Fordham International Law Journal Volume 19, Issue 3 1995 Article 9 Privatization and EC Competition Law Mario Siragusa∗ ∗ Copyright c 1995 by the authors. Fordham International Law Journal is produced by The Berke- ley Electronic Press (bepress). http://ir.lawnet.fordham.edu/ilj Privatization and EC Competition Law Mario Siragusa Abstract This Article will first review whether and how EC competition and state aid rules are appli- cable to privatizations, emphasizing issues peculiar to the privatization process. Other EC law principles that are relevant in the context of privatizations, such as freedom of establishment and investment, and public procurement rules will also be discussed. PRIVATIZATION AND EC COMPETITION LAW Mario Siragusa* CONTENTS Introduction ............................................. 1002 I. Competition Rules Applicable to Enterprises ........ 1007 A. The Control of Concentrations: The Application of the Merger Regulation to Privatizations .................................... 1007 1. The EC Merger Regulation in a Nutshell .... 1007 2. Potential Impact of the Privatization Process on the Structure of Concentrations Involving Privatized Companies ........................ 1012 3. Different Forms of the Change in Control Brought About by Concentrations Involving Privatized Companies: In Particular, Concentrative Joint Ventures ................ 1014 4. States' Public Power Prerogatives Do Not Confer a Decisive Influence over Privatized Enterprises ................................... 1020 5. Potential Impact of Statements Made by the Relevant National Privatization Authority on the Commission's Substantive Assessment of a Concentration ............................. 1021 6. Privatizations Carried Out Through the Public Flotation of a State-Owned Enterprise 1022 B. Application of Articles 85 and 86 of the EC Treaty to Acquisitions of Influence Short of Control .......................................... 1027 1. Minority Shareholding Acquisitions Resulting in a Transfer of Control of the Acquired Com pany .................................... 1027 2. The Influence Threshold Triggering * Partner, Cleary, Gottlieb, Steen & Hamilton, Brussels. A version of this Article will appear in 1995 FORDHAM Coiu. L. INST. (Barry E. Hawk ed., 1996). Copyright © Transnational Juris Publications, Inc., 1996. The Author wishes to acknowledge the invaluable contributions of his colleagues Sean-Paul Brankin, Francois Brunet, Raffaele Cavani, Lorenz K6dderitzsch, Cesare Rizza, and Giuseppe Scassellati-Sforzolini. 1000 FORDHAMINTERNATIONALLAWJOURNAL [Vol. 19:999 Application of Articles 85 and 86 of the EC Treaty Under the Philip Morris Judgment .... 1028 3. The Expansion of the Philip Morris Influence Standard in the Gillette Commission Decision 1030 4. Acquisition of Influence over an Enterprise To be Privatized by Way of a Minority Shareholding Acquisition or Other non-Joint Venture Arrangement: The Requirements for Application of Articles 85 and 86 of the EC Treaty .................................... 1034 C. Special Issues Raised by the Privatization of Enterprises Holding a Dominant Position Prior to Privatization .................................. 1036 1. Acquisition of Sole or Joint Control of a Monopoly to be Privatized: Substantive Assessment of the Transaction under the Merger Regulation ........................... 1037 2. Acquisition of Limited Influence over an Enterprise to be Privatized: Substantive Assessment of the Transaction under the EC Treaty Rules ................................. 1044 a. Article 85(1) of the EC Treaty ........... 1045 b. Article 86 of the EC Treaty .............. 1048 3. Creation of a True "Public Corporation" Through a Public Flotation of a Dominant Enterprise: Substantive Competitive Assessm ent ................................... 1050 4. Liberalization of the Relevant Market as a First Step to Removing the Pre-existing Shield to the Dominant Position Held by a Publicly-Owned Enterprise to be Privatized .. 1051 5. Does the Privatization of a Dominant Firm Without Concomitant Market Liberalization Infringe Articles 90 and 86 of the EC Treaty Within the Meaning of the Corbeau Judgm ent? ................................... 1053 6. The Combined Impact of Privatization and Market Liberalization on Competition: -Does the Privatization of a Dominant Firm "Create" a Dominant Position on a Newly- Created Market? ............................. 1058 1996] PRIVATIZATION AND EC COMPETITION LAW 1001 D. Application of Articles 85 and 86 of the EC Treaty to the Market Behavior of Undertakings Enjoying Exclusive or Special Rights After Privatization ..................................... 1060 1. Potential Recourse by Privatized Utilities to Unlawful Commercial Practices Directed at Reinforcing Their Market Power ............. 1060 2. Possible Issues for Review Under Article 85 of the EC Treaty ............................. 1061 3. Possible Issues for Review Under Article 86 of the EC Treaty ............................ 1064 4. Possible Issues for Review Under Article 5 juncto Articles 3 (g) and 85 or 86 of the EC T reaty ........................................ 1065 II. Privatization and the European Union Rules Applicable to Public Undertakings ................... 1068 A. Liberalization and Privatization: Article 90, a Critical Overview ................................ 1068 B. Article 90(1) of the EC Treaty .................. 1070 C. The Traditional Interpretation of Article 90(1) of the EC Treaty ................................ 1070 D. The New Theory of Structural Abuse ........... 1072 E. The Public Service Defense ..................... 1074 F. Article 90(3) of the EC Treaty: The Role of the Com m ission ..................................... 1079 III. Privatization and State Aid Rules .................... 1081 A. General Principles: An Overview ................ 1081 B. Reasons for Privatization of Public Undertakings 1083 C. State Aid Rules: The Court and the Commission Approaches ........................ 1085 D. State Aid to Public Undertakings ............... 1089 E. Constraints on Privatization Imposed by State Aid Rules ........................................ 1093 F. The Treuhand: The German Experience ....... 1095 IV. Freedom of Establishment, Investment, and Non- Discrim ination ....................................... 1098 A. The Scope of the EC Rules and Their Impact on Privatization Programs ....................... 1098 B. The United Kingdom Approach .................. 1102 C. The French Approach ........................... 1103 D. The Italian Approach ........................... 1104 1002 FORDHAMINTERNATIONAL LAWJOURNAL [Vol. 19:999 V. Public Procurement Issues ........................... 1105 A. The Scope of the EC Directives on Public Procurem ent .................................... 1105 B. The "General Directives" and the "Excluded Sectors Directive" ....... ........................ 1106 C. The British Telecommunications Case .......... 1108 Conclusion ................................... 1110 INTRODUCTION The competition rules of the EC Treaty' ("Treaty") both protect competition as an economically desirable force and pre- serve individual economic freedom as one of the fundamental political freedoms guaranteed by a democracy.2 These rules are based on the fundamental liberal belief that market forces should be the principal regulating factor in the economy and must be protected from improper interference: optimal eco- nomic efficiency is achieved when economic decision-making is left to businesses competing with one another in the market- place, so that available resources are allocated to the most pro- ductive sectors and firms are stimulated to undertake risk, inno- vate, stimulate technical progress, and develop active market strategies.3 The Treaty competition rules also have a key role in ensur- ing that the establishment of a single market, through the open- ing of the Member States' national markets, completed in 1993, yields the expected economic and social benefits in terms of higher output, growth, and employment. These rules must en- sure that existing regulatory barriers to trade are not replaced by market divisions, resulting from restrictive business practices or protectionist measures adopted by the Member States. 1. Treaty Establishing the European Community, art. 85, Feb. 7, 1992, [1992] 1 C.M.L.R. 573, 626 [hereinafter EC Treaty], incorporatingchanges made &y Treaty on Euro- pean Union, Feb. 7, 1992, O.J. C 224/1 (1992), [1992] 1 C.M.L.R. 719, 31 I.L.M. 247 [hereinafter TEU]. The TEU, supra, amended the Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-11 [hereinafter EEC Treaty], as amended by Single European Act, OJ. L 169/1 (1987), [1987] 2 C.M.L.R. 741 [hereinafter SEA], in TREATIES ESTABLISHING THE EURO- PEAN COMMUNITIES (EC Off'l Pub. Off. 1987). 2. See LENNART PRITIER ET AL., EEC COMPETITION LAW 9-10 (1991). 3. See COMMISSION OF THE EUROPEAN COMMUNITIES, EIGHTEENTH REPORT ON COM- PETITION POLICY 1988 13-17, Introduction (1989); COMMISSION OF THE EUROPEAN COM- MUNITIES, XXIID REPORT ON COMPETITION POLICY 1992 13-16, Introduction (1993). 1996] PRIVATIZATION AND EC COMPETITION LAW 1003 Therefore, companies must not be allowed to thwart market integration through the creation of cartels for the purposes of splitting markets, blocking exports or imports, by abusing ex- isting local or Community-wide dominant positions,' or by block- ing new entrants or creating new dominant positions through anticompetitive