International merger control: globalization or global failure?

• Author: Holloway, Sarah

1. INTRODUCTION

   "It has been said that arguing against globalization is like arguing the laws of gravity." (1) Like the inescapable force of gravity, the world today has succumbed to the force of economic globalization. With technological innovations such as the World Wide Web enabling instantaneous communication and transaction across the globe, companies and consumers have overcome the geographic barriers that once limited their reach. To sustain the needs of an expanding global market, companies must expand globally as well. Companies wanting to maximize the potential of an international market must take advantage of transnational synergies by merging with other companies in other areas of the world. The merger game hasn't changed; the playing field has just gotten larger.

   In many areas of the world, domestic mergers face stringent regulations in order to prevent the formation of monopolies and to protect competition in a free market. International mergers are no different; however, conflicts often arise when more than one nation attempts to exert its laws and regulations on the same merger. International mergers are often the subject of disputes arising over which nation has jurisdiction to prescribe its laws, and, if multiple nations have jurisdiction, over which law prevails should the laws conflict. This Note focuses specifically on the conflicts of international merger control arising between the United States and the European Community. Part II of this Note provides a brief procedural history of the current merger regulations of both systems and their application extraterritorially. Part III identifies problems arising from the current system of dual regulation. A brief analysis of the Boeing-McDonnell Douglas merger illustrates the problems arising when political and economic incentives of two legal regimes conflict, even if the substantive law does not. Problems arising from a conflict in substantive law and its application by separate enforcement agencies are demonstrated in a brief analysis of the GE-Honeywell merger. Part IV suggests solutions to these problems, including possible steps for implementation and the likelihood of success, and Part V concludes.

2. CURRENT MERGER LAWS

   Every state has its own legal system for handling merger control. While some systems may vary greatly based on the current governmental regime, many are very similar in both regulation and enforcement. This Note focuses specifically on the similarities and differences of the two major economies for international mergers: the United States and the European Community. In order to effectively analyze the effects and consequences of dual regulation of these authorities, it is important to first understand the legal procedures and the role of extraterritorial jurisdiction and comity in the application process.

   1. U.S. Merger Regulation

      The U.S. federal government has been controlling mergers for well over a hundred years, with laws dating back to the late 1800s. The primary U.S. legislation governing the competitive effects of mergers and acquisitions is section 7 of the Clayton Act. (2) Section 7 prohibits mergers and acquisitions that might substantially lessen competition or tend to create a monopoly. (3) Mergers may also be challenged under sections 1 or 2 of the Sherman Act as placing unreasonable restraints on trade or as creating a potential monopoly. (4) The tests of illegality under both Acts are complementary; the Sherman Act employs general language and broad approach to antitrust problems, while the Clayton Act seeks to reach certain specified practices which have been held by courts to be outside the ambit of the Sherman Act, but which Congress considered dangerous to free competition in trade and commerce. (5) Furthermore, the Federal Trade Commission (FTC), an enforcement agency, may challenge mergers as violations of section 5 of the Federal Trade Commission Act (FTCA), which prohibits unfair competition. (6)

      In 1978 the FTC enacted the Pre-merger Notification Program, requiring parties to certain mergers or acquisitions to notify the FTC and the Department of Justice (DOJ) before consummating a proposed merger or acquisition. (7) The program was established to avoid the difficulties and expenses that these enforcement agencies encounter when they challenge anticompetitive mergers after they have occurred. (8) By reviewing the potential mergers before they occur, the FTC and DOJ are able to determine which mergers are likely to be anticompetitive and can challenge them at a time when remedial action is most effective. (9)

      In order for parties to a proposed merger to be required to report a merger for review, relatively high minimum financial thresholds must be met. (10) These high standards ensure that only mergers involving substantial assets will be required to report. Given that the larger the merger, the more likely it is to have an effect on the market, this system of limiting the pool of mergers to be controlled is an efficient way for the enforcement agencies to direct their limited resources on the mergers most likely to have anticompetitive effects. In addition to simply reporting to the enforcement agencies, companies involved in a merger that meets the reporting standards are subjected to a significant filing fee. The filing fee associated with the reporting of a proposed merger ranges from $45,000 to $280,000, depending on the value of assets or voting securities to be held. (11)

      Once the parties to the merger have filed their proposed merger with the enforcement agencies, the parties must then observe a statutory waiting period of either 15 or 30 days, depending on the type of transaction, during which time they may not continue with the merger. (12) If the parties fail to file prior notification of a merger or fail to wait until the expiration of the statutory waiting period, they may be subject to civil penalties of up to $11,000 per day for each day in violation of the Act. (13)

      1. Extraterritorial Application of U.S. Laws

         Requiring only that companies meet the prerequisite financial standards for merger regulations to apply suggests that both domestic and foreign parties can be subject to U.S. merger regulations. The U.S. applies its competition laws to mergers involving foreign parties based on an "effects test." This standard, established in 1945 by Judge Learned Hand in United States v. Aluminum Co. of America, allows antitrust laws to be applied extraterritorially if the acts in question (1) were intended to have an effect on the U.S., and (2) did have an effect on the U.S. (14) As U.S. commerce continued to expand globally, the effects test was attacked by foreign countries, which criticized the extraterritorial application of U.S. antitrust laws to activity within their territorial borders as infringements of their sovereignty. (15)

         Perhaps in response to this criticism, the Ninth Circuit attempted to limit the effects test with the integration of international comity. (16) In Timberlane Lumber Co. v. Bank of America, the Ninth Circuit incorporated international comity into a new standard known as the "jurisdictional rule of reason," requiring a three part analysis: (1) does the activity have or intend to have a substantial effect on U.S. commerce; (2) is the activity of the magnitude to be covered by U.S. law; and (3) as a matter of international comity and fairness, should the extraterritorial jurisdiction of the court extend to cover the activity. (17) Under the theory of comity, the court must look at the interests of other jurisdictions to determine whether another's interest is so great that the court should refuse to apply jurisdiction. (18)

         The U.S. Supreme Court has not yet decisively ruled on whether extraterritorial application should be restricted with a standard of reasonableness, however, it has considered the issue of extraterritorial application of U.S. antitrust laws in general. In Hartford Fire Ins. Co. v. California, British companies operating in the U.S. conspired with one another to obtain favorable terms on insurance premiums. (19) Because such collusion violated antitrust laws, 19 states joined to bring an antitrust action against the British companies. (20) The insurance companies argued that British law should control based on the idea of comity and that extraterritorial application of U.S. law created a conflict between the two countries' laws. (21) The Supreme Court did not rule on the application of a reasonableness standard, but instead held that the consideration of comity is required only when there is a true conflict between laws, which was not present in this case. (22) Such a conflict will exist only when the laws of two countries conflict such that the party cannot comply with both obligations. (23) Because a merger is never required by law, a firm can always comply with the obligations of both nations; therefore, the holding in Hartford implies that comity will not play a role in the judicial analysis of mergers. (24)

         The standard of reasonableness has, however, been adopted by the Restatement (Third) of Foreign Relations. (25) In accordance with customary international law, the Restatement of Foreign Relations has codified the jurisdiction of the U.S. to prescribe its laws extraterritorially based on the "effects test," but limited by the "rule of reasonableness." (26) Although the term "comity" is not expressly used in the Restatements, some courts have applied this principle of reasonableness as a requirement of comity. (27)

         Even without express language requiring it, comity is nonetheless a standard practice in the U.S. In an antitrust suit against a foreign party doing business in the U.S., traditional practice has allowed U.S. courts to refuse to exercise extraterritorial jurisdiction, or the government to decline to bring enforcement proceedings, based on issues of comity. (28)

      2. Comity in Enforcement

         The DOJ and FTC are the...