

course of action on the market and, although having a separate legal personality,

enjoys no economic independence.7

3.3. Parental liability

The Competition Act applies to "undertakings". Also, in accordance with

Competition Act it is the undertaking that is held accountable for a violation of Art

5 Competition Act.

7 Case 22/71 Beguein Import v GL Import Export [1971] ECR 949 [1972] CMLR 81.

15

It is submitted that the notion of undertaking is an economic concept rather than

a formal legal one and an undertaking may be composed of several legal entities.

Thus, the general scheme for attributing liability in a decision with fines can be

stated as follows: first, it is necessary to determine the economic unit, i.e.,

undertaking, which took part in the infringement; secondly, it is necessary to

consider which legal entities within that undertaking can be held liable for the

infringement.

There are the following principle grounds for liability to attribute liability to a legal

entity:

The primary basis for liability is what may be called direct involvement in the

cartel conduct.

Other entities forming part of the same undertaking, i.e., the parent company,

may be held liable for the infringement for the actual exercise of decisive

influence, i.e, the subsidiary did not act autonomously in the market and, thus,

could not determine the its course of conduct on the market independently (e.g.,

Case T-9/99 HFB and other vs Commission [2002] ECR II-1487).

4. Definition of Agreement, Concerted Practice,

Decision of Association of Undertaking

A legal definition of the term “agreement” and “horizontal agreement” is

provided in Art 4 Competition Act:

„Agreement – any form (verbal or written) of manifestation of common will,

regarding the conduct on the market expressed by two or more independent

undertakings;

Horizontal agreements – agreement or concerted practice between two or

more undertakings which function at the same level/levels on the market“

4.1. Agreements

In the light of the definition stated in Art 4 Competition Act it is submitted that an

agreement can be said to exist when the parties adhere to a common plan which

limits or is likely to limit their individual commercial conduct by determining the

16

lines of their mutual action or abstention from action in the market. While it

involves joint decision-making and commitment to a common scheme, it does not

have to be made in writing; no formalities are necessary, and no contractual

sanctions or enforcement measures are required.

Also, there do not have to be physical meetings of the parties for an agreement

to be reached. Indeed, an exchange of letters or telephone calls may already

suffice.

4.2. Concerted practices

Art 5 of Competition Act also applies to concerted practices. The boundary

between the two concepts is imprecise. The key difference is that the term

“concerted practice” applies to less formal arrangements. That is, a concerted

practice does not however require the participants to have reached an actual

agreement express or implied regarding the terms of their mutual action or

abstention from action. Indeed, the ECJ confirmed in Suiker Unie that the concept

in no way requires „the working out of an actual plan“.

4.3. Decision of Association of Undertakings

Art 5 of Competition Act provides that collusive behaviour can also be expressed

by decisions of associations of undertakings. In this regard, it should be

mentioned that undertakings may act jointly in the context of more

institutionalised frameworks, in particular, through the intermediary of an

association. In this respect, the ECJ has construed the concept of association of

undertakings extensively, that is, any body which represents the interest of its

members is eligible for the qualification as an association of undertakings.

In practice, it covers not only trade associations but also a myriad of bodies with

statutory, disciplinary, regulatory and executive duties. e.g. General Council of

the Dutch Bar; Belgian Architects’ professional order; agricultural cooperatives.

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5. Restriction of competition by object or effect

5.1. Introductory remarks

Generally, the prohibition rule of Art 5 (1) Competition Act distinguishes between

restrictions of competition by object and restrictions by effect. The distinction

between restrictions by object and restrictions by effect is important insofar as

there is no need to take account of the concrete effects of an agreement once it

has been established that it has as its object the restriction of competition. That

is, where an agreement has as its object the restriction of competition, it is

unnecessary to prove that the agreement would have an anti-competitive effect

in order to find an infringement of Art 5 (1) Competition Act.

A restriction of competition does not fall under the scope of Art 5 (1) Competition

Act unless it has an appreciable impact on competition in the relevant market.

Pursuant to Art 8 (1) Competition Act agreements that do not significantly restrict

competition are deemed of minor importance and, thus, will fall outside the

scope of the prohibition rule of Art 5 (1) Competition Act.

Art 9 (1) Competition Act stipulates an important exception to the de minimis rule

according to which for certain restrictions enumerated in Art 5 Competition Act

there are no "safe harbours" for restrictions pursuant to Art 5 Competition Act.

5.2. Object restrictions

5.2.1. General remarks

Generally, in order to be able to determine whether an agreement restricts

competition by its object, it also needs to be assessed in its economic and legal

context. However, certain types of agreements blatantly go against what the

prohibition rule aims at protecting, i.e. the process of rivalry, so that, according

to the Community Courts, a detailed analysis of the facts underlying the

agreement and the specific circumstances in which it operates is not required.

Types of agreements that would typically be qualified as restrictive by object are:

(i) price fixing; (ii) market sharing; (iii) group boycotts (collective exclusive

dealing); (iv) the exchange of commercially sensitive (i.e. price) information; (v)

limiting output; or (vi) limiting sales. These types of restrictions, given their

18

negative impact on the most important parameters of competition, by their very

nature have the potential of restricting competition so that it is, according to the

Community Courts, unnecessary to carry out a detailed market analysis and show

the agreement had actual effects on the market.

5.2.2. Per se restrictions of competition

Art 7 Competition Act stipulates that certain horizontal agreements are to be

regarded as hardcore cartels and are presumed to per se restrict competition.

The reference to “per se” implies that all restrictions of competition are, by law,

automatically considered “object” restrictions irrespective of the effects on the

market and, thus, do not require an in-depth analysis of the facts underlying the

agreement and the specific circumstances in which it operates.8 However, regard

must be had that Art 7 Competition Act only gives rise to a presumption which is

rebuttable by the parties of an agreement.

Furthermore, Art 9 (1) Competition Act precludes that such restrictions are

weighed against any claimed efficiencies/pro-competitive effects in the context of

Art 6 Competition Act as hardcore cartels do not benefit of the exemption of Art 6

Competition Act.

5.2.3. Typology of cartel arrangements

Generally, hardcore cartels typically involve collusion on prices, other commercial

terms applied to transactions, output levels, allocation of market shares, or

customers or geographic areas. According to this broad classification of collusive

arrangements the following restrictive practices can be distinguished within each

category:

(i) Price fixing

Price fixing schemes may have different facets but it is submitted that

competitors commonly agree on either the level of prices or the timing of

price increases (horizontal price restraint). Furthermore, it is also not allowed

that the producer and the reseller agree on end consumer prices (vertical

price restraint).

8 It is submitted, though, that the exact meaning of the term “per se” is not defined in the Competition Act.

19

As regards the level of prices, competitors may not agree on common selling

prices or a common price calculation formula. Similarly, common systems to

calculate costs in order to determine the final sales prices allow competitors

to more easily compare their respective prices and, thus, to coordinate their

action on the market.9 Also, competitors may not fix prices by agreeing on

minimum selling prices despite leaving companies the possibility to charge

customers above the agreed minimum level.10

(ii) Limitation or control of production or markets

Given that the price is a function of output and demand, any restriction in

output by manufactures has the potential to affect prices. To that effect,

arrangements to limit the production are often corollary to agreements on

prices.

A means to restrict output is to allocate production or sales quotas among the

cartel participants which frequently occurs along the lines of the market

shares of the respective competitors. Other ways to limit production is to

agree to scale back on marketing, distribution or investment efforts.

(iii) Sharing markets and customers

Market or customer sharing agreements may exist separately but may also be

concluded together with other price fixing arrangements since such

agreements ultimately also aim at increasing prices.

Market sharing practices may take different forms, such as the allocation of

certain sales regions or distribution channels. As regards the allocation of

customers, this usually takes place by agreeing to respect each other’s

traditional customers, i.e. to keep the own customers and not to expand sales

and marketing efforts to the other competitors’ customers.

(iv) Co-ordinated boycotts and concerted refusal to deal

Competitors are not allowed to agree on measures to keep other competitors

away from their markets with a view to protect their cartelised markets which,

as a consequence, contributes not only to reduce customers’ choice but also

to maintain price levels above of which that would have prevailed if another 9 Glass containers, [1974] OJ L 160/1, para 46.10 Case 8/72 Vereeniging van Cementhandelaren v Commission [1972] ECR 977, para. 21.

20

competitor would have entered the market. This can be achieved by blocking

imports or agreeing with other competitors to share out their resources of

supply.

5.3. Restrictions by effects

5.3.1. Assessment of restrictive effects

If a agreement does not restrict competition by object (see chapter 5.2), it must

be assessed whether it has restrictive actual or potential effects on competition,

i.e. (appreciable) adverse effects on at least one of the parameters of

competition, such as in particular price, output, product quality, product variety

or innovation. Potential effects are given, if it is likely that the agreement

produces anti-competitive effects.

To this end, a comprehensive analysis of the effects of the agreement in its

market context is required. This analysis is done by way of comparison of the

actual legal and economic context which would occur in the absence of the

agreement. In other words, a counter-factual11 needs to be established by

determining which actual or potential competition would have existed in the

absence of the agreement. This comparison, however, does not include an

analysis of (potential) efficiency gains, these are to be assessed in the framework

of Art 6 Competition Act.

Possible anticompetitive effects (i.e., theories of harm) are the following: the loss

of competition between the undertakings involved, the enhanced risk of

coordination through the access to strategic business information of the parties

to the agreement on the one hand or a communality of costs (e.g. production

agreements) on the other hand, and potential foreclosure (e.g. production

agreements, standardisation agreements).

Relevant factors when carrying out the analysis are:

The nature and content of the agreement: An agreement may concern very

different stages of the undertaking’s activities (e.g. R&D, production,

commercialisation).

11 That is the situation on the market in absence of the agreement.

21

Market power: The market power12 is another crucial factor when analysing the

effects of an agreement. Therefore the analysis requires a definition of the

relevant market(s) and a determination of market shares of the parties. The

applicability of Art 5 (1) Competition Act is explicitly excluded when the market

shares do not meet the thresholds of Art 8 Competition Act regarding

agreements of minor importance. In all other cases, the degree of market power

causing competitive concerns depend on a number of factors, such as the type of

agreement and the market situation (e.g. distribution of market shares, stability

of market shares, barriers of entry).

5.3.2. Common types of horizontal agreements

(i) Research and Development Agreements:

Generally, R&D agreements have positive effects, such as the development of

new products or cost savings which may result in lower prices. Therefore,

restrictive effects will only occur in particular cases, for instance where the

undertaking’s possibilities to engage in other R&D activities are unreasonably

restricted.13

(ii) Production Agreements

Joint production may result in cheaper prices because of cost savings through

better production technologies and/or economies of scale. Nevertheless, anti-

competitive effects are possible, such as a collusive outcome because of a

significant communality of costs or foreclosure, if the product concerned is an

important imput and the parties are capable to raise rival’s costs.

(iii) Purchasing Agreements

Joint procurement may lead to cheaper prices because of enhanced

bargaining power vis-à-vis suppliers, which may also result in lower retail

prices (if there is functioning competition at the selling market). Nevertheless,

there are a number of possible theories of harm, namely the risk of collusion

(through communality of costs or information exchange) or effects resulting

from enhanced buying power.

(iv) Commercialisation Agreements

12 It shall be noted that the degree of market power required in this context is less than the one required for a finding of dominance held individually and jointly by the parties.13 It shall be stressed that theses restrictions would constitute infringements by object.

22

Commercialisation agreements may vary significantly in scope, i.e. they may

cover the whole process of commercialisation (including price setting) or only

single elements (e.g. advertising, after-sales-services). The potential

restrictive effects vary according to the extent of integration of functions, but

joint price setting will certainly give rise to competitive concerns.14

C.Guidelines regarding vertical agreements

Purpose – Implementation of the Regulation envisaged in Art. 6 (3) of

the Draft Law on Competition of Moldova regarding exemption from a

prohibition of certain vertical agreements

Guidelines Regarding the Assessment and the Exemption of Certain

Vertical Agreements from the Prohibition of the Agreement Specified in

Article 5 of the draft Competition Law of Moldova

 

These guidelines govern the criteria according to which certain vertical

agreements between market participants are assessed pursuant to Article 5 of

the Competition Law (in the following “CL”). In this context exemptions to the

cartel prohibition are set out.

1. Preamble - General Rules for the Assessment of

Vertical Restraints:

The Authority applies the following general rules when assessing vertical

restraints. In the case of an individual examination by the Authority, the Authority

will bear the burden of proof that the agreement in question infringes Article

Article 5 of CL. The undertakings claiming the benefit of Article 6 of CL bear the

burden of proving that the necessary conditions are fulfilled. The Authority asks

parties to submit such evidence early in the investigation process to avoid

unnecessary efforts and costs for the Authority and the parties.

The assessment of whether a vertical agreement has the effect of restricting

competition will be made by taking regard to the actual or likely future situation

in the relevant market with the vertical restraints in place as opposed to what

14 See FN above.

23

would have been the situation in the absence of such vertical restraints.

Appreciable anticompetitive effects are likely to occur when at least one of the

parties has or obtains some degree of market power and the agreement

contributes to the creation, maintenance or strengthening of that market power

or allows the parties to exploit such market power.

The negative effects on the market that may result from vertical restraints which

the Competition law aims at preventing are the following: (i) anticompetitive

foreclosure of other suppliers or other buyers; (ii) hindrance of competition and

facilitation of collusion between the supplier and its competitors; (iii) hindrance of

competition between and facilitation of collusion the buyer and its competitors;

(iv) the creation of obstacles to market integration.

On a market where individual distributors distribute the brand(s) of only one

supplier, a reduction of competition between the distributors of the same brand

will lead to a reduction of intra-brand competition. However, if inter-brand

competition is fierce, it is unlikely that a reduction of intra-brand competition

trough restrictions which do not contain hardcore restrictions of competition will

have negative effects for consumers.

Exclusive arrangements are generally worse for competition than non-exclusive

arrangements. For instance, under a non-compete obligation the buyer purchases

only one brand. A minimum purchase requirement, on the other hand, may leave

the buyer scope to purchase competing goods and the degree of foreclosure may

therefore be (much) less.

Vertical restraints agreed for non-branded products are in general less harmful

than restraints affecting the distribution of branded products. The distinction

between non-branded and branded products will often coincide with the

distinction between intermediate products and final products.

Vertical restraints may have positive effects by, in particular, promoting non-

price competition and improved quality of services. The case of efficiencies is in

general strongest for vertical restraints of a limited duration which help the

introduction of new complex products, which protect relationship-specific

investments or which facilitate the transfer of know-how.

 In general, Article 5 of CL will not apply to any agreement between a supplier and

its genuine agent, i.e. such agreements may include fixed prices, territorial

24

restrictions as well as customer restrictions. However, Article 5 of CL may apply

where an agency agreement goes beyond ‘genuine agency’ and includes

provisions according to which an agent accepts commercial and financial risks (of

the kind normally accepted by a distributor) in selling the supplier’s contract

products.

Article 5 of CL does not apply to agreements between companies that form part

of a single economic entity. In determining whether one company is part of the

same economic entity as another, focus is to be put on the concept of

‘autonomy’. Where companies do not enjoy real autonomy in determining their

course of action on the market, but instead carry out the instructions issued to

them by their parent company, they will be seen as part of the same economic

entity as the parent company. A 50/50-owned joint venture, for example, does

not constitute a single economic entity with its parents, so that Article 5 of CL, in

general, applies to vertical restraints concluded between the parent companies

and the joint venture.

Under Article 5 of CL, restrictions of competition infringing Article 5 of CL and not

qualifying for exemption under Article 6 of CL are rendered null and void. There

are two main alternative consequences – either the entire agreement is void and

unenforceable or the prohibited restriction alone is void and unenforceable.

2. Definitions Used in these Guidelines:

2.1. vertical agreement

– agreement or concerted practice entered into between two or more

undertakings each of which operates, for the purposes of the agreement or the

concerted practice, at a different level of the production or distribution chain, and

relating to the conditions under which the parties may purchase, sell or resell

certain goods or services;

2.2. contract goods

– goods or services, which are the subject of a vertical agreement;

25

2.3. agreement on exclusive supply (distribution)

– vertical agreement, according to which a supplier directly or indirectly

undertakes to sell contract goods to only one purchaser in the particular territory

for specific use or resale;

2.4. agreement on selective distribution

– vertical agreement, according to which a supplier directly or indirectly

undertakes to only sell contract goods to distributors selected according to

specific criteria and these distributors undertake not to sell the contract goods to

unauthorised distributors.

2.5. non-compete obligation

– within the meaning of these Guidelines – vertical agreement, according to

which a purchaser directly or indirectly undertakes not to produce, purchase or

sell goods competing with the contract goods, or directly or indirectly undertakes

to purchase more than 80 per cent of the total purchase amount of contract

goods or competing goods thereof in the particular market from the supplier or

from a market participant indicated by the supplier during the preceding calendar

year;

2.6. intellectual property rights

– within the meaning of these Guidelines – industrial property rights, copyright

and neighbouring rights;

2.7. supplier

– within the meaning of these Guidelines – a producer or another market

participant who sells contract goods to a purchaser;

2.8. purchaser

– a market participant who purchases goods for a specific use or resale thereof;

2.9. customer of the purchaser/buyer

- means an undertaking not party to the agreement which purchases the contract

goods or services from a buyer which is party to the agreement.

26

2.10. active sale

– active actions of a distributor of goods, the purpose of which is to sell goods to

clients in the exclusive territory allocated to an another distributor or to an

exclusive client group, for example, using direct mail and visits, arranging trade

sites or with the aid of other active measures;

2.11. passive sale

– selling goods to individual clients upon their request (including delivery of

goods to such clients), without performing measures directed towards the

creation or increase of demand for goods in exclusive client groups or among the

clients of an exclusive territory;

2.12. end user

– within the meaning of these Guidelines – a natural or legal person who

purchases contract goods for personal use, not resale;

2.13. agreement on reciprocal distribution

– within the meaning of these Guidelines – an agreement between competitors,

including producers and service providers, according to which participants of the

agreement mutually undertake to distribute the goods produced or supplied by

the other participant of the agreement;

2.14. hard core restrictions of competition

- hard-core vertical restraints are: the fixing of minimum resale prices; certain

types of restriction regarding the customers to whom or the territory into which a

buyer can sell the contract goods; restrictions on members of a selective

distribution system supplying each other or end users; and restrictions on

component suppliers selling components as spare parts to the buyer’s finished

product;

2.15. resale price maintenance (RPM)

- the practice whereby a supplier / reseller and its distributors agree that the

latter will sell the former's product at certain prices (resale price

27

maintenance), at or above a price floor (minimum resale price

maintenance) or at or below a price ceiling (maximum resale price

maintenance). Recommended retail price (RRP) of a product is the price

which a supplier / reseller recommends to the retailer for the sale of the product;

2.16. parallel import

- a genuine product, bearing an authorized trademark, intended for sale in one

country, but which is instead sold without the authorization of the trademark

owner in a second country with higher market prices. In other words, the goods

acquired from authorized dealers responsible for distribution in a "cheap" country

are imported into an "expensive" country and compete with the goods distributed

by authorized dealers in the "expensive" country. As a result, intra-brand

competition in the import market will increase and, most probably, prices will

decrease;

2.17. genuine agent

- bears no substantial financial risk in respect of the transactions in which it acts

as agent.

3. Exemption Rule

Pursuant to Article 6 of CL and subject to the provisions of these guidelines, it is

hereby declared that the cartel prohibition contained in Article 5 of CL shall not

apply to vertical agreements. This exemption shall apply to the extent that such

agreements contain vertical restraints.

4. Market Share Threshold

The exemption provided for in Article 3 shall apply on condition that the market

share held by the supplier does not exceed 30 % of the relevant market on which

it sells the contract goods or services and the market share held by the buyer

does not exceed 30 % of the relevant market on which it purchases the contract

goods or services.

 

28

5. Hardcore Restrictions of Competitions

5.1. Hard-core Restrictions in General

In the case of contractual provisions or concerted practices that directly establish

the resale price, the restriction is obvious. However indirect resale price

maintenance may occur, for example, by fixing the distribution margin, fixing the

maximum level of discount the distributor can grant from a prescribed price

level, making the grant of rebates or reimbursement of promotional costs by the

supplier subject to the observance of a given price level, linking the prescribed

resale price to the resale prices of competitors, threats, intimidation, warnings,

penalties, delay or suspension of deliveries or contract terminations in relation to

observance of a given price level15. Recommended sales prices, on the other

hand, are generally seen to be in compliance with Article 5 of CL.

As territorial restrictions can lead to market partitioning, the Authority will

consider such restraints as hard-core restraints that will almost always fall within

Article 5 of CL and will hardly ever qualify for exemption under Article 6 of CL.

Where a supplier sets up a network of exclusive distributorships and prevents

each buyer from actively selling into a territory granted exclusively to another

buyer (or reserved to the supplier itself), the Authority accepts that this may lead

to an increase in inter-brand competition, provided the restrictions relate only to

‘active’ sales (ie, they do not cover ‘passive’ or unsolicited sales) into territories

granted on an exclusive basis to another buyer or to the supplier itself and the

market share on the relevant markets does not exceed 30%. Where restrictions

on active sales into territories reserved exclusively to another buyer, or the

supplier itself, are imposed by supplier having market shares in excess of 30 per

cent, such arrangements may qualify for individual exemption under Article 6 of

CL in special situations.

Customer restrictions give rise to issues similar to those arising in the case of

territorial restrictions and are viewed by the Authority as hard-core restrictions.

As such, limitations on a buyer’s sales to particular classes of customer will

almost always fall within Article 5 of CL and will hardly ever qualify for exemption

under Article 6 of CL. The assessment is similar to the aforementioned

assessment of territorial restrictions.

15For other examples, as the list of indirect resale price maintenance cases is not exhaustive, see Commission Notice, Guidelines on Vertical Restraints,( SEC/2010/0411 final) Art.48

29

A policy of restricting parallel imports through which the seller is restricting

the distributors’ right to conduct active or passive sales into a different country is

generally prohibited. It is only allowed to restrict active sales into a territory

which has been exclusively allocated to another distributor.

Selective distribution systems will fall outside Article 5 of CL where distributors

are selected on objective criteria of a purely qualitative nature. In order to satisfy

this doctrine: (i) the contract products must be of a kind necessitating selective

distribution (eg, technically complex products where after-sales service is of

paramount importance and products where brand image is of particular

importance); (ii) the criteria by which buyers are selected must be objective; and

(iii) the restrictions imposed must not go beyond that which is necessary to

protect the quality and image of the product in question.

5.2. Prohibition.

The vertical agreement shall be subjected to the prohibition of agreement if the

purpose of the agreement directly or indirectly, in isolation or in combination with

other factors under the control of the parties, have as their object:

5.2.1. to restrict the opportunity of a purchaser to determine the sales

price. A supplier is entitled to determine the maximum or recommended

sales price provided that the participants of the agreement do not thus

covertly introduce a specific or minimum sales price with their actual action;

5.2.2. the restriction of the territory into which, or of the customers to whom,

a buyer party to the agreement, without prejudice to a restriction on its place

of establishment, may sell the contract goods or services, except:

a) the restriction of active sales into the exclusive territory or to an exclusive

customer group reserved to the supplier or allocated by the supplier to

another buyer, where such a restriction does not limit sales by the customers

of the buyer. This means that such protection of exclusively allocated

territories or customer groups must, however, permit passive sales to such

territories or customer groups.16

16 For examples of hardcore restrictions of passive selling see for example Verical guidelines, Art. 52.

30

b) the restriction of sales to end users by a buyer operating at the wholesale

level of trade;

c) a prohibition to participants of the selective distribution network to sell

contract goods to unauthorised distributors;

d) the restriction of sales by the members of a selective distribution system to

unauthorised distributors within the territory reserved by the supplier to

operate that system, and

d) the restriction of the buyer's ability to sell components, supplied for the

purposes of incorporation, to customers who would use them to manufacture

the same type of goods as those produced by the supplier;

5.2.3. a prohibition to participants of the selective distribution network who

perform economic activities at the retail trade level to perform active or

passive selling to end users unless such activities are not performed from an

unauthorised trade site;

5.2.4. a prohibition to participants of the selective distribution network (also

participants who perform economic activities at different levels of trade) to

perform cross-supplies;

5.2.5 the restriction, agreed between a supplier of components and a buyer

who incorporates those components, of the supplier’s ability to sell the

components as spare parts to end-users or to repairers or other service

providers not entrusted by the buyer with the repair or servicing of its goods.

6. Non-hardcore Vertical Restrictions

6.1. Assignment of Intellectual Property Rights

The exemption provided for in Article 3 shall apply to vertical agreements

containing provisions which relate to the assignment to the buyer or use by the

buyer of intellectual property rights, provided that those provisions do not

constitute the primary object of such agreements and are directly related to the

use, sale or resale of goods or services by the buyer or its customers. The

exemption applies on condition that, in relation to the contract goods or services,

those provisions do not contain restrictions of competition having the same

object as vertical restraints which are not exempted under these guidelines. 

 

31

6.2. Non-compete Obligation

6.2.1. Non-compete Obligation in General

The Authority recognises that such clauses can be precompetitive because, for

example, they provide a guarantee of ensured sales to the supplier and a

guarantee of continuous supply to the buyer. As such, providing non-compete

clauses do not have a duration exceeding five years, they are deemed legal if the

market share on the relevant markets does not exceed 30%. If the

aforementioned criteria are not met, non-compete clauses may nevertheless fall

outside the scope of Article 5 of CL or, alternatively, may satisfy the conditions

for exemption under Article 6 of CL, depending on the market positions of the

parties, the extent and duration of the clause, barriers to entry and the level of

countervailing buyer power.

A requirement pursuant to which the buyer is obliged to purchase from the

supplier a certain amount or minimum percentage of its requirements of the

contract is considered akin to noncompete clauses, effectively restricting the

ability of the buyer to stock products competing with the contract products. They

are therefore subject to a similar antitrust assessment. In particular the following

clauses are equivalent to a non-compete clause: obligations on the buyer to

purchase 80 per cent or more of its requirements of the products in question

from the supplier and obligations to purchase minimum volumes amounting to

substantially all of the buyer’s requirements (quantity forcing).

6.2.2. Prohibition

The exemption provided for in Article 3 of these Guidelines shall not apply to the

following obligations contained in vertical agreements:

(a) any direct or indirect non-compete obligation, the duration of which is

indefinite or exceeds five years. A non-compete obligation which is tacitly

renewable beyond a period of five years shall be deemed to have been concluded

for an indefinite duration;

(b) any direct or indirect obligation causing the buyer, after termination of the

agreement, not to manufacture, purchase, sell or resell goods or services;

(c) any direct or indirect obligation causing the members of a selective

distribution system not to sell the brands of particular competing suppliers.

32

6.2.3. Exemptions from Article 6.2.2.

6.2.3.1. By way of derogation from paragraph 6.2.2.(a), the time limitation of

five years shall not apply where the contract goods or services are sold by the

buyer from premises and land owned by the supplier or leased by the supplier

from third parties not connected with the buyer, provided that the duration of

the non-compete obligation does not exceed the period of occupancy of the

premises and land by the buyer.

6.2.3.2. By way of derogation from paragraph 6.2.2. (b), the exemption

provided for in Article 3 shall apply to any direct or indirect obligation causing

the buyer, after termination of the agreement, not to manufacture, purchase,

sell or resell goods or services where the following conditions are fulfilled:

(a) the obligation relates to goods or services which compete with the

contract goods or services;

(b) the obligation is limited to the premises and land from which the buyer has

operated during the contract period;

(c) the obligation is indispensable to protect know-how transferred by the

supplier to the buyer;

(d) the duration of the obligation is limited to a period of one year after

termination of the agreement.

Paragraph 6.2.2. (b) is without prejudice to the possibility of imposing a

restriction which is unlimited in time on the use and disclosure of know-how

which has not entered the public domain.

7. Agreements between Competing Undertakings

The exemption provided for in paragraph 3 shall not apply to vertical agreements

entered into between competing undertakings. However, it shall apply where

competing undertakings enter into a non-reciprocal vertical agreement and:

(a) the supplier is a manufacturer and a distributor of goods, while the buyer is a

distributor and not a competing undertaking at the manufacturing level; or

(b) the supplier is a provider of services at several levels of trade, while the buyer

provides its goods or services at the retail level and is not a competing

undertaking at the level of trade where it purchases the contract services.

33

8. Withdrawal of Exemption

8.1. A change in the market position of one of the parties, or both, may result

in an agreement that was originally permissible under Article 5 of CL

becoming prohibited. Article 4 of these Guidelines states that an agreement

may benefit from a ”safe harbour” where the supplier has a market share

below 30 per cent (the same case with the buyer) at the time of agreeing the

restraint in question but will lose such benefit where the supplier’s / buyers

market share subsequently exceeds 30 per cent by 2% for two years in a row.

8.2. The Authority will normally take into account the cumulative impact of

supplier’s agreements when assessing the impact of vertical restraints on

competition in a given market. In addition, the assessment of a given vertical

restraint can vary depending on the vertical restraints concluded by that

supplier’s competitors. If the vertical restraints imposed by the supplier and

its competitors have the cumulative effect of foreclosing market access, then

any vertical restraints that contribute significantly to that foreclosure may be

found to infringe Article 5 of CL. In such a case, the Authority may consider

withdrawing the benefit of the safe harbour. Such a withdrawal of the ” safe

harbour” is effected by decision addressed to the relevant parties and has

only prospective effect.

9. Procedural Issues

Private parties showing a legitimate interest (those actually or potentially

suffering damage as a result of the conduct in question) can file a complaint with

the Authority either formally or informally (including orally or anonymously). The

submission of a formal complaint ties the Authority to respond within a given

time (in principle, {time period to be discussed} months)

10. Formal Notification Procedure

In case of novel questions of law, the Authority will provide for legal guidance.

Apart from this procedure applying to requests for guidance relating to novel

questions, there is no formal notification procedure.

34

D.Guidance paper on verticals

In a Nutshell: How to Assess Vertical Cases Pursuant to EU Law

Article 101 TFEU may apply to vertical restraints provided they are NOT:

carrying out non-economic activities; ‘genuine agency’ arrangements; or, concluded among related companies (e.g. between a parent and its

100% subsidiary).

If none of the above criteria is met, then an agreement containing a vertical

restraint may require review under Article 101 TFEU.

The Commission’s Vertical Guidelines set out a number of factors that will be

taken into account in assessing whether vertical agreements fall within Article

101 (1) TFEU, namely: supplier market position; competitors’ market positions;

buyer market position; barriers to entry; market maturity; the level of trade

affected by the agreement; and the product nature.

There are a series of steps to be taken in determining whether and how Article

101 TFEU may apply to a vertical restraint. First, does the vertical agreement

contain a ‘hard-core’ restraint? If the agreement contains a hard-core restraint, it:

will not benefit from the safe harbour created by the Commission’s De Minimis notice;

will not benefit from the Vertical Block Exemption’s safe harbour; and is highly unlikely to satisfy the conditions of Article 101 (3) TFEU.

Hard-core vertical restraints are: the fixing of minimum resale prices; certain

types of restriction on the customers to whom or the territory into which a buyer

can sell the contract goods; restrictions on members of a selective distribution

system supplying each other or end users; and restrictions on component

suppliers selling components as spare parts to the buyer’s finished product.

Second, if the agreement contains no hard-core vertical restraints, are the

parties’ positions on the relevant markets sufficiently minor such that the

Commission’s De Minimis notice may apply. If the criteria of the De Minimis

notice are met (most importantly, a market share of no more than 15% on the

35

relevant markets), then the Commission will not consider that the agreement

falls within Article 101 (1) TFEU as it does not ‘appreciably’ restrict competition.

Third, does the agreement fall within the Vertical Block Exemption? If the

agreement falls within the scope of the Vertical Block Exemption, it will benefit

from a ‘safe harbour’. This ‘safe harbour’ will apply in relation to decisions taken

not only by the Commission but also by member state competition authorities

and courts in their application of Article 101 TFEU.

Fourth, where the vertical agreement does not fall within the terms of the

Commission’s De Minimis notice or the Commission’s Vertical Block Exemption, it

is necessary to conduct an ‘individual assessment’ of the agreement in order

to determine whether it falls within Article 101 (1) TFEU and, if so, whether the

conditions for an exemption under Article 101 (3) TFEU are satisfied.

The second step, which becomes relevant only when an agreement is found to be

restrictive of competition, is to determine the pro-competitive benefits produced

by that agreement and to assess whether these pro-competitive effects outweigh

the anti-competitive effects. The balancing of anti-competitive and pro-

competitive effects is conducted exclusively within the framework laid down by

Article 101(3) TFEU. The present guidelines examine the four conditions of Article

101(3) TFEU:

efficiency gains; fair share for consumers; indispensability of the restrictions; no elimination of competition.

Given that these four conditions are cumulative and have to be proven by

the party using the restriction, it is unnecessary to examine any remaining

conditions once it is found that one of them is not fulfilled. In individual cases it

may therefore be appropriate to consider the four conditions in a different order.

For the purposes of these guidelines, it is considered appropriate to invert the

order of the second and the third condition and thus deal with the issue of

indispensability before the issue of pass-on to consumers. The analysis of pass-on

requires a balancing of the negative and positive effects of an agreement on

36

consumers. It should not include the effects of any restrictions that already fail

the indispensability test and are, for that reason, prohibited by Article 101 TFEU.

37

E. Merger Control

Horizontal merger

Non-horizontal merger

F. Undertakings Concerned

Undertakings concerned are the direct participants in a merger or acquisition of

control. In this respect, Article 20(2) provides that:

A concentration operation shall be deemed to arise when the modification of

control results from:

a) the merger of two or more previously independent undertakings or parts of

undertakings;

b) the acquisition, by one or more persons already controlling at least one

undertaking, or by one or more undertakings, whether by purchase of securities

(shares in the social capital) or assets, by contract or by any other means, of

direct or indirect control of the whole or parts of one or more other undertakings.

c) Joint establishment of a commercial society which fulfils the functions of an

autonomous entity.

In the case of a merger, the undertakings concerned will be the undertakings that

are merging. In the remaining cases, it is the concept of ‘acquiring control’ that

will determine which are the undertakings concerned. On the acquiring side,

there can be one or more companies acquiring sole or joint control. On the

acquired side, there can be one or more companies as a whole or parts thereof,

when only one of their subsidiaries or some of their assets are the subject of the

transaction. As a general rule, each of these companies will be an undertaking

concerned within the meaning of the competition act. However, the particular

features of specific transactions require some refinement of this principle, as will

be seen below when analyzing different possible scenarios.

38

In concentrations other than mergers or the setting-up of new joint ventures, i. e.

in cases of sole or joint acquisition of pre-existing companies or parts of them,

there is an important party to the agreement who is to be ignored when

identifying the undertakings concerned: the seller. Although it is clear that the

operation cannot proceed without his consent, his role ends when the transaction

is completed since, by definition, from the moment the seller has relinquished all

control over the company, his links with it disappear. Where the seller retains

joint control with the acquiring, it will be considered to be one of the

undertakings concerned.

Once the undertakings concerned have been identified in a given transaction,

their turnover for the purposes of determining jurisdiction should be calculated

according to the rules set out in Article 24 of the competition act.

For clarification the next chapters deal with the identification of undertakings

concerned in different types of operations.

1. Mergers

In a merger, several previously independent companies come together to create

a new company or, while remaining separate legal entities, to create a single

economic unit. As mentioned earlier, the undertakings concerned are each of the

merging entities.

1.1. Acquisition of sole control

1.1.1. Acquisition of sole control of the whole company

Acquisition of sole control of the whole company is the most straightforward case

of acquisition of control; the undertakings concerned will be the acquiring

company and the acquired or target company.

1.1.2. Acquisition of sole control of part of a company

When the operation concerns the acquisition of parts of one or more

undertakings, only those parts which are the subject of the transaction shall be

taken into account with regard to the seller. The concept of ‘parts’ is to be

39

understood as one or more separate legal entities (such as subsidiaries), internal

subdivisions within the seller (such as a division or unit), or specific assets which

in themselves could constitute a business (e. g. in certain cases brands or

licenses) to which a market turnover can be clearly attributed. In this case, the

undertakings concerned will be the acquirer and the acquired part(s) of the

target company.

1.1.3. Acquisition of sole control after reduction or enlargement of the

target company

The undertakings concerned are the acquiring company and the target company

or companies, in their configuration at the date of the operation. The ANPC bases

itself on the configuration of the undertakings concerned at the date of the event

triggering the obligation to notify under Article 22, namely the conclusion of the

agreement, the announcement of the public bid or the acquisition of a controlling

interest. If the target company has divested an entity or closed a business prior

to the date of the event triggering notification or where such a divestment or

closure is a pre-condition for the operation, then sales of the divested entity or

closed business are not to be included when calculating turnovers. Conversely, if

the target company has acquired an entity prior to the date of the event

triggering notification, the sales of the latter are to be added.

1.1.4. Acquisition of sole control through a subsidiary of a group

Where the target company is acquired by a group through one of its subsidiaries,

the undertakings concerned for the purpose of calculating turnover are the target

company and the acquiring subsidiary. However, regarding the actual

notification, this can be made by the subsidiary concerned or by its parent

company. All the companies within a group (parent companies, subsidiaries, etc.)

constitute a single economic entity, and therefore can only be one undertaking

concerned within the one group - i. e. the subsidiary and the parent company

cannot each be considered as separate undertakings concerned, either for the

purposes of ensuring that the threshold requirements are fulfilled.

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1.2. Acquisition of joint control

1.2.1. Acquisition of joint control of a newly-created company

In the case of acquisition of joint control of a newly-created company, the

undertakings concerned are each of the companies acquiring control of the newly

set-up joint venture (which, as it does not yet exist, cannot be considered to be

an undertaking concerned and moreover, as yet, has no turnover of its own).

1.2.2. Acquisition of joint control of a pre-existing company

In the case of acquisition of joint control of a pre-existing company or business,

the undertakings concerned are each of the companies acquiring joint control on

the one hand, and the pre-existing acquired company or business on the other.

However, where the pre-existing company was under the sole control of one

company and one or several new shareholders acquire joint control while the

initial parent company remains, the undertakings concerned are each of the

jointly-controlling companies (including this initial shareholder). The target

company in this case is not an undertaking concerned, and its turnover is part of

the turnover of the initial parent company.

1.2.3. Acquisition of joint control with a view to immediate partition of

assets

Where several undertakings come together solely for the purpose of acquiring

another company and agree to divide up the acquired assets according to a pre-

existing plan immediately upon completion of the transaction, there is no

effective concentration of economic power between the acquirers and the target

company since the assets acquired are jointly held and controlled for only a ‘legal

instant’. This type of acquisition with a view to immediate partition of assets will

in fact be considered to be several operations, whereby each of the acquiring

companies acquires its relevant part of the target company. For each of these

operations, the undertakings concerned will therefore be the acquiring company

and that part of the target which it is acquiring (just as if there was an acquisition

of sole control of part of a company).

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1.3. Acquisition of control by a joint venture

In transactions where a joint venture acquires control of another company, the

question arises whether or not, from the point of view of the acquiring party, the

joint venture should be regarded as a single undertaking concerned (the turnover

of which would include the turnover of its parent companies), or whether each of

its parent companies should individually be regarded as undertakings concerned.

In other words, the issue is whether or not to ‘lift the corporate veil’ of the

intermediate undertaking (the vehicle). In principle, the undertaking concerned is

the direct participant in the acquisition of control. However, there may be

circumstances where companies set up ‘shell’ companies, which have little or no

turnover of their own, or use an existing joint venture which is operating on a

different market from that of the target company in order to carry out

acquisitions on behalf of the parent companies. Where the acquired or target

company has a turnover of less than 10,000,000 MDL, the question of

determining the undertakings concerned may be decisive for jurisdictional

purposes. In this type of situation, the ANPC will look at the economic reality of

the operation to determine which are the undertakings concerned.

Where the acquisition is carried out by a full-function joint venture, i. e. a joint

venture which has sufficient financial and other resources to operate a business

activity on a lasting basis and is already operating on a market, ANPC will

normally consider the joint venture itself and the target company to be the

undertakings concerned (and not the jointventure’s parent companies).

Conversely, where the joint venture can be regarded as a vehicle for an

acquisition by the parent companies, ANPC will consider each of the parent

companies themselves to be the undertakings concerned, rather than the joint

venture, together with the target company. This is the case in particular where

the joint venture is set up especially for the purpose of acquiring the target

company, where the joint venture has not yet started to operate, where an

existing joint venture has no legal personality or full-function character as

referred to above or where the joint venture is an association of undertakings.

The same applies where there are elements which demonstrate that the parent

companies are in fact the real players behind the operation. These elements may

include a significant involvement by the parent companies themselves in the

initiation, organization and financing of the operation. Moreover, where the

acquisition leads to a substantial diversification in the nature of the joint

venture’s activities, this may also indicate that the parent companies are the real

42

players in the operation. This will normally be the case when the joint venture

acquires a target company operating on a different product market. In those

cases, the parent companies are regarded as undertakings concerned.

1.4. Change from joint control to sole control

In the case of a change from joint control to sole control, one shareholder

acquires the stake previously held by the other shareholder(s). In the case of two

shareholders, each of them has joint control over the entire joint venture, and not

sole control over 50 % of it; hence the sale of all of his shares by one shareholder

to the other does not lead the sole remaining shareholder to move from sole

control over 50 % to sole control over 100 % of the joint venture, but rather to

move from joint control to sole control of the entire company (which, subsequent

to the operation, ceases to be a ‘joint’ venture). In this situation, the

undertakings concerned are the remaining (acquiring) shareholder and the joint

venture. As is the case for any other seller, the ‘exiting’ shareholder is not an

undertaking concerned.

1.5. Change in the shareholding in cases of joint control of an existing

joint venture

The decisive element in assessing changes in the shareholding of a company is

whether the operation leads to a change in the quality of control. The ANPC

assesses each operation on a case-by-case basis, but under certain hypotheses,

there will be a presumption that the given operation leads, or does not lead, to

such a change in the quality of control, and thus constitutes, or does not

constitute, a notifiable concentration. A distinction must be made according to

the circumstances of the change in the shareholding; firstly, one or more existing

shareholders can exit; secondly, one or more new additional shareholders can

enter; and thirdly, one or more existing shareholders can be replaced by one or

more new shareholders.

1.5.1. Reduction in the number of shareholders leading to a change from

joint to sole control

It is not the reduction in the number of shareholders per se which is important,

but rather the fact that if some shareholders sell their stakes in a given joint

43

venture, these stakes are then acquired by other (new or existing) shareholders,

and thus the acquisition of these stakes or additional contractual rights may lead

to the acquisition of control or may strengthen an already existing position of

control (e.g. additional voting rights or veto rights, additional board members,

etc.). Where the number of shareholders is reduced, there may be a change from

joint control to sole control, in which case the remaining shareholder acquires

sole control of the company. The undertakings concerned will be the remaining

(acquiring) shareholder and the acquired company (previously the joint venture).

In addition to the shareholder with sole control of the company, there may be

other shareholders, for example with minority stakes, but who do not have a

controlling interest in the company; these shareholders are not undertakings

concerned as they do not exercise control.

1.5.2. Reduction in the number of shareholders not leading to a change

from joint to sole control

Where the operation involves a reduction in the number of shareholders having

joint control, without leading to a change from joint to sole control and without

any new entry or substitution of shareholders acquiring control, the proposed

transaction will normally be presumed not to lead to a change in the quality of

control and will therefore not be a notifiable concentration. This would be the

case where, for example, five shareholders initially have equal stakes of 20 %

each and where, after the operation, one shareholder exits and the remaining

four shareholders each have equal stakes of 25 %. However, this situation would

be different where there is a significant change in the quality of control, notably

where the reduction in the number of shareholders gives the remaining

shareholders additional veto rights or additional board members, resulting in a

new acquisition of control by at least one of the shareholders, through the

application of either the existing or a new shareholders’ agreement. In this case,

the undertakings concerned will be each of the remaining shareholders which

exercise joint control and the joint venture.

1.5.3. Any other changes in the composition of the shareholding

Finally, in the case where, following changes in the shareholding, one or more

shareholders acquire control, the operation will constitute a notifiable operation

as there is a presumption that it will normally lead to a change in the quality of

44

control. Irrespective of whether the number of shareholders decreases, increases

or remains the same subsequent to the operation, this acquisition of control can

take any of the following forms:

entry of one or more new shareholders (change from sole to joint control,

or situation of joint control both before and after the operation),

acquisition of a controlling interest by one or more minority shareholders

(change from sole to joint control, or situation of joint control both before

and after the operation),

substitution of one or more shareholders (situation of joint control both

before and after the operation).

The question is whether the undertakings concerned are the joint venture and

the new shareholder(s) who would together acquire control of a pre-existing

company, or whether all of the shareholders (existing and new) are to be

regarded as undertakings concerned acquiring control of a new joint venture.

This question is particularly relevant when there is no express agreement

between one (or more) of the existing shareholders and the new shareholder(s),

who might only have had an agreement with the ‘exiting’ shareholder(s), i.e. the

seller(s).

A change in the shareholding through the entry or substitution of shareholders is

considered to lead to a change in the quality of control. This is because the entry

of a new parent company, or the substitution of one parent company for another,

is not comparable to the simple acquisition of part of a business as it implies a

change in the nature and quality of control of the whole joint venture, even when,

both before and after the operation, joint control is exercised by a given number

of shareholders. ANPC therefore considers that the undertakings concerned in

cases where there are changes in the shareholding are the shareholders (both

existing and new) who exercise joint control and the joint venture itself. As

mentioned earlier, non-controlling shareholders are not undertakings concerned.

1.6. ‘Demergers’ and the break-up of companies

When two undertakings merge or set up a joint venture, then subsequently

demerge or break up their joint venture, and in particular the assets are split

between the ‘demerging’ parties, particularly in a configuration different from the

original, there will normally be more than one acquisition of control. For example,

45

undertakings A and B merge and then subsequently demerge with a new asset

configuration. There will be the acquisition by undertaking A of various assets

(assets which may previously have been owned by itself or by undertaking B and

assets jointly acquired by the entity resulting from the merger), with similar

acquisitions by undertaking B. Similarly, a break-up of a joint venture can be

deemed to involve a change from joint control over the joint venture’s entire

assets to sole control over the divided assets. A break-up of a company in this

way is ‘asymmetrical’. For such a demerger, the undertakings concerned (for

each break-up operation) will be, on the one hand, the original parties to the

merger and, on the other, the assets that each original party is acquiring. For the

break-up of a joint venture, the undertakings concerned (for each break-up

operation) will be, on the one hand, the original parties to the joint venture, each

as acquirer, and, on the other, that part of the joint venture that each original

party is acquiring.

1.7. Exchange of Assets

In those transactions where two (or more) companies exchange assets,

regardless of whether these constitute legal entities or not, each acquisition of

control constitutes an independent concentration. Although it is true that both

transfers of assets in a swap are usually considered by the parties to be

interdependent, that they are often agreed in a single document and that they

may even take place simultaneously, the purpose of the competition act is to

assess the impact of the operation resulting from the acquisition of control by

each of the companies. The legal or even economic link between those

operations is not sufficient for them to qualify as a single concentration.

Hence the undertakings concerned will be, for each property transfer, the

acquiring companies and the acquired companies or assets.

1.8. Acquisitions of control by individual persons

Article 20 of the competition act specifically provides that a concentration is

deemed to arise:

a) the merger of two or more previously independent undertakings or parts of

undertakings;

b) the acquisition, by one or more persons already controlling at least one

undertaking, or by one or more undertakings, whether by purchase of securities

46

(shares in the social capital) or assets, by contract or by any other means, of

direct or indirect control of the whole or parts of one or more other undertakings.

c) Joint establishment of a commercial society which fulfills the functions of an

autonomous entity.

The ANPC considers that the undertakings concerned are the target company and

the individual acquirer (with the turnover of the undertaking(s) controlled by that

individual being included in the calculation of the individual’s turnover).

1.9. Management buy-outs

An acquisition of control of a company by its own managers is also an acquisition

by individuals, and what has been said above is therefore also applicable here.

However, the management of the company may pool its interests through a

‘vehicle company’, so that it acts with a single voice and also to facilitate

decision-making. Such a vehicle company may be, but is not necessarily, an

undertaking concerned. The general rule on acquisitions of control by a joint

venture applies here. With or without a vehicle company, the management may

also look for investors in order to finance the operation. Very often, the rights

granted to these investors according to their shareholding may be such that

control within the meaning of Article 20 will be conferred on them and not on the

management itself, which may simply enjoy minority rights.

1.10. Acquisition of control by a state-owned company

In those situations where a State-owned company merges with or acquires

control of another company controlled by the same State, the question arises as

to whether these transactions really constitute concentrations within the

meaning of Article 20 of the competition act or rather internal restructuring

operations of the ‘public sector group of companies’. A merger or acquisition of

control arising between two companies owned by the same State may constitute

a concentration and, if so, both of them will qualify as undertakings concerned,

since the mere fact that two companies are both owned by the same State does

not necessarily mean that they belong to the same ‘group’. Indeed, the decisive

issue will be whether or not these companies are both part of the same industrial

holding and are subject to a coordinated strategy.

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G.Market Delineation

Market definition is a key step to apply competition law since market shares can

only be calculated after the market has been defined. Usually in the assessment

of market power the market definition is the first step. Also in the purpose of a

new market entry, it is necessary to identify the market that might be entered.

Additionally, an appropriately defined relevant market may provide information

that allows an investigation to be closed at an early stage.

The hypothetical monopolist test

The process of defining a market typically begins by establishing the

closest substitutes to the product (or group of products) that is the focus of

the investigation. These substitute products are the most immediate

competitive constraints on the behaviour of the undertaking supplying the

product in question. In order to establish which products are 'close enough'

substitutes to be in the relevant market, a conceptual framework known as

the hypothetical monopolist test (HM-test) is usually employed.

The test seeks to establish the smallest product group (and geographical

area) such that a hypothetical monopolist controlling that product group

(in that area) could profitably increase prices above competitive prices.

This test is also known as SSNIP-test, where SSNIP means small but

significant non-transitory increase in prices. Normally the small but

significant price increase is between 5 and 10%. If the price increase is

profitable, that product (group and area) is usually the relevant market. If

a hypothetical monopolist could not profitably increase competitive prices

up to 5-10% than the candidate product (group) is too narrow to be a

relevant market. This is typically because a sufficiently large number of

customers would switch some of their purchases to other substitute

products (or areas). Thus, one has to add the substitute products (or

areas) to the relevant market and repeat the process (iterative process)

until the market is defined properly, i.e. until the price increase is

profitable.

If, on the other hand, a hypothetical monopolist could profitably increase

prices just in the “first process round”, then the relevant market would

usually be narrower than the candidate product (group).48

A market definition should normally contain two dimensions: A product and

geographic area. It is often practical to define the relevant product market first

and then to define the relevant geographic market.

1. The product market

1.1. The demand side

As described above, the market definition process usually starts by looking at a

relatively narrow potential definition and further asks whether a hypothetical

monopolist of the candidate product could profitably increase prices by a small

but significant amount above competitive levels. Following the price rise,

customers may switch some of their purchases from the candidate product to

other substitute products (demand side substitution). It is not necessary for all

customers, or even the majority, to switch. The important factor is whether the

volume of purchases likely to be switched is large enough to prevent a

hypothetical monopolist profitably sustaining prices 5-10% above competitive

levels. Substitute products or their prices do not have to be identical to be

included in the same market.

However, defining a market in strict accordance with the test's assumptions is

rarely possible. Evidence on substitution from a number of different sources may

be considered. Although the information used will vary from case to case the

following evidence and issues are often likely to be important:

Evidence from the undertakings active in the market and their commercial

strategies may be useful. For example, company documents may indicate

which products the undertakings under investigation believe to be the

closest substitute to their own products. Company documents such as

internal communications, public statements, studies on consumer

preferences or business plans may provide other useful evidence.

Customers and competitors will often be interviewed. In particular,

customers can sometimes be asked directly how they would react to a

hypothetical price rise, although because of the hypothetical nature of the

question, answers may need to be treated with a degree of caution. Survey

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evidence might also provide information on customer preferences that

would help to assess substitutability: For example, evidence on how

customers rank particular products, whether and to what extent brand

loyalty exists, and which characteristics of products are the most

important to their decision to purchase.

A significant factor in determining whether substitution takes place is whether

customers would incur costs in substituting products. High switching costs

relative to the value of the product will make substitution less likely. Substitution

will also be less likely if there is high brand loyalty, even though the product

characteristics are similar. Conversely, products with very different physical

characteristics may be close substitutes if, from a customer's point of view, they

have a very similar use.

Patterns in price changes can be informative. For example, two products showing

the same pattern of price changes, for reasons not connected to costs or general

price inflation, would be consistent with (although not proof of) these two

products being close substitutes. Customer reactions to price changes in the past

may also be relevant. Evidence that a relatively large proportion of customers

had switched to a rival product in response to a relatively small price rise in the

focal product would provide evidence that these two goods are close substitutes.

Equally price divergence over time, without significant levels of substitution,

would be consistent with the two products being in separate markets.

Evidence on own or cross price elasticities of demand may also be examined if it

is available. The own price elasticity of demand measures the rate at which

demand for a product (e.g. the candidate product) changes when its price goes

up or down. The cross price elasticity of demand measures the rate at which

demand for a product (e.g. a rival product) changes when the price of another

product (e.g. the focal product) goes up or down. One drawback of calculating

elasticities of demand is that a very good – and mostly not available - database is

needed.

Critical loss or price-concentration analysis might be also very useful in defined

the relevant product market. In this context however one has to be aware of

price discrimination - In some cases the hypothetical monopolist may be able to

charge some customers a higher price than others, where the price difference is

50

not related to higher costs of serving those customers. This is called price

discrimination. Where a hypothetical monopolist would (or would be likely to)

price discriminate significantly between groups of customers, each of these

groups may form a separate market. If so, a relevant market might be defined as

sales of the relevant product in the relevant geographic area to a particular

customer group. By contrast, where an undertaking is unable to price

discriminate, this may lead to the relevant market being wider than the

candidate product or candidate area.

1.2. The supply side

If prices rise, undertakings that do not currently supply a product might be able

to supply it at short notice and without incurring substantial sunk costs. This may

prevent a hypothetical monopolist profitably increase competitive prices up to 5-

10%. This form of substitution is carried out by suppliers and hence is known as

supply side substitution.

Supply side substitution can be thought of as a special case of entry – entry that

occurs quickly (e.g. less than one year), effectively (e.g. on a scale large enough

to affect prices), and without the need for substantial sunk investments. Supply

side substitution addresses the questions of whether, to what extent, and how

quickly, undertakings would start supplying a market in response to a

hypothetical monopolist raising prices by 5-10%.

When assessing the scope for supply side substitution, the evidence from some

or all of the following sources may be relevant:

Potential suppliers might be asked whether substitution was technically

possible, about the costs of switching production between products,

and the time it would take to switch production. The key question is

whether it would be profitable to switch production, given a small (e.g.

5-10%) but non-transitory price increase by a hypothetical monopolist.

Potential suppliers might be asked whether they had spare capacity or

were free or willing to switch production. Undertakings may be

prevented from switching production because all their existing capacity

was tied up, e.g. they may be committed to long term contracts. There

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might also be difficulties obtaining necessary inputs or finding

distribution outlets. Undertakings may be unwilling to switch production

from an existing product to a new one, if producing the former product

is more profitable than the latter.

2. The geographic market

Geographic markets are defined using the same process as that used to define

product markets. The geographic market may be national (i.e. the Republic of

Moldova), smaller than the Republic of Moldova (e.g. local or regional), wider

than the Republic of Moldova (e.g. the Republic of Moldova and neighboring

countries), or even worldwide.

2.1. The demand side

As with the product market, the objective is to identify substitutes which are

sufficiently close that they would prevent a hypothetical monopolist of the

candidate product in one area from profitably increasing prices by 5-10%. The

process starts by looking at a relatively narrow area – the candidate area. The

hypothetical monopolist test is applied to this area, and repeated over wider

geographic areas as appropriate until the hypothetical monopolist would find it

profitable to raise competitive prices by 5-10% in the area(s) in question.

The principles applied in defining the geographic market are the same as those

for the product market. The value of a product in relation to costs of search and

transport is often an important factor in defining geographic markets. The higher

the relative value, the more likely customers are to travel further in search of

cheaper supplies. The mobility of customers may also be a relevant factor.

2.2. The supply side

If focusing the supply side the question is if there is potential for undertakings in

other (e.g. neighboring) territories to supply the candidate area. When defining

the geographic market, supply side substitution is analyzed using the same

conceptual approach set out for the product market. Where the price of a product

is low relative to its transport costs, this might indicate a relatively narrow

geographic market.

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When considering whether the geographic market should be defined more widely

than a national market, data on imports may be informative. Significant imports

of the product may indicate that the market is wider than a national market.

However, the presence of imports in a territory will not always mean that the

market is international (e.g. imports may come only from international operations

of domestic suppliers, international suppliers may require substantial

investments in establishing distribution networks or branding their products in

the destination country). Conversely a lack of imports does not necessarily mean

that the market cannot be international. The potential for imports may still be an

important source of substitution should prices rise.

3. The competitive versus the current price

The test has been applied in terms of a hypothetical monopolist profitably

sustaining prices above competitive levels. However, where an undertaking has

market power, it may operate in a market where the current price is substantially

different from the competitive price. An undertaking with market power may well

have already raised prices above competitive levels to its profit maximizing level.

If so, the undertaking would not profitably sustain prices above current levels. If it

tried to sustain higher prices, consumers would switch to purchasing other

products. However, it would be wrong to argue that these products prevented the

undertaking from exercising market power and so it would usually be

inappropriate to include them in the relevant market. This problem is sometimes

known as the cellophane fallacy after a US case involving cellophane products.

The HM-test might be also distorted if prices are sustained below competitive

levels, as, for example, may occur in an investigation of predatory pricing.

H.Calculation of Turnovers

The competition act has a twofold test for the Moldovan jurisdiction. One test is

that the transaction must be a concentration within the meaning of Article 20.

The second comprises the turnover thresholds contained in Article 22 and

designed to identify those transactions which have an impact upon the Republic

53

of Moldova. Turnover is used as a proxy for the economic resources being

combined in a concentration, and is allocated geographically in order to reflect

the geographic distribution of those resources.

Two sets of thresholds are set out in Article 22: Firstly, the thresholds which must

first be checked in order to establish whether the transaction has to be notified.

In this respect, the turnover threshold is intended to measure the overall

dimension of the undertakings concerned; the turnover threshold seek to

determine whether the concentration involves a minimum level of activities.

Article 22 must only be applied in the event that the thresholds of more than

25,000,000 MDL by the undertakings concerned are met and each of at least two

undertakings concerned achieved a turnover more than 10,000,000 MDL for the

year prior to the operation.

The thresholds as such are designed to establish jurisdiction and not to assess

the market position of the parties to the concentration nor the impact of the

operation. In so doing they include turnover derived from, and thus the resources

devoted to, all areas of activity of the parties, and not just those directly involved

in the concentration.

The fact that the thresholds of Article 22 of the competition act are purely

quantitative, since they are only based on turnover calculation instead of market

share or other criteria, shows that their aim is to provide a simple and objective

mechanism that can be easily handled by the companies involved in a merger in

order to determine if their transaction has an economic dimension for the

Republic of Moldova and is therefore notifiable.

In this context, it is clear that turnover should reflect as accurately as possible

the economic strength of the undertakings involved in a transaction. This is the

purpose of the set of rules contained in Article 24 of the competition act which

are designed to ensure that the resulting figures are a true representation of

economic reality.

The concept of turnover as used in Article 22 of the competition act refers to ‘the

amounts derived from the sale of products and the provision of services’. Sale, as

a reflection of the undertaking’s activity, is thus the essential criterion for

calculating turnover, whether for products or the provision of services. In the

54

case of products, turnover can be determined without difficulty, namely by

identifying each commercial act involving a transfer of ownership. In the case of

services, the factors to be taken into account in calculating turnover are much

more complex. Generally speaking, the method of calculating turnover in the

case of services does not differ from that used in the case of products: The ANPC

takes into consideration the total amount of sales. Where the service provided is

sold directly by the provider to the customer, the turnover of the undertaking

concerned consists of the total amount of sales for the provision of services in the

last financial year. Because of the complexity of the service sector, this general

principle may have to be adapted to the specific conditions of the service

provided. Thus, in certain sectors of activity (such as tourism and advertising),

the service may be sold through the intermediary of other suppliers. Because of

the diversity of such sectors, many different situations may arise. For example,

the turnover of a service undertaking which acts as an intermediary may consist

solely of the amount of commissions which it receives.

With regard to aid granted to undertakings by public bodies, any aid relating to

one of the ordinary activities of an undertaking concerned is liable to be included

in the calculation of turnover if the undertaking is itself the recipient of the aid

and if the aid is directly linked to the sale of products and the provision of

services by the undertaking and is therefore reflected in the price. For example,

aid towards the consumption of a product allows the manufacturer to sell at a

higher price than that actually paid by consumers.

1. ‘Net’ turnover

The turnover to be taken into account is ‘net’ turnover, after deduction of a

number of components specified in Article 24 of the competition act. The ANPC`s

aim is to adjust turnover in such a way as to enable it to decide on the real

economic weight of the undertaking. Thus, the competition act provides for the

‘deduction of sales rebates and of value added tax and other taxes directly

related to turnover’. ‘Sales rebates’ should be taken to mean all rebates or

discounts which are granted by the undertakings during their business

negotiations with their customers and which have a direct influence on the

amounts of sales. Furthermore, the fifth subparagraph of Article 24 states that

"the aggregate turnover of undertakings involved does not include the sales of

products intervened among any of the undertakings mentioned in par. (4)." The 55

aim is to exclude the proceeds of business dealings within a group so as to take

account of the real economic weight of each entity. Thus, the ‘amounts’ taken

into account by the competition act reflect only the transactions which take place

between the group of undertakings on the one hand and third parties on the

other.

Regarding the geographical allocation of turnovers it can only be said that the

turnover shall comprise all products sold and services provided to undertakings

or consumers worldwide.

2. Adjustment of turnover calculation rules for the

different types of operations

2.1. The general rule

According to Article 24 of the competition act, aggregate turnover comprises the

amounts derived by the undertakings concerned in the preceding financial year

from the sale of products and the provision of services. The basic principle is thus

that for each undertaking concerned the turnover to be taken into account is the

turnover of the closest financial year to the date of the transaction. This provision

shows that since there are usually no audited accounts of the year ending the

day before the transaction, the closest representation of a whole year of activity

of the company in question is the one given by the turnover figures of the most

recent financial year.

Notwithstanding paragraph 22ff, an adjustment must always be made to account

for acquisitions or divestments subsequent to the date of the audited accounts.

This is necessary if the true resources being concentrated are to be identified.

Thus if a company disposes of part of its business at any time before the

signature of the final agreement or the announcement of the public bid or the

acquisition of a controlling interest bringing about a concentration, or where such

a divestment or closure is a pre-condition for the operation the part of the

turnover to be attributed to that part of the business must be subtracted from the

turnover of the notifying party as shown in its last audited accounts. Conversely,

the turnover to be attributed to assets of which control has been acquired

56

subsequent to the preparation of the most recent audited accounts must be

added to a company’s turnover for notification purposes.

Other factors that may affect turnover on a temporary basis such as a decrease

in orders for the product or a slow-down in the production process within the

period prior to the transaction will be ignored for the purposes of calculating

turnover. No adjustment to the definitive accounts will be made to incorporate

them.

2.2. Acquisitions of parts of companies

Where the concentration consists in the acquisition of parts, whether or not

constituted as legal entities, of one or more undertakings, only the turnover

relating to the parts which are the subject of the transaction shall be taken into

account with regard to the seller or sellers’. This provision states that when the

acquirer does not purchase an entire group, but only one, or part, of its

businesses, whether or not constituted as a subsidiary, only the turnover of the

part acquired should be included in the turnover calculation. In fact, although in

legal terms the seller as a whole (with all its subsidiaries) is an essential party to

the transaction, since the sale-purchase agreement cannot be concluded without

him, he plays no role once the agreement has been implemented. The possible

impact of the transaction on the market will depend only on the combination of

the economic and financial resources that are the subject of a property transfer

with those of the acquirer and not on the remaining business of the seller who

remains independent.

2.3. Staggered operations

Sometimes certain successive transactions are only individual steps within a

wider strategy between the same parties. Considering each transaction alone,

even if only for determining jurisdiction, would imply ignoring economic reality.

At the same time, whereas some of these staggered operations may be designed

in this fashion because they will better meet the needs of the parties, others

could be structured like this in order to circumvent the application of the

competition act. For those reasons, these transactions shall be treated as one.

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2.4. Turnover of groups

When an undertaking concerned in a concentration within the meaning of

Article 20 of the competition act belongs to a group, the turnover of the group as

a whole is to be taken into account in order to determine whether the thresholds

are met. The aim is again to capture the total volume of the economic resources

that are being combined through the operation. The competition act does not

define the concept of group in abstract terms but focuses on whether the

companies have the right to manage the undertaking’s affairs as the yardstick to

determine which of the companies that have some direct or indirect links with an

undertaking concerned should be regarded as part of its group.

Article 24 of the competition act provides the following: ’The aggregate turnover

of undertakings concerned shall be calculated by adding together the turnovers

of:

(a) the undertakings concerned;

(b) those undertakings in which the undertaking concerned directly or indirectly:

— owns more than half the capital, or

— has the power to exercise more than half the voting rights, or

— has the power to appoint more than half the members of the

supervisory board, the administrative board or bodies legally

representing the undertakings, or

— has the right to manage the undertaking’s affairs;

(c) those undertakings which have in an undertaking concerned the rights or

competences listed in (b);

(d) those undertakings in which an undertaking as referred to in par (c) has the

rights or competences listed in (b);

(e) those undertakings in which two or more undertakings as referred to in

par (a) to (d) jointly have the rights or powers listed in (b).’

This means that the turnover of the company directly involved in the transaction

(par (a)) should include its subsidiaries (par (b)), its parent companies (par (c)),

the other subsidiaries of its parent companies (par (d)) and any other

undertaking jointly controlled by two or more of the companies belonging to the

group (par (e)).

Several remarks can be made:

58

1. As long as the test of control of par (b) is fulfilled, the whole turnover of the

subsidiary in question will be taken into account regardless of the actual

shareholding of the controlling company.

2. When any of the companies identified as belonging to the group also controls

others, these should also be incorporated into the calculation.

3. When two or more companies jointly control the undertaking concerned (a) in

the sense that the agreement of each and all of them is needed in order to

manage the undertaking affairs, the turnover of all of them should be included.

If there are two parent companies (c) of the undertaking concerned (a), the

turnovers would be taken into account as well as their own parent companies.

4. Any intra-group sale should be subtracted from the turnover of the group (see

Article 24 par 5).

The competition act also deals with the specific scenario that arises when two or

more undertakings concerned in a transaction exercise joint control of another

company or vice versa. Pursuant to par 6 of Article 24, the turnover resulting

from the sale of products or the provision of services between the joint venture

and each of the undertakings concerned or any other company connected with

any one of them in the sense of Article 24 should be excluded. The purpose of

such a rule is to avoid double counting. With regard to the turnover of the joint

venture generated from activities with third parties, par 6 of Article 24 provides

that it should be apportioned equally amongst the undertakings concerned, to

reflect the joint control.

Following the principle of par 6 of Article 24 by analogy, in the case of joint

ventures between undertakings concerned and third parties, the ANPC’s practice

has been to allocate to each of the undertakings concerned the turnover shared

equally by all the controlling companies in the joint venture. In all these cases,

however, joint control has to be demonstrated. The practice shows that it is

impossible to cover in the present guideline the whole range of scenarios which

could arise in respect of turnover calculation of joint venture companies or joint

control cases. Whenever ambiguities arise, an assessment should always give

priority to the general principles of avoiding double counting and of reflecting as

59

accurately as possible the economic strength of the undertakings involved in the

transaction.

It should be noted that Article 24 refers only to the groups that already exist at

the time of the transaction, i.e. the group of each of the undertakings concerned

in an operation, and not to the new structures created as a result of the

concentration. For example, if companies A and B, together with their respective

subsidiaries, are going to merge, it is A and B, and not the new entity, that

qualify as undertakings concerned, which implies that the turnover of each of the

two groups should be calculated independently.

Since the aim of this provision is simply to identify the companies belonging to

the existing groups for the purposes of turnover calculation, the test of having

the right to manage the undertaking’s affairs in Article 24 is somewhat different

from the test of control set out in Article 20, which refers to the acquisition of

control carried out by means of the transaction subject to examination. Whereas

the former is simpler and easier to prove on the basis of factual evidence, the

latter is more demanding because in the absence of an acquisition of control no

concentration arises.

2.5. Turnover of State-owned companies

In order to avoid discrimination between the public and private sector, account

should be taken of undertakings which form an economic unit with independent

power of decision, independent of the way in which their capital is held or of the

rules of administrative supervision exercisable to them.

Thus the mere fact that two companies are both State-owned should not

automatically lead to the conclusion that they are part of a group for the

purposes of Article 24. Rather, it should be considered whether there are grounds

to consider that each company constitutes an independent economic unit. Thus

where a State-owned company is not part of an overall industrial holding

company and is not subject to any coordination with other State-controlled

holdings, it should be treated as an independent group for the purposes of Article

24, and the turnover of other companies owned by that State should not be taken

into account. Where, however, interests are grouped together in holding

companies, or are managed together, or where for other reasons it is clear that

State-owned companies form part of an ‘economic unit with an independent

60

power of decision’, then the turnover of those businesses should be considered

part of the group of the undertaking concerned for the purposes of Article 24.

3. Credit and other financial institutions and insurance

undertakings

Credit institution means an undertaking whose business is to receive deposits or

other repayable funds from the public and to grant credits for its own account.

‘Financial institution’ shall mean an undertaking other than a credit institution,

the principal activity of which is to acquire holdings or to carry one or more of the

activities listed below.

From the definition of ‘financial institution’ given above, it is clear that on the one

hand holding companies must be regarded as financial institutions and, on the

other hand, that undertakings which perform on a regular basis as a principal

activity one or more activities expressly mentioned below:

— lending (inter alia, consumer credit, mortgage credit, factoring, etc.),

— financial leasing,

— money transmission services,

— issuing and managing instruments of payment (credit cards, travellers’

cheques and bankers’ drafts),

— guarantees and commitments,

— trading on own account or on account of customers in money market

instruments, foreign exchange, financial futures and options, exchange and

interest rate instruments, and transferable securities,

— participation in share issues and the provision of services related to such

issues,

— advice to undertakings on capital structure, industrial strategy and related

questions and advice and services relating to mergers and the purchase of

undertakings,

— money broking,

— portfolio management and advice,

— safekeeping and administration of securities.

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3.1. Calculation of turnover

For credit institutions and other financial institutions, the sum of the following

income items after deduction of value added tax and other taxes directly related

to those items, shall be used in place of turnover:

(a) interest income and similar income;

(b) income from securities:

— income from shares and other variable yield securities,

— income from participating interests,

— income from shares in affiliated undertakings;

(c) commissions receivable;

(d) net profit on financial operations;

(e) other operating income.

There are normally no particular difficulties in applying the banking income

criterion for the definition of the worldwide turnover to credit institutions and

other kinds of financial institutions (other than financial holding companies).

A financial holding company is a financial institution and therefore the calculation

of its turnover should follow the criteria for the calculation of turnover for credit

and other financial institutions. However, since the main purpose of a financial

holding is to acquire and manage participation in other undertakings, those

participations allowing the financial holding company to exercise a decisive

influence on the business conduct of the undertakings in question. Thus, the

turnover of a financial holding is basically to be calculated as stated above, but it

may be necessary to add turnover of undertakings (Article 24 - companies) falling

within the categories set out in Article 24 of the competition act. In practice, the

turnover of the financial holding company must first be taken into account. Then

the turnover of the Article 24 - companies must be added, whilst taking care to

deduct dividends and other income distributed by those companies to the

financial holdings.

3.2. Insurance undertakings

Regarding insurance undertakings one revert to ‘gross’ premiums written. ‘Gross’

premiums written are the sum of received premiums (which may include received

reinsurance premiums if the undertaking concerned has activities in the field of

62

reinsurance). Outgoing or outward reinsurance premiums, i.e. all amounts paid

and payable by the undertaking concerned to get reinsurance cover, are already

included in the gross premiums written. Wherever the word ‘premiums’ is used

(gross premiums, net (earned) premiums, outgoing reinsurance premiums, etc.),

these premiums are related not only to new insurance contracts made during the

accounting year being considered but also to all premiums related to contracts

made in previous years which remain in force during the period taken into

consideration.

In order to constitute appropriate reserves allowing for the payment of claims,

insurance undertakings, which are also considered as institutional investors,

usually hold a huge portfolio of investments in shares, interest-bearing securities,

land and property and other assets which provide an annual revenue which is not

considered as turnover for insurance undertakings. With regard to the application

of the competition act, a major distinction should be made between pure financial

investments, in which the insurance undertaking is not involved in the

management of the undertakings where the investments have been made, and

those investments leading to the acquisition of an interest giving control in a

given undertaking thus allowing the insurance undertaking to exert a decisive

influence on the business conduct of the subsidiary or affiliated company

concerned. In such cases Article 22ff of the competition act would apply, and the

turnover of the subsidiary or affiliated company should be added to the turnover

of the insurance undertaking for the determination of the thresholds laid down in

the competition act.

I. Developing and Assessing a Theory of Harm in

Merger Control

63

J. Assessment of Possible Merger Remedies

This chapter should provide guidance for effective application of

Article 25 (1) b) and (2) c) of the competition act in respect of commitments

proposed by the parties involved in the concentration as well as the conditions

and obligations set by the Competition Council in decision in a view of

implementing the compatibility of the concentration with the competition

environment.

1. Principles of remedies

Concentrations mostly differ and as a consequence, effective concentrations

remedies also come in a wide variety. Regardless the form a particular

concentration remedy takes there are certain basic principles that apply to all

effective concentration remedies.

1.1. Effectiveness

Assessing the effectiveness of a remedy, or package of remedies, will involve

several distinct dimensions:

Impact . The remedy should seek to deal with all the competitive

detriments expected from the merger. Restoring the process of rivalry

through remedies means re-establishing the structure of the market

expected in the absence of the merger. Structural remedies are considered

to be more preferable as behavioral remedies such as price caps, supply

commitments or restrictions on use of long term contracts as these are

unlikely to deal with incompatibility of the concentration with the

competition environment as comprehensively as structural remedies and

may result in distortions compared with a competitive market outcome. Of

course another aspect is that it is a lot easier to monitor structural than

behavioral remedies.

64

Acceptable Risk . The eventual impact of any remedy may not be precisely

presumed and is uncertain. In evaluating the effectiveness of remedies,

the Competition Council will seek remedies that have a high degree of

certainty of achieving their intended effect. The Competition Council will

seek to implement remedies with a low level of risk of not adequately

addressing competitive detriments.

Practicality . An effective remedy should be capable of practical

implementation, monitoring and enforcement within the jurisdiction of the

relevant competition authority. This will also imply that the implementation

and operation of the remedy should be clearly expressed. Remedies

regulating on-going behaviour are thus generally subject to the

disadvantage of requiring on-going monitoring and compliance activity.

Appropriate Duration and Timing . It is desirable for remedies to address

the competitive detriments effectively over their expected duration.

Remedies that act quickly in addressing competitive concerns are

preferable to remedies that are expected to have an effect only in the

longer term or where the timing of the effect is uncertain. The effect of a

remedy should also be sustained for the duration of competitive

detriments.

1.2. Potential remedy burdens and costs

Having considered the effectiveness of remedy options, the Competition Council

will then consider the costs of those remedies it expects to be effective in

addressing the competition problems and resulting adverse effects. In order to be

reasonable and proportionate the Competition Council will seek to select the

least costly remedy, or package of remedies, that it considers to be effective. If

the Competition Council is choosing between two remedies which it considers will

be equally effective, it will select the remedy that imposes the least cost or that

is least restrictive.

The costs of a remedy may be incurred by a variety of parties including the

merger parties, third parties and monitoring agencies. As the merger parties

have the choice of whether or not to proceed with the merger, the Competition

65

Council will generally attribute less significance to the costs of a remedy that will

be incurred by the merger parties than costs that will be imposed by a remedy on

third parties, and monitoring agencies. In particular, for completed mergers, the

Competition Council will not normally take account of costs or losses that will be

incurred by the merger parties as a result of a divestiture remedy as it is open to

the parties to make merger proposals conditional on Competition Council

approval. It is for the parties concerned to assess whether there is a risk that a

completed merger would be subject to a significant lessening of competition

finding and the Competition Council would expect this risk to be reflected in the

agreed acquisition price. Since the cost of divestiture is, in essence, avoidable,

the Competition Council will not, in the absence of exceptional circumstances,

accept that the cost of divestiture should be considered in selecting remedies.

Costs may arise in a variety of areas:

Remedy impact costs. Remedies may result in distortions or inefficiencies

in market outcomes. This is more likely to be the case in instances where

behavioral remedies are used which intervene directly in market

outcomes, especially over a long period. For example, price caps may

discourage market entry by creating doubt concerning the ability to recoup

investment or to maintain profitability. Similarly, non-price restraints may

adversely affect investment decisions.

Remedy operating costs. For those authorities that impose or directly seek

remedies, these comprise the directly attributable costs of implementing

and, if necessary, monitoring and enforcing remedies e.g. employing

trustees, collecting monitoring information etc17.

1.3. Merger efficiencies or other benefits foregone

A frequent advantage of remedies is that they enable the realization of at least

some efficiencies or other benefits expected from a merger that would otherwise

be lost through prohibition. Particular benefits expected from a merger may

include lower prices, higher quality, a greater choice of products or a greater rate

of innovation. Jurisdictions differ significantly in how merger efficiencies and

other benefits are defined and assessed. However, for those that will consider

efficiencies claim, these benefits are only generally considered relevant to the

17 Merger Remedies: Competition Commission Guidelines, November 2008, www.competition-commission.org.uk

66

extent that they arise from the merger and would not have occurred otherwise.

In addition, many require that any expected efficiencies to be gained by the

merging parties are only likely to be considered relevant if they are expected to

result in significant benefits to customers. Moreover, the merging parties will

normally bear the burden of demonstrating that relevant merger benefits are

likely. A competition authority will generally seek to modify the choice or design

of a remedy to minimize the impact on these efficiencies or other relevant

benefits. But the competition authority will still wish to ensure that the remedy is

effective in addressing the competitive detriments.

1.4. Transparency and consistency

In choosing, designing and implementing remedies, transparency and

consistency are desirable principles in their own right in producing just decisions

and conferring legitimacy on the outcomes. However, these principles are also

important in optimizing the effectiveness of remedies.

Transparency implies that the principles and major issues in determining

remedies in individual cases are visible and intelligible to the merging firms, and,

where deemed appropriate, their competitors and customers. The specific

application of these principles to an individual case should be clearly explained

during the merger review process. As appropriate, Competition Council will

consult third parties and customers on the effectiveness of the remedy.

Transparency should not imply disclosure of confidential information.

Consistency of remedy practice is desirable to provide a reliable basis for

corporate decisions and expectations. However, consistency will normally be

tempered by the need to deal with each case on its merits.

2. General rules

a. Under the competition act, the Competition Council assesses the

compatibility of a notified concentration with the market on the basis of its

effect on the competitive environment.

b. Where a concentration raise significant barriers for the effective

competition on the market or on a substantial part of it, in particular as a

67

result of the creation or enhancement of a dominant position the parties

and the Competition Council may seek to modify the concentration in order

to resolve the competition concerns and thereby gain clearance of their

merger. The parties and the Competition Council submit commitments

with a view to rendering the concentration which raise doubts about the

compatibility with the competition environment.

c. Under the structure of the competition act, it is the responsibility of the

Competition Council to show that a concentration would significantly

impede competition. The Competition Council communicates via writing its

competition concerns to the parties and presents its proposals to resolve

the situation. At the same time the Competition Council can offer their own

conditions – the necessary provisions. This allows the parties to respond

and formulate appropriate and corresponding remedy proposals.

d. If, however, the parties do not validly propose remedies adequate and

does not accept the conditions offered by the Competition Council, the

Competition Council will adopt a prohibition decision or the Competition

Council issues a conditioned decision of conditioning authorization by

which sets up the obligations or/and the conditions to ensure the

compliance with the commitments undertaken by the parties concerned

for the purpose of compatibility of the concentration with the competition

environment.

3. Basic conditions for acceptable commitments

It is crucial, that the commitments offered are full and effective and satisfies the

Competition Council and that the remedies are sufficient to restore the conditions

of effective competition on a permanent basis. The legal basis for the acceptance

of such commitments or remedies is set out in the competition act

Article 25 (2) (c);

a. Under the competition act the Competition Council only has power to

accept commitments that are deemed capable in view of implementing the

compatibility of the concentration with the competition environment. Such

commitments should be proportionate to the competition problem and

entirely eliminate it;68

b. The Competition Council may attach to its decision conditions and

obligations in order to ensure that the undertakings concerned comply

with their commitments in a timely and effective manner so as to render

the concentration compatible with the common market;

c. In order for the commitments to comply with these principles (contained in

chapter 5.1. of this document), there has to be an effective

implementation and ability to monitor the commitments. Whereas

divestitures once implemented, do not require any further monitoring

measures, other types of commitments require effective monitoring

mechanisms in order to ensure that their effect is not reduced or even

eliminated by the parties. Otherwise such commitments would have to be

considered as mere declarations of intention by the parties and would not

amount to binding obligations, as, due to the lack of effective monitoring

mechanisms, any breach of them could not result in the revocation of the

decision;

d. Where, however, the parties submit remedy proposals that are so

extensive and complex that it is not possible for the Competition Council to

determine with the necessary degree of certainty at the time of its

decision, that they will be fully implemented and that they are likely to

maintain effective competition in the market, an authorization decision

cannot be granted. The Competition Council may reject such remedies in

particular on the grounds that the implementation of the remedies cannot

be effectively monitored and that the lack of effective monitoring

diminishes, or even eliminates, the effect of the commitments proposed.

4. Types of mergers

Horizontal mergers, vertical mergers, and mergers with both horizontal and

vertical dimensions typically present different competitive issues and as a result

different remedial challenges. In cases in which neither behavioral nor structural

remedial actions, nor a combination of the two would effectively preserve

competition, the Competition Council will seek to block the transaction.

Horizontal Mergers 69

Horizontal mergers involve firms that are actual or potential competitors.

Horizontal mergers can enhance market power by eliminating actual or

potential competition between the merging parties, by increasing the risk

of coordination among rivals, or both. In the case of horizontal mergers,

enhanced market power is the result of combining similar sets of assets

that otherwise would be used to compete. Consequently, if a competitive

problem exists with a horizontal merger, the typical remedy is to prevent

common control over some or all of the assets, thereby effectively

preserving competition. Thus, the Competition Council will pursue a

divestiture remedy in the vast majority of cases involving horizontal

mergers. Divestiture of overlapping assets, usually an existing business

entity, can effectively preserve competition that the merger otherwise

would eliminate.

Vertical Mergers

Vertical mergers involve firms that do not operate in the same markets,

and may not result in an overlap between the assets of the purchaser and

the acquired entity. A purely vertical merger does not itself change the

number of firms competing to produce a particular product or service.

Nevertheless, vertical mergers can create changed incentives and enhance

the ability of the merged firm to impair the competitive process. In such

situations, a remedy that counteracts these changed incentives or

eliminates the merged firm’s ability to act on them may be appropriate.

Accordingly, in appropriate vertical merger matters the Competition

Council will consider tailored conduct remedies designed to prevent

conduct that might harm consumers while still allowing the efficiencies

that may come from the merger to be realized. The Competition Council

also will consider structural remedies in vertical merger matters — they

may be particularly effective when the vertical integration is a small part of

a larger deal.

Mergers with horizontal and vertical dimensions

Mergers sometimes have both, horizontal and vertical dimensions. These

types of mergers can present combinations of the challenges mentioned

above. Effective remedies in these situations may require a combination of

structural and conduct provisions affecting multiple markets.

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Merger remedies

Structural remedies Behavioural remedies

Divestiture and partial prohibition Facilitating horizontal rivalry Controlling

outcomesIntelectual property based remedies

Restricting effects of vertical relationships Modifying relationship with end-customersChanging buyers’ behaviour

5. Types of remedies

Remedies are classified as either structural or behavioral. Structural remedies are

generally one-off measures that seek to restore or maintain the competitive

structure of the market. Behavioral remedies are normally ongoing measures

that are designed to regulate or constrain the behavior of merger parties. Some

remedies, such as those relating to access to intellectual property rights, may

have features of structural or behavioral remedies depending on their particular

formulation.

Figure: Overview of the merger remedies universe

Effective merger remedies typically include structural or behavior remedial

actions. Each can be used to preserve competition in the appropriate factual

circumstances. In some cases an effective remedy may call for a combination of

different types of remedies. In other cases, an effective remedy may be

unavailable. In that circumstance, the Competition Council will seek to block the

merger.

Structural remedies

Structural remedies generally will involve the sale of physical assets by the

merging firms or requiring that the merged firm create new competitors

through the sale or licensing of intellectual property rights. Structural

remedies in many cases can be “simple, relatively easy to administer, and

sure” to preserve competition. A structure remedy ordinarily requires

divestiture of the activities of an existing viable business that can operate

71

on a stand-alone-basis. Alternatively, a commitment by the parties to

terminate exclusive agreements which would otherwise have foreclosure

effects, post-merger, or remedies to facilitate market entry through the

grant to competitors of access to infrastructure, platforms, technology,

production or R&D facilities, or through the licensing of intellectual

property rights might have a sufficient effect on the market to restore

effective competition. The key requirements of structural remedies are

that the commitments should ensure the effective competitive structure of

the market and – for member states – that they are capable of rendering

the notified transaction compatible with the common market.

Divestiture. The most effective means of restoring effective

competition is through divestiture of a subsidiary or production

facilities and the creation of a new competitive entity or the

strengthening of existing competitors. The divesture gives a new or

existing competitor the possibility of gaining access to the market.

In such cases the Competition Council will wish to ensure that the

activities, consisting of a viable business which can operate on a

stand-alone-basis and compete effectively with the merger entity

on a lasting basis, are divested to a suitable purchaser within a

specified time period. Sometimes the authority may require the

parties to find a buyer prior to completion of the notified operation.

The sale of the entity may itself amount to a modifiable

concentration. In practice, a structural solution, such as a

commitment to sell a subsidiary may be preferable, since the

commitment may prevent the impediment to effective competition

arising and it does not require medium or long-term monitoring

measures. Further, behavioural remedies may be difficult to control

and enforce. It could also be that structure remedy will be the only

possible means of solving the structural problem caused by the

creation of market power, which results in the significant

impediment of the effective competition.

By designing divestiture the following risks should be taken into

account:

Composition risks – the scope of the divestiture package may

not be appropriately configured to attract a suitable

72

purchaser or allow a suitable purchaser to operate

effectively.

Purchaser risks – a suitable purchaser may not be available

or the merging firms may wish to dispose to a weak or

otherwise inappropriate purchaser.

Asset risks – the competitive capability of a divestiture

package may deteriorate significantly prior to completion of

a divestment, for example through loss of customers or key

members of staff.

Behavioural remedies

A behavioral remedy can preserve a merger’s potential efficiencies, and, at

the same time, remedy the competitive harm that otherwise would result

from the merger. Behavioral remedies can be a particularly effective option

when a structural remedy would eliminate the merger’s potential

efficiencies, but, absent a remedy, the merger would harm competition. A

general distinction can be made between divestitures, other structural

remedies such as granting access to key infrastructure or inputs on non-

discriminatory terms, and other commitments relating to the future

behaviour of the merged entity. Commitments relating to the future

behaviour of the merged entity may be acceptable only exceptionally in

very specific circumstances. In particular, commitments in the form of

undertakings not to raise prices, to reduce product ranges or to remove

brands, etc., will generally not eliminate competition concerns resulting

from horizontal overlaps. In any case, those types of remedies can only

exceptionally be accepted if their workability is fully ensured by effective

implementation and monitoring. Therefore, the Competition Council may

examine behavioural promises only exceptionally in specific

circumstances, such as in respect of competition concerns arising in

conglomerate structures.

It will be necessary to consider the appropriate duration for any

behavioural remedies. A package of remedies can remain in place for a

given number of years, specified at the outset, after which they fall away.

Alternatively, they can be subject to review after a specified number of

years, with the option that, on the basis of the review, they may be kept,

removed or adjusted in some way. In general, it is not desirable to put a

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particular package of behavioural remedies in place indefinitely. This is

because as time elapses there is an increasing risk that the behavioural

remedy will not be appropriate to the conditions of the market and will

create undesirable side-effects.

5.1. Procedure

The Competition Council may accept commitments in either phase of the

procedure of Article 25 (1) b) or (2) c) of the competition act. However, given the

fact that an in-depth market investigation is only carried out in the phase

prescribed by Article 25 (2) c) of the competition act, commitments submitted to

the Competition Council in this phase must be sufficient to clearly rule out serious

doubts about the compatibility with the competition environment. The time

periods for both submitting the remedies and for the Competition Council to

make its decision are tight, which means that the possibility of offering

commitments should be considered very early in the procedure, generally with

the notification. Parties can submit proposals for commitments to the

Competition Council on an informal basis even before notification.

Commitments in phase I (within 30 working days) can only be accepted where

the competition problem is readily identifiable and can easily be remedied. The

competition problem therefore needs to be so straightforward and the remedies

so clear-cut that it is not necessary to enter into an in-depth investigation and

that the commitments are sufficient to clearly rule out ‘serious doubts’.

In Phase II cases, the Competition Council has to make its decision within 90

working days from the date of investigation initiation. The parties are encouraged

to submit draft proposals dealing with both substantive and implementation

aspects which are necessary to ensure that the commitments are fully workable

well in advance of the end of the 90 day period.

In order to form the basis of a decision the parties have to meet the following

requirements:

a. they shall fully specify the substantive and implementing commitments

entered into by the parties or rather have to accept the commitments

proposed by the Competition Council;

b. they shall be signed by a person duly authorised to do so;

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c. they shall be accompanied by a non-confidential version of the

commitments for the purposes of market testing them with third parties.

The non-confidential version of the commitments must allow third parties

to fully assess the workability and the effectiveness of the proposed

remedies to remove the competition concerns.

If the parties do not accept the conditions/obligations offered by the Competition

Council, than:

a. the Competition Council is obliged to prohibit concentration or

b. the Competition Council is entitled to allow the concentration by imposing

commitments proposed by the Competition Council. In this case it is up to

parties to realize on enforcement of concentration with commitments

proposed by the Competition Council.

The Competition Council will ensure the enforceability of commitments by

making the authorization of the merger subject to compliance with the

commitments. Where the undertakings concerned commit a breach of an

obligation, the Competition Council may revoke clearance decisions issued

according to

Article 25 (1) b) or (2) c) of the competition act, operating as it is set out by

Article 26 of the competition act.

5.1.1. Operating and monitoring trustees

The Competition Council may appoint or approve the appointment of a trustee to

assist in various aspects of the implementation such as monitoring or handle a

possible divestment. A trustee or monitoring agent may also be appointed to

facilitate the ongoing monitoring of behavioural commitments such as rights of

competitive access. Trustees should be independent of the merging firms, have

appropriate qualifications for the task and should not be subject to conflicts of

interest. The trustee will generally be remunerated by the merging firms. The

trustee’s remuneration contract should not compromise its independence and

should be subject to approval by the Competition Council.

The Competition Council will consider appointing an operating trustee if it

believes that the defendant has the ability and incentive to mismanage the

assets during the typical divestiture period and thereby reduce the likelihood that

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the divestiture will effectively preserve competition. Appointment of an operating

trustee might be warranted, for example, when intangible property, such as

computer software, has been ordered divested, and under-investment in the

development and improvement of the software in a rapidly changing business

environment may irreparably impair the value of the assets. The Competition

Council also may opt to appoint a monitoring trustee to review a defendant’s

compliance with its decree obligations to sell the assets to an acceptable

purchaser as a viable enterprise and to abide by injunctive provisions to hold

separate certain assets from a defendant’s other business operations. The

Competition Council also will consider appointing a monitoring trustee to oversee

compliance with a behavioural remedy involving ongoing obligations, especially

when effective oversight requires technical expertise or industry specific

knowledge. A monitoring trustee with industry experience can reduce the burden

on the Competition Council and the parties while ensuring that the parties adhere

to the decree. The monitoring trustee should provide frequent updates to the

Competition Council.

5.1.2. Monitoring

Effective monitoring is critical to the effectiveness of a remedy – a firm’s

incentive to comply with a remedy decreases the less effective it perceives the

monitoring of its compliance to be. It is necessary to ensure effective monitoring

throughout the lifetime of the remedy. In certain cases, market participants may

have an interest in ensuring compliance with a remedy and where appropriate

they should be involved. It is easier to involve market participants, such as

customers and competitors, in monitoring where they are relatively well informed

and well resourced, or are intended beneficiaries of a remedy. Reliance on

market participants, however, may complicate the process and cause other

problems because they may seek to advance their individual interests.

Nonetheless, if their assistance is to be encouraged, these third parties must be

given clear information as to the nature of the remedy and what the firm must do

to comply. They must also know how and to whom they should complain.

5.1.3. Divestiture process

The divestiture has to be completed within a fixed time period agreed between

the parties and the Competition Council. The total time period is divided into a

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period for entering into a final agreement and a further period for the closing, the

transfer of legal title, of the transaction. The period for entering into a binding

agreement is further normally divided into a first period in which the parties can

look for a suitable purchaser (the ‘first divestiture period’) and, if the parties do

not succeed to divest the business, a second period in which a divestiture trustee

obtains the mandate to divest the business at no minimum price (the ‘trustee

divestiture period’). Preference will be given to short divestiture periods as,

otherwise, the business to be divested will be exposed to an extended period of

uncertainty. The time periods should therefore be as short as feasible. The

Competition Council will normally consider a period of around six months for the

first divestiture period and an additional period of three months for the trustee

divestiture period as appropriate. A period of further three months is normally

foreseen for closing the transaction. These periods may be modified on a case-

by-case basis. In particular, they may have to be shortened if there is a high risk

of degradation of the business' viability in the interim period.

5.1.4. Proposed purchaser approval

The Competition Council must approve any proposed purchaser. Its approval will

be conditioned on three fundamental tests.

First, divestiture of the assets to the proposed purchaser must not

itself cause competitive harm. For example, if the concern is that

the merger will enhance an already dominant firm’s ability

unilaterally to exercise market power, divestiture to another large

competitor in the market is not likely to be acceptable, although

divestiture to a fringe incumbent might. If the concern is one of

coordinated effects among a small set of post-merger competitors,

divestiture to any firm in that set would itself raise competitive

issues. In that situation, the Competition Council likely would

approve divestiture only to a firm outside that set.

Second, the Competition Council must be certain that the purchaser

has the incentive to use the divestiture assets to compete in the

relevant market. The seller has an incentive not to sell to a

purchaser that will compete effectively. A seller may wish to

sacrifice a higher price for the assets in return for selling to a rival

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that will not be especially competitive in the future. This is in

contrast to a situation in which the firm selling the assets is itself

exiting the market. The incentive of the latter firm is simply to

identify and accept the highest offer. Because the purpose of

divestiture is to preserve competition in the relevant market, the

Competition Council will not approve a divestiture if the assets will

be redeployed elsewhere. Thus, there should be evidence of the

purchaser’s intention to compete in the relevant market. Such

evidence might include business plans, prior efforts to enter the

market, or a status as a significant producer of a complementary

product.

Third, the Competition Council will perform a “fitness” test to ensure

that the purchaser has sufficient acumen, experience, and financial

capability to compete effectively in the market over the long term.

As part of this process, the Competition Council will examine the

purchaser’s financing to ensure that the purchaser can fund the

acquisition, satisfy any immediate capital needs, and operate the

entity over the long term. Divestiture decrees state that it must be

demonstrated to plaintiff’s sole satisfaction that the purchaser has

the “managerial, operational, technical and financial capability” to

compete effectively with the divestiture assets.

The requirement for an approval by the Competition Council does usually not

only extend to the identity of the purchaser, but also to the sale and purchase

agreement and any other agreement entered into between the parties and the

proposed purchaser, including transitory agreements. The Competition Council

will verify whether the divestiture according to the agreements is in line with the

commitments. The Competition Council will communicate its view as to the

suitability of the proposed purchaser to the parties. If the Competition Council

concludes that the proposed purchaser does not meet the purchaser

requirements, it will adopt a decision that the proposed purchaser is not a

purchaser under the commitments. If the Competition Council concludes that the

sale and purchase agreement (or any ancillary agreements) does not foresee a

divestiture in line with the commitments, the Competition Council will

communicate this to the parties without necessarily rejecting the purchaser as

such. If the Competition Council concludes that the purchaser is suitable under

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the commitments and that the contracts agree a divestiture in line with the

commitments, the Competition Council will approve the divestiture to the

proposed purchaser. The Competition Council will issue the necessary approvals

as expeditiously as possible.

5.1.5. Obligations of the parties in the interim period

It is the parties' responsibility to reduce to a minimum any possible risk of loss of

competitive potential of the business to be divested resulting from the

uncertainties inherent in the transfer of a business. Up to the transfer of the

business to the purchaser, the Competition Council will require the parties to

offer commitments to maintain the independence, economic viability,

marketability and competitiveness of the business. Only such commitments will

allow the Competition Council to conclude with the requisite degree of certainty

that the divestiture of the business will be implemented in the way as proposed

by the parties in the commitments.

The parties will be required to ensure that all assets of the business are

maintained, pursuant to good business practice and in the ordinary course of

business, and that no acts which might have a significant adverse impact on the

business are carried out. This relates in particular to the maintenance of fixed

assets, know-how or commercial information of a confidential or proprietary

nature, the customer base and the technical and commercial competence of the

employees. Furthermore, the parties must maintain the business in the same

conditions as before the concentration, in particular provide sufficient resources,

such as capital or a line of credit, on the basis and continuation of existing

business plans, the same administrative and management functions, or other

factors relevant for maintaining competition in the specific sector. The

commitments also have to foresee that the parties should take all reasonable

steps, including appropriate incentive schemes, to encourage all key personnel to

remain with the business, and that the parties may not solicit or move any

personnel to their remaining businesses.

The parties should further hold the business separate from its retained business

and ensure that the key personnel of the business to be divested do not have any

involvement into the retained businesses and vice versa. Any documents or

information confidential to the business obtained by the parties before adoption

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of the decision have to be returned to the business or destroyed. The parties may

further be required to appoint a hold-separate manager with the necessary

expertise, who will be responsible for the management of the business and the

implementation of the hold-separate and ring-fencing obligations. The hold-

separate manager should act under the supervision of the monitoring trustee

who may issue instructions to the hold-separate manager. The commitments

have to provide that the appointment should take place immediately after the

adoption of the decision and even before the parties may close the notified

concentration. Whereas the parties can appoint the hold-separate manager on

their own, the commitments have to foresee that the monitoring trustee is able

to remove the hold-separate manager if s/he does not act in line with the

commitments or endangers their timely and proper implementation. A new

appointment of a hold separate manager afterwards will be subject to the

approval of the monitoring trustee.

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K.Dominance

Dominance is defined as the “position of economic power which an undertaking

benefits of, and which allows it to prevent the maintenance of an effective

competition on a relevant market, giving the possibility to a considerable extent, to

behave independently of its competitors, clients, and finally of its consumers” (article

4, competition act). The NAPC is well aware of the fact that economic independence

cannot be understood mechanically: Even the perfect monopoly is not able to act

independently of the slope of its demand curve (i.e. the preferences of its

consumers).

1. Assessment of Dominant Position

The purpose of these guidelines is to provide guidance how the NAPC will assess

the dominant position of one (or several) undertakings in a specific market. In

assessing dominance the NAPC will try to get a full picture and will evaluate the

whole range of factors which may be of relevance for the specific case. In pursuing

this task

a. it will especially look at the coherence of facts,

b. it will integrate the individual facts into a round-about analysis,

c. it will not assume an a priori fixed hierarchy of facts irrespective of the merits

of the individual case.

In its dominance assessment the NAPC will not restrain itself to a merely static point

of view. As far as possible it will take into account the often more important dynamic

elements of competition. It will do so i.a. by

a. carefully investigating the development of the market concerned and

b. by looking into potential competition stemming from outside developments

1.1. The interface between market definition and dominance assessment

The dominance assessment exercise of the NAPC will take as its basis the

outcome of the establishment of the relevant market which has to be pursued in

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accordance with article 28 to 31 of the competition act. As “the main goal of

defining the market is to identify the competition constraints that the relevant

undertakings are systematically facing” (par. (4) of article 28, competition act),

the market definition exercise has to be able to provide a broad variety of

evidence, at least the relevant information concerning

a. demand side substitutability as well as

b. supply side substitutability.

Using the outcome of the analysis of establishing the relevant market the NAPC is

aware of the problem that “depending on the nature of the competition issue the

size of the relevant market may differ from case to case” (par. (3) of article 28,

competition act). The NAPC will carefully take into account especially two sets of

problems:

a. Possible errors stemming from the “cellophane fallacy” (see chapter 2.3.).

b. Differences in the competitive constraints the market in general may be

facing relative to the competitive restraints the individual undertaking

being allegedly dominant is facing.

Different from merger inquiries the dominance assessment does an ex-post

analysis. It is concerned with the current (or past) competiveness of the markets,

not with the future one.

As “cellophane fallacy” the NAPC identifies the following analytical problem: The

profit-maximising enterprise will always set the prices at a level at which a

further price increase would be unprofitable. The degree of substitution between

two products depends to a large part on the current relative prices of the

products concerned. As a consequence the allegedly dominant enterprise will

only face demand substitutes at existing prices because it has already elevated

its prices to that point that even those products become substitutes which in

more competitive would not considered exchangeable with the product of the

company concerned. Thus the empiric elasticity may indicate an inflated degree

of substitutability. This extended range of substitute products may lead to an

underestimation of the market power of the allegedly dominant undertaking and

to an overestimation of the competitive restraints deriving from its competitors.

In other words: The market is defined overly broad.

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To overcome these obstacles the NAPC does not intend abandoning demand side

substitutability as an important tool for analysis, rather it will try to enrich its

analysis by investigating other factors not tainted by the “cellophane fallacy”,

e.g. by looking at

a. other comparable geographic markets,

b. consumer research revealing preferences not that much disturbed by

currently prevailing price relations.

In markets with a high degree of product differentiation the competitive

constraints vis-à-vis a certain undertaking may well differ from the competitive

constraints vis-à-vis the whole market. The investigator has to deal with

imperfect substitution within a yet defined market. If the market definition

exercise has been done properly its outcomes should provide reliable information

on the issue of product differentiation and on inhomogeneity within the market.

The NAPC will therefore also look into the issue if substitutes have to be

considered as closer or more distant even - within the market defined according

to articles 28 to 31 of the competition act.

a. Generally a high degree of product differentiation goes hand in hand with a

higher degree of market power. Thus market shares could underestimate

the size of market power exercised effectively.

b. On the other hand: A strong position in their respective market segments

may enable smaller competitors to compete more fiercely than we would

expect from their mere size (market share).

1.2. Market shares and market concentration

1.2.1. Market Shares

The analysis of market shares may well provide a valuable first insight into the

issue if dominance is prevailing in a certain market. Consequently the NAPC will

use market share analysis as a first empiric indication of market power in the

cases where appropriate.

The calculation of market shares will be pursued along the lines laid out in article

31 of the competition act.

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If appropriate data is available the NAPC will choose to calculate market shares

on a value basis (sales, turnover in monetary terms) as it provides a clearer

picture of the purchasing power an individual firm is able to command on the

market. Market shares calculated in volume terms are not able to reveal the price

setting power of an undertaking. To the contrary, they tend to camouflage it. This

is especially detrimental in the case of differentiated products.

Nevertheless the comparison of market shares in monetary and in volume terms,

be it in comparing data between different segments of the market (e.g. big

versus small customers; imports versus domestic supply etc.) or over a time span

may help to expose structural distortions as well as the underlying dynamics of

the market. This said, the NAPC is fully conscious about possible flaws of this

approach: Changes in (or differences between) monetary and volume market

shares may originate also from other factors (e.g. different compositions of the

underlying product samples) providing no indication for market power.

If available the NAPC will calculate market shares at the prices charged to the

enterprise´s direct customers as providing the more informative measure of

market power. E.g.: If the products are sold to retailers the market share at this

distribution level should enter into the analysis rather than the market share

calculated at the level of the final consumers.

a. Following a similar analytic reasoning the NAPC will normally exclude

captive production (i.e. the supply which is destined to internal needs of an

undertaking) from calculating the market share, except that the

undertaking has been diverting these capacities repeatedly to the open

market.

b. Private label sales (i.e. sales of branded companies to retailers under the

retailers´ own brand name) are usually excluded from turnover, except for

issues where the availability of capacity is in the focus and not brand

strength.

The NAPC will take market shares as an indication for market power, to some

extent similar to a gliding scale going from no or small market power to

monopoly power. In general, market power is more likely to exist if an enterprise

enjoys a persistently high market share and less likely, if its market share is

persistently low.

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With a market share exceeding 50 % the undertaking(s) face the legal

presumption of being dominant (par. 4 of article 10 of the competition act). This

fact confirmed the NAPC will stop assessing market dominance any further. If

according to the arguments submitted by the parties the legal presumption gets

rebutted by sound empiric and economic reasoning the NAPC will continue

assessing dominance along the lines laid out in this document.

Nevertheless the NAPC is fully aware of the fact that market share and market

power may deviate considerably in a substantial number of instances. The NAPC

will take into account especially the following features:

a. High market shares could parallel low market power if the barriers to entry

(see chapters below) are low. This could be the case in particular if entry is

imminent within a limited time span or a strong and credible threat from

potential competitors imposes a solid restraint on the enterprise holding

the high market share.

b. In markets characterized by a high level of product differentiation the

aggregate market share might not be a reliable indicator for market power.

Market power would depend very much on the fact how close (or how

distant) the next substitutes are located. In case the issue of product

differentiation within a market could be decisive, the NACP will also look

into the separate segments of the market.

c. In cases of pronounced product differentiation or (regional or other)

market segmentation the comparison of market shares between different

product specifications and different customer groups may allow additional

insights into strengths and weaknesses of the undertaking allegedly

dominant.

d. Subjective or objective switching costs of customers may be different

between enterprises. An undertaking the customer base of which has

higher switching costs could exert more market power than indicated by

its market share.

In markets characterized by bidding processes (i.e. public procurement auctions

or tenders issued by private business) high market shares at one point of time

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might provide an insufficient or even misguiding indicator for market power. To

the contrary, competition might be intense, especially where

a. tenders are large and infrequent,

b. products are relatively homogeneous and

c. free capacity is available.

If appropriate time series are available the NAPC will look into the development

of market shares because the history of market shares could reveal the dynamic

nature of the market:

a. Swift and considerable changes in market shares could derive from the

lack of persistent market power. They might also indicate the importance

of innovations in this market.

b. Growing market shares of smaller companies could provide a hint that

barriers to entry and expansion are low; the evidence is that stronger the

more recent entry was observed.

c. Loosing market shares could give some indication that the allegedly

dominant undertaking has been lessening its grip on the market.

The general remark that the analysis of market shares may well provide a

valuable first insight into the issue if dominance applies even the more: The

development of market shares does rarely produce sufficient evidence in itself

but rather may contribute valuable indications pointing at the direction of further

investigations.

1.2.2. Market concentration

The market share of an individual undertaking may provide a stronger indication

of market power if it is set into relation with the overall structure of the market

and/or the market shares of its competitors.

A big difference between the market share of the allegedly dominant undertaking

and its next competitors can – with due caution – be applied as an additional

indication for market power. As some – very rough – rule of thumb a difference of

more than 20%-points in market shares could be considered as exposing a

greater likelihood of dominance.

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To explain the importance of relative market shares by an example: A market

share of 51% may allow for a strong indication of single dominance if the rest of

the market is distributed between a number of small competitors. Quite the

contrary would be the case if the residual share of 49% is occupied by only one

player. In this case single dominance would be highly unlikely.

To take the overall market structure into account several concentration ratios

(CR) can be applied. The easiest approach is by calculating CR3, CR4 … by simply

adding up the market shares of the 3, 4 … biggest companies. The disadvantage

of this type of measures can be seen in the fact that - in summing up - each

enterprise is attributed the same weight although it seems to be obvious, that

grosso modo – bigger/lower market shares may often exert a disproportionately

higher/lower competitive pressure.

The Herfindahl-Hirschman Index (HHI) meets this problem by summing up the

squares of the market shares of the individual undertakings, using the formula

HHI =∑i=1

n

si2, si being the market share of enterprise i. The HHI puts a premium on

the inequality of market shares, i.e. the asymmetry of the market structure.

Theoretically the market shares of all undertakings should be integrated into the

calculation of the HHI. Nevertheless for the sake of economising investigative

costs the NAPC may well leave smaller enterprises aside as their market shares

are not capable of influencing the HHI decisively.

As in the case of simple market shares there is no linear or even unambiguous

relationship between market power and the level of the HHI. As a rough rule of

thumb in many jurisdictions it is assumed that

a. a low HHI level (under 1000 according to the European merger notice,

< 1500 according to the US merger guidelines) is extremely unlikely to go

along with dominance,

b. a medium HHI level (EU between 1000 and 2000, US between 1500 and

2500) indicates a moderately concentrated market and

c. competition concerns may only arise with an HHI above levels of 2000 /

2500 – except for special circumstances.

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1.3. Barriers to entry and expansion

Entry barriers prevent or hinder companies from entering a relevant market. To

assess dominance of an undertaking in the relevant market, entry barriers have

to be taken into account in addition to finding market share of an undertaking in

that market.

Entry barriers are specific features of the market, which give incumbent under-

takings advantages over potential competitors. If entry barriers in the relevant

market are low and entry is easy, then incumbents even with a high market

share will not be able to behave in an anticompetitive way as described in artticle

11 par (2) of the competition act.

Conversely, if entry barriers are high, potential or existing competitors will be

prevented from easily entering the market or expanding their share in it.

Therefore incumbents in such situation will tend to exert their dominance.

Entry barriers comprise a multiplicity of factors and are particular to each

relevant market. Specific circumstances of a case will determine the degree to

which certain barriers will contribute towards establishing dominance more likely

than others. Therefore assessment of dominance can take into account any

number or combination of entry barriers. For example, article 10 par (5) of the

competition act already stipulates specific entry barriers, the presence of which

establishes statutory dominance.

As entry barriers are case specific, the list of them elaborated in the present

chapter is indicative and not exhaustive.

1.3.1. Entry barriers

Entry barriers are elaborated according to the order provided in the article 10

par. (3) of the competition act.

Legal barriers tend to limit the number of undertakings active on the relevant

market and prevent entry by new competitors. Legal barriers will most likely be

constituted by legislation and other state measures, authorisation, licensing

requirements or intellectual property rights. The list is not exhaustive.

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Legal barriers which are created by granting exclusive rights or which grant the

performance of the services of general economic interest are addressed by

article 10 par. (5) of the competition act.

Legislation and other states measures, authorization or licensing requirements

can also constitute an absolute or significant barrier to entry.

a. Planning laws, licensing laws or authorization procedures may impose

quotas on the number of undertakings, which are allowed to operate on

the relevant market, and thus safeguard incumbents from a potential

entry.

b. Legal barriers should be distinguished from legislation which sets objective

standards. Where standards apply equally to all undertakings, such as

health or safety regulation, they might not affect the cost for potential

competitors any more than they affect the cost for incumbents. However,

regulation might lead to entry barriers when it does not apply equally to all

undertakings. Undertakings already present on the relevant market might

benefit from standards that are relatively easy for them to meet, but

harder for a new entrant to achieve.

Trade barriers – whether tariff or non-tariff – can have effect of weakening

competitive strength of a potential competition from abroad. If the trade barriers

are high, an incumbent is more likely to exert market power. However, if trade

barriers are low or non-existent, then an incumbent even with a high market

share in the relevant national market will be unlikely to hold a dominant position

as is faced with a potential international competition.

Intellectual property rights (IPR) may also prevent entry and expansion, or make

it more difficult. The impact of IPR on entry and expansion depends on the nature

and actual strength of the IPR held by the allegedly dominant undertaking.

a. To assess strength of IPR, it is necessary to look to what extent IPR prevent

other undertakings from competing with the IPR holder in the relevant

market. Assessment has to take into account that protection of IPR is

essential to provide sufficient incentives for investment and innovation.

Although protection of IPR may reduce competition in the short term, in

the long term a potential competitor may be able to overcome it by its own

innovation. Thus short term profits, which IPR can provide, are an incentive

to innovate and thus stimulate competition and innovation. In markets,

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where high rate of innovation occurs or is expected, innovation may

overcome product market barriers to entry relatively quickly.

b. According to the nature of IPR, patents and copyright are more likely to

confer dominance on their holder in the relevant market as they usually

provide input for provision of products and services. Trademarks, in

themselves, are less likely to confer dominance, but might be an important

factor contributing to a conclusion that dominance exists, particularly if

they concern well-established brands enjoying strong consumer loyalty.

Besides legal barriers article 10 par. (3) of the competition act refers also to

‘factual’ (economic) barriers to entry. These may include sunk costs of entry,

privileged access to input and distribution, essential facilities, economies of scale,

network effect etc.

Sunk costs of entry are those costs, which must be incurred to compete in the

market, but which cannot be recovered if entry fails.

a. It is useful to consider the extent to which sunk costs give the incumbent

an advantage over potential new entrants and to what extent such costs

create barrier to entry.

b. The mere existence of sunk costs in any particular industry does not

automatically mean that entry barriers are high or that competition in the

relevant market is excluded or significantly impaired.

c. Different types of sunk costs have to be incurred in order to enter a new

market. They may differ according to the undertaking’s field of activity

(production, research and development, distribution or marketing).

Privileged access to supply or distribution channels can constitute a barrier for

potential competition. An incumbent may be vertically integrated or may have

established sufficient control or influence over the supply of inputs, e.g., through

long term exclusive contractual obligations. An incumbent might have its own

dense distribution network, established distribution logistics or wide geographical

coverage that would be difficult to replicate for the rivals. Assessment has to take

into account overall competition in the relevant downstream or upstream market.

The incumbent might also own or have privileged access to an essential facility.

Although competitors might have no access to this facility, it must be carefully

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considered, that a facility will only be viewed as essential and determinative for

finding dominance, where it can be demonstrated that access to it is

indispensable in order to compete in the downstream market and where

duplication of the facility is impossible or extremely difficult owing to physical,

geographical or legal constrains.

If the incumbent has an established position on the relevant market, it may be

difficult to enter an industry, where experience or reputation is necessary to

compete effectively, both of which may be difficult to obtain as an entrant. Such

incumbent generally will enjoy high consumer loyalty, relevant market will be

characterized by the closeness of relationships between suppliers and customers,

importance of promotion and advertising as well as other reputation advantages.

Advertising and other investments in reputation are often sunk costs which

cannot be recovered in the case of exit, therefore making entry more risky.

Switching costs for the customers may also be a factor preventing new entry. An

entry barrier will exist if a customer on the relevant market has to bear high

costs in order to switch to the new entrant. For example, if the customer has to

invest in new facilities in order to be supplied by the competitor or when it has to

train its workforce to use the new entrant’s product. Usually the new entrant will

have to support part of these switching costs in order to enter the market, while

the incumbent undertaking will not.

1.3.2. Barriers to expansion

In comparison to barriers to entry, barriers to expansion prevent undertakings

already present in the relevant market from expanding their market share. Many

factors which make it harder for a potential competitor to enter into a relevant

market, might also make it harder for an undertaking already operating on the

market to expand its market share and therefore its competitive impact.

Barriers to expansion will tend to be high in sectors where increase in capacity

requires large investments (building production plants, finding new sources of

supply, expanding distribution networks), but are low in those sectors where,

once a large entry investment has been made, the marginal cost of supplying a

new product unit is very low.

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Having the same effect of on the competitive impact of the potential or existing

competitors, barriers to expansion will be assessed in a similar way as barriers to

entry are.

1.3.3. Assessment of entry barriers

Assessing the effects of entry barriers and the advantages they give to

incumbents can be complex and will depend on the specific circumstances of the

case. NAPC can ask incumbents and potential competitors to provide information

on sunk costs associated with an entry, relative ease of obtaining the necessary

inputs, how regulation affects the prospect of entry, the cost of operating at the

minimum viable scale and any other factor that may impede entry or expansion

in the relevant market.

NAPC will look carefully at the history of the industry when assessing barriers to

entry and expansion. It is unlikely that the barriers to entry or expansion could be

found in an industry, which experienced frequent and successful examples of

entry. Conversely, if the previous attempts to expand in or enter into the relevant

market have been unsuccessful, perhaps due to deterring behavior by an

incumbent, then expansion and entry would seem less likely to have competitive

constrains on the market power of incumbents.

Expected development of the market can impact possibility of entry. Due to

prospects of increased profits, entry into a market, which is expected to

experience high growth in the future, is more likely than in a market which is

mature or expected to decline. Entry is particularly likely if suppliers in other or

related markets already possess production facilities that could be used to enter

the relevant market, thus reducing sunk costs of entry. Relevant time period for

the assessment of market growth dynamics and entry associated with it should

be similar to that of a timely entry discussed next.

Entry has to be sufficiently immediate and sustained to prevent the incumbent

from exercising market power. Possibility of a timely entry of potential

competitors acts as a deterrent force for the incumbent undertaking, e.g. not to

increase prices. The appropriate time period for entry depends on the

characteristics and dynamics of the relevant market and specific capabilities of

potential entrants. The period of time needed for undertakings already on the

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market to adjust their capacity can be used as a starting point. According to the

article 4 of the competition act, if entry or expansion in the relevant market is not

successful within three years, it will not be considered as timely thus providing

evidence of the existence of barriers on the relevant market. This time period

sets the upper limit for entry and based on particularities of the market in

question might be less than three years.

Entry or expansion has to be sufficient in scope and magnitude in order to

constitute an effective constraint on the incumbent. Small-scale entry, for

example into a niche market may not be considered as sufficient.

1.4. Other barriers to entry

1.4.1. Economies of scale and scope

The NAPC defines economies of scale as the situation where in the production of

a product an undertaking enjoys declining average costs as output increases.

This is a very common feature in a broad range of businesses, in particular where

high fixed costs are involved. As a consequence larger undertakings may have a

significant advantage over smaller enterprises. In assessing economies of scale

the NAPC is aware of the fact that they are productivity enhancing thus bearing

the potential for welfare increases.

A similar feature is displayed by economies of scope: It is cheaper to produce two

(or more) products jointly than to do it separately.

With respect to economies of scale (and scope) the NAPC is aware of the fact that

they rarely could establish a significant entry barrier if they are not combined

with other factors and if incumbents and possible entrants face a similar cost

curve.

A significant barrier to entry may well arise out of economies of scale (and scope)

if the following combination of factors (or part of it) is given:

a. Economies of scale (and scope) go often hand in hand with a minimum size

required to enter the market as an efficient competitor (so-called

(minimum) viable scale).

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b. The allegedly dominant undertaking enjoys a stable consumer base, which

makes it difficult for the entrant to reach the minimum size.

c. The allegedly dominant undertaking could employ strategies deterring

entry (see below section "Deterrence strategies").

The (minimum) viable scale could constitute a prerequisite established either on

the production side (e.g. by the technologies available) or on the distribution side

(e.g. minimum number of outlets required for an efficient distribution channel).

Being large enough the viable scale may increase sunk costs considerably and

thereby raise the risks affiliated with entry.

When assessing the dimension of the viable scale the NAPC will normally look at

actual evidence of entry in its domestic market or into comparable foreign

markets as providing the probably most convincing empirical indication.

Additionally it may take into account background information gathered within the

industry such as business plans and engineering studies (blueprints). If the

underlying complaint comes from within the industry the NAPC will require the

complainant to provide exhaustive information about all sets of information

shedding light on the viable size in particular with regard to cost structures or

consumer attitudes (market studies, detailed sales statistics).

Although being (at least potentially) as efficient as the allegedly dominant

undertaking the (potential) entrant may face significant hurdles to achieve the

viable scale. E.g.:

a. Suppliers could be bound by long term contracts;

b. distributors could be locked-in to dealings with the incumbent(s);

c. strong brand loyalty of consumers;

d. high switching costs of customers.

1.4.2. Network effects

The NAPC defines network effects as the situation where the benefit for the user

of the network increases with the number of users. This is often the case with

communication industries; it is obvious that the utility of a communication device

is the higher the more users can be interconnected.

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The concern with respect to an entry barrier is quite similar to the issues raised

above in connection with economies of scale:

a. Potentially welfare enhancing (in the extreme the monopoly might be the

most efficient structure);

b. minimum viable scale necessary;

c. has to be assessed in combination with other factors.

1.4.3. Deterrence strategies

As deterrence strategies the NAPC terms strategies which are employed by the

allegedly dominant undertaking with the aim to deter possible entrants (or to

hamper the growth potential of rivals significantly). Most of these strategies have

to be dealt with under the topic abuse of a dominant position (article 11 of the

competition act).

Nevertheless there exist some strategies which rarely could be assessed as

abusive on its own but which may well have the potential to carry deterrence as

a (possibly welcome) side effect. E.g.:

a. Building up of excess capacities (in comparison with the normal course of

business); this strategy might be useful for meeting demand peaks as well

as for deterring entrants and/or rivals.

b. Increasing consumer loyalty by non-abusive measures (e.g. advertising).

c. Repositioning of products (with respect to brand, quality etc.

characteristics); this could help to cover a broader range of consumer

preferences thus enlarging sales; on the other hand the room of

maneuvers of actual or potential competitors could get reduced.

1.5. Buyer Power

Competitive pressure on an undertaking might be exercised not only by

competitors, but also in the presence of strong buyers. The strength of buyers

and the structure of the buyers’ side of the market may constrain or countervail

the market power of a seller. Even undertakings with very high market shares

may not be in a position to significantly impede effective competition, in

particular by acting to an appreciable extent independently of their customers, if

the latter possess buyer power.

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Buyer power characterizes bargaining strength that a buyer has vis-à-vis a seller

in commercial negotiations due to its size, commercial significance to the seller

and buyer’s ability to switch between alternative suppliers.

Source of countervailing buyer power would be if a customer could credibly

threaten to resort, within reasonable timeframe, to alternate sources of supply,

should the supplier decide to increase prices or otherwise threaten to deteriorate

conditions of delivery. This would be the case if the buyer could immediately

switch to other suppliers either entirely or by significantly reducing volume of

purchases. Also, buyer might credibly threaten to vertically integrate into the

upstream market or to sponsor upstream expansion or entry, for example, by

persuading a potential entrant to enter by committing to place large orders with

this company. The buyer with power will also be able to intensify competition

among suppliers though establishing a procurement auctions or purchasing

through a competitive tender.

1.6. Collective dominance

A dominant position need not to be held by a single undertaking only. A situation

is termed collective dominance (= holding collectively a dominant position),

where two or more undertakings, which are independent in the sense of the

competition act (article 4) get linked together in such a way that they are able to

adopt a common policy on the market. In other words: Undertakings although not

belonging to the same group (i.e. corporate group, concern) are connected or

interrelated in such a way that they behave as a single collective entity in the

market, irrespective of whether that relationship is characterized by more formal

or more economic links.

The link may be formal or structural in the sense that the two (or more)

undertakings are bound together by a legal contract, a legal obligation or a

common venture. E.g.: In a transport network several transportation companies

could be linked together by an agreement on a common schedule and by a

corresponding agreement on joint tickets. Both agreements have no anti-

competitive purpose and might well be deemed as highly beneficial for

customers. Nevertheless, these agreements limit the room for maneuvers of the

individual undertakings considerably: Their times of service are set by the

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common schedule and even the prices have to be fixed at least insofar as it is

required by the monetary transfers associated with the joint ticket.

There could be a broad variety of structural links: Besides the example above

licensing agreements, joint operations or joint ventures, cross-shareholding etc. If

necessary the NAPC will investigate these structural links between companies not

only by looking into the contracts (inclusive all side-agreements) but also by

investigating how these contracts are lived. Memos for executives, board minutes

etc. could shed light on this issue and ultimately – in the case of doubt – the

analysis of its economic effects.

The concept of collective dominance could also be applied to an oligopoly where

parallel behavior (e.g. in prices) can be observed. There need not to be an

explicit agreement on prices, but the deliberate adoption of the same pricing

policy (so-called tacit collusion (or tacit coordination)).

Without going into detail - as this issue should be dealt with more in detail in the

context of horizontal coordination – the main features of tacit collusion can be

characterized as following:

a. Oligopoly structure of the market:

i. Homogeneous products in transparent markets;

ii. Market categorized by small fluctuations and modest innovations;

iii. Small number of (main) enterprises which would be able to control the

market;

iv. Asymmetric structure of these enterprises with regard to the features

most relevant on the market concerned (size, cost structure etc)

facilitates collusion.

b. Ability to coordinate the behavior:

i. Possibility to monitor the compliance of the competitors with the

collusive strategy;

ii. A credible deterrent mechanism to punish deviators from the common

policy;

iii. Outsiders (like smaller companies, the so-called fringe) as well as

customers are not able to jeopardize the coordination.

c. Often the existence of facilitating devices can be observed (like same

restrictive sales contracts, information exchange etc.).

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In contrast to merger cases, in abuse cases more weight should be attached to

factual evidence regarding the behavior of the market participants. Particular

evidence may be warranted for example with respect to the close alignment of

prices over a longer period and to the consistently elevated level of prices. The

authority should also be able to show that deviation from the common conduct

had been followed by retaliatory measures.

Only in the absence of an alternative reasonable explanation this would give rise

to a presumption of an existing collective dominant position.

1.7. Assessing dominance in aftermarkets

Aftermarkets comprise complimentary products (secondary product) that are

purchased after the purchase of another product (primary product). Aftermarkets

as a standard will include after sales services and spare parts for durable goods,

as well as consumables such as ink cartridges and toner for printers and

photocopiers.

Aftermarkets typically are proprietary (brand specific), that is secondary products

can be used with one brand of primary product and cannot be used with another

brand of primary product, although the primary products themselves are

substitutes. Proprietary rights, such as patents or private information about the

market, usually create high entry barriers, making entry by competitors into the

market of the secondary product difficult. The contention is that the supplier of

the primary product often attempts to reserve the secondary market for itself,

leading to a strong position on the secondary market. However, that position is

usually constrained by the competition in the primary market and on its own may

not be indicative of the actual degree of the market power of the supplier in the

secondary market. Therefore dominance in the aftermarket may not be

established without considering its link to the primary market. Consequently the

NAPC usually will assess the competitive structure of both – the primary and the

secondary market.

It is useful to distinguish the effect of a dominant position on the aftermarket on

future and existing customers of the primary product. Competition on the primary

market may allow future customers to avoid negative effects of high aftermarket

prices. Existing customers, however, cannot protect themselves in the same way,

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if after the purchase of the primary product the supplier raises its prices or lowers

the quality in the secondary market.

A supplier of a primary product may consider the effect prices and quality of

products and services provided in the aftermarket have on the sales in the

primary market for two reasons. Firstly, customers may base their purchasing

decision on a life cycle cost calculation, which consist of the price paid for the

primary product and secondary products. The amount of information and to what

extent it could enable customers to make accurate life cycle cost calculation is an

important factor in assessing ability of customers to make an informed choice on

the primary market. It is necessary to assess, if sufficient number of customers

engages in life cycle costs calculations to constitute a sufficient constraint on the

supplier’s market power in the aftermarket. At the same time it is necessary to

assess in such case the ability of the supplier to respond by a different pricing

strategies to customers who do calculations and customers who do not

(professional buyers and private customers).

Secondly, even if the customers do not base their choice of the primary product

on the life cycle cost calculation, the competitors of the supplier in the primary

market could make such calculations and compete hard in the primary market,

compensating it with higher profits in the aftermarket. As a result, the supplier

would not enjoy high overall profits, despite having set high prices in the

aftermarket.

2. Abuse of Dominant Position

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L. Investigative methods and tools

1. Investigation Decision

1.1. Introduction

The aim of the guidelines is to introduce the main methods of the collecting the

information in the official investigations and market studies and to give the

recommendations on the election of the relevant methods, on the most efficient

use of them, on the legal aspects of use and on the operations with the electronic

evidences.

The level of information an agency has in the early stages of a investigation will

vary from case to case. Generally, most cartel investigations begin on the basis

of limited information. Establishing a clear methodology and investigative plan

will assist agencies to build upon the cartel allegations and conduct successful

investigations.

There are numerous ways to conduct a competition investigation. The degree of

information that an agency has during the early stages of the investigation is a

critical factor in determining how an investigation will be conducted. The key

concern of agencies in the beginning phase of a full-scale investigation is the

identification of evidence and potential sources of such evidence.

Accordingly, an agency should analyse and assess information and evidence

gathered during the preliminary inquiry before embarking on a full- scale

investigation. In light of this consideration, it can be useful for an agency to

establish an investigative plan to assess the facts and evidence relevant to

determining whether an offence has been committed. The investigative plan is a

living document that should be revised throughout the life of the investigation.

There is no single model for investigative planning. It is a continuous process

driven by the course of the investigation and should serve as a guide for the

investigation. Accordingly, investigative plans should be revised and adjusted to

reflect the developments in and the understanding of the case. Two essential

features are typically reflected in an investigative plan—the analysis of the target

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cartel and investigative environment, and the activities relevant to evidence-

gathering.

The investigative plan is intended to serve as a guide to assist in developing the

information necessary to prove the infringement, to test theories of the case and

to evaluate the course of the investigation. The investigative strategy is thereby

based on the analysis of the target cartel and the investigative environment

serves as a basis upon which the investigative strategy is set up. Most

importantly, the analysis of the target cartel and the features of the conspiracy

include:

summarising features of the target cartel analysis of evidence obtained through the preliminary inquiry forming a hypothesis or case theory determination of evidence required to establish an infringement/violation determination of the most effective strategy to obtain required evidence consideration of the use of special powers to collect required evidence determination of businesses, persons and locations to be investigated.

In the early stage of a full-scale investigation, agencies usually use information

gathered during the preliminary inquiry to gain an understanding of the key

features of the cartel. The early evidence and information-gathering about the

infringement obtained through a complaint, leniency applications, informants, or

any other method of detecting cartel conduct assumes an important role in

determining the features of the cartel. In the early stages of a full-scale

investigation, agencies may not initially communicate with individuals within the

industry or individuals and corporations that may be implicated in the alleged

violation, with the exception of leniency applicants. If additional information on

the infringement is needed in the early stages (for example, to prepare covert

operations, such as dawn raids or searches), agencies should take care to ensure

that cartel participants are not pre-maturely alerted to the investigation.

1.2. Examples of Types of Investigated Behaviour

1.2.1. Price fixing

The evidence section of the investigative plan for a price-fixing cartel should

identify elements that would assist in determining the existence of the

conspiracy. Key elements are likely to include:

price lists, or industry wide or association price schedules price change notices

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meetings or telephone conversations among competitors exchanges of pricing information between competitors evidence of competitors monitoring or policing their agreement testimonies from members of the conspiracy documents, emails, or faxes that provide evidence of price fixing.

1.2.2. Market allocation

The evidence section of the investigative plan for a cartel involving market

allocation agreements should focus on the allocation scheme implemented by the

cartel members. Key evidence would include conspirator testimonies. Evidence

indicating that a particular customer (or territory, supplier or line of commerce) is

exclusive to a particular company or business may be indicative of market

allocation agreements.

1.2.3. Bid rigging

Bid-rigging activities often involve an agreement or arrangement among

competitors that pre-determines the successful bidder and price of the successful

bid. Sometimes potential bidders may agree to refrain from bidding on a

particular project. In other situations, competitors may agree to take turns at

being the successful bidder and rotate projects among themselves. When

investigating a bid-rigging cartel, the evidence section of the agency’s

investigative plan should identify elements that could assist in determining the

existence of a bid-rigging conspiracy. Key elements are likely to include:

evidence indicating advance non-public knowledge of competitor’s bids or pricing

evidence indicating competitors have discussed bids or have reached an understanding about bids

evidence indicating that a particular customer or contract is exclusive to a particular company

or business similar spelling errors or similar handwriting, typeface or stationery in the

proposal or bid forms submitted by competitors testimonies from members of the conspiracy wide spread subcontracting among the bidders discernable and predictable winning patterns marked differences in bids and/or bid patterns when a non-regular or

newcomer bids.

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1.3. How a cartel operates

Cartel participants tend to establish mechanisms to monitor each other in an

attempt to prevent cheating. Successful cartels typically develop sophisticated

and flexible systems designed to manage the cartel. Identification of the cartel’s

monitoring mechanisms can often be a useful way to determine the key

characteristics or elements of the infringement.

Mechanisms of monitoring output and prices:

Trade associations and industry publications that report detailed market information

payments made between competitors.

Other schemes to share information:

Use of a trust company or a secretarial company or individuals to assist in data collection.

Internal organisational hierarchy:

Many successful cartels develop a system to implement cartel policies. Such a system may involve engaging high-level executives to determine the broad outline of the cartel agreement and working-level groups of managers responsible for the day-to-day implementation of the cartel.

Communication mechanisms:

Cartel members tend to use sophisticated communication mechanisms. In setting out the investigative plan for gathering evidence, agencies should consider the various possible mechanisms for communication. For example:

use of software to allocate markets and customers and to control output and sales

periodic exchange of pricing information to give effect to the cartel agreement

seminars or cartel courses for relevant employees the establishment of steering committees and audit systems the imposition of punishment on companies that do not comply with the

cartel arrangements communication through an intermediary (e.g. someone hired to manage

the cartel).

1.4. Determination of evidence required

The standard of evidence required to prove a cartel differs according to

jurisdiction and will largely depend on whether an agency is undertaking the

investigation as an administrative, civil or criminal matter. The validity or

admission of direct and indirect evidence and the approach to the admissibility of

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evidence obtained through surveillance also varies from jurisdiction to

jurisdiction.

Investigative planning relating to evidence gathering should focus on:

factual issues relevant to determining and proving guilt identification of any gaps in the evidence identification of any evidence needed to address critical issues, including

any relevant documentary evidence potential sources of evidence identification of potential witnesses of fact and whether they should be

interviewed.

The evidence required to prove an infringement will depend on the type of

agreement or arrangement under investigation (see ‘Type of agreement or

arrangement’, above), and frequently includes:

price lists price change notices meetings or telephone conversations between competitors exchange of competitor pricing or bidding information testimonies from members of the conspiracy documents, emails and/or faxes providing evidence of price fixing industry-wide or association price schedules evidence indicating advance non-public knowledge of competitor’s bids or

pricing evidence indicating that competitors have discussed bids or have reached

an understanding about bids evidence of competitors monitoring or policing their agreement evidence indicating that a particular customer or contract is exclusive to a

particular company or business similar spelling errors or similar handwriting, typeface or stationery in the

proposal or bid forms submitted by competing bidders.

1.5. Investigative strategy

Early analysis of the cartel and investigative environment should enable agencies

to assess (i) the evidence obtained to date, and (ii) any further evidence needed

to prove the case. Having established the scope of the suspected cartel and the

theory of the case, agencies will then determine their investigative strategies for

resource allocation and effective evidence-gathering methods.

An analysis of the evidence required to prove the offence will allow the

investigation team to identify any gaps in the evidence gathered to date and will

focus the investigation on acquiring any further relevant evidence from

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appropriate sources. Some agencies draft an outline of the evidence gathered,

setting out an evidence trail. The evidence trail is a useful reference throughout

the course of the investigation to determine whether the evidence obtained

would be admissible in and likely to sustain adjudicative proceedings.

1.5.1. Investigation tools and resources

When determining the investigative strategy, an agency should consider any

available tools or resources to maximize investigative capacity and knowledge of

the case. Such tools or resources may include leniency programs and cooperation

with other domestic agencies as well as foreign anti-cartel enforcement agencies.

1.5.2. Leniency application

Leniency applications are considered to be a source of direct evidence. Leniency

applicants are particularly valuable because they can assist in identifying the

target of the investigation and in prioritising the businesses, individuals, and

locations for investigation. They are often able to offer valuable information

throughout all stages of the investigation and are under a duty to cooperate fully

throughout the full investigative proceedings.

1.5.3. Cooperation with other domestic government bodies

Some agencies have established formal and/or informal cooperation

arrangements with other law enforcement bodies for the detection or

investigation of cartels. Such arrangements may include basic information

sharing—for example, information on specific conduct such as bid rigging or

general market information such as import data. Issues of confidentiality,

procedure and governing laws should be considered when cooperating with other

domestic government bodies. In some cases, expectations for cooperation may

be outlined within the framework of a cooperation agreement. When cooperating

with other domestic government bodies, agencies should be mindful to ensure

that cartel participants are not pre-maturely alerted to.

1.5.4. Cooperation with foreign anti-cartel enforcement agencies

Cooperation between agencies across the various jurisdictions affected by the

cartel can be an important feature of full-scale investigations involving cross-

border elements. Cooperation can involve coordination of simultaneous searches,

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raids or inspections; exchange of information; or gathering information and

interviewing witnesses on behalf of another agency. The coordination of surprise

inspections across relevant jurisdictions, particularly in the early stages of a full-

scale investigation, has been reported as an effective way to minimise the

potential destruction of evidence. Cooperation also plays an important role even

in cases where parallel investigations are not being conducted in other

jurisdictions.

Other counterpart agencies may provide assistance by sharing information on a

cartel that may be located outside the investigating agency’s territorial borders.

Information may also be available in relation to similar cartel behaviour in

related, or even different, industries or country-specific regional or local cartels in

the same industry. In such cases, it can be useful to secure cooperation from an

agency in the jurisdiction in which potentially relevant evidence may be located.

Cooperation between anti-cartel enforcement agencies is often pursued through

formal agreements or arrangements.

An increasing number of agencies have established international agreements,

which may include state-to-state cooperation agreements, inter-agency

cooperation agreements and mutual legal assistance agreements, as well as

competition-related provisions in bilateral free trade agreements. The

investigative plan should consider any timeframe issues.

1.6. Time constraints

The investigative plan should include a basic schedule that identifies tasks,

assigns responsibilities and sets deadlines and timeframes for completion. Such a

schedule ensures that time constraints (such as statutes of limitations) are taken

into account appropriately. These tools will become more important as staffing

resources grow. Case agenda can take different forms such as a calendar or a ‘to

do’ list. In some cases, more than one method may be useful; in all cases, the

investigation schedule should cover tasks to be accomplished, prioritising the

most critical items. Agencies may also use software packages that assist with the

creation of case agenda. Effective planning is important to ensure that all aspects

of the investigation are accomplished within the prescribed statutory period.

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1.7. Selecting voluntary and/or compulsory tools

Most agencies with compulsory powers to obtain evidence will generally use

them because of the seriousness of cartel conduct and the efforts exerted by

cartelists to hide or destroy evidence. Some agencies have no compulsory

powers to obtain evidence or information, and therefore rely on the voluntary

cooperation of the parties under investigation and other market participants.

An agency may rely upon informal voluntary requests for information—both in

the form of interviews and requests for documents—from the potential subjects

of the investigation, other companies within the industry, customers, trade

associations, and other sources. Voluntary requests may be useful to keep

communications less formal, avoid the adversarial tone injected by the use of

compulsory processes and expedite the collection of useful information. Reliance

on voluntary requests for information may also be appropriate where the

evidence already obtained is insufficient to justify the use of formal compulsory

powers.

However, voluntary requests for information should be made with caution. Such

requests may not always produce valuable evidence and may alert the cartel

participants to the investigation, enabling them to conceal or destroy evidence

before compulsory requests are issued. Accordingly, to minimise the risk of

document destruction, where the agency has compulsory powers, it may wish to

consider pursuing voluntary requests for information only after compulsory

requests have proved problematic. It should also be noted that under criminal

regimes, there may be a need to provide proper warnings in relation to self-

incrimination.

1.8. Types and characteristics of the methods of collection of information

The success of an investigation often largely depends on the choice of

investigative tools. Inappropriate choice of investigative tools may lead to the

investigation being ineffective. The choice of investigative tools should be

reevaluated as facts and evidence come to light during the course of the

investigation. Several factors may influence the choice of investigative tools at

particular stages of an investigation. The investigation will often become public

knowledge once an agency takes formal action on the basis of official decisions,

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such as conducting a search, raid or inspection. Searches often prompt leniency

applications or cooperation from cartelists, which may provide a valuable source

of evidence. The element of surprise is often a key factor when conducting

searches to ensure that all relevant evidence is secured.

The methods of collection of information are as follows:

Form Official written request Call/invitation for the meeting in order to give explanations Announced visit Surprise visit Dawn raid

2. Legal aspects of the right of defence in

investigation of competition cases

1. The right to confidentiality in communication between the lawyer and the

client

2. The right not to self-incriminate

2.1. The right to confidentiality in communication between lawyer and

their client

The right to confidentiality in communication between lawyer and their client

(Legal professional privilege (LPP)) is the very basis for the rights of defence and

it is the general principle of the law of European Union, to which an undertaking

can allege in the course of investigation of competition infringements.

Laws assign extensive powers to Competition Protection authority (Authority) in

the course of investigation of competition cases. In the process of market study

and investigation of relevant cases, the officials of Authority receive wide range

of information both in paper and electronic form (stored on the computers of

undertaking and on other storage media (device)).

Among the various kinds of undertaking’s information there can such information

be stored that is prepared or received specially for providing legal advice from

lawyer. This information is subject to special protection. Access to this

information is deemed exceptional and is intended only to identify this

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information, as well as for distinguishing the information that is important as

evidence in the case.

Therefore, when using its powers, the Authority must maintain a balance

simultaneously between the undertaking’s rights of defence and need to prevent

misuse of this right.

The scope of protection of LPP.Communication between the client and lawyer is

subject to protection only if two cumulative criteria occur:

1) The correspondence is done with an independent lawyer;

2) Correspondence is done within the frame of client’s rights of defence and

for that purpose.

Regarding the first criterion - the "independent lawyer" - a lawyer is deemed

independent, if he is not employed by the client. Independent lawyer is not

structurally, hierarchically and functionally integrated within the undertaking that

receives the legal advice.

Please keep in mind: the communication between the undertaking and the in-

house lawyer and other legal consultants that do not have the status of an

independent lawyer (advocate) is not subject of protection. This is due to the fact

that in-house lawyer of a company is economically dependent from his employer;

therefore he is not independent in making decisions and he acts (also gives legal

advice) in the commercial interests of the undertaking. While the activities of

lawyers and requirements to their qualification (i.e. rules of professional ethics

and discipline) are strictly regulated. The lawyers in their professional activities

are independent and subordinated only to the Law, and consequently they shall

advice the client independent (objective) and in the overriding interests of

justice.

The second criterion, i.e. correspondence within the frame of client's rights of

defence and for that purpose, includes:

1) The communications after the initiation of Competition Law infringement

proceedings (consultations in a particular case);

2) Preliminary correspondence, i.e. consultations prior initiation of the

proceedings that relates to consultation on application of Competition Law

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(different kinds of consultations of the employees of undertaking on uncertain

legal issues);

3) Internal records (notes) circulated within the undertaking, which are

confined to reporting the text or the content of communications with

independent lawyers containing legal advice (usually – by company’s own

legal advisor to other employees);

4) Documents that are prepared for seeking legal advice from an independent

lawyer.

We shall draw your attention to the last type of documents. These documents are

protected if they are prepared exclusively with the purpose of seeking legal

advice from independent lawyer, using the right to defence. The particular

undertaking alleging the LPP, is obliged to prove that the documents have been

prepared exclusively for seeking legal advice from independent lawyer.

Keep in mind that illegal actions of lawyer in the interests of the client, as well as

facilitating the client in his illegal activities are not covered by the LPP and are

not protected thereby. Therefore the information and documents related to

infringement of Competition Law or to contribute to violations are not subject to

protection.

If during the investigative actions (for obtaining information), the undertaking

alleges to the LPP, we recommend following procedure:

1) Invite the company to identify the sensitive information by indicating the

recipient, the author, the purpose and number of pages in a relevant

document (in case if information is in electronic format – identify the file

name, creation time, location, size, place of location, addressee of the

information, author and purpose of the document). If necessary, in the

presence of the representative of the company the officials of Authority are

entitled to view the specific page or part thereof, which contains the name of

the document, requisites and information related to the origin of this

document without acquainting themselves with the contents of the document.

It is important to keep in mind that it is duty of the undertaking to provide

“useful facts” to the representatives of Authority and to prove that the

document complies with the conditions justifying its legal protection without

disclosing the contents of the document. "Useful facts" are, for instance,

information about the author and recipient of the document, purpose and

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context in which the document was prepared, type of document classification,

relation to other documents. The company is entitled to refuse the officials of

the Authority to get acquainted with the contents of the document in the

scope, protected by the LPP only if it has presented useful facts to the

Authority.

2) If the officials of the Authority has no doubt that a particular document

conforms to the status of privileged information, this document is not subject

to seizure;

3) If the evidence (of the privileged status of documents) is not presented or

does not prove the privileged nature of the documents the official of the Office

are entitled to:

a) Request to present the documents and to seizure them;

b) Impose fines for refusing to give information and supply evidence.

4) If the evidence supplied does not sufficiently enough prove the

confidentiality of the documents in question and the Authority has doubts

regarding their privileged nature:

a) The documents shall be seized and placed in sealed envelope, giving the

undertaking the right to submit additional justification for their privileged

nature within a specific time limit;

b) Independent officer performs the conformity check for the document’s

compliance to the privileged status.

„Independent Officer”:

• Is not involved in the investigation of the case and in the decision making;

• Is obliged not to disclose information to other officials or employees of

Authority, and other third parties;

• Other officials and employees of Authority are not entitled to give

instructions on evaluation of the information and on the expected result of the

evaluation.

We recommend to record in the Protocol of proceedings all actions in the

process of identification of the privileged information.

5) If the undertaking has indicated that the privileged information is located in

the computer or on other storage media (i.e. in electronic format), the

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information initially shall be processed by selecting the necessary information

for a particular case by keywords;

6) The selected information is stored on a separate CD, DVD, USB memory or

other device so that independent officer could perform its evaluation;

7) Prior evaluation of the information it is required invite the undertaking to

express its opinion on confidential status of information;

8) After clarification of opinions the independent officer makes the decision on

the conformity of the information to the status of privileged information.

Should it be established that the information complies with the privileged

status, it shall be returned to the company, destroyed or its confidentiality

ensured. Should it be established that the information fails to comply with the

privileged status, it is transferred to the officer in charge of the case, and

attached to the case materials.

Since it is prohibited to use documents that are protected by the LPP to prove the

infringement of competition law failure to comply with such requirement may

cause following consequences:

a) A decision on establishment of an infringement can be fully or partially

revoked;

b) The undertaking is entitled to demand compensation for the losses.

2.2. The right against self-incrimination

The general legal principle of European Union states that the right against self-

incrimination protects from the official investigation, which focuses on gaining

admission in acts punishable criminally or administratively (if the sanction in

essence is of criminally nature).

On this basis, the right against self-incrimination is one of the rights of defence,

to which an undertaking can allege in the process of investigation of

infringements of competition law.

This right stems from the European Convention for the Protection on Human

Rights and Fundamental Freedoms (Article 6) and the relevant applicable

practice of the European Court of Human Rights. The interaction of the

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fundamental rights [of an undertaking] and the application of competition law is a

matter of balancing these rights, i.e. protection of fundamental rights is opposed

by effective application of competition law. For the effective application of

competition law in the process of investigation of infringements, the right against

self-incrimination is limited thereto.

By evaluating whether in a particular situation rights against self-incrimination

exist (and to what extent), the two different situations should be distinguished:

1) A request to answer the questions, and

2) Request for documents.

In the first situation there should be more detailed division. On one hand, the

undertaking is obliged to cooperate actively with the Authority, but on the other

hand, it does not mean that the undertaking should incriminate itself by

admitting infringement of competition law.

Consequently, the Authority is entitled to request the undertaking to answer

questions about facts (purely factual questions), but it has no right to compel the

undertaking to give answers which might involve an admission on its part of the

existence of an infringement which it is incumbent upon Authority to prove.

Among these questions, response to which include admission to any

infringement, are direct questions (for instance, whether the company has

participated at the particular collusion?) and indirect questions (for instance, on

the subject and the results of meetings, on agreements made). When refusing to

answer such questions, the undertaking may refer to its right to remain silent as

part of its rights of defence.

In the second situation, the right against self-incrimination does not restrict the

Authority powers of investigation in relation to the documents. The undertaking,

if it is requested, shall present available documents relating to the subject of the

investigation, even if these documents can be used for the establishment of

infringement. Consequently, the obligation of co-operation does not allow the

company to avoid the request to present documents, referring the refusal by the

fact that with submitting of those documents the undertaking will be forced to

incriminate itself.

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Summarising the above mention, it follows that the right against self-

incrimination does not apply to information that exist independently from of the

undertaking will, i.e. to information about the facts and documents. The

undertaking is entitled to prove during further procedure at the Authority or at

the court that the documents produced and answers to the questions about the

facts have a different meaning from that ascribed to them by Authority.

3. The main principles for operations with electronic

evidence

3.1. Receiving the information stored in electronic format

We recommend starting development in this are from creating technical basis.

You need to purchase storage media: CDs, flash cards, hard external drives. The

above media are required for search of electronic evidence, transfer them from

the place of inspection to the Authority and for storage of the data. If the

Authority intends to continue to engage itself into procession of information

(filtration), we recommend purchasing computer for this purpose.

The next step is – personnel training and mastering the computer programs; it is

preferable to start cooperation with official government institutions that are

engaged in area of cyber technological expertise. Additionally you will need some

internal regulation for actions of Authority that identifies, verifies and withdraws

electronic data (development of Protocol forms for fixation of the verification

process of electronic information systems, list of computer programs and

securing the rights of investigation to use appropriate programs).

The least harmful interference with the activities of the company during the

inspection is done, when the computers are not removed for detailed inspection,

but there are so-called "Mirror images" (image copies) from the hard drives made

to media storages of the Authority and further data analysis is done on these

storages. We recommend mastering the technology of creating image copies.

The advantage of this technology lies by the fact that when you create an image

copy simultaneously there is so-called "Mixed sum" (a certain set of numbers)

created. Having fixed this set of numbers, you will be able with this "mixed-sum"

to prove in court that the Authority has not changed the content of the files.

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3.2. Processing the information stored in electronic format

Please keep in mind that there are two possibilities how to organize the

processing of information received: 1) to train your personnel, to master free-

ware and purchase and master charged software that are designed for a deep

and specific data analysis; and 2) to use the "outsourced" services, establishing

co-operation with relevant agencies.

To facilitate the work of persons involved in the evaluation of the evidence

(investigation, members of the board, participants in the process, the court) we

recommend to print the files containing the proof and to attach them to the case

materials. We recommend regulating the procedure of annexing printed

documents to the case materials by internal regulation.

3.3. Storage of information received in electronic format

We also recommend regulating the issue of storage of the electronic evidence by

internal regulation. In this act we recommend you to consider the following key

points:

1) Limited access to information (stored in a safe);

2) Reporting and responsibility of persons who have access to electronic

evidence;

3) Duplication of information (2 copies of information in case of accidental loss

/ destruction thereof);

4) Recording the movement of electronic evidence (acts on the transfer to

another institution for filtering (including by keywords));

5) Destruction of information or return of it after the decision has entered into

force.

M. Leniency program

– Guiding principles for adopting a successful leniency program in

Moldova –

This document reflects general principles shared by the National Agency for the

Protection of Competition (NAPC) for the effective implementation of the leniency

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program by the NAPC and is to provide practical guidance on the conduct of the

proceedings before the NAPC concerning the leniency provisions in the draft

Competition Act.

1. Scope of leniency

The scope of the leniency program is co-extensive with the scope of the

substantive provision prohibiting anticompetitive or restrictive

agreements/practices (Article 84). The inclusion of vertical restrictions of

competition to the scope of the leniency program extends the scope also to

vertical behavior which might be said to be facilitating horizontal cartel activities.

Comment A: Including all types of infringements, that is, both horizontal and

vertical agreements/practices, to the scope of the leniency program recognizes

the fact that leniency generally contributes to the effective and efficient

prosecution of anticompetitive practices. Indeed, the key driver for a leniency

policy is detection. Also, cost reductions and efficiency gains in pursuing an

investigation/punishing an infringement justify a wider scope.

2. Thresholds for immunity

Pursuant to the leniency program a 100% reduction from fines is guaranteed for

a company provided that it submits sufficient information and evidence which,

according to the NAPC's view, either allows the NAPC to carry out an inspection

(type A ) or, in case the NAPC is already in possession of sufficient evidence to

carry out an inspection, enables the NAPC to find the infringement (type B).

Comment A: The minimum threshold to qualify for immunity, when the cartel is

still undetected (type A), is substantially lower than when the NAPC has already

started its investigation but had not gathered sufficient evidence to find the

infringement (type B). The differing immunity thresholds ensure that the option

of informing the NAPC about an unknown cartel is the more attractive choice for

companies which, thus, will create an incentive to come forward at a stage where

the NAPC is not yet aware of the cartel.

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3. Excluded applicants

Pursuant to the leniency program, companies which have instigated and/or

coerced others to participate in the alleged anticompetitive conduct are excluded

from the possibility to benefit from immunity, though they may still benefit from

reduction in fines (Article 88).

Comment A: A coercer may be defined as a company which compelled another

company to participate in the cartel by means of coercion, such as violence,

threats in an economical sense, or boycotts.

Comment B: An instigator may be defined as a company which is concerned with

the establishment or enlargement of a cartel by way of persuasion or

encouragement of other companies to establish or join a cartel.

Comment C: Under efficiency considerations the scope of the exclusion should

generally not only encourage companies to come forward which were merely

marginally involved in the cartel. Indeed, companies playing a leading role in the

cartel are most likely the best source of information on a cartel. It is therefore

submitted that in practice the scope of the exclusion should be construed

narrowly, not least because instigation is considered as an aggravating

circumstance under the draft competition act.

4. Thresholds for the reduction of fines

Applicants who are not the first to report the cartel and/or fail to meet the

immunity thresholds (type A or B) may qualify for a reduced fine (Article 89). In

order to have their fines reduced, the applicants must contribute significantly to

the investigation of the alleged infringement.

Comment A: Reduction form fines is closely linked to the granting of immunity to

a company as it only comes into play where immunity is no longer available. In

particular in situations where the NAPC has already started an investigation but

has not gathered sufficient information to prove the infringement, the provision

of further information is of crucial interest to the authority as it eases its burden

of proof.

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Comment B: The leniency program does not set out any particular time limit until

what point in time companies can come forward to apply for reduction from fines.

However, it is submitted that the reduction of fines applicants may come forward

throughout the administrative procedure until the investigatory report is sent.

Comment C: To qualify for a reduction in the fine, the company must significantly

contribute to the investigation and ease the NAPC’s burden of proof. That is, the

relevant substantive test applied in order to qualify for a reduction of fines may

be referred to as the significant added value test (SAV).

Comment D: Whether the evidence submitted amounts to SAV is not assessed on

a stand-alone basis but is to be assessed against the information and evidence

the NAPC has already got in its possession. Thereby, the relevant benchmark is

not the evidence which the authority has already got from the reduction of fines

applicant, for instance by means of an inspection, but rather the entire evidence

that is in the file. This creates an incentive for companies both to come forward

quickly and to provide the best possible evidence. This ensures also the race

between companies to provide the information and evidence required to meet

the SAV threshold which effectively contributes to the detection and termination

of the infringement.

The requirement of significantly contributing to the investigation refers to the

extent to which the evidence provided by a company enhances, by its nature

and/or level of detail, the NAPC’s ability to prove the existence of the alleged

infringement.

Comment A: The evidence submitted by the reduction of fines applicant must

ease the NAPC’s burden to prove the alleged cartel. Evidence must therefore, by

its nature and/or level of detail, strengthen the NAPC’s ability to prove the

alleged infringement. That is, the evidence amounts to “added value” only if it

constitutes incriminating evidence and, thus, contributes to establish the facts in

question.

Non-incriminating evidence which does not contribute to establish the

infringement should not be deemed to provide “added value”, that is, for

instance, information which concerns the economic and legal context in which

the alleged infringement took place, such as information on the relevant market,

the market shares of the companies involved, the effect of the anticompetitive

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conduct on the market, the products or services concerned, or other general

information on the companies involved in the alleged infringement.

Comment B: The requirement to submit evidence which adds “significant” value

to the investigation refers to the fact that the evidence must not only strengthen

or confirm the evidence already in the NAPC's possession (for instance a

corporate statement not disputing the facts). Rather the evidence and

information must put the NAPC in a position to prove all or part of the facts

already known to it or enable it to prove facts not yet known to it.

Comment C: It is submitted that the term "significant" adds discretion to the

NAPC's assessment of whether the SAV threshold is met or not. This will require

the NAPC to take into account all the specific circumstances of a case.

The NAPC will grant a reduction in the fine of between 30 and 50% to the first

company which is deemed to have provided evidence representing significant

added value. The second company will be granted a reduction of between 20 and

30% and all subsequent applicants will be granted a reduction of up to 20%

(Article 89).

Applications for a reduction in the fine must be made in an explicit form (Article

90).

Comment A: A company may only benefit from a reduction of a fine if it makes a

formal application to the NAPC.

Comment B: According to the leniency program, the NAPC is under no obligation

to take a position on the first reduction of fines application before the

examination of the second application. That is, companies compete with each

other for the purpose of passing the SAV threshold. The company which is first to

submit evidence amounting to SAV will be able to secure its place in the highest

band of reduction.

Comment C: Successive applications are examined in a chronological order, that

is, each application is assessed whether the substantive test is met on the basis

of all the evidence and information submitted by the applicant, even if another

applicant for a reduction from fines has also submitted relevant information in

the meantime.

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The level reduction of fines within each band of reduction is determined by the

time at which the submission of the evidence is made and the extent to which

the supplied evidence provides added value.

Comment A: Generally speaking, the magnitude of the reduction granted should

reflect the effective contribution to the investigation.

Comment B: The first criterion is the time at which the evidence is submitted in

relation to the stage of the NAPC’s investigatory proceedings. Evidence

submitted at an early stage of the investigatory proceedings is considered of

more value than evidence supplied at a later stage, that is, when the NAPC has

applied an array of investigatory measures, such as requests for information.

Comment C: The second criterion relates to the extent to which the evidence

amounts to added value, that is, the more facts the submitted evidence

contributes to establish the higher the reduction within a given band of reduction

should be. In this context, it is submitted that the authority will necessarily also

have to look at the probative value of the evidence submitted.

5. Partial immunity

If an applicant for the reduction from fines provides evidence concerning facts

previously unknown to the NAPC, which have a direct bearing on the gravity or

duration of the infringement, the NAPC will grant immunity for such facts.

Comment A: If a company is the first to submit evidence pertaining to facts which

have a direct bearing on the amount of fine, these will not be taken into account

when the NAPC imposes the fine against the company which submitted that

evidence. This implies that the effective reduction in the applicant's fine may, in

effect, be greater than the reduction bands set out in the leniency program.

Critically, this provides an incentive to come forward with as much information as

possible and to submit the best evidence pertaining to the additional facts.

Comment B: The concept of partial immunity can be applied, for instance, where

an undertaking allows the NAPC to extend the geographic scope of the

investigation. It could also apply if the company shows that the investigated 120

infringement covers more products than the authority had identified or is of a

longer duration as previously known.

Comment C: The evidence must relate to facts which pertain to the cartel

conduct under investigation. That is, if the company submits evidence concerning

a different anticompetitive conduct, it could be granted immunity for that other

cartel, provided the evidentiary thresholds (type A) are met, without increasing

the reduction of its fine in the first procedure.

6. Conditions attached to leniency

Both immunity and reduction of fines applicants must meet three cumulative

conditions in order to qualify for lenient treatment. The applicant must fully,

continuously, and expeditiously cooperate with the NAPC.

Comment A: Generally, the duty to cooperate starts at that point in time at which

the application is lodged with the NAPC. Yet, it is submitted that the obligation

not to destroy relevant information and evidence arguably starts as soon as the

company intends to come forward and apply for lenient treatment. The obligation

not to destroy evidence is crucial to preserve key documents for the

investigation.

Comment B: The obligation to provide all evidence requires the company to

supply the entirety of the evidence available to it and not merely information to

meet the type A threshold, that is, to allow the NAPC to carry out an

investigation.

Comment C: The obligation to answer all questions is important to the NAPC not

only to elaborate the facts provided by the applicant but also to understand the

legal and economic context in which the alleged infringement took place.

Comment D: It is submitted that the general obligation to fully cooperate with the

NAPC also includes the duty to make the personnel involved in the cartel conduct

available for interviews with the NAPC (this is of particular importance if witness

testimony is permitted to prove the infringement).

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The company must end its involvement in the cartel upon the NAPC’s request.

Comment A: The obligation to terminate the infringement means that the

applicant both informs all relevant business sections within her company and

ensures that the company's instruction to cease the cartel activities are

respected. To that end, it is necessary that the company's implicated employees

clearly dissociate themselves from all current and future cartel

contacts/activities.

Comment B: According to the leniency program the obligation to terminate the

infringing conduct does not automatically become effective at the point in time

when the application is lodged. Rather, the applicant may continue its

participation until the NAPC instructs otherwise.

Comment C: The NAPC's discretion as to when the applicant must terminate the

infringement avoids the risk that, if the applicant suddenly would cease her cartel

activities, other cartel participants might raise suspicion. That might

consequently lead to the destruction of evidence before the inspection took

place. Thus, the continuation of certain cartel activities might be necessary to

safeguard the integrity of the investigatory measure.

Comment D: Yet, the NAPC's responsibility to decide when to stop might expose

the NAPC to accusations of condoning illegal activities (possibility of damage

claims). This requires the NAPC (i) to go ahead with the investigation quickly so

that the termination of the infringement can be requested as soon as possible

and (ii) to discuss with the company immediately after it lodged its leniency

application which cartel activities are indispensable and, thus, necessary to be

continued in order to avoid risking leaks or destruction of evidence. It is essential

that any further cartel activities should be strictly limited to passive cooperation

with other cartelists without requiring the applicant to actively solicit or reveal

any sensitive data.

Failure to comply with one of the obligations results in a loss of lenient treatment

of which the applicant is notified only in the final prohibition decision with fines.

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7. Procedure

7.1. Full application system

The immunity applicant's place in line and, thus, the possibility to obtaining

immunity is determined by the point in time at which the full application is

submitted.

Comment A: For the submission to be deemed a full application, it has to be

immediate and substantial, that is, it already needs to contain all information

stipulated in the leniency program including all the evidence and information that

the applicant has at her disposal at that point in time.

Comment B: Under the full application system no other application will be

considered until a position has been reached on the prior application whether or

not the evidence submitted suffices to overcome the evidentiary threshold.

Comment C: Under the full application system the applicant's place in the

leniency queue only crystallizes when the company provides sufficient evidence

to meet the evidential threshold. That is, only the company which is first to

submit information and evidence which meets the evidential threshold (type A or

type B) will be granted immunity.

Hence, any application which does not yet encompass all evidence available to

the applicant (staggered applications) cannot be completed if in the meantime a

second immunity application is lodged. The first application must then be

evaluated only on the basis of the information and evidence submitted until the

moment when the second applicant came in.

7.2. Hypothetical/Anonymous applications

Under the leniency program companies are able to approach the NAPC in an

anonymous way in order to check whether they are able to overcome the

evidential threshold and qualify for (type A or B) immunity (Article 91).

Comment A: The procedure proposed under the leniency program takes place in

two stages. In a first step, the potential applicant submits a list of the evidence in

her possession which describes the nature and content of each item of evidence.

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In a second step, after the NAPC concluded on the basis on the descriptive list

that the evidence will meet the evidential threshold and verified whether the

actually submitted evidence corresponds to the list provided by the applicant the

NAPC grants conditional immunity.

Comment B: It is submitted that in practice the applicant should be requested to

adduce all "direct" evidence in his possession (such as, minutes of meetings or

notes from cartel contacts) allowing, though, that names and other indications

which might reveal the identity of the company are blackened. Moreover, it is

crucial that also the type of the infringement, the products concerned (at least

the broad product sector), the geographic scope and the duration are revealed in

order to be able to check whether or not there is already an investigation under

way in that sector concerned. The descriptive list together with the submitted

direct evidence should enable the NAPC to render a firm opinion whether the

evidence is sufficient to meet the applicable substantive test.

7.3. Conditional immunity notification

As soon as the immunity applicant meets the evidential threshold the NAPC will

grant conditional immunity.

Comment A: To assure the company about the status of its application, a

conditional immunity decision is to be made as soon as the NAPC determines that

the evidence submitted meets the type A or B threshold.

Comment B: In order to determine exactly for what infringement the grant of

conditional immunity refers to the NAPC should specify the infringement by

describing the products or services concerned, the geographic scope and the

duration of the alleged infringement. Also, the conditional immunity decision

should explicitly stress the obligation to fully cooperate and, most importantly,

the duty not to reveal to other participants in the cartel the fact that an

application has been lodged with the NAPC.

If the information and evidence submitted fails to meet the requirements under

type A or B, the NAPC will inform the company that it does not qualify for

immunity.

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Comment A: As soon as the NAPC concludes that the evidential threshold has not

been met it will notify the applicant that it rejects the application. It is submitted

that the NAPC, as long as there has not been a second company lodging an

immunity application, should not outright reject the application but rather

informally indicate, upon the inquiry of the first applicant whether she qualifies

for immunity, that the authority views the evidence as insufficient. That will allow

the first applicant to search actively for additional pieces of evidence relating to

the infringement and to communicate them to the NAPC. However, adopting a

rejection decision is inevitable if, for instance, a second application was lodged in

the meantime or the first applicant clearly indicates that she is not in the position

to supply further information and evidence.

Comment B: It is submitted that companies notified on the NAPC’s decision to

reject the immunity application should be construed as not being challengeable

in its own right as the effects of the NAPC's decision will only appear if and when

the NAPC takes a final decision with fines. Consequently, rejection decisions

should be deemed only as provisional acts.

7.4. Notifying the company on whether significant added value has been

provided

The NAPC will, no later than the investigatory report is sent, notify the reduction

of fines applicant in writing whether the company has provided significant added

value and, thus, will qualify for a reduction from fines. If the NAPC concludes that

the evidence amounts to significant added value, the NAPC also specifies the

band of reduction within which the applicant is placed.

7.5. Oral applications

Corporate statements which describe in detail the company's involvement as well

as that of other undertakings can be provided orally.

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8. Miscellaneous

8.1. Leniency for individuals

Under the leniency program lenient treatment is only available to companies

which leaves the personnel of a company unprotected against criminal

prosecution.

Comment A: Pursuant to Art 246 Criminal Code individuals can be prosecuted for

entering into agreements which separate markets, limit access to the market,

eliminate other market participants, or increase prices provided a significant

profit was obtained or a significant damage was sustained by third parties.

Comment B: If individuals are not granted immunity from criminal prosecution

simultaneously with the company they work for, this might influence corporate

decision-making away from seeking corporate leniency out of concern, in part, for

their own circumstances. It is submitted that, as a result, lack of coherence

between competition law enforcement and criminal enforcement might lead to

under-enforcement.

Comment C: A possible way to tackle this issue is to foresee leniency for

individuals, that is, to extend leniency automatically to current and former

employees and directors of the company which has submitted a leniency

application. The advantage would be that this would increase the effectiveness of

the investigation as it poses a real incentive for individuals to cooperate with the

investigation.

8.2. Personal scope of the corporate leniency program

The personal scope of the leniency program concerns both undertakings and

associations of undertakings.

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N.Fining

1. General Notions

The Autority's policy with regards to competition law infringements is one of

prevention. Hence it issues extensive guidance on how to comply with the law.

Should companies break the law, fines may be imposed. These too are ultimately

aimed at prevention, and must hence fulfil two objectives: to punish and to deter.

Breaking the competition rules is profitable if it goes unpunished – that is why

companies do it. To take cartels as an example, the OECD looked at a selection of

cartels, estimating the median price increase to be 15 to 20%, with a high of over

50%.

If a cartel lasts for several years, then the companies involved benefit from these

higher prices for every year of the cartel. The fine has to take this into account if

it is to achieve its objective of prevention on industry as a whole. Commission

fining policy is based on the principles that some breaches cause more harm to

the economy than others, that breaches affecting a high value of sales cause

more harm than infringements affecting a low value of sales, and that long-

running breaches cause more harm than short ones.

The position of fines as the only sanction against cartels or one of a bigger

number of sanctions can potentially have an important impact on the approach

to determining the amount of the fine. Where fines are the only sanction, they

must bear the entire burden of deterrence, and a priori may need to be higher

than in jurisdictions where they are combined with other sanctions (most notably

this concerns prison terms).

2. Fines in the Context of the General Legal

Framework

In jurisdictions which have introduced incarceration as a sanction, or which have

been able to incarcerate individuals for some time, the primary reason for the

introduction of this sanction has been the aim of increasing effective deterrence

by focusing the attention of company managers on the extreme personal

consequences of participating in cartels. It is sometimes felt that fines on

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companies affect in the first place shareholders, who are not involved in the daily

running of a company, and thus may have limited effect on the behaviour of

managers. On the other hand, the European Commission considers that effective

deterrence can be achieved through pecuniary sanctions, but only with very high

ones, especially for recidivists.

Moreover, civil damages actions (under civil law) by the injured parties of a cartel

may be also available (whether these are regarded as sanctions or not is a moot

point). Recovery of damages for their monetary loss, either in the course of the

enforcement proceeding by the competition authority or separately in a civil

action, is also possible. To be successful, claimants have to be able to prove the

damage they suffered and the causality with the cartel, which often may not be

that easy.

The issue of transparency is not only related to good enforcement practice and

openness of information but also to other factors such as the relationship

between the predictability of sanctions and deterrence. According to the principle

“nullum crimen et nulla poena sine lege”, for conduct to be considered as a

crime/offence, there must be a legal provision establishing it and imposing a

specific punishment on the perpetrators of such conduct. In cartel cases, the

imposition of a specific punishment will affect deterrence of cartel conduct. If a

company could determine in advance the amount of the fine which would be

imposed on it for any particular cartel offence, it could take a rational decision

about whether or not to become involved in a cartel.

Under a rather simple cost benefit analysis, the company and the executives

acting on its behalf could determine in which circumstances or conditions it

would be economically sound to enter a cartel or to stay in it. Corporate

executives will be deterred from committing cartel offences if they perceive that

the potential costs of engaging in the conduct exceed the anticipated rewards.

3. Fining Principles in the EU

In the EU, the European Commission has published guidelines on the

determination of fines concerning anticompetitive conducts since 1998. These

guidelines were amended in 2006. The rationale for the 1998 Guidelines also 128

mentioned in the 2006 Guidelines is to ensure the transparency and impartiality

of the Commission’s decisions. This must be combined with the objective of

reaching a sufficiently deterrent effect, not only in order to sanction the

undertakings concerned (specific deterrence) but also in order to deter other

undertakings from engaging in, or continuing, behaviour that is contrary to

Articles 81 and 82 of the EC Treaty (general deterrence).

The guidelines aim at limiting the Commission’s disctretion, which otherwise

would only be bound by the statutory maximum of 10% of the annual world-wide

turnover of an undertaking. According to the case-law of the European Court of

justice, “the Guidelines are an instrument intended to define, while complying

with higherranking law, the criteria which the Commission proposes to apply in

the exercise of its discretion when determining fines, the Commission must in

fact take account of the Guidelines when determining fines, in particular the

elements which are mandatory under the Guidelines”.

In the EU, the Commission in determining the basis for setting the fine refers to

the value of sales of the goods or services to which the infringement relates. The

value of sales in this context refers to the sales of the cartelised product(s) in the

geographic area concerned in the EU or EEA. The combination of the value of

sales to which the infringement relates and of the duration of the infringement is

thought to provide “an appropriate proxy to reflect the economic importance of

the infringement as well as the relative weight of each undertaking in the

infringement”.

In the EC, the basic amount of the fine will be related to a proportion of the value

of the cartelised sales, depending on the degree of gravity of the infringement,

multiplied by the number of years of the infringement. The proportion of the

value of sales taken into account can be set between 10 and 30%, depending on

several factors (discussed above). Such amount will be multiplied for each

undertaking by the number of years of its participation in the cartel. In addition,

irrespective of duration, the basic amount in cartel cases will include an entry fee

of between 15% and 25% of the value of the cartelised sales during the last year

of the infringement. The latter amount aims at deterring undertakings from even

entering into a hardcore cartel.

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Increases and Decreases: The fine can be increased (for example if the company

is a repeat offender), or decreased (for example if the company’s involvement

was limited, or legislation or authorities encouraged the infringement).

Leniency Reductions: The Commission encourages companies that are involved

in a cartel to come forward with evidence to help the Commission to detect

cartels and build its case. The first company to provide sufficient evidence of a

cartel to allow the Commission to pursue the case can receive full immunity from

fines; subsequent companies can

receive reductions of up to 50% on the fine that would otherwise be imposed.

Settlement Reductions: In cartel cases, the Commission also offers a reduction of

10% in the fine if the Commission reaches a settlement with the company.

Settlements reduce the administrative costs of cartel decisions, including before

the court, and help the Commission deal more quickly with cartel cases, freeing

up resources to devote to new investigations.

In exceptional circumstances, the Commission may reduce the fine if the

company provides sufficiently clear and objective evidence that the fine is likely

to affect seriously the economic viability of the undertaking. The analysis looks in

detail at various company-specific factors, and aims to be as objective and

quantifiable as possible to ensure equal treatment and maintain deterrence.

4. Fine Calculations in Moldova

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Literature

Commission notice on remedies acceptable under Council Regulation (EC)

No 139/2004 and under Commission Regulation (EC) No 802/2004.

Merger Remedies: Competition Commission Guidelines, November 2008

(www.competition-commission.org.uk).

ICN Merger Working Group: Analytical Framework Subgroup. MERGER

REMEDIES REVIEW PROJECT. Report for the fourth ICN annual conference.

ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES. U. S.

DEPARTMENT OF JUSTICE Antitrust Division. June 2011.

Market definition. Understanding competition law. Office of fair trading.

2004,

www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft403.pdf

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