The Court of First Instance's (CFI's) annulment, two years down the line, of the European Commission's (EC's) clearance of the Sony/BMG merger highlights the risks associated with contentious EC merger clearances and the unsatisfactory nature of the current EC appeals process.

A less obvious consequence is that when seeking a merger, clearance parties and their lawyers must be aware of the risk that if their advocacy is too effective an initial clearance may be overturned and come back to bite them.

It is not just a case of reprinting business cards when two firms the size of Sony and BMG decide to merge. During the first years of any merger, the costs and management time involved are substantial. When the news broke that two years after the EC's clearance of the Sony/BMG merger, the CFI was to annul that decision, it was clear questions would be asked.

In its ruling, the CFI severely criticised the EC's decision. Branding the clearance decision as the product of "inadequate reasoning", the CFI agreed with the appellant trade association, Impala. It ruled that the facts had been widely misinterpreted and the clearance could not stand.

The EC's merger clearance procedure is thus again under the spotlight, despite sweeping reforms only two years ago following the repeal of three EC merger prohibitions by the European courts in 2002.

Clearly still out of kilter with the commercial requirements of the world it regulates, the lengthy court proceedings required to settle an appeal against an EC verdict are one of the current system's obvious shortcomings. In the Sony/BMG case, the newlymerged business waited two years for a resolution.

In addition, commercial certainty is widespread. Although clearance decisions have always been capable of appeal, clients tend to assume that obtaining clearance marks the end of the road. Deals are then implemented, businesses integrated and strategic plans actioned – in other words, businesses take near-irreversible steps.

After Sony/BMG, the level of commercial certainty attached to the receipt of EC clearance in difficult merger cases must be re-evaluated. When added to the time it takes for an appeal to be concluded, the net result has been the further undermining of business confidence in the current EC merger review process. For the second time in four years, the EC is again faced with a battle to re-instill faith in the EC merger regime.

One less obvious consequence of the Sony/BMG appeal decision is that the advocacy skills of competition lawyers could actually increase the possibility of a successful appeal – and with it the degree of uncertainty, and cost, for the client.

During any merger review, the EC is reliant largely on the market information submitted by the opposing parties. Lawyers must strike a balance between presenting their client's case in a favourable manner while not misleading the competition authority or court.

If, along the way, the EC has misunderstood how a market works, then, so long as it favours the notifying party, there has been a natural reluctance for legal advisers to highlight the error.

Lawyers should not be so driven to obtain a favourable decision that they are blind to the risk of the EC misinterpreting their arguments. If a complex merger is cleared following the EC's acceptance of the picture of the market painted by the parties' lawyers, the risk is that those same clever arguments could – on appeal – result in the EC's decision being overturned.

The interests of the merging parties may even become aligned with those of the EC, since only by providing an accurate – even if unhelpful – picture of the market will the notifying parties be sure that the subsequent judgment is based on a sound picture of the market.

Factual misinterpretations

It follows that the client's needs are best served through the notifying parties considering correcting potentially favourable factual misinterpretations by the EC. If anything, this is likely to require even more skilled advocacy than before to reach the end goal of a merger clearance.

In light of the Sony/BMG appeal, competition lawyers will need to take greater care in weighing up the relative merits of their advocacy against the risk of a subsequent appeal in contentious cases.

Indeed, we may see a greater alignment of interests between the EC (to understand the market accurately in order to reach the correct conclusion) and the notifying parties (to provide an accurate, even if unhelpful, picture of the market).

It will also be interesting to see whether the EC merger review process faces further procedural reform and whether a dedicated competition appeals body is adopted to help the regulator better meet the commercial requirements of the business community. |

Simon Neill is head of Osborne Clarke's competition practice and Douglas Peden specialises in competition litigation.