Mergers: EUC Report

HL Deb 30 January 2003 vol 643 cc1287-315

3.30 p.m.

Lord Grenfellrose to move, That this House takes note of the report of the European Union Committee on the Review of the EC Merger Regulation (32nd Report, HL Paper 165, Session 2001–02).

The noble Lord said: My Lords, I rise in my capacity as the chairman of Sub-Committee A, as I was at the time that we conducted the inquiry and published, in July 2002, the report which is before your Lordships' House this afternoon. I very much regret that your Lordships have had to wait so long for an opportunity to debate it. In my new capacity as chairman of the European Union Select Committee, I am hopeful that the recommendation contained in our recently published report on the scrutiny of European legislation—that the debating of Select Committee reports not be so long delayed—is really taken to heart by the usual channels. I am very sorry that a further and eleventh-hour delay in the scheduling of this particular debate inconvenienced a number of noble Lords and deprived us of the participation of two of the greatest experts in the House on this issue. I think that that is a great shame.

I am. however, delighted that the noble Lord, Lord Brittan of Spennithorne, is participating today. As the Competition Commissioner from 1989 to 1992, he did a great deal to develop and expand the European competition policy as the final stages of the single market were being put in place. We much look forward to hearing what he has to say.

This inquiry was prompted by the publication, in December 2001, of the Commission's Green Paper reviewing the European Community's Merger Regulation—the ECMR. The purpose of the Green Paper was to launch a broad debate on how the ECMR was working, and it proposed a wide range of possible ways to improve the merger regime. Our report was a response to Commissioner Monti's desire to gather views from all interested quarters. We were delighted to have this opportunity to contribute once again to the long-evolving debate on the merger regulation as we have done over the years both immediately prior to its adoption in 1989 and on two subsequent occasions (in 1992 and 1996) before this latest inquiry and report.

I am extremely grateful to members of the subcommittee who put a great deal of hard work, time and effort into the inquiry and the deliberation on the draft report which was so brilliantly prepared by our clerk, Dr Richard McLean, to whom we are greatly indebted. Our warm thanks go also to Dr Richard Whish and Miss Jennifer Halliday of King's College London who served as our indispensable specialist advisers through a three-month inquiry of particular complexity.

As we note in paragraph 21 of the report, the merger regulation has become one of the cornerstones of EC competition law and many witnesses—from the business community to the regulators—told us how highly they regarded the regulation and what a success its operation had been. The committee recognises the good work of the Commission in applying the ECMR, and we endorse the Department of Trade and Industry's view, as offered to us in oral evidence, that the Commission has, responded with great success to the huge challenge of enforcing the Regulation vigorously but fairly, despite an exponential increase in the case-load".

The latter point is borne out in the footnote on page 31 of our report, which shows the number of notifications to the Commission increasing from 12, in 1990. to 340, in 2001.

That said, one has to acknowledge that not all is sweetness and light. We shared the view of the many witnesses who expressed disappointment that the Green Paper devoted only limited attention to the important issue of due process and the checks and balances to the Commission's decision-making procedures. Of course, these issues go beyond the rules set out in the ECM R itself and concern the Commission's internal administrative practices for handling cases and the role of the Community courts.

Meanwhile, the Commission has been the subject of some serious criticism, and witnesses drew attention to shortcomings in the ECMR system which were causing increasing concern. Some had already been borne out by the judgment, on 6th June 2002, of the Court of First Instance in the Airtours/First choice case which, while our inquiry was still in progress, overturned the Commission's decision to block the merger. Then, three months later, within the space of just one week, the court overturned two more Commission decisions: Sehneider/Legrand and Tetra Laval/Sidel. I should add in parenthesis, however, that one should bear in mind, before accusing the Commission and its Merger Task Force, as some have, of being too big for their boots, that it has blocked only 18 out of almost 2,100 of the mergers it has examined since given its powers of control in 1990.

That said, and in light of these recent reverses in court, our committee was, I think, in retrospect, right to have considered it important that the broad review of the Green Paper be taken as art opportunity to assess all of the ECMR procedures. Obviously, the committee could not address all of them ourselves in our inquiry, so we focused on what we considered the three essential issues, which were jurisdictional, substantive and procedural. Late last year, when Commissioner Mario Monti completed his review and the full Commission, on 11th December, adopted his recommended package of reforms, we found that many if not most of our own recommendations were in line with the conclusions that he himself had eventually reached after considering the extensive advice he had invited from many quarters.

What, then, were our own recommendations? I will certainly not weary your Lordships with a long recital of them. For convenience's sake, they are set out in summary form in Part 6 of our Report, at pages 51–52. As noble Lords will hear, I suspect, from the Minister—the noble Lord, Lord Sainsbury, who will be replying this afternoon—the committee's position on all the major issues appeared very close to that of the Government as stated in their own response to the Green Paper and in their response to our report. Indeed, there are reflections of our common position on some of the issues in the Enterprise Act which the noble Lord skilfully guided through this House. We look forward to hearing his reply to this debate.

Meanwhile, permit me to select just a few of the conclusions and recommendations which find particular resonance in the Commission's latest package of reforms.

Although we dealt with jurisdictional issues first in our inquiry, we were in no doubt from the start that the top priority for reform was the need to ensure greater objectivity and fairness and greater efficiency in the ECMR process. The grounds on which the Commission suffered those three recent reverses in the court suggest that we were not wrong to place such emphasis on due process. In your committee's view, the many concerns about due process would be best addressed by improving the procedural safeguards in the current system, in particular enhancing the internal checks and balances in the ECMR regime. Efforts to ensure an effective system of due process cannot, in the committee's view, be limited solely to trying to obtain speedier judicial review or a greater role for the courts.

Our report strongly recommends that any case reaching Phase II should be subjected to a measure of independent thinking through the introduction of the so-called "second pair of eyes". In practice, that means that the Commission should divide responsibility for the consideration of cases in Phase I and Phase II. Appointment of a review panel is one of the Commission's own new recommendations. We believe that that is a step in the right direction.

We also concluded that the objectivity of the Commission's proceedings would be further enhanced if the hearing officer's report was fully reasoned and contained a comprehensive explanation of his or her conclusions. The Government agreed with that, and we are very happy to note that the Commission recommends increasing the hearing officer's support staff, presumably with this among other improvements in mind.

We were particularly insistent that the Commission strengthen its overall capacity for economic analysis in merger cases. There has been, according to many of our witnesses, a tendency in the merger task force to rely too much on narrow legal points or untested theories instead of on hard economic evidence. We recommended that the Commission appoint a chief economist, and we are pleased to see that the Commission's package of recommended reforms includes the creation of a chief competition economist in the directorate-general.

We note with interest provisions in the package for merging parties to have an earlier opportunity—for example, before the statement of objection is issued—to review the content of the Commission's files pertaining to the deal that they wish to make and any third-party submissions on the impact on competition.

In our inquiry we were much impressed by evidence strongly suggesting that by conducting the oral hearing before the statement of objections, the issues involved in the case would be out on the table earlier, which would be to everyone's benefit. That is reflected in our recommendation summarised in paragraph 299. It would allow the hearing officer to summarise the situation after the oral hearing, identifying the competition problems and their possible solutions. Drawing on that, the merger task force would then be able to come up with a statement of objections amounting to a draft decision which could act as the framework for remedy negotiations. That would be fairer to the parties concerned and a more logical and orderly way of proceeding.

I turn now to jurisdictional issues. They are covered in paragraphs 32 to 97 with our recommendations summarised in paragraphs 275 to 285. Once again I shall not abuse your Lordships' patience by itemising them, but I shall say a word about those that are related to important new measures now proposed by the Commission.

As we saw it, the key jurisdictional issue was how best to amend the regulation to minimise the problems associated with multiple filings while ensuring that mergers that could significantly affect competition in a distinctive market within a member state are examined at national level. That is to say, mergers must be examined by the regulatory body that is best placed to ensure the maintenance of effective competition. We agreed that no single measure would achieve that, and that a workable package of measures had to be devised.

As an important component of that package, and to clarify the issue of who has jurisdiction over which mergers, we supported the Green Paper's proposal to move to a simpler system whereby the Commission would have jurisdiction over all mergers that are subject to three or more national filings—the so-called "three-plus rule". That change, we felt, would provide greater certainty to businesses as it would reduce the instances where companies are required to file with a multiplicity of national competition authorities. We felt that the three-plus rule would serve better if it were mandatory, thus lessening the risk of so-called forum shopping. The Government feel that it should be optional—one of the rare instances where our recommendations and the Government's response part company.

The Commission package proposes a simplified system for the referral of cases by the Commission to member states and vice versa, an idea that we ourselves advanced by means of a simplification of Articles 9 and 22 of the regulation. The Commission's changes are clearly designed at least in part to make the one-stop shop in Brussels available in more cases, but interestingly it has abandoned its earlier proposal in the Green Paper, and thus implicitly our recommendation, that it should take jurisdiction in every case where the three-plus-one rule would normally apply.

I turn to the third of our three main concerns, the substantive test. That is dealt with in Part 4 of our report in paragraphs 98–161 and our conclusions and recommendations are summarised in paragraphs 289–290. We were impressed by the arguments for having the Commission switch from the dominance test to the substantial lessening of competition test, commonly known as the SLC test as applied in the US, Canada and a number of other jurisdictions. Some of our witnesses claimed that only semantics distinguished the two tests, and that a switch from one to the other would produce no fundamental change in how the ECMR functioned. We accepted that there were similarities between the two tests and that in many cases their application may give the same result. However there seemed to be broad agreement that the SLC test is in many ways better in theory, and that if one were today drafting the regulation from scratch, one would probably adopt the SLC test.

We accepted, however, that a change in the test should not be made lightly. There would inevitably be short-term disruptive consequences. We remained persuaded that the longer-term interest would be better served by a switch. Given that the Enterprise Act replaces the existing United Kingdom public interest test with one based on SLC, it is not surprising that we and the Government are at one in wanting to see the switch made at the European level.

We set out our reasons for recommending a switch in six bullet points appearing in paragraph 160. Time does not permit me to elaborate, but I suggest that they are clear enough. At the heart of our argument lies the conviction that any merger that substantially lessens competition should be investigated, and that the SLC provides a better basis on which to assess such cases than the dominance test, even though it can be argued that today the dominance test could fairly be described as "dominance plus".

When we met with Commissioner Monti he told us that he had not yet reached any conclusion on this issue and might not do so during the time available to him for the review of the Green Paper. In the end he reached a conclusion, which was to retain the dominance test. However, it seems that it will be redefined to extend to situations in which, the combined entity holds the economic power to influence appreciably and sustainably the parameters of competition, … or appreciably to foreclose competition". Some are suggesting that that wording could be read as extending the reach of the ECMR further than the SLC test. Time will tell.

The Committee was extremely sceptical of the necessity or desirability of introducing into the text of the ECMR provisions setting out an explicit efficiency defence. We felt that if there were a significant reduction in competition in a market, there would be very little incentive or reason for the company to pass on any efficiencies to the consumer. The Government have taken a rather different view, believing that efficiency considerations can be relevant under the rubric of clearly defined customer benefits. However, the Government appear to agree with us that where there are doubts that benefits will materialise as a natural consequence of a merger, and within a reasonable timeframe, the efficiency defence should fall. We note that the Commission wishes to consider efficiencies in its assessments with certain provisos that are similar to those adopted by the Government. I am afraid that we remain sceptical.

Let me close with one specific plea that we on the committee wished to express strongly. The ECMR and its effective, equitable and transparent implementation is far too important to be jeopardised by resource constraints. We urge member states—this is the final recommendation in our report—to agree the provision of the necessary new posts; otherwise, all the advice that has been tendered to the Commission and the Commission's own generally commendable recent proposals to improve this vitally and increasingly important regulatory system will have been in vain.

I have covered much less than the totality of our findings and recommendations in this long and fairly complex report, but doubtless others will fill in some of the gaps. I greatly look forward to the debate. I beg to move.

Moved, That this House takes note of the report of the European Union Committee on the Review of the EC Merger Regulation (32nd Report, HL Paper 165, Session 2001 –02).—(Lord Grenfell.)

3.48 p.m.

Lord Brittan of Spennithorne

My Lords, I warmly welcome the debate and congratulate the authors of the report on the way in which their conclusions are argued and on the care that they have taken in considering this extremely important subject. I also welcome the debate because, in spite of the kind invitation to give evidence to the committee, unfortunately I was unable to do so due to absence overseas.

Much has happened since the committee deliberated. There has been further criticism by the Court of Justice of the handling of particular cases, and most notably last December the Commission put forward its own reform proposals. That has not rendered the report or the debate less valuable because the Commission's proposals are still being considered, although there have been firm announcements on some points such as the appointment of an independent economist, as recommended by the committee.

When I arrived at the Commission as the commissioner responsible for competition, it was by no means clear that the merger regulation would be enacted. It had been the subject of debate for some 16 years. The noble Lord, Lord Hannay, who at the time was the permanent representative in Brussels, however, immediately assured me that by the end of the year it would be agreed. That was the first of many examples of his prescience that I encountered—and it indeed proved to be the case.

As one can imagine, it is all the more gratifying to me that so many years later the noble Lord, Lord Grenfell, and his committee have felt able to commend the regulation and how it has operated in paragraph 21 of the report.

In considering the faults, the problems and the desirable reforms, the noble Lord was absolutely right to lay stress on the enormous increase in cases that have occurred—an increase that is far greater than we could have envisaged at the time that the regulation was passed. However, as part of the bargain between the Commission and the member states for approving the regulation, we insisted that the Commission should be adequately staffed with people who could handle issues of this kind. It was impossible to predict the explosion from three to over 340 cases that occurred in a decade.

The handling of cases has been criticised by the court in recent times and condemned by others for arrogance. I suspect that that was in large part caused by the sheer pressure of the workload. Therefore, I strongly support the conclusion of the committee, referred to by the noble Lord, Lord Grenfell, that adequate resources must be provided for this work. It is a priority. It is, indeed, a service to industry in the European Union.

The report is full of other detailed recommendations. I want to focus on two main issues. The first is the question of the support for switching the tests from the dominant position to the substantial lessening of competition test. Despite reading the report carefully and participating in numerous debates on this issue here, but mostly in the United States, I do not believe that the committee has made that case out. The report includes a very fair and full analysis of the pros and cons, but the conclusion it ultimately put forward—if one reads it carefully—is on the narrowest of grounds.

The report refers to serious and considered arguments on both sides. In fact, the most vociferous calls for change have come from the other side of the Atlantic, from the American business community, which is furious that the Commission dared to reach a different conclusion from the American authorities in the Honeywell case. Those who have spoken in that sense have been motivated by not only a desire that we should accede to the American test, but also a desire to make it easier for companies to push mergers through.

The reality is that the difference of opinion that occurs in cases where the two tests are applied is almost always caused not by the difference in the test but by the difference in the application of the test to the facts. Indeed, paragraph 102 of your Lordships' committee states: Some witnesses, such as Dr William Bishop, Chairman of Lexecon Limited, thought that there was 'very little difference in practice between the two tests'. He did not see 'major differences' between SLC and dominance in the way that the latter had been developed and applied by the Commission. The Government said that a change from dominance to SLC would not be 'a fundamental change' to how the ECMR functioned. The Confederation of British Industry accepted that 'real differences' between the tests were 'difficult to pin down"'. There is a very good reason for thinking that if the change were made the result would be the exact opposite of what some of the American critics would wish and that more transactions would be prohibited.

Therefore, the argument is a narrow one. I think sufficient weight has to be given to the fact that a considerable jurisprudence has evolved applying the dominance test and that if a change were to be made that jurisprudence would be lost and the precedents would disappear. Unless, therefore, a substantial gain is to be achieved by a change in the test, that in itself is a ground for not making such a change. As all seem agreed that the differences are narrow and the results difficult to predict—and probably not in the direction that the advocates of change would wish—I feel that the case for change has not been made out.

Nor am I convinced by the argument that if the same test is applied in all jurisdictions there would be a gain in uniformity and a propensity for fewer clashes. As is said in paragraph 123, even if the same substantive test were applied across the different jurisdictions, the way in which the test was applied could give different results. For the CBI, harmonising the legal test in the legislation would not 'in and of itself lead to a more consistent approach' because, however the test was phrased. the regulators would retain 'a broad margin of discretion"'. As one would expect, in the American cases there are often divisions of opinion between different judges and different regulators applying the same test but coming to a different conclusion on the facts of a specific case.

It is also important to point out that, in practice, the two tests have moved closer together. That is stated in the report. The reason for that is largely because of how the Commission has developed the doctrine of collective dominance. Indeed, paragraph 138 specifically accepts the fact that the two tests have moved together.

So, if one considers all that—the limited difference between the tests, the fact that they have increasingly converged and the last of the jurisprudence under the existing test—it is difficult to see a reason for change. Indeed, the only reasons for change given in the report are three specific examples where it might be difficult to apply the collective dominance test and a desire to distinguish the tests under the merger regulation from the tests applied under Article 82 with regard to the abuse of a dominant position.

The argument that it is difficult to apply the merger regulations unless one changes the test, has, I think been rendered less cogent—and will be rendered still less cogent when the Commission adopts measures, as it says it will, that deal with vertical mergers and conglomerates. These will tackle the concept of oligopolistic market dominance and reflect the experience acquired through the examination of over 2,000 cases. So, I think that the argument founded upon the three specific examples is not sufficient for a change.

As to the argument that there should be a distinction between the tests applied under the merger regulation and the tests applied under Article 82, I find no real evidence that there has been confusion because the language of the two is similar. I do not find that a reason for change either. Therefore, I would go along with the Commission's rather than the committee's conclusions on that point.

I shall say word on the efficiencies defence. The report is very cool on that issue. As the noble Lord, Lord Grenfell, has indicated, it is considerably chillier than the Government. I was extremely reluctant to accept arguments in favour of such a test at the time of the introduction of the merger regulation. The reason for that was very simple. It seemed to me that—at a time when many people wanted the merger regulation to be used to apply industrial policy rather than competition policy—explicitly to include an efficiency test would be an open invitation for protectionist tendencies to gain force.

On the other hand, the Government are right to say that efficiencies are not absolutely irrelevant. The latest Commission position is reasonable: it has promised to grant particular attention to the positive effect of a merger that at first glance would appear a threat to competition; but concrete and sufficient proof will be requested from the companies and a positive effect on consumers will have to be demonstrated. The Commission said that a green light to the creation of monopoly or quasi-monopoly was unlikely. In other words, there would be a hard row to hoe for those who wanted to run an efficiencies defence.

The other question to which I shall refer is that of checks and balances. The committee recommends that responsibility for consideration of phases I and II should be divided between two separate teams of officials. As I understand it, after phase I, the first team would leave and the phase II officials would enter. That proposal was made because the committee thought that a switch to a judicial-based system would be premature and too radical, but that, on the other hand, something had to be done to deal with the objections to the Commission acting as prosecutor, judge and jury in merger cases.

I should like to be somewhat less cautious and take the argument head-on. I do not favour going down the American route of requiring a judicial determination before a merger can be banned. That would certainly import considerable delays to the decision-making process and not have the effect favoured by those that advocate it. The desire to avoid delays would lead to exactly the same process of negotiation over remedies that takes place today. Moreover, it would give the courts the task of taking the decisions, as opposed to reviewing them—a role that does not fit well with the basic distribution of functions between the institutions that has been central to the EU's operation.

It is therefore understandable that the Commission does not want to go down that route and instead suggested as a way to deal with the problem the creation of a peer review panel to scrutinise the investigating team's conclusion with a fresh pair of eyes. As I understand that proposal. that is not quite the same as the committee's proposal for the substitution of a new team, because the Commission does not envisage that the old team would disappear, it would merely be subject to the additional scrutiny of a fresh pair of eyes.

Whether such a system will satisfy the Commission's critics will depend heavily on the precise way in which it is set up and then operates. The panel must be of high standing, with full access to the file and considerable transparency in its operations, if it is to win the confidence of critics. Even so, it is in my view unlikely to be considered sufficiently independent if it consists solely of senior Commission officials.

One way to strengthen what is proposed and make the scrutiny of the merger taskforce's operations appear more robust would be to include one genuinely independent person on each panel—someone who is not a Commission official. I hope that that suggestion can be seriously considered during current discussions.

I conclude by once again warmly commending the report. I remember Jacques Delors once telling me— although we often had our disagreements, we often met to discuss them—that reports of the House of Lords represented by far the best analysis and critique of Commission proposals in the European Union. This report can only enhance support for that opinion.

4.4 p.m.

Lord Hannay of Chiswick

My Lords, I begin by paying tribute to the noble Lord, Lord Grenfell, for introducing the debate and chairing Sub-Committee A during the production of the report. He chaired the committee with great determination, patience and skill, and managed to squeeze out the report before the summer holiday. That is all the more reason to regret that it has taken us well into the New Year to get around to debating it.

It is also a pleasure to follow the speech of the noble Lord, Lord Brittan of Spennithorne. As he reminded the House, he and I had some dealings when the regulation was being adopted. It was my duty from time to time to go to express the deep regret of the British Government that he was taking an especially tough line on some piece of state aid. I am glad to say that he always gave me a fair hearing; I am equally glad to say that he was always firm.

This debate is taking place at an important stage in the evolution of the European Union's competition policy—in particular, of its arrangements for dealing with mergers. The Commission has now completed its analysis of the responses to its Green Paper on the reform of those arrangements, of which the report that we are debating forms part. It has revealed its thinking and the member states will shortly begin consideration of changes to the basic regulation on mergers arising from the whole complex and lengthy process.

I hope that it will not be considered unduly self-congratulatory if, as a member of the sub-committee that drafted the report before us, I point out that many of the ideas that the Commission has now decided to pursue figure prominently in that report. Perhaps that is not too surprising, because the dialogue that the subcommittee was able to have with Commissioner Monti when we visited Brussels showed just how much common ground there was between us. Even if it is not surprising, it is a cause for satisfaction.

When one plunges into the wood of the merger regulation, it is all too easy rapidly to lose sight of anything but the technical trees, each one lovingly analysed by a host of legal and economic experts whose daily task it is to work in the field. But it is important to remember at every stage just how vital a part of the single market is an effective, objective and smoothly functioning merger regulation. I doubt whether many would now deny that without such a regulation, the single market would be lacking an essential component. National competition authorities have their role to play, but the degree of integration now reached by the European single market makes a central, regulatory authority for mergers a necessity, not an optional extra.

How well, then, are the present arrangements functioning? Although the apocalyptic conclusions drawn by some commentators from recent European Court cases that found against the Commission are often wide of the mark, there have been rather too many such cases to be able to dismiss them as of marginal significance. So the honest answer to the question is probably not far from that of the curate's reply to the Bishop on the quality of his breakfast egg: "Good in parts, my Lord".

The Commission provides a speed of service that is the envy of companies in other parts of the world, including the United States. It has built up a body of case law that enables companies contemplating mergers to proceed with a fair degree of confidence as to what will be acceptable and what will not. The benefits of the EU's competition policy to consumers and to the effective functioning of the market have been real—albeit intangible and not easy to quantify.

However, time and experience have shown up weaknesses and it is now necessary that they be remedied, not just swept under the carpet. Many arise within the Commission itself and are of an organisational nature, which the Commission itself can remedy without much involvement by the member states. The appointment of a chief competition economist, properly staffed to ensure that economic considerations are as carefully analysed at every stage of the process as are legal considerations, is one such measure.

Another is to ensure that during the second, critical phase of any merger review, the work of the reviewer is considered by a second, independent panel of experts not hitherto involved in the process. A third is to give hearings officers more resources and to make their work more transparent. A fourth is to issue guidelines on the scope for and limits of an efficiencies defence of a merger.

Many of those proposals, supported by the subcommittee, have been accepted by the Commission, but, regrettably, it has not gone the whole way by accepting a second phase review by a second group of examiners. I welcome the Government's intention, set out in their Explanatory Memorandum, which this House has just received, to press this point in the forthcoming legislative process on amendments to the regulation. The Commission should in any case be encouraged to implement the procedural changes that it has accepted without more ado and without waiting for the adoption of an amended regulation. If they require additional resources, as they certainly will, I express the hope, as did others, that the budgetary authorities—shorthand for the British and other governments—will not take too stingy an approach.

On wider issues requiring a more direct response by the member states, and perhaps some amendment to the basic regulation, the introduction of provisions for a limited stopping of the clock makes sense. So, too, does the clarification of the rules for transferring cases between the national competition authorities and the Commission. But I regret that the Commission seems to be turning its face against any radical change in what is called the "substantive test" to be applied to merger cases. Despite the fact that some of the problems in recent court cases seem to result from the lengths to which the Commission has gone to stretch the existing notion of a dominant position. it appears to think that minor changes to the notion of dominance will suffice. It is, thus, setting aside the compelling arguments for moving to a substantive test based on the alternative notion of a significant lessening of competition (SLC) test.

The main argument for such a switch in the substantive test is not just that the SLC test is widely applied internationally—for instance, in the USA, Canada, Japan and New Zealand, as well as nationally in the Enterprise Act that we passed in the last Session—although there would be benefits from the application of a global standard. Rather, the real argument is that the SLC test has a more obvious and common-sense relevance; it is wider in its scope and thus more likely to catch the broadest number of anticompetitive features of proposed mergers. In that respect, I agree with the noble Lord, Lord Brittan. in thinking that the US advocates of the test as being more restrictive might have a nasty shock if it were applied. The SLC also seems to bring economic factors more directly into play.

There are arguments against such a switch: it will create confusion and a lack of continuity for European businesses contemplating mergers. But I hazard a guess that, even if the European Union follows the Commission in sticking to a dominance test on this occasion, it will not be long before we are all back again examining the case for the EU to switch to the SLC test. That will not be a disaster but an opportunity missed.

I very much agree with the Commission's resistance of the arguments advanced in favour of handing over the final determination of all negative merger cases to the courts, as in the United States. That would put at risk one of the chief merits of the European Union system—its relative expeditiousness and the certainty of the timetable that a company faces. It would also tip the balance back towards the legal considerations in respect of mergers, just when we are trying to tilt it towards economic considerations. However many promises were made of speeding up European judicial procedures—and it is good that the Commission will try to ensure that the present appeals procedures work more rapidly—I have little confidence that sending all negative merger determinations to a two-tier legal system. which is already struggling with its existing workload, would do other than create uncertainty and delay. Those are two factors that European businesses could well do without.

In conclusion, I hope that our debate will send to the Commission a general message of firm support for its vital work on competition policy, tempered by a strong desire to see the earliest possible introduction of reforms designed to make the system more flexible, transparent and objective. No aspect of the European Union brings its citizens more benefits and value than the single market. A competition policy that works well is a necessary part of that single market.

4.14 p.m.

Lord St John of Bletso

My Lords, I, too, have been greatly privileged to serve under the able chairmanship of the noble Lord, Lord Grenfell, on Sub-Committee A in this, my second term. The timing of this inquiry was opportune in the light of the Airtours case, which effectively expedited many of the sought-after reforms in the EC Green Paper. I should at the outset declare an interest as a consultant to Merrill Lynch, which is not mentioned in the report. I thank our specialist advisers, Professor Whish and Dr Jennifer Halladay, for their able stewardship and expert knowledge of this complicated subject.

The noble Lord, Lord Grenfell, has given us an admirable overview of the main findings of our report. I shall I ouch on two key issues: enforcement, which all noble Lords have mentioned, and the need for a universal substantive test. One of my concerns throughout the inquiry was the fact that the Commission has tended to act on referrals as investigator, prosecutor and judge, and that there has been inadequate separation of responsibilities and insufficient checks and balances on the Commission's decision-making process.

As the noble Lord, Lord Grenfell, mentioned, following the publication of our report, the European Commission suffered three consecutive defeats in the European Court of First Instance in the cases of Airtours, Schneider and Laval. The court used unusually harsh language in concluding that the Commission had failed to satisfy its burden of proof and had variedly failed to take into account the evidence, had drawn speculative conclusions from selective hits of evidence, and, in the Schneider case, had failed to protect the parties' rights by failing to give them the opportunity to respond to, and defend themselves against, specific allegations. If one reads those decisions, taking into account how the Commission has in the past rebutted its critics by bragging that a merger had never been overturned by the courts, there is an inference that the Commission was smug and arrogant. There was, therefore, much collective cheer by practitioners, in particular, following those judgments.

Having said that, there is much respect and appreciation of the Commission's work in applying the EC Merger Regulation to the ever-burgeoning numbers of referrals. The critics have been constructive in the consultation process. It is noteworthy that over 40 per cent of the submissions to the consultation on the Commission's Green Paper on merger reform came from the United States. I, therefore, warmly welcomed the comprehensive package of reforms of EU merger controls that the Competition Commissioner, Mario Monti, announced last month. I welcomed, in particular, plans for the European Commission to improve its scrutiny of takeovers by listening more to companies involved in the deals. I hope that the Commissioner's business-friendly words will be matched by the Commission's actions. To quote Commissioner Mario Monti: Merger control is not about blocking mergers. It is about ensuring consumers continue to benefit from sufficient innovation, choice and competitive prices". The proposals addressed another recommendation in our report; namely, the need for a chief economist to bolster the Commission's expertise. It was accepted that the Commission's level of in-house economics expertise was weak and that more legal certainty should be given in setting out clear economics-based guidelines, mirroring the US merger guidelines.

I also support the move to create a peer review panel composed of experienced officials to review cases at key points during the inquiry and, in a way, act as devil's advocate. That certainly goes a long way towards addressing my concern that officials were acting as investigators, prosecutors and judges in the merger control process. I also welcome the move towards more transparency whereby merging firms will be able to review the Commission's file and third party submissions to the inquiry. That is a good move and will give the merging parties more of a chance to discuss their case with senior Commission management. The reforms are all welcome, if not a bit overdue. However, they still leave concerns over the accountability and competence of the Commission.

The question of how the merger will foster or impede efficiency is a black hole in the European merger regulation. I was alarmed to read in a recent KPMG report that over 82 per cent of cross-border mergers involving the United Kingdom and other member states had unfortunately failed to deliver value. The reasons for that include the lack of understanding and consistency in commercial and financial due diligence, which stems from cultural differences as well as corporate governance inconsistencies.

My final point relates to the substantive issue. The Commission was pulled up by the Court of First Instance in the Airtours case, particularly over the way in which it interpreted and applied the concept of collective dominance, under which a number of firms with significant market share can be regarded as collectively having market power, as opposed to single firm dominance, where a firm has a market share of 40 per cent or more and acts in a way that infringes the EU treaty. The Commission failed in Airtours to establish that, with the merger, the firm would act in a way that could be seen as constituting collective dominance. The Court of First Instance regarded its analysis as highly speculative. That has been clarified by the EU Court now, and we can proceed on that basis.

Despite the far-reaching reforms, the Commission has decided to continue using the dominance test as the merger competition test. In our inquiry, most of our witnesses were in broad agreement that the SLC test was better in theory—I notice that the noble Lord, Lord Brittan of Spennithorne, disagrees with me—and was a more economically based test than the dominance test. We did not have the wisdom of the noble Lord, but, as outlined in paragraph 160 of our report, some witnesses, were concerned about the implications of a change in terms of the uncertainty it would cause and the unpredictability of how the new test would be applied". It was felt that a move in Europe to SLC would have short-term disruptive consequences.

I disagree fundamentally with that approach and support the view of Mr Vickers. In a speech at the joint conference held by the International Bar Association and the European Commission in November in Brussels, he pointed out that the word "dominance" has different meanings. He referred to Humpty Dumpty and Through the Looking Glass and claimed that the dominance test reduced legal certainty. Furthermore, from a practitioner's point of view and from a company's point of view, the position is complicated by the fact that some member states, such as Ireland and, following the recent reforms under the Enterprise Act 2002, the United Kingdom, have changed to the SLC as they reform their merger laws, while the Commission continues with the dominance test by shoring up the gap. In brief, the risk for Europe is that we have differing merger standards, thus undoing the benefits of consistency and certainty.

Although I still have several reservations about the reform of the EU Merger Regulation, there is no doubt that we are moving in the right direction. We are moving in the right direction to ensure transparency, checks and balances, and speed and efficiency. I am often concerned that our Select Committee reports and sub-committee reports are rarely read and rarely get much coverage in the broadsheets, and I was delighted to hear the comments made by the noble Lord, Lord Brittan of Spennithorne, about the praise from Jacques Delors. However, this inquiry has raised many important questions, several of which have, thankfully, recently been addressed.

4.25 p.m.

Baroness Sharp of Guildford

My Lords, I join others in paying tribute to the noble Lord, Lord Grenfell, and declare that I am wearing two hats today. I was a member of the committee when the report was drawn up, but I speak today from the Liberal Democrat Front Bench, partly with a Liberal Democrat hat on.

As the noble Lord, Lord Hannay of Chiswick, said, EU competition policy has emerged in the past 20 years as part of the bedrock of the single market. Merger policy, which has shorter roots—the merger regulation came into effect only in 1989—has become a vital part of competition policy. When the merger regulation was introduced, it was agreed that there would be regular reviews of how it worked. The Green Paper, which was the impetus for our report, was, in its way, a routine part of that review process. It raised several questions about difficulties and wrinkles in the way in which the regulation worked, suggested ways in which it might be revised and asked for views on those suggestions. In some senses, what we covered in the review was part of the routine process of monitoring and review.

Some of the issues that were covered were, in a way, commonsense proposals to tighten up procedures. On the whole, the jurisdictional issues that we dealt with—in particular, how to cope with multiple filings, given the substantial increase in the number of applications—were fairly routine. There was also the question of whether we should stop the clock on procedures, to enable the initial phase 1 and phase 2 investigative procedures to be given more time in complex cases. They were routine issues, and the proposals that were made were relatively commonsense proposals. I am pleased that, in that sense, the Commission took note of our views. On the whole, the developments on those lines are sensible.

I shall talk about two of the more substantive issues that emerged in the report. There was the question of shifting from the dominance test to the substantial lessening of competition; and there was the issue of due process and whether the Commission, in acting as prosecutor, judge and jury, allowed for a fair hearing. On the latter point, we on these Benches endorse the committee's conclusion that the shift to the US system, in which cases are dealt with judicially, would be a major step. It would not be necessary and would not be welcome. We endorse the committee's proposals, and, to some extent, the Commission has gone along with them.

There are ways of strengthening current procedures. The procedures needed to be more obviously objective. It was proposed to separate phases 1 and 2, and to strengthen the role of the hearing officer. Indeed, like the Commission, we should have liked to go along with the committee's proposals to have a separate review of phases 1 and 2. However, in the event, we are pleased that the Commission has gone as far as it has in proposing independent members of panels. Perhaps it has not gone as far as we might have wanted, but it is a move in the right direction.

I turn to the issue of the substantive test. I shifted my stance during the course of the committee hearings. I began by feeling strongly that the dominance test had been applied; that there was little difference between the concept of collective dominance and the substantial lessening of competition in relation to oligopoly; that the two could come together; and. that there was the great advantage of an established body of case law.

I changed my mind during the inquiry. I should like to explain why, and how ultimately I came down firmly in favour of the substantial lessening of competition. To economists, the case for mergers is known as the "market for managerial control". A firm can be seen as a collection of physical assets, human capital, goodwill and so forth. If a group of managers do not make the most of those assets, and that is reflected in their market capitalisation, they may be challenged in the market by another group of managers who believe that better use could be made of those assets. Thus, there are take-overs and mergers. Essentially, the case for non-interference is that the market knows best and should be allowed to decide which group of managers can make the best use of those assets.

However, a substantial body of literature now suggests that mergers do not always perform as the market predicts. In the late 1970s, the economist Ronald Meeks, wrote a seminal study on how a series of mergers worked out—or rather, how badly a series of mergers worked out. The book is entitled Disappointing Marriages. Since that time there have been a substantial number of academic studies on post-merger developments.

One of the people who addressed the hearings was Professor John Kay. I should like to quote from his evidence. He said: there are quite a lot of academic studies of the performance of mergers—really of several different kinds. There is looking at stock market impact; to what extent do mergers add value to the combined companies; comparisons of pre and post merger; costs and profitability: to what extent are mergers followed by disposals which are often at least an indication that this has not been very successful; and then just asking people, 'Do you think this merger has succeeded?', and the overall tenor of that quite large literature is really pretty negative. The disagreement is more whether the consequences are neutral or negative rather than how positive they are". The dominant market structures that we face today are structures of oligopoly—competition among the few. In many ways, where there is oligopoly, there is often intense competition. One has only to look at the intense competition between Tesco and Sainsburys, the two main supermarkets within an area. But oligopoly also poses problems for monopoly control. That is seen most regularly with oil companies, the large oil companies competing intensely with each other. Yet, by a process of osmosis, prices always go up and go down at the same time. That is partly because the companies are watching each other intensely. The whole structure of oligopoly encourages what is sometimes called implicit collusion. There is no question of explicit collusion, but there is a degree of implicit collusion.

However, oligopoly has posed to all anti-trust authorities—whether they be British, American or indeed now European —a very real problem. It could be suggested that during the past 20 to 25 years there has been in Britain a shift away from national oligopoly. Many of the firms that we dealt with, such as GEC and ICL, were national companies and in the 1980s they became European companies. Perhaps, to an increasing extent, at that point we were faced with European oligopoly.

In the 1990s, a huge number of trans-national mergers took place and the word "globalisation" is often applied to that. Glaxo, a British company, became GlaxoWellcome. Still a British company, it finally became GlaxoSmithKline, a huge multinational company. AstraZeneca and ABB, formed in the 1980s, are large European multinationals.

One of the problems that has arisen with the push towards globalisation is that one has seen—ABB illustrates the point well—a move from family management to the development of managerial capitalism, with professional managers and perhaps accountants going in and taking over. One of the results has been the emergence of large international conglomerates in which the assets of companies are being traded around, rather in the manner of a game of Monopoly—casino capitalism. Thus, we have seen the emergence of huge companies such as Enron, TXU Energy, and so forth, who are trading assets around.

Those companies have turnovers which are often well in advance of the turnover of some small national states; namely, countries such as Estonia or Lithuania. Clearly, there are dangers. Those huge companies wield considerable political influence. The offer of foreign direct investment can mean that those companies have considerable influence on national governments. Therefore, it is of vital importance that we have within the European Union a strong measure by which we can, to some extent, hold those companies to account.

The noble Lord, Lord Brittan, said that there was by no means agreement, but those pushing for the term "substantial lessening in competition" were largely the aggrieved American partners who were fed-up at the decision made as regards GEC/Honey-well. It is clear from the evidence of the economists and those involved in the regulatory framework that they substantially endorse that view. Perhaps I may quote from Derek Morris, who felt strongly that the "substantial lessening in competition" was an important concept and a better concept than that of "collective dominance".

He said: imagine a set of incumbent firms in the market, perhaps a market in which there has not been any great innovation, and a new entrant appears with new technology, new ideas, new products, and it really threatens the existing companies, so one of them buys it out. It may be a very small company. It may just involve buying this particular computer specialist or whatever. It is almost impossible to apply the concept of dominance, and yet it could very effectively and substantially lessen the competition that would appear in that market. Indeed, you could have a series of such innovative entrants emerging and the incumbents just picking them off one at a time. Of course they will want themselves to develop the innovation of the new company, but their incentive to do it is very much less because to some extent they would be losing out from their pre-existing operations". That picks up the concept of what the economists call "contestable competition"; that what we are concerned about is the dynamics; that there is the ability for new companies to come into the market and to make their mark.

In his evidence to the Committee, John Vickers stated: I see the prime purpose of merger policy as to act as that basic safeguard against competitive market processes being undermined. If one takes that view, there is a sense in which one gets there in one go if one has the test in terms of substantial lessening of competition". We on these Benches are highly sceptical about mergers and we back the SLC test because it is tougher. We believe that governments, whether at national or European level, should be tough about mergers. We are worried about the emergence of giant international companies and the power and influence they can wield.

It is vital that at the supra-national European level we have effective competition policies, including effective merger control. We are very sceptical on these Benches as to how much benefit derives from mergers. We generally take the view that competition has increased, is increasing, and should be diminished. The tougher the controls exercised, the better.

4.42 p.m.

Baroness Miller of Hendon

My Lords, I declare a former interest by reminding noble Lords of my membership of the Monopolies and Mergers Commission—now the Competition Commission—from which I resigned immediately on my elevation to your Lordships' House because of the obvious conflict of interests that could have arisen.

Having said that, I, too, thank the noble Lord, Lord Grenfell, for his presentation of his committee's report. I also congratulate the committee on the comprehensive way in which it has studied the many problems in regard to mergers within EC law, as well as on its mastery of the alphabet soup of acronyms that issues from EC jargon.

So far five very distinguished noble Lords have spoken. Four served on the committee, one as the chairman and the other three as members, and the fifth, my noble friend Lord Brittan, was not on the committee but his experience and expertise speak for themselves so he did not need to be. I make the point merely because the Minister and I are the only two speakers who were not involved in this. I find it daunting following all of those speakers, knowing very well that I shall be overtaken in due course by the Minister. That is why I am particularly grateful for the useful glossary included in the report.

The inquiry was particularly timely, coming at a moment when the Commission was facing what the Financial Times described as, a barrage of criticism from governments, companies and judges". The report that came before the European Court had rendered a judgment in two cases striking down decisions of the Commission. The committee had already completed taking evidence when a first devastating judgment was given against the Commission in the Airtours/First Choice merger case in June 2002. I wonder whether any of the committee's recommendations would have been even more vigorous than they are—indeed, whether they would have been any different—had it been able to take those judgments into account. I do not in any sense criticise the committee for what it did not and could not possibly have known, what The Times described as, the gung ho approach to merger controls", of the Commission.

The European Court described the merger task force's handling of the Airtours case as, not being based on cogent evidence and being vitiated by a series of errors of assessment". The Commission's response to this devastating judgment was not contrition, but a sign posted in the merger task force's Brussels' office which stated: Merger Task Force versus the World". This arrogant attitude was presumably supported by the Competition Commissioner, Professor Monti, who claimed that the Airtours judgment simply showed that Brussels was subject to effective external scrutiny. However, by the time the two further adverse judgments were rendered against his department he had adopted a more contrite attitude.

After admitting that the Commission had in these three cases suffered "unprecedented criticism"— which in some regimes might have resulted in his resignation—Professor Monti told the European Commission/IBA conference on EU merger control that: I believe that, in a certain time. with hindsight. we will say that these judgments, no matter how painful, came at a right moment. Indeed there are no doubt lessons to be learned from these judgments; in particular that the Court of First Instance is holding us to a very high standard of proof". Let me say in passing that, in exercising a powerful quasi-judicial function, the Commission should not have needed the Court to remind it of the elementary duty of being held to a very high standard of proof.

Turning to the substance of the Commission's proposals. it seems that it is in favour of an approach that uses the market dominance test in deciding about a proposed merger, as many noble Lords have mentioned. Quite rightly, your Lordships' Select Committee takes the view that the so-called SLC test— that is, the substantial lessening of competition test—is the more appropriate criterion and one which will inevitably lead to more consistency in its decisions. Again, other nobles Lords have made that point.

That is also the view of witnesses who gave evidence to the committee, such as the TUC and Professor Kay. It is also the view of the Government and most European competition experts. Not only does the test conform to the test applied in the United States; it is also in accordance with the views of the Director-General of Fair Trading, who attacked the dominance test with a favourite quotation of mine. I thought my quotation would be fresh but the noble Lord on the Cross-Benches half used it earlier. It states: 'When I use a word', Humpty Dumpty said, 'It means just what I choose it to mean, neither more nor less"'. That is the classic definition of a subjective test, when what is required—especially in view of the dismal record of the merger task force—is an entirely objective one that can be measured by something other than a flawed opinion or a philosophical approach. Despite the overwhelming support for the purely objective SLC test from all around the world, the best that Professor Monti can propose is a kind of offer—one could call it a grudging offer—to clarify the meaning of "dominance".

It was suggested that applying the SLC test might lead to more applications being made to the Commission, but I cannot see why it should, because applications would be based on more clearly defined facts rather than on opinions. It might also concentrate the minds of the Commission on not shooting at everything in sight in a kind of Pavlovian reaction to every large merger that comes before it.

As regards a philosophical approach, I hope that your Lordships will forgive me if I digress for a moment to tell you about my own personal experience in Europe. When I expanded my successful United Kingdom mail order business into Germany, I was immediately assailed by two cases alleging that I was guilty of unfair competition. Me! Unfair competition! Noble Lords know that I would not be involved with that.

In one case it was said that I was charging too much for my goods, whereas in the other case, which came before the Kartellamt—the competition court— on exactly the same day, I was accused of unfairly competing because I was charging too little. Both cases were heard in the same court on the same day. I had to fight no fewer than 18 separate law suits before I could convince the German courts and competitors that I was there to stay, with a better mousetrap that I had built, and that I was not unfair to the consumer or to the competitor. Your Lordships will therefore understand why I view the EC's approach, with its sometimes rigid attitude to competition, with some scepticism.

The Commission is discussing procedures intended to save parties from having to make multiple applications to member states, and it is acknowledged that the current rules under Article 1(3) of the EC treaty are extremely complex and cumbersome.

The suggestion is that the new so-called "three plus" rule should be imposed—that is, when a filing is necessary in three or more member states, the Commission should have jurisdiction. Despite the fact that the committee embraces this idea, I personally— I stress that this is a personal view—have reservations for two reasons: first, because, as the Select Committee points out: It is possible for international transactions to affect purely national markets; in those circumstances such transactions were often better dealt with by the relevant National Competition Authority". Secondly, I personally doubt whether three states should be the criterion when the EL currently has 15 states, and will soon have 25. With such a multiplicity of states—some of them less commercially sophisticated than others, to put it politely, and some only recently emerging from bureaucratic regimes—applications might have to be made in circumstances where it would be simpler only to apply in those countries where the merger was actually relevant.

A higher number than three might be better. But, as ever, I defer to the committee's view, and that of the Commission, that three-plus is the correct level. I hope, however, that the level will be kept under review when it is seen how it operates in practice, since it is obvious that the greater number of applications that have to be referred to the Commission instead of the individual national committees, the greater might be the degree of interference in commercial transactions by the Commission instead of by the states that are actually involved.

The other reason for limiting the extent of EC interference in mergers is the principle of subsidiarity which the former Prime Minister, John Major, established for the benefit of the United Kingdom at the time of the Maastricht Treaty.

There may be occasions when a merger with cross-border implications is nevertheless of real concern to just one state. Let us suppose that an international airline is in serious difficulty, and suppose that the solution is either merger with another airline or for a "White Knight" to come to its rescue. This is a case where the national competition authority could be the sole judge, able to make a speedy decision rather than going through the cumbersome procedures of. the Commission, which could cause such delay that the struggling company could collapse, thereby reducing the market by one business in any case.

It would not be right simply to substitute interference from Brussels with interference from Whitehall—which is why it is right that we should have a strong Competition Commission operating in this country. The matter of the composition of the merger task force also comes into question after the debacle of the three adverse judgments. These three judgments, in the words of an article in the Financial Times of October 28th last, have: Laid bare a long-standing deficiency of the Merger Task Force: the lack of economic expertise". Professor Monti is himself an economist, and it is reported in the same article that he wants to bolster the Commission's economic expertise by appointing a chief economist and several junior economists. The committee states in its report that, the Commission should certainly strengthen its overall capacity for economic analysis in merger cases". I noted that, in introducing the debate, the noble Lord, Lord Grenfell, highlighted that part of the report.

Of course it is important to start the merger task force with economists and with whatever expertise it currently requires from its employees, but I suggest that it might not do any harm if some experienced business people or industrialists were involved. I mean no disrespect to economists, and certainly not to any economists who may be present, but George Bernard Shaw once said If all the economists in the world were laid end to end, they would not reach a conclusion". It would do no harm if the task force included some successful business people and industrialists—people who have been out in the world and have created some wealth, and who have established or run businesses, and not merely people who have failed and are seeking a less demanding position—ones who, in the classic American phrase, know what it is like to meet a payroll every week or every month.

On 25th October 2002, Professor Monti suggested that the wheels of justice might be speeded up by creating a special competition court within the European Court of Justice. Far be it from me to suggest that the criticism that he recently received from the ECJ had anything to do with that particular idea. However, the idea would load more cost on to the EC. It would probably result in insistence by each of the 15 EC members—soon to be increased to 25—appointing their own competition judge and having the decisions translated into all of their national languages.

I spoke earlier of the philosophical aspects of the regulation of mergers. There is, not for the first time, a vast difference in approach between the United Kingdom and the rest of Europe. In the rest of Europe, the test of a merger can be prohibited only if it creates or strengthens a dominant position. That means that if a company is already in a dominant position, a permanent lid is put on further expansion.

The Select Committee has produced a massive and carefully reasoned report and has made no fewer than 31 recommendations to your Lordships. It is not necessary for every Member of this House to agree with every one of those recommendations for me to say, nevertheless, that the report has provided us with a great deal of food for thought and a great deal of common sense.

I can only hope that Her Majesty's Government will take the report to heart and, more importantly, will ensure that it is also given serious consideration by Brussels, which has to remember that its task is simply to ensure that there is a fair and free market in the EC.

4.57 p.m.

Lord Sainsbury of Turville

My Lords, I join other noble Lords in welcoming the report of the European Union Committee on the review of the EC Merger Regulation and I congratulate the committee and the noble Lord, Lord Grenfell, on producing an outstanding and extremely effective report. We have had an excellent debate.

The Government support the great majority of the findings and recommendations in the Select Committee's report. The committee's position on all the major issues is very close to the Government's own. We agree in particular with the report's assessment of the priority issues for the review: improving the system of internal checks and balances; changing the substantive test at the heart of the regime to one of "substantial lessening of competition"; and implementing a simpler, more predictable system of deciding jurisdiction based on the principle that mergers should be examined by the authority best placed to do so. Our own response to the European Commission's Green Paper focused on those three key areas.

As the House will be aware, the European Commission recently published its proposals for amendments to the merger regulation itself, which will come before the European Council for consideration in due course. I know that it considered the Select Committee's report in drawing up its proposals, and in this sense the Select Committee report has already had a very successful impact. It may be that having an impact on the Commission's view is a more satisfying outcome even than early debates on the report. The report has been extremely effective and many of its considerations have been taken on board.

I emphasise that in our view the EC Merger Regulation is a success story. I was pleased to hear the intervention of the noble Lord, Lord Brittan. He was the Commissioner responsible for competition matters when the regulation was first brought into force. He is to be congratulated on introducing a regulation which, in the 12 years since it came into force, has become embedded as one of the cornerstones of European competition law.

The Commission has responded with great success to the huge challenge of enforcing the regulation rigorously but fairly, despite an exponential increase in its caseload. As the noble Lord, Lord Grenfell, reminded us, in 1990 there were only 12 mergers notified under the regulation; in 2001 there were more than 300. I make the point because I believe that it is important to keep the system's fundamental strengths in mind when considering possible improvements to it. Having said that, the system's strengths do not mean that there is no room for improvement.

As I said earlier, we attach priority to three key issues, as did the committee. First. priority must be given to the possibility of improving the checks and balances in the EC Merger Regulation system. The results of our consultation of key UK stakeholders and the wider debate on the Green Paper indicated that this was clearly the main issue of concern to those using the ECM R system.

The European Commission has announced a number of changes to its internal working methods to address some of these concerns. We welcome its appointment of a chief economist, which should improve the quality of the economic analysis in merger cases. I would say to the noble Baroness, Lady Miller, that economic analysis is key to these cases. A high level of expertise is essential to getting them right, even if we do not always feel that the people involved understand the problems of business as we should like them to.

We welcome, too, the decision to appoint a panel to review individual cases, which should go some way to ensuring that the Commission's analysis of mergers is subject to robust scrutiny. We do, however, believe that there are further steps that the Commission could and should consider taking to maintain confidence in the system.

Secondly, we believe there is a clear need to reconsider the way in which jurisdiction over mergers is divided between the Commission on the one hand and the member states on the other. This is not a turf war; the question is simply whether changes to the current arrangements could improve the chances of merger cases being considered by the competition authority best placed to do the job without compromising clarity and certainty for business. We are studying carefully the Commission's proposed amendments to the relevant articles of the merger regulation and will want to ensure that they provide a rapid, predictable and effective mechanism for allocating cases to the most appropriate competition authority.

Thirdly. there is the question of the substantive test used in the assessment of mergers, which has played a prominent role in the debate. The Enterprise Act will introduce a competition test for the new UK merger regime based on the concept of a substantial lessening of competition—or SLC. We see benefits in a move to SLC in the EC Merger Regulation from the current substantive test, which is based on the different concept of "dominance". We are disappointed that, although the Commission has sought to clarify the way in which the substantive test is applied, it has not taken the opportunity to introduce an SLC test into the regulation, despite support for its introduction from a great number of respondents to the Green Paper.

An SLC test has been selected for the new UK merger regime for good reasons. It is not correct to say, as the noble Lord, Lord Brittan, said, that it is simply a question of American pressure.

Lord Britton of Spennithorne

My Lords, I did not say that.

Lord Sainsbury of Turville

My Lords, I take the point that the noble Lord did not say that the UK one was selected for that reason.

Lord Brittan of Spennithorne

My Lords, I said that the loudest voices arguing for it were the Americans', not that that was why it was introduced by the present Government or why the committee came down in its favour.

Lord Sainsbury of Turville

My Lords, I accept the noble Lord's point. I want to make it clear that there are substantial arguments, from an economist's point of view, in selecting these tests, and that they are independent from the arguments of others who may want to support that view.

We believe that the test is fundamentally better adapted to merger control than is "dominance". Its advantages lie primarily in the fact that it is more directly grounded in economic principles, thus providing the UK competition authorities with greater flexibility to deal with all forms of anti-competitive mergers. I agree with the noble Lord. Lord Hannay, that the introduction of SLC at European level would therefore be an important strengthening of the European competition regime.

The most important benefit, as the noble Baroness, Lady Sharp, said, would be to plug potential gaps in the dominance test in a straightforward way. That would minimise the risk of any anti-competitive mergers slipping through the Commission's net. I agree with the noble Lords, Lord 13rittan and Lord Hannay, that it would not be less restrictive. It would also bring the ECMR into line with other key international merger regimes, including that of the United States, which can only be of benefit as the importance of international co-operation in competition enforcement increases. We agree with the noble Lord, Lord St John of Bletso, that that would not lead to substantial disruption.

Such a change would not amount to a radical overhaul of the ECMR system. The current system is basically a sound one, and a move to SLC would in all probability not alter the way in which the Commission goes about its job in the great majority of cases. However, adopting SLC could bring real benefits in analysing certain types of merger. We will therefore continue to argue the case for the introduction of SLC in a revised merger regulation.

The coming months will be important in shaping the new regulation. We will be consulting stakeholders closely on the Commission's latest publications and will continue press for changes to the regulation to address UK priorities during the ongoing negotiations.

The noble Lord, Lord Grenfell, raised the question of member state jurisdiction. The Commission originally proposed in its Green Paper a system whereby mergers subject to three or more national filings would fall to the ECMR regime. The noble Baroness, Lady Miller, is incorrect to refer to the three-plus test, as the Commission has moved away from it in its revised proposals. It has made a new set of proposals, which it believes will simplify the way in which cases can be allocated to a competition authority and then, if necessary, transferred between member states and the Commission. based on amendments to articles 9 and 22 of the ECMR, including their use at a pre-notification stage. We want to consider the proposals carefully to ensure that they achieve the desired results.

Under the new proposals, the parties would approach the Commission during pre-notification discussions and request that the matter be dealt with either by them or the member states. The Commission would then work with the concerned member states before considering whether to apply a new pre-notification referral mechanism to the case. That mechanism mirrors the one in place in articles 9 and 22 but sets strict time limits in which decisions must be taken on where the case should be handled. We look forward to working with other member states during the negotiating phase to ensure that the mechanism leads to cases being dealt with by the best placed authorities.

The noble Lords, Lord Grenfell and Lord Brittan, raised the question whether the European merger process should include an efficiency defence. The Commission's recently published proposals make clear its view that the current regulations provide a sufficient legal basis for efficiencies to be taken into consideration. We welcome the recent publication of draft guidance on how efficiencies would be considered by the Commission.

Efficiency considerations can have a part to play in merger analysis. In a minority of cases, efficiencies may flow from a merger that actually reduces competition. A restrictive approach needs to be taken in consideration of such efficiencies, and we need to take a tough line on the issue. To be relevant to merger analysis, efficiencies must be likely to be passed on to consumers, be expected to be delivered in a reasonable time frame, and be unlikely to be achieved in the absence of a merger.

The noble Lords, Lord Brittan and Lord Hannay, raised the question of accountability. We have already made clear that we see merit in the introduction of a second pair of eyes in the ECMR system, and are pleased that the Commission has announced that it will establish review panels to consider individual cases as part of the process. However, we agree with the noble Baroness, Lady Sharp, that second case teams considering individual mergers would be even better. The ECMR system of administrative authorisation rather than judicial authorisation is appropriate and proportionate for mergers, but again there is room for improvement.

The noble Lord, Lord Grenfell, expressed concern at the Commission's resource constraints. The Government made clear in their response to the Select Committee's report that it is essential that the necessary resources are provided to maintain the effective equitable and transparent implementation of the ECM R. The Government agree that the Commission should therefore give careful consideration to the question of whether procedural improvements following the ECMR review will require the provision of additional resources to the Competition Directorate-General.

In closing, I say again that we believe that the EC merger regime has functioned very well in the vast majority of cases. Its one-stop shop approach has been a key strength and a benefit to business. In 2001 the European Commission received notification of 335 mergers, 299 of which were cleared speedily without any competition concerns needing to be addressed. Indeed, since the regime's inception in 1990 only 18 notified mergers have been prohibited.

The three recent decisions by the Court of First Instance overturning aspects of the European Commission's decisions on certain mergers are unfortunate but I do not think they mean that the whole system is inherently flawed. The review provides an opportunity to take stock and to improve some of the areas which it has been argued constitute weaknesses in the current system. The Government will continue to press the Commission on those areas which we have identified as important for the review: better checks and balances; improvements to the process of determining jurisdiction; and the introduction of a test based on the concept of substantial lessening of competition.

The coming months will be important in shaping the changes to the EC merger regulation and we shall be working closely with the European Commission and other member states to ensure that our priorities are reflected. We believe that the introduction of an SLC test would be an important strengthening of the European competition regime. We want a merger regime that is transparent and based on sound economic principles so that businesses can conduct their activities within a clear framework.

The Select Committee's report is a very useful contribution to the ongoing debate and our response to it illustrates how much agreement there is between the Government and the committee. The Government are grateful to all those who took part in the preparation of the report and to all those who have taken part in the debate.

5.12 p.m.

Lord Grenfell

My Lords, I thank all those who took part in the debate from both the Front and the Back Benches for their excellent contributions to what was a most interesting and well informed discussion on this important issue. I particularly appreciate the Minister's thoughtful and encouraging reply.

I wish to take up briefly two points. The noble Lord, Lord Hannay, is surely right to say that the argument over the substantive test is by no means over. It will certainly come back. My own view on that—if I may reinforce it—is that as the Commission reinforces its economic capability to look at mergers, it is likely that the dominance test will move towards the SLC in everything but name, and that it is only a question of time before this change takes place and we shall eventually move, as I hope, to the SLC.

I was interested in the point raised by the noble Lord, Lord Brittan, on the loss of jurisprudence. We recognised in our discussions that there certainly would be a short-term loss of certainty. But we also feel strongly that that can be compensated for if the Commission issues clear guidelines on how it intends to interpret an SLC test, if there is one. We believe that that would remove much of the uncertainty and compensate for a loss of jurisprudence.

The noble Baroness, Lady Miller of Hendon, suggested that it was too late for us to take Airtours into account. However, Airtours had given evidence to us so we were able to incorporate that into our conclusions. But it is a matter of record that Commissioner Monti came into his job just five days before the Airtours decision was given in court. He got rather a "bum rap", as the Americans would say, when he was hit over the head by the media for that result. I have known him a long time. Frankly, I consider him one of the least arrogant international civil servants that I have ever come across. I refer to subsequent cases which he lost in the courts. However, everything that we, had heard from him prior to that indicated that he was fully aware of the relevant problems and had a great determination to set things straight.

I end simply by commending the report to your Lordships' House and also to the Government as they enter the negotiations in which we wish them well. It looks as though they have some good material and the right attitude as they go into the negotiations in the Council.

On Question, Motion agreed to.