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Discussion on the pros and cons, of enacting controlling legislation on mergers and acquisitions reached a high point at last week’s 9th Annual Shirley Playfair Lecture, which United States (US) attorney and antitrust expert, Joseph Krauss, delivered.
Mr. Krauss does not seem to put too much emphasis on the difference between mergers and acquisitions, except to recognise that a merger is a voluntary amalgamation of two firms on roughly equal terms into one new legal entity, whilst an acquisition is said to be effected when one company purchases 51 per cent or more of the shares of another company.
He argues that in either case, the result is a bigger entity, which is the ultimate desire that drives mergers and acquisitions. And the bigger the corporation, the more powerful it becomes, capable of dominating the market and suppressing competition, which became illegal in Jamaica as of March this year.
Expressing the importance of competition laws and why countries would seek to introduce them, Mr. Krauss points to the changing landscape in the global environment, which has shifted attention from domestic to the global explosion of competition regimes.
Jamaica became one of over 100 countries with some form of competition law, and more and more countries are moving in this direction, a trend which holds true in the Latin American and Caribbean region, where 15 countries have competition laws and another six are at some stage of drafting one.
But the competition legislation kicks in, only after the breach has been committed, hence the need for laws that require firms to file the transaction with the competition authority before the merger takes effect, so that they can restructure it to address the competition concerns.
The expert first distinguishes between “controlling” and “review” legislation, advising that “the attempt must not be to control mergers and acquisitions, but rather to review them to assess what impact it will have on competition.”
“If it does not seem to lessen competition, then the competition authority must keep their hands off the merger or acquisition, but if it does, then they must be able to move in and address the competition concern by restructuring the deal,” Mr. Krauss says.
However, several of the over 100 countries with competition laws, including Jamaica, are yet to adopt laws requiring the review of mergers and acquisitions and the attendant reporting requirement. This is why Mr. Krauss’ expertise was brought in, as the country considers moving ahead.
The first issue which he has to resolve is, how soon Jamaica should move to implement such laws, and he says: “there is no rush.”
“No one should think that rushing into a merger review scheme is the norm and, indeed, one should consider whether the implementation of a merger review process would benefit from delay, until what I call more basic competition laws and concepts become more fully developed and understood by the constituents who must abide by them,” he adds.
Mr. Krauss says there is precedence for delaying the process, citing the US, where it took 64 years to bring about effective merger control measures, from the time the Clayton Act of 1914 prohibited mergers and acquisitions, to The Hart-Scott-Rodino Antitrust Improvement Act of 1976, which did not come into effect until 1978, which placed a requirement on companies to report transactions with the antitrust authorities before the transaction closes.
Even with these laws, Mr. Krauss cautions that, “… once merger review laws are implemented, they must continue to develop and respond to changing legal and economic developments.” He cites the US experience, whereby concerns surrounding competition shifted over time from domestic to global, with multiple competition regimes. Hence, he says, “there is need to constantly review and revise merger review requirements as necessary.”
Another major issue when implementing such laws, is the cost of the reporting requirement. He says when the number of acquisitions in the US grew beyond the capability of the competition authority to process, as occurred during the merger wave in the 1990s, the authorities “increased the filing thresholds, so as to eliminate smaller valued transactions that pose little risk of anti-competitive harm, while reducing the burden on the regulators.”
But are there any benefits to be gained by a country from implementing merger review regimes? Mr. Krauss says there are many potential benefits, but warns of potential downsides. He assures that there is a lot Jamaica can learn from the experience of other countries over the past several decades.
One such benefit, he explains, is that the merger review laws which Jamaica is considering to introduce, “are fundamentally different from the conduct provisions in competition laws, because they (review laws) operate prospectively, rather than retrospectively, thereby enabling the competition authority to predict and prohibit anti-competitive conduct, such as monopolistic pricing by a dominant firm, or collusion among competitors in a oligopolistic industry, before it takes place.”
Another benefit cited by Mr. Krauss, is the ‘suspensive’ system, because merger laws are applied before the deal goes through, which is what Jamaica is eyeing, as it allows for the undoing or restructuring of a merger to resolve any competitive issue.
The suspensive system may also create incentives for merging parties to co-operate more eagerly with a competition authority before the transaction closes, as the parties may be more forthcoming in providing the competition authority with the necessary information in order to obtain clearance as quickly as possible. After consummation, however, the parties may have less incentive to be as forthcoming.
“Despite the benefits, some people may argue that they are not necessary for smaller economies, because they often cannot support a large number of competitors, which naturally results in fewer firms with high market shares,” Mr. Krauss says.
Nevertheless, he argues that “even in these markets, the remaining firms can still maintain the necessary level of competition to the benefit of consumers.”
He also warns of the pitfalls in adopting merger review laws, such as wrong predictions, as “the lawyers and economists working for the competition authorities cannot see the future, even with sophisticated economic analyses and internal business plans.”
Mr. Krauss says the good thing about considering review laws at this time is that, “Jamaica can learn from the mistakes and difficulties encountered by other countries, the best practices and procedures they have found to be most successful, and those that are least likely to impose unnecessary burdens on the private sector.”
“It is important that a competition authority avoid adopting laws that solve only short term problems to the detriment of long-term, sustainable policies that encourage business transactions that result in efficiencies, increased innovation, and societal advances,” he stresses.