The European Antitrust Review 2015 • Section 4: Country chapters
Serbia: Merger Control
Merger Control: Remedies on the Table
‘Man can climb to the highest summits, but he cannot dwell there long’ – George Bernard Shaw
Merger control has a long and developed tradition in Serbia. With a legal framework modelled after the European Union, Serbia is one of the jurisdictions consistently considered in multi-jurisdictional filings. The Serbian Competition Commission (the Commission) was established as an independent regulator in 2006 and has since developed significant experience, routinely surpassing 100 reviewed concentrations per year. On one hand, this represents a regulatory burden for companies doing business in Serbia: Serbia is a small market and not yet a member state of the European Union, but the financial thresholds are set rather low1 and many foreign-to-foreign transactions that have little appreciable effect on the local market still require clearance by the Commission. On the other hand, merger control has been a field where the Commission has taken its first steps in developing Serbian competition law and which introduced the Commission to the workings of many markets and industries. In merger control, the Commission first tried its hand at economic analysis and basic competition law instruments, such as defining the relevant market, assessing the effects on competition, even procedural trial and error in specific legal fields.
It is only natural, then, that in almost a decade since the establishment of the Commission, merger control – this basic tool for monitoring the Serbian market – has markedly changed and evolved. The Commission is no longer a timid newcomer, testing the waters of an exotic and strange legal field, struggling with the basics of law and procedure. Seminars and tips from EU colleagues, together with vibrant local practice, have brought forth a veteran authority with a keen awareness of most of the markets, willing to examine both the horizontal and vertical aspects of a transaction and mindful of any harmful effects to the consumer. Most importantly, after several bumps along the way, the Commission seems to have learned an important lesson: a powerful regulator needs also to be humble, and factor the reasonable arguments of the business community into its decisions. Tampered by experience, the Commission is confident enough to use its authority to prevent the restrictions of market competition and open enough to talk to the parties along the way. And nowhere is this duality of purpose more evident than in the field of its remedies.
Blocks and phases
As mentioned, the financial thresholds for mandatory notification are rather low in Serbia. While they have provided the Commission with an abundance of training, in effect only around 4–5 per cent of notified concentrations cause any significant competition concerns for the local market and are reviewed in an in-depth procedure (Phase II). These proceedings always entail high-profile local cases, sensitive sectors and usually significant market shares. However, apart from market shares, a merger is always evaluated in light of the effects it could cause after implementation, so high market shares do not automatically mean that a merger will be thoroughly investigated or that conditions will be imposed.
Therefore, it is obvious that cases which could result in conditional clearances are usually nationally sensitive, tied to strong market positions and affect the interests of different stakeholders. A clearance (or conditions) could be made or broken based on feedback from the market (for example, in one case, a particularly important buyer’s negative appraisal of the concentration had a profound effect on the Commission’s ultimate decision) or the public (a multi-jurisdictional regional filing recently had the different competition authorities comparing notes, with the media comparing decisions to grade the toughness of local authorities on the applicants). The Commission is not immune to criticism or pressure. From its very beginnings, it was both cautious and adamant in examining such sensitive cases thoroughly. This led to the Commission imposing both behavioural and structural remedies in some two dozen cases so far. The Commission didn’t even shrink from the outright prohibition of two mergers, a result that not many authorities in Europe can boast of. While both prohibitions ultimately proved ineffective, each served as an important milestone in the authority’s practice and each helped usher in a new period for merger control and remedies.
The first merger prohibition in Serbia came soon after the Commission was constituted. In 2006, the acquisition vehicle Primer C acquired a majority stake in C Market, a leading grocery retailer in Serbia, active predominantly in the country’s capital, Belgrade. At the time of the acquisition, the transaction involved the number one and number two players in terms of market share in Belgrade, with joint market shares exceeding 60 per cent. The case represented a high-profile political and legal minefield, with Primer C failing to notify the merger. The Commission initiated ex officio proceedings, and then, to the shock of the entire profession, prohibited the transaction. However, Primer C then implemented the transaction contrary to the decision. Without sufficient authority to impose fines or order divestments at the time, the Commission finally lost a protracted legal battle to the company, with the statute of limitations expiring. Ultimately, the affair did not conclude happily for either of the parties involved, but market competition did see a happy ending. Primer C may have walked away with impunity, but the company would lose its market share significantly over the coming years due to the development of competitive retail chains in Belgrade. In addition, until the sale of its retail business to the Belgian Delhaize, the company group, Delta, ended up with a rather unsavoury reputation, perceived as a monopolist and a public scapegoat for all the ills of Serbian society. The Commission, on the other hand, was perceived as impotent at the time. While this weakness of the authority would play a major part in its extensive empowerment under the 2009 Competition Law, since the market shares of the merged cmpanies dropped so rapidly in the intervening years, the (unimplemented) block itself did not really stand the test of time. The case itself had a profound effect on the Commission’s handling of conditional clearances, turning each subsequent case into a careful scrutiny of potential vertical effects on retail.
The second merger prohibition came to a head in early 2012. Sunoko, a leading local sugar producer, was set to purchase two sugar processing factories from the ailing Hellenic Sugar Industry. With very significant market shares in play (the merging parties would have controlled five out of six of the sugar processing factories in Serbia) and significant pressure from both buyers and suppliers to the parties, the Commission, scrambling for time in the review process, ultimately rejected the terms negotiated beforehand with the acquirer and prohibited the transaction. This decision would not stand before judicial review, however, and after annulment of the decision on procedural grounds and reinitiated proceedings, the case ultimately ended with a conditional clearance. While C Market was the case that kick-started the Commission’s complex merger reviews, Sunoko would be the one propelling it into full maturity.
The Commission practically started its merger control practice with a blocking decision. This decision, while it might have seemed right at the time, was conducted by a passionate, yet inexperienced and toothless authority. From then on, the Commission was basically learning the ropes and flexing its muscles. In an ironic coincidence, it would be the second blocking decision, which also failed, that would mark the end of baby steps and usher in a new and seasoned authority. The manner and nature of remedies imposed in the interim would also reflect these two phases in the development of the Commission’s merger control practice.
A few words on remedies
It is important to note that Serbian Competition Law is not very verbose when it comes to remedies. Under the current law, if conditions for an unconditional clearance have not been met, the Commission is obliged to notify the applicants via a statement of objections. The merging parties may, in their response, propose specific conditions they are willing to accept in order for the transaction to be cleared. If the Commission considers that the proposed terms alleviate significant competition concerns, it is entitled to clear the transaction, while requiring the parties to satisfy the previously outlined terms. Accordingly, the law provides for conditional clearances, and both structural and behavioural remedies may be applied by the Commission. However, the legal foundation for imposing remedies is based on a very general provision in the law, and there have been no guidelines, best practices or model texts adopted for the purpose of issuing conditional clearances. Accordingly, much of the know-how concerning remedies is rooted in the developing practice of the Commission. Remedies are usually considered and negotiated in formal meetings between the parties and the authority, and predicting the satisfactory remedies is not an exact science but more of a back-and-forth (often quite spirited and fierce!) between the lawyers and the authority.
Normally, conditional clearances take place following an in-depth procedure (Phase II). The proceeding is often very complex and burdensome for the Commission and the applicants. As these are usually complicated cases, case handlers will collect a significant amount of documents and information from the applicants. It is common for the authority to contact the parties’ main competitors, their largest suppliers and buyers in order to assess their expectations of the effects of the merger on the market. Economic, technical or other experts are sometimes also involved.
The primary concern of the Commission in merger review is the creation or strengthening of the acquirer’s dominant position (the dominance test). The Commission applies the SIEC test in combination with the dominance test, based on wording transposed from the EUMR.2 The authority will usually analyse the level of concentration of the market by relying on the Herfindahl–Hirschman index, and assess the parties’ market power based on market share information. Despite the SIEC test being an integral part of the assessment toolkit, in practice, the Commission initiates Phase II proceedings, considers remedies and blocks transactions almost exclusively by relying on the dominance test. Thus, the evolution of remedies paralleled the evolution of the concept of dominance in Serbian law. Once, a finding of dominance was almost without exception based on the legal presumption of 40 per cent market share.3 However, with the development of the Commission’s practice, reviewing the actual market conditions increasingly took precedence, until the very definition of dominance was changed through legal amendments so as to clearly make market shares only one aspect in a rather complex dominance assessment. This turnaround from a strict and formalistic approach to a more fluid and economically grounded one was also evident in the history of the Commission’s conditional clearances and remedies.
Phase I: Apprenticeship
As outlined, the Commission started its foray into complex merger decisions with a prohibition in the controversial case C Market. As far as complicated cases go, the first five years of the Commission’s practice (from 2006–2012, concluding with the second prohibition decision in the Sunoko case) could rightfully be dubbed its apprenticeship. Herein, the Commission was gaining in-depth awareness of the markets, receiving live training in understanding the analysis of horizontal and vertical effects, learning to apply a consistent approach to market definitions and mastering the economic, substantial and procedural legal tools at its disposal.
As befits youth, the Commission of this time could be characterised as impetuous and somewhat indelicate, well-intentioned, but lacking the patience for complex analysis, comprehensive consultations and follow-through with the procedural steps required. Merger clearances were very short, simple and without detailed elaborations. The procedure usually lasted no more than a month. In this form, the Commission’s conditional decisions were very similar to regular (unconditional) clearances. All of the conditional clearances were issued in a summary procedure, even though one would expect that an in-depth procedure would be initiated once the competition authority reached the conclusion that conditions and obligations must be imposed. In these cases, the Commission would simply conclude at a certain stage of the review process that the merger filing could neither be cleared nor prohibited, but rather that certain conditions had to be imposed on the applicant. These conditions were the ones considered most appropriate in the case in question by the authority, and unfortunately usually imposed without any consultations with the applicant itself. Among the numerous legal issues inherent in such an approach, most significantly, there were no clear rules that the Commission should have adhered to during the process and the applicants were not even aware of the possibility that a conditional clearance decision could be issued. Instead, the applicants found out about the imposed conditions only after receiving the decision, when they had no other recourse but to initiate a lawsuit which could potentially jeopardise (and certainly prolong) the transaction.
At the time, lawyers were occasionally left surprised, hard-pressed to explain to puzzled clients the reasoning and backing behind the remedies imposed. Furthermore, perhaps fuelled by the bitter feeling left over after C Market, the Commission was evidently very concerned with the effects of any concentration on the retail market, especially in Belgrade. The remedies were usually behavioural, often included reporting obligations, as well as restrictions in dealing and price caps that could be quite burdensome to the daily operations of the merged business. Finally, most likely due to the perceived strength of grocery retailers, the public outcry over perceived ‘monopolies’ and the importance of this sector to the average consumer, the Commission was quite concerned with any vertical effects and vertical integration related to this market.
As an example of this approach to remedies, in TAU 1/Robne Kuce Beograd, concerning the leasing of office space market (2008), the Commission mandated that any lease agreements concluded within three years with groceries retailers would require its prior consent. In the reasoning, the Commission clearly spelled out its fear of possible expansion of the market power of the then-leading retailers, seeking to curtail this potential vertical effect by imposing a behavioural measure on the (unaffiliated) merging parties. In several conditional clearances (some of which were contested in front of the Administrative Court), the Commission tried to control the markets themselves, requiring the acquirer to sell to its competitors a set percentage of raw material under market conditions (eg, at least 20 per cent of produced tobacco foil in Philip Morris Participationes BV/Duvanska Industrija Bujanovac, 2008); to purchase a set percentage of raw material from the target’s competitors (eg, 20 per cent of its demand for raw tomato in Delta Agrar/La Verdura, 2008); or to offer competitors’ products on its shelves (eg, 20 per cent of different types of nuts on offer in Delta Agrar/Florida Bel, 2008). That the Commission took other interests into account, even in this period, was evident in the Lufthansa/Austrian Airlines (2009) decision, where the Commission seemed to have been just as concerned with protecting the national air carrier (JAT Airways) as the consumers, since it mandated that the acquirer would have to maintain the code-sharing arrangement with JAT Airways already in place, simultaneously with prohibiting any price increases (bar costs) until the first transitional phase of the Open Sky Agreement came into force.
In this phase, the Commission did not shy from ex ante decisions and preventive actions, sometimes even explicitly stating that the aim of the remedies was preventive action in order to preclude the creation of a dominant position on a related market, even if such a position concerned third parties that had nothing to do with the concentration itself. This approach, coupled with the lack of transparency in the procedure, made predicting remedies a veritable minefield and made the decisions of the Commission open to all kinds of economic and legal scrutiny. However, this would all change with the Sunoko/Hellenic Sugar (2012) prohibition, which would mark a new stage in the Commission’s practice.
Phase II: Mastery
The prohibition decision in Sunoko/Hellenic Sugar came to fruition after months of market investigation, negotiations with the applicant and scrutiny of the terms of the transaction by the Commission. With the deadline for reaching a decision approaching,4 the Commission surprisingly rejected the terms coordinated with the applicant in the previous negotiations (which, interestingly enough, included price caps, pegging the Serbian price to the price of sugar the company sold in the European Union; these would not make a reappearance). The prohibition decision was appealed before the court and ultimately annulled on procedural grounds. After several additional hiccups and a reinitiated proceeding, a conditional clearance was finally rendered in February 2013. However, by this time, wizened by the lessons of the previous casework, the Commission itself represented a much changed authority.
The original Sunoko/Hellenic Sugar case in particular revealed the weaknesses in the Commission’s opaque and headstrong approach. The target, Hellenic Sugar, was a failing firm, dragged down by the economic crisis in Greece. Its two sugar factories in Serbia were of little interest to third parties, save the acquirer, who sought to consolidate its local business and become a developed player on the regional and European scene. However, due to EU sugar export quotas and a lack of developed competition in Serbia, the joint market shares were high and the merger could have ostensibly caused concerns for local sugar beet growers and buyers of refined sugar. The matter represented a significant strain on resources, both for the applicant and the case handlers, only to end ignobly due to procedural faults and a lack of transparency and communication.
In several cases since then, the Commission tried its best to make it right the first time around and to implement clear and straightforward processes for negotiations and clearances. Gone were the days of laconic commands, ‘gut feelings’ and mystical remedies; the keywords became understanding, economic analysis5 and 60-page briefs. Instead of generally referring to the EU framework, the Commission actually started applying the principles of the European Commission’s merger control guidelines, model texts and best practices for behavioural measures and divestiture commitments. Adequate deadlines were provided to implement the remedies, trustees were appointed to monitor the process, and guidelines on the requirements of the process were provided (eg, a period where the acquirer may divest under a minimal purchase price or the steps to be taken if the sale is unsuccessful).
Accordingly, the remedies in the later phase of the Commission’s practice were much more advanced. An in-depth review of the transaction involving the acquisition by Štampa Sistem of its major competitor in the kiosks market, Futura Plus (another failing firm), led the Commission to conclude that the merged entity would have a dominant position in seven Serbian municipalities.6 After negotiations, the applicant proposed behavioural measures that led to a merger clearance acceptable to the competition authority. The acquirer was not allowed to further increase the number of its (owned/rented) kiosks in the affected municipalities in the following three years. Furthermore, a monitoring trustee was appointed, and a flexible safeguard was implemented in case of a change in the market structure, to the benefit of the acquirer (if its market shares on any of the local markets fall below 40 per cent, the decision could be amended).
The remedies concerning the related acquisition of a major distributor of telecom prepaid services in Centrosinergija/Lanus were even more complex. Both behavioural and structural, the Commission would for the first time impose a divestiture commitment. Centrosinergija was obliged to divest between 3,500 and 4,000 GPRS terminals that provide telecom prepaid services (reflecting a certain market share of the business). As for the behavioural measure, the acquirer, as the general distributor of prepaid telecom services of the incumbent operator, was obliged to implement an ‘objective and balanced’ policy of rebates towards its sub-distributors, with the decision including set percentages of rebates for specific groups of sub-distributors. And again, both monitoring and divestiture trustees made an appearance in the decision.
With such decisions under its belt, it is little wonder that when the Sunoko/Hellenic Sugar case re-emerged, the Commission was much readier and could resolve it decidedly. In March 2013, the Commission ultimately cleared the transaction with both structural (divestiture of one of the target’s Serbian sugar factories) and behavioural remedies (extensive notification and reports made to the authority on investments, sugar sale and pricing policy), once again with trustees appointed to monitor the process.
The experience gained in these transactions would come in handy with the most recent conditional clearance to capture the public’s attention – the merger of two regional retail giants, Croatia’s Agrokor and Slovenia’s Mercator, the second and third players in the Serbian market. A complicated regional affair in the former Yugoslavia, for the Serbian Commission, would present a different challenge from the old C Market case (and, perhaps, an apt homage to the intervening years of practice). The December 2013 decision included:
- lengthy negotiations;
- structural divestures (24 stores were to be sold or altered, including the sale of business, termination of leases, decrease of net sales area and changes to their operational activities);
- behavioural measures (in order to prevent the foreclosure of competitors of Agrokor’s vertically integrated ice cream and oil production companies), such as notifications on agreements concluded with such competitors; and
- a clear rebate policy for the merging entity, together with a record appointment of three trustees, one each for the sale, monitoring the commitments and management of the divested business.
Even a cursory look demonstrates the obvious: as the Commission became more experienced in market structures, competition concerns and competition law finesses, it began to use all of the legal tools at its disposal, including in-depth procedures, conditional clearances and remedies. However, only when it realised the importance of a transparent and clear procedure (instead of considering it a burden) and extended respect and cooperation to the filing parties, would these tools really become successful.
Looking to the future
Nowadays, the merger control regime in Serbia functions relatively well. There is always room for improvement, but the Commission has increased capacity and handles cases in an efficient and fairly consistent manner. While some of its activities have, to a certain extent, been motivated by public pressure and consumer expectations, the standard of review is now transparent and predictable. The authority has extensive practice, in-depth experience with markets and experience handling complex matters in production, wholesale/distribution and retail. Remedies imposed in Serbia followed an evolution from a procedurally unsound, formalistic and insecure nascent authority (with a light trigger for prohibitions!) to a professional, streamlined and comprehensive regulator. While Serbian competition law does not explicitly provide for an effects-based approach, the practice of the Commission generally does: market shares do not represent the end-all argument they once were.
Learning from experience, the Commission now takes the time to analyse the situation, sit down to engage with parties and tailor the most effective and appropriate remedies to the situation. The remedies may still hurt and the negotiations can be intense. The Commission might still impose divestitures or pesky behavioural measures, but this time around, it will be expected. More importantly, parties will now be able to understand why such remedies have been imposed, and this represents the foundation for rule of law. For the Serbian Commission, at least, the path to mastery lay in humility.
- The financial thresholds for mandatory notification are set at the total global annual turnover exceeding €100 million, with just one of the parties exceeding €10 million locally; or total local annual turnover exceeding €20 million, with at least two of the parties each exceeding €1 million locally. Foreign-to-foreign mergers are not exempted from review, and the Commission has consistently required mandatory filing whenever either of the two thresholds is met (ie, there is no local effects test). Normally, foreign-to-foreign mergers without any competition concerns in the local Serbian market will be processed through a Phase I proceeding, but there are no prescribed fast-track proceedings. The Commission did not shy away from issuing conditional clearances (and remedies) in foreign-to-foreign transactions, as evidenced by the Lufthansa/Austrian Airlines decision. ↑
- Accordingly, when deciding on clearing a concentration, the Commission is obliged to take into consideration: the structure of the relevant market; actual and potential competitors; the market position of the parties and their economic and financial power; the possibility to choose suppliers and customers; the barriers to entry; the level of competitiveness of parties; the supply and demand trends for the relevant goods or services; the technical and economic development trends; and the interests of consumers. ↑
- While generally straightforward and simple to use, the legal presumption could often lead to strange outcomes (eg, a company having to prove it was not dominant despite having a competitor with 50 per cent market share or a local company with significant market shares dominating over one of the largest international conglomerates). ↑
- In line with the Competition Law, if the Commission does not render a decision within the allocated time in Phase II, the notified concentration is considered cleared unconditionally. ↑
- Including using external analysts: for assessing the Agrokor/Mercator merger, there were two parallel reports prepared. ↑
- This case was further complicated by the fact that it was part of a multi-transaction deal involving Serbia’s incumbent telecom operator, Telekom Srbija, including the purchase of prepaid distribution business from several smaller distributors and several other agreements. Furthermore, kiosks are a very sensitive market, with high percentage of fixed-price goods (ie, prepaid plans, cigarettes, newspapers, etc), limited geographic scope and location flexibility – they can be moved, after all, and depend on the municipal permissions for operations. ↑
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