REFORM OF CROATIAN COMPETITION LAWS – A VIEW FROM THE PRIVATE PRACTICE

Boris Babić, Partner, Babić & Partners, Zagreb

1Introduction

Croatian Bar Association (“CBA”) organized an international conference: Status and Prospects of the Croatian Competition Law. The conference was held on 23 September 2008 at CBA headquarters in Zagreb. During the conference the organizers received sad news that dr.sc. Vedran Šoljan[1] who was to speak on this conference died. The organizers immediately decided to terminate the conference. Subsequently CBA invited all panelists to submit their contribution in writing within a certain deadline and thus end the conference.

The conference program[2] evolved around the following topics: (i) Importance of Competition Law for Croatian Economy and Consumers; (ii) Key Issues and Current Practice: Merger Control; (iii) Key Issues and Current Practice: Abuse of Dominance; (iv) Key Issues and Current Practice: Cartels; and (v) Reforms: In anticipation of the new Croatian Competition Act.

The author[3] was privileged to act as a conference moderator and also a panelist for the merger control session. Against this background the article provides an overview of the relevant topics given from the perspective of a private practitioner.

2Legislative Framework and Competition Authorities

2.1 Legislative Framework

The prime source of the competition law in Croatia is 2003 Act on Protection of Market Competition (“Act”).[4]The Act replaced the 1995 Competition Act (“Old Competition Act”).[5] Subsequently, the Croatian Government adopted various implementing regulations including those on (i) notification and assessment of concentration,[6] (ii) definition of relevant market[7] and (iii) vertical agreements block exemption.[8]

Furthermore, under the Stabilization and Association Agreement signed between the Republic of Croatia and the European Communities and their Member States (“SAA”), Croatian competition laws are to be applied and interpreted in accordance with the rules, measures and principles of EU competition laws.[9] Accordingly, the Act provides that the criteria arising from the appropriate application of EU competition rules shall apply.[10]

The Code of Administrative Procedure and the Administrative Disputes Act will apply on a subsidiary basis regarding the procedure.[11] The Administrative Fees Act and the related tariff will apply with regard to administrative fees.[12]

Furthermore, particular sector-specific laws[13] (e.g. those regarding banking, media and telecommunications) governing competition issues in a respective industry sector and the takeover laws[14] containing rules related to merger control in the context of a takeover regime must be taken into account.

2.2 Competition Authorities

The Croatian Competition Agency (“Agency”) is the principle authority for competition law matters in Croatia.

In the banking sector this authority is however vested with the Croatian National Bank and in telecommunications sector to a certain degree to the Croatian Telecommunications Agency.

3 Merger Control

3.1General

There are many issues as regards implementation of merger control regulation.

In addition to the legislative sources relevant for merger control the Agency has adopted important guidelines concerning merger control that also must be considered. For example, the Agency has adopted Guidelines on Horizontal Mergers (2005)[15] and Guidelines on Merger Control (2004).[16]

Both guidelines expressly mention that they are not a legislative source proper and that they are not binding for the Agency.[17] In addition, Guidelines on Horizontal Mergers mention that they are largely modelled on the EC Horizontal Merger Guidelines.[18] While we appreciate the efforts of the Agency to produce these guidelines, we would recommend that before the adoption of any of the guidelines they be available for comments similar to the process used in EU. Also, the process of convergence and Croatia’s commitment under SAA require that these guidelines be interpreted in the context of EC law. Finally, we note that as regards merger control there are other guidelines of relevance established by the European Commission, most notably those that relate to the vertical and conglomerate mergers.[19]

We will discuss further below some important substantive and procedural issues that we would recommend to be treated as a part of the reform. Of course there are other issues of relevance that are beyond this paper.

3.2Substantive Test

3.2.1Dominance Test

The current substantive test is provided in the Article 18 of the Act which reads (English translation as disclosed on the Agency’s web

“There shall be prohibited the concentrations of undertaking that create a new, or strengthen a dominant position of one or more undertakings, individually or as a group, if they can significantly influence the prevention, restriction or distortion of competition, unless the participants in that particular concentration provide valid evidence that their concentration will lead to strengthening of competition in the market, bringing benefits that will prevail over negative effects produced by the creation or strengthening of their dominant position.”

We hold that the current substantive test is a dominance test. However, it appears that the Agency may be on a different standpoint. We will now present both Agency’s as well as our arguments in defining the current substantive test.

The essential feature of the dominance test is that creation or strengthening of the dominance is a requirement for a prohibition. It is apparent from the wording of Article 18 of the Act that this criterion is met. Therefore, under the black letter of the law a concentration cannot be prohibited absent creation or strengthening of a dominant position of one or more undertakings individually or as a group.

However, the Agency appears to be on the standpoint that creation or strengthening of existing dominant position in itself is not a sufficient reason to prohibit concentration.[20] Furthermore, the Agency holds that for a concentration to be prohibited based on dominance, there should in addition be significant impediment of effective competition on the relevant market. The Agency further holds that Croatian substantive test is effectively a significant impediment of effective competition (“SIEC”) test as introduced in EC law.[21] Our comments are as follows.

First, as noted above, Croatian substantive test is clearly a dominance test as this follows from the wording of Article 18 of the Act.

Second, the legislative sources used in drafting the Article 18 of the Act in fact have as a substantive test a dominance test. We believe that likely sources are (i) Old European Community Merger Control Regulation[22] and (ii) German Competition Act.[23] Under Old ECMR the substantive test is defined as follows: ”A concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it shall be declared incompatible with the common market.”[24] Again, it is apparent from the wording of the substantive test of Old ECMR that indeed it is a dominance test.

In addition, the substantive test under German Competition Act[25]reads as follows: “A concentration which is expected to create or strengthen a dominant position shall be prohibited by the Bundeskartellamt unless the undertakings concerned prove that the concentration will also lead to improvements of the conditions of competition and that these improvements will outweigh the disadvantages of dominance.” Again, the wording of a German substantive test clearly indicates that it is a dominance test.

Third, a separate issue is whether under present test in addition to creation or strengthening of dominance the concentration must significantly influence prevention, restriction or distortion of competition. We hold based on EC law that it would suffice for a prohibition if the concentration would lead to creation or strengthening of the dominance of the undertaking concerned. The second limb which calls for significance is in fact redundant. In short, it is presumed that “a merger would impede effective competition if it created or strengthened a dominant position”.[26]

It is interesting to note that the Agency’s Guidelines on Merger Control 2004 to a certain degree uphold our interpretation. These Guidelines mention that the concentration which creates or strengthens dominant position of one of more undertakings (participants to the concentration) either individually or jointly shall be deemed prohibited.[27]These Guidelines furthermore indicate that this is a rebuttable presumption and that the concentration shall not be deemed as prohibited if the participants to the concentration prove that such concentration shall lead to the strengthening of the competition which shall outweigh the negative effects of creation or strengthening of their dominant position. We tend to concur with these statements at least when reviewing the black letter of Croatian law.[28]

However, it is questionable whether the present wording of the Croatian substantive test can stand in the context of EC law. In fact, it appears that the current substantive test refers to the possibility of the so called “efficiency defense”. The concept of the efficiency defense was not recognized under Old ECMR. Moreover, although EC Horizontal Guidelines mention the concept of efficiency[29]it is indeed questionable whether efficiency can be used as a sole instrument to defend a problematic merger (e.g. when creation or strengthening of dominance is established). Prominent scholars believe that this would not be possible.[30]

To summarize, the Croatian current substantive test is a dominance test. This test should be viewed as a legal standard and interpreted in accordance with EC law. Croatia should replace this test with the SIEC test as described below.

3.2.2Significant Impediment of Effective Competition Test

Under present EC law substantive test is the significant impediment of effective competition test (“SIEC”). It is defined as follows:“A concentration which would significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position, shall be declared incompatible with the common market.”[31] This test is clearly different than the substantive test under Old ECMR.

According to EC law, any significant impediment to effective competition likely to be caused by a merger must be taken into account. The creation or the strengthening of a dominant position is a primary form of such competitive harm.[32] The essence of this test is that the concentration can be prohibited not only as a result of creation of strengthening of a dominant position, but also in some other precisely defined circumstances. As defined, the notion of significant impediment of effective competition should be interpreted as extending, beyond concept of dominance, only to the anti-competitive effects of a concentration resulting from the non-coordinated behavior of undertakings which would not have a dominant position of the market concerned.[33] The SIEC test is therefore a more stringent test than the standard dominance test. In short, the present Croatian test cannot be viewed as a SIEC test. It is beyond this paper to comment whether SIEC test as the more stringent test could nevertheless be used in Croatia based on SAA.

3.3Turnover Thresholds

Old Competition Act did not provide clear threshold rules.[34] The current Act contains a transparent concept of thresholds which is a result of last reform. We appreciate this as it benefits parties and their advisors. However, the Act slightly increased the turnover thresholds.

The forthcoming reform represents a good opportunity for review of turnover thresholds. The thresholds are currently defined as (i) the combined worldwide turnover of all participants to the concentration of at least 1 billion HRK (approximately € 134 million) and (ii) the aggregate Croatia-wide turnover of each of at least two of the participants of at least 100 million HRK (approximately € 13,40 million).

Taking into account the size of the overall Croatian economy, the question is whether there should be a downward review at least as regards the Croatia-wide turnover test. We are on the standpoint that (i) the concept of thresholds should be preserved; (ii) the thresholds should not be increased and (iii) that any potential downward review of thresholds should not be substantial.

3.4Notification

3.4.1Short Form Notification

The merger control system does not distinguish between straightforward and problematic mergers in terms of notification requirements. A voluminous documentation must be submitted even if the merger does not raise any competition law concerns. We believe that a short form notification system should be introduced for non-problematic mergers with a view to ease the process, both from the perspective of the undertakings concerned and also from the perspective of the Agency.

3.4.2Deadline for Filing

There is a strict deadline for filing: not later than eight calendar days from the date of publication of a public bid or from the execution of the agreement based on which control or controlling influence is acquired, whichever occurs first.[35] It may be good to abolish these deadlines following the ECMR.[36] The solution would be to make the filing mandatory with a deadline before closing. This would be beneficial for both undertakings concerned and the Agency as it would give more time to undertakings concerned to prepare a comprehensive notification.

3.4.3Pre-notification Informal Consultation

We welcome the willingness of the Agency’s officials to discuss informally potential merger notifications. It may be beneficial in the future to establish best practices which would further facilitate this pre-notification process and expedite the filing. We also believe that such best practice would be of help to our colleagues at the Agency and that they could bring further quality and completeness of the notification. The best practices could be structured along the lines of similar best practices used in EC law.[37]

3.4.4Data/Document Requests

It would be beneficial to establish within a legislative source a full list of data and documents that must be attached to the application so as to avoid or reduce incompleteness of notification. Any subsequent data/document request from the Agency should be time limited.

Assuming that the Agency would have the power to levy fines should the applicants provide incomplete notifications after the Agency has made a request for certain missing document or data this should prove sufficient to discipline applicants. As a result we can reasonably expect a better quality of notifications. In this context the present system which requires a confirmation on completeness of the notification to be issued by the Agency should be accordingly abolished.

3.4.5Notification Form

The current merger control regulations do not mandate any particular form. The respective Decree on Concentration provides only that the notification must be made on standard paper form and also in electronic form.[38] The Agency’s Guidelines on Merger Control 2004 recognize this, however they establish further requirements as regards the manner in which the application must be completed.[39]

While we appreciate that the Agency might expect a certain standard to be followed such standard to facilitate the review we would recommend that these further requirements be abolished or treated as a part of best practices.

3.5Investigation

3.5.1Phase I

The current “phase one” tacit approval system should be abolished. Under this system if the Agency does not decide to initiate second-phase proceedings within 30 days from the date of due notification, the merger shall be deemed tacitly approved.[40] In such circumstances the Agency will not issue a decision in writing save if the participants to the concentration have specifically required such a decision.[41]This structure raises various complex procedural issues. Also, the tacit approval system does not allow full monitoring of the Agency’s practice concerning merger control because the Agency does not render a formal decision unless the parties to the concentration request from the Agency to do so. Since the parties typically do not request that the Agency issues a formal ruling, decisions on “phase one” review are rarely publicized. This makes it harder for the public to monitor the work of the Agency and to assess the arguments and the line of thinking of the Agency when approving the merger in “phase one” proceedings.

3.5.2Phase II

The deadlines for the second phase decision should be reviewed. The conservative interpretation would lead to a conclusion that the Agency can deliberate on the merger approval up to seven months from the date of filing.[42]We believe that there is a room to shorten these timelines.

The current merger control regime implies that commitments can be made only as a part of the phase two review.[43] In order to speed the process and echoing ECMR it would be good to include the possibility of commitments also as a part of “phase one” review. To that end the commitments should be allowed only within a certain time frame in accordance with EC standards. This would eliminate the possibility of multiple filings and shopping for clearance subject to conditions attached if the initial filing results in prohibition of a merger.

3.6Third Party Rights

The Act does not contain clear rules as regards third party rights. For example, the Act does not provide any rules on how the information concerning notified mergers is to be made available to the public nor does it provide deadlines for the interested parties to comment on the notified merger. Although the Act is silent on this issue the Agency in the last few years publicizes notifications on its web pages and gives typically a deadline of ten days for filing the comments from interested parties.

In addition, it is not fully clear in the present Act when a third party can enjoy a status of a party proper to the proceedings and thus exercise the associated rights (e.g. file review or appeal). The reform should treat this issue in a way to preserve the rights of the applicants and timelines for review on one side and also to establish clear rules as regards third party rights in merger control proceedings.

4Abuse of Dominance

4.1General

The concept of abuse of dominance is reflected in the Act along the lines of EC law. Also, we appreciate that the Agency has shown economic based approach to assessment of alleged abuse of dominance based on European Commission Discussion Paper on Article 82 of the EU Treaty to exclusionary abuses.[44] Clearly, the Agency can benefit if the interested parties file a complaint concerning alleged abuse of dominance. Under EC law: (i) complaints are an essential source of information for detecting infringements of competition rules and (ii) it is important to define clear and efficient procedures for handling complaints lodged.[45]

Unfortunately, the current Act does not contain clear rules and as a result there are various deficiencies or ambiguities as regards the complaints. These are treated further below. Also, the current system of fines and lack of powers of the Agency must be clearly changed as a part of the reform. Finally, there are other issues of importance but these are beyond this paper.