Privatization and EC Competition Law

Fordham International Law Journal, Dec 1995

This Article will first review whether and how EC competition and state aid rules are applicable 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.

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Privatization and EC Competition Law

FORDHAMINTERNATIONALLAWJOURNAL Fordham International Law Journal - 1995 Article 9 Copyright c 1995 by the authors. Fordham International Law Journal is produced by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/ilj Privatization and EC Competition Law Mario Siragusa This Article will first review whether and how EC competition and state aid rules are applicable 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. Mario Siragusa* CONTENTS * 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. INTRODUCTION The competition rules of the EC Treaty' ("Treaty") both protect competition as an economically desirable force and preserve 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 economic efficiency is achieved when economic decision-making is left to businesses competing with one another in the marketplace, so that available resources are allocated to the most productive sectors and firms are stimulated to undertake risk, innovate, stimulate technical progress, and develop active market strategies.3 The Treaty competition rules also have a key role in ensuring that the establishment of a single market, through the opening 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 ensure 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. 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 existing local or Community-wide dominant positions,' or by blocking new entrants or creating new dominant positions through anticompetitive mergers.5 Moreover, although it is true that the EC Treaty competition rules concern only the behavior of undertakings and do not apply to legal or regulatory measures adopted by Member States, these provisions, if read in combination with Article 5 of the EC Treaty,' impose an obligation upon Member States to abstain from adopting or maintaining in force measures, including those of a legislative nature, that could render ineffective the EC Treaty competition rules.7 This may be the case, for example, where a Member State imposes or facilitates the conclusion of agreements contrary to Article 85,8 reinforces the effects of such agreements, or deprives its own legislation of its official character by delegating the responsibility for taking decisions affecting the economic sphere to private traders.' It may also occur where a Member State extends an exclusive right granted to a monopolist to cover an ancillary activity, without objective justification,"0 or structures such an exclusive right in a way that inevitably leads the monopolist to commit an abuse of that right contrary to Article 86 of the EC Treaty." FORDHAMINTERNATIONAL LAWJOURNTAL In addition, Member States must not be allowed to replace protectionism, abolished in the market integration process, with state aid.1 2 The use of public funds by a Member State to give a national industry a competitive advantage over industry elsewhere in the European Union' 3 or to prop up inefficient businesses at the expense of those that are more successful, is as likely to distort competition in the EU market as the anticompetitive behavior of companies. It discourages the entry of new firms and prevents efficient players from increasing their market share through internal growth.' 4 Moreover, although Article 22215 of the EC Treaty leaves Member States free to adopt their own system of property ownership, which may include state-owned enterprises,' 6 they must refrain from acting in a manner contrary to the EC Treaty when they engage in commercial activity or influence the conduct of business enterprises.' 7 Pursuant to Article 90(1) of the EC Treaty, Member States may neither enact nor maintain in force, in relation to public enterprises and enterprises to which they grant special or exclusive rights, any measure contrary to the rules of the EC Treaty, including the principle of non-discrimination on grounds of nationality,"8 and the rules on competition and subsidies. 9 As a result, EC competition rules can also be used to open sectors, such as the markets for energy, telecommunications, and postal services, that remain closed despite the establishment of the internal market, because Member States have entrusted management of those sectors to undertakings to which they have granted special or exclusive rights. 20 It may be interesting to note that, subject to the exception under Article 90( 2 ) of the EC Treaty,2 1 the commercial activities 20. See id. art. 90(3), (1992] 1 C.M.L.R. at 629. Under Article 90(3), the Commission is to ensure the application of Article 90 and, where necessary, to address appropriate directives and individual decisions to Member States imposing upon them an obligation to abolish certain special or exclusive rights which conflict with the objectives of the internal market. In recent years, the Commission has more frequently used Article 90(3) of the Treaty as an instrument for attacking various state or private monopolies, in particular those that are fragmented along national lines or otherwise uncompetitive in the sectors of insurance, maritime transport, postal services, port services, airport services, and telecommunications. See Commission Decision 85/276/EEC, 0J. L 152/ 25 (1985) (Greek Insurance); Commission Decision No. 87/359/EEC, OJ. L 194/28 (1987) (maritime transport); Commission Decision No. 90/16/EEC, 0.J. L 10/47 ( 1990 ) (Dutch express delivery services); Commission Decision No. 90/456/EEC, 0J. L 233/19 ( 1990 ) (Spanish international express courier services); Commission Decision No. 94/119/EC, 0.J. L 55/52 (1994) (port services); Commission Decision No. 95/364/EC, 0.J. L 216/8 (1995) (landing fees at Brussels National Airport); Commission Directive No. 88/301/EEC, 0J. L 131/73 (1988) (on competition in markets in telecommunications terminal equipment); Commission Directive No. 90/388/EEC, OJ. L 192/10 ( 1990 ) (on competition in the markets for telecommunications services); Commission Directive No. 94/46/EC, 0.J. L 268/15 (1984) (amending directives 881301 and 901388 with regard to satellite communications). The distribution of gas and electricity, air transport and financial services are other areas in which the Commission indicated its intention to introduce greater competition by tackling existing monopolies. COMMISSION OF THE EUROPEAN COMMUNITIES, XXIVTH REPORT ON COMPETITION POLICY 1994, at 19, 6 (1994); COMMISSION OF THE EUROPEAN COMMUNITIES, XXIIIRD REPORT ON COMPETITION POLICY 1993, at 30-34, 1 36-42 (1994); COMMISSION OF THE EUROPEAN COMMUNITIES, XXIIND REPORT ON COMPETITION POLICY 1992, at 29-31, 11 21-27 ( 1993 ). The Commission's powers to use Article 90 of the Treaty to prevent national governments from restricting competition by conferring monopoly or other special rights when it is not justified on genuine public-interest grounds of a non-economic nature were upheld by the Court ofJustice in two judgments involving the Article 90(3), France v. Commission, and Spain, Belgium and Italy v. Commission. France v. Commission, Case C-202/88, [1991] E.C.R. 1-223; Spain, Belgium & Italy, Joined Cases C-271, 281, 289/90, [1992] E.C.R. 1-5833. And, in a ruling concerning an Article 90(3) individual decision that the Commission addressed to the Netherlands in order to impose the liberalization of the provision of express delivery services. The Netherlands, Koninklijke PTT Nederland & PTT Bost v. Commission,Joined Cases C-48/90 and 66/ 90, [1992] E.C.R. 1-565. 21. EC Treaty, supra note 1, art. 90( 2 ), [1992] 1 C.M.L.R. at 629. Article 90( 2 ) provides that undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly are only subject to the Treaty competition rules insofar as their application does not obstruct the performance of the particular tasks assigned to them and where the development of trade is not affected to an extent contrary to the interests of the European Union. See Corbeau, Case C-320/91, [1995] 4 C.M.L.R. 621. of public enterprises and firms granted special or exclusive rights are treated much like the commercial activities of private enterprises. Indeed, like Article 222,2 Article 90 is neutral as to the ownership of business enterprises2 3 and makes only a functional distinction in favor of undertakings, public or private, that are required in the general economic interest to perform specific tasks on behalf of all consumers. 2 4 Although the privatization of utilities may increase the number of privately owned firms that enjoy special or exclusive rights, such firms will remain within the scope of Article 90.25 At first sight, the process of privatization, that is, the transfer of the ownership of an enterprise from public to private hands, appears to raise no particular issues in relation to the competition rules of the EC Treaty. Ostensibly, privatizations should be treated no differently than the transfer of businesses between private parties. There are cases, however, when privatization should be treated differently. The following analysis of the impact of competition rules on the privatization process starts from the intuitively appealing assertion, which has now become commonplace, that the privatization of enterprises enjoying special or exclusive rights must be accompanied by market liberalization measures to prevent private monopolies from replacing pre-existing public ones.2 6 Indeed, the apparent neutrality towards public and privileged enterprises of the Treaty of Rome 27 establishing the Euro1996] pean Economic Community seems to have been replaced in the Maastricht Treaty on European Union by a policy that clearly favors free markets over state planning." The aim of this Article is to establish a firm legal basis for this concept, derived from the Commission's practice and the case law of the Court of Justice. This Article will first review whether and how EC competition and state aid rules are applicable 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. I. COMPETITIONRULES APPLICABLE TO ENTERPRISES A. The Control of Concentrations: The Application of The Merger Regulation to Privatizations 1. The EC Merger Regulation in a Nutshell EC antitrust law concerning merger control was, until recently, based on the concept of "structural" abuses of a dominant position under Article 86 of the EC Treaty. 9 The law was changed by the long-awaited Council Regulation 4064/891" 28. TEU, supranote 1, O.J. C 224/1 ( 1992 ), [1992] 1 C.M.L.R. 719. Under Article 3(a) of the Treaty on European Union, "the activities of the Member States and the Community shall include ... the adoption of an economic policy.., conducted in accordance with the principles of an open market economy with free competition." Id. art. 3(a), OJ. C 224/1, at 8 ( 1992 ), [1992] 1 C.M.L.R. at 589. See generally Anthony Gardner, The Velvet Revolution: Article 90 and the Triumph of the Free Market in Europe's Regulated Sectors, 16 EUR. COMPETITON L. REv. 78 (1995). 29. Europemballage Corporation and Continental Can Company Inc. v. Commission, Case 6/72, [1973] E.C.R. 215, 244-45 ("Abuse may... occur if an undertaking in a dominant position strengthens such position in such a way that the degree of dominance reached substantially fetters competition, i.e., that only undertakings remain in the market whose behavior depends on the dominant one."). As first established by the Continental Can Court, mergers strengthening an existing dominant position held by one of the merging firms may amount to an "abuse" in violation of Article 86 of the Treaty. Europemballage Corporationand Continental Can Company, [1973] E.C.R. at 24445. This case is solely of historical interest since Article 86 of the Treaty is no longer applicable to concentrations except by national courts, and only in case of transactions which do not create but strengthen a dominant position through concentration. 30. Merger Regulation, supra note 5, O.J. L 395/1 (1989). Firms are referred to as "undertakings" in EC law parlance. On the other hand, the Regulation uses the wider term of "concentrations" instead of mergers because it also applies to operations, such as concentrative joint ventures, which are not "mergers" in the strict sense. The Regulation has been supplemented. See Commission Regulation No. 3384/94, O.J. L 377/1 (1994) (notifications, time-limits, and hearings); Commission Guidelines, O.J. C 203/5 ("Merger Regulation" or "Regulation") on the control of concentrations between undertakings, which came into force on September 21, 1990. The Merger Regulation established a "onestop-shop" review procedure for all mergers having a "Community dimension."3 1 The concept of "concentration" in the Merger Regulation is based on a principle of "change in control. 3 2 According to Recital 23 of the Merger Regulation,3 3 the concept of "concentration" covers only operations that bring about a lasting change in the structure of the enterprises concerned. Such a structural change, under Article 3(1), s4 is brought about by either a merger between two previously independent undertakings or the acquisition of control over the whole or part of another business. Under Article 3(5) of the Merger, Regulation,35 acquisitions of securities made by credit, other financial institutions, or insur( 1990 ) (concerning ancillary restrictions in connection with notified concentrations); Commission Notice, O.J. C 385/1 (1994) (distinction between concentrative and cooperativejoint ventures); Commission Notice, O.J. C 385/5 (1994) (articulating notion of concentration); Commission Notice, O.J. C 385/12 (1994) (notion of undertakings concerned); Commission Notice, O.J. C 385/21 (1994) (calculation of turnover). The notification form, known as Form CO. was published as an annex. Commission Regulation No. 3384/94, O.J. L 377/9, annex (1994). 31. Merger Regulation, supra note 5, arts. 9, 21, O.J. L 395/1 at 7,11 (1989). In order to avoid overlapping review of mergers by the Commission and the enforcement agencies of the Member States, the Regulation gives the former exclusive jurisdiction over mergers having a "Community dimension" (with the possibility, however, for the Commission to refer the merger to national agencies in certain cases). Id. A merger, including a combination involving non-Community firms, has a Community dimension where the merging companies have combined worldwide sales in excess of 5 billion European Currency Units ("ECU") (equaling approximately US$5850 million at the average 1994 exchange rate of 1.16982), at least two of the firms have a minimum of ECU250 million sales each within the European Union, and no more than two-thirds of each firm's sales in the European Union come from within one and the same Member State. Id. art. 1( 2 ), O.J. L 395/1, at 3 (1989). Mergers above these turnover thresholds must be notified to the Commission in advance of their implementation and may not be consummated for three weeks after notification or until the Commission so decides. The time limits for Commission action are one month from notification for straightforward cases and five months for mergers which "raise[ ] serious doubts as to [their] compatibility with the common market" and thus require the opening of in-depth second-phase proceedings. Id. arts. 4-7, O.J. L 395/1, at 4-6 (1989). 32. See generally II BARRY E. HAWK, COMMON MARKET AND INTERNATIONAL ANTITRUST: A COMPARATIVE GUIDE 915 (2d ed. 1985 & Supp. 1992). 33. Merger Regulation, supra note 5, recital 23, O.J. L 395/1 (1989). 34. Id. art. 3(1), O.J. L 395/1, at 4 (1989). 35. Id. art. 3(5), O.J. L 395/1, at 4 (1989). ance companies, whose activities include transactions for their own account or for the account of third parties, do not constitute "concentrations" if the securities are acquired for resale and are held only on a temporary basis. In this context, temporary basis means one year from the date of the acquisition, subject to extension where the acquired company can show that disposal of the acquired securities would not be reasonably possible within that period, and the acquiring company abstains from exercising the pertaining voting rights, or exercises them only with a view to preparing the disposal of the securities acquired and not in order to influence the competitive behavior of the undertaking involved. 6 Control is defined in Article 3(3)-(4) of the Merger Regulation as the ability to exercise a decisive influence on another undertaking through rights, contracts, or any other means, and may be acquired by one or more undertakings or persons, including public bodies, 7 acting alone or jointly. 38 A concentra36. Id. The acquisition by an investment bank, therefore, acting as global coordinator or underwriter in the context of the privatization of a state-owned enterprise, of a controlling interest in that enterprise for re-sale to institutional or retail investors does not normally involve a change in control and does not amount to a concentration. Id. On the other hand, the exception set forth in Article 3(5) (a) of the Merger Regulation does not normally apply to acquisitions of controlling interests by investment banks (e.g., in the context of rescue operations or buy-outs) in which, although the primary intention of the banks involved is a restructuring of the financing of the acquired company for its subsequent resale, the restructuring program requires the controlling banks to determine the company's strategic commercial behavior and makes it unrealistic to transfer a rescued company into a commercially viable entity and resell it within one year. See, e.g., Commission Decision, O.J. C 223/38, 11 5-6 ( 1991 ) (Kelt/American Express) (finding concentrative joint venture in new entity formed by eight banks because strategic decisions on development of new entity would require unanimity). See also Commission Decision O.J. C 67/11, 11 6-7 (1994) (CWB/Goldman Sachs/Tarkett) (clearing management buy-out where joint control acquirerers of newly-formed holding company would have certain rights coffered on them over acquired companies); Commission Decision, O.J. C 258/10, 11 5-9 ( 1992 ) (CCIE/GTE) (authorizing buy-out of IL by Edil, special purpose company set up and controlled by CCIE, which is whollyowned subsidiary of Citicorp, where purchase constituted concentration since CCIE would continue to control Edil after completion of proposed transaction). In Mediobanca/Generali, the Commission apparently concluded that, under the surrounding circumstances, the Article 3(5) (a) exception was not applicable to Mediobanca's participation in the underwriting of an issue of new shares by Assicurazioni Generali, the largest Italian insurance company. Mediobanca/Generali, Case IV/M156, [1994] 4 C.M.L.R. Ml, M3, 1 8. 37. See, e.g., Commission Decision No. 94/449/EC, O.J. L 186/38 ( 1993 ), (Kali+Salz/MdK/Treuhand). "Persons" also include states. Air France/Sabena, Case IV/M517, [1994] 5 C.M.L.R. MI, 1 11. 38. Air France v. Commission, Case T-2/93, [1994] E.C.R. 11-323, 11 62-65. In Air tion may also occur where a transaction leads to a change in the structure of control, such as a change from joint to sole control or an increase in the number of shareholders exercising joint control.3 9 Even the creation of a joint venture is a "concentration," pursuant to Article 3( 2 ) of the Merger Regulation, if the new entity "perform [s] on a lasting basis all the functions of an autonomous economic entity, which does not give rise to coordination of the competitive behavior of the parties amongst themselves or between them and the joint venture." 40 In the Commission's assessment of mergers notified to it, the Merger Regulation is intended to determine whether the proposed combination is likely to increase the risk of the unilateral exercise of market power or the risk of coordinated interaction between players in the relevant market, i.e., the risk of the collective exercise of market power.4 ' Pursuant to Article 2(3) France, the Court of First Instance ruled that where the holdings of shares in a controlled undertaking and the conferment of powers laid down by its statutes are such that major decisions can only be taken by mutual consent by the two undertakings involved in a concentration, the combined entity is jointly controlled in spite of the fact that one of them exercises a substantial influence over it. Id. 39. Commission Notice, OJ. C 385/1, at 1-2. E.g., O.J. C 38/12 ( 1993 ) (Volkswagen AG/VAG UK); Commission Decision, OJ. C 165/26 ( 1992 ) (Solvay/Laporte/ Interox) (finding that transaction, in which Solvay and Laporte would break-up and divide assets of jointly controlled Interox group, gave rise to two separate concentrations through which both parties would acquire sole, as opposed to joint, control over two separate activities and sets of products); Commission Decision, O.J. C 204/12 (1991) (Eridania/ISI) (holding that new shareholder agreement, that came about because Eridania increased its shareholding enough to give it sole, instead of joint control, was not sufficient to confer on Finbieticola decisive influence over ISI); Commission Decision, OJ. C 163/9 (1995) (Nokia Corporation/SP Tyres) (finding that obligation of second largest shareholder fell short of indication of joint control, making Merger Regulation inapplicable). 40. Merger Regulation, supra note 5, art. 3( 2 ), O.J. L 395/1, at 4 (1989). 41. Merger Regulation, supra note 5, O.J. L 395/1 (1989). Although the Merger Regulation appears to focus overwhelmingly on the former risk, the Commission has already accepted the concept of collective dominance. Commission Decision No. 92/ 553/EEC, OJ. L 356/1 ( 1992 ) (Nestl6/Perrier) (determining that oligopolistic dominance may result in restriction of competition, in particular, where relevant market is already performing anti-competitively prior to proposed merger and leading companies therein face no sufficient price-restraining actual or potential competition). See, e.g., Kali+Salz/MdK/Treuhand, O.J. L 186/38, at 46-49, 1 51-68, 96 (1993) (finding that, absent agreement of parties to give several undertakings, acquisition would lead to duopoly because no effective competition would remain due to structural features of market, fragmentary nature of competition, and longstanding links between two companies). See generally HAwK, supra note 32, at 964.3; Derek Ridyard, Economic Analysis of Single Firm and OligopolisticDominanceUnder the EuropeanMergerControl, 15 EUR. COMPETITION L. Rav. 255 (1994). 1996] of the Merger Regulation,4" where the Commission finds that a concentration "creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it," the Commission must declare the transaction "incompatible with the common market" and prohibit its consummation. Commission decisions under the Regulation have, thus far, endorsed the Court's established definition of dominance4 3 as the Commission refers to the combined entity's power "to gain an appreciable influence on the determination of prices without losing market shares."44 The privatization of an enterprise, by definition, implies one or more successive changes of control over it. Transition from public to private ownership of the business to be privatized often takes place in stages, with the national government or local entities selling significant minority stakes prior to transferring control to, or sharing control with, private investors.45 A change in the control or in the structure of control of a public enterprise triggers the application of the Merger Regulation or, where the transaction does not fall within the Regulation's scope for lack of Community dimension, the national merger control rules 42. Merger Regulation, supra note 5, art. 2(3), O.J. L 395/1, at 3-4 (1989). 43. See, e.g., Nederlandse Bandenindustrie Michelin v. Commission, Case 322/81, [1983] E.C.R. 3461, 3511. A dominant position relates to a position of economic strength enjoyed by an undertaking that enables it to prevent maintenance of effective competition on the relevant market by giving it the power to behave, to an appreciable extent, independently of its competitors, customers, and ultimately of consumers. Michelin, [1983] E.C.R. at 3511. 44. See, e.g., Re The Concentration Between Renault and Volvo, Case IV/M4, [1991] 4 C.M.L.R. 297, 302-03, 14. See also Commission Decision, O.J. L 211/1, 105 (1995) (Mercedes-Benz/Kassbohrer); Commission Decision, O.J. L 354/32, 183 (1994) (Procter & Gamble/VP Schickedenz (II)); Commission Decision, OJ. C 68/5, 10 ( 1993 ) (British Airways/Dan Air); Commission Decision, O.J. L 334/1, 72 ( 1991 ) (Atrospatiale-Alenia/de Havilland) (referring to combined entity's "freedom of maneuver that escapes adequate competitive control" or power "to act independently of its customers and competitors"). See also COMMISSION OF THE EUROPEAN COMMUNITIES, XXIST REPORT ON COMPETITION POLICY 1991, at 85-86, 110 ( 1992 ) (stating that analysis of mergers is based on definition of dominant position under traditional case law of Article 86 of Treaty). 45. Merger Regulation, supranote 5, O.J. L 395/1 (1989); EC Treaty, supra note 1, arts. 85, 86, [1992] 1 C.M.L.R. at 626-28. If the new private investors do not acquire decisive influence over the public undertaking individually or jointly (e.g., through a shareholders' agreement among themselves, or with the state), the transaction does not fall under the Merger Regulation but may be scrutinized under Articles 85 and 86 of the Treaty. Id. of the relevant jurisdictions. 46 A review of the decisions adopted by the Commission pursuant to the Merger Regulation shows that the very structure of concentrations undertaken in the context of privatizations is often affected by the relevant national legislative framework, or by the vendor national government's need or desire to ensure a smooth transition from public to private ownership. For example, in order to acquire Cokoladovny, a company manufacturing and marketing biscuits and chocolate sweets privatized by the Government of the Czech Republic, the agrifood groups BSN and Nestle established a Dutch holding company in which they each owned 50%." 7 The holding company, in turn, acquired a 43% stockholding in Cokoladovny. Following a capital increase reserved to shareholders, this percentage would grow to 50.41%, with the rest of the capital divided among the European Bank for Reconstruction and Development, the Investicni Banka, the firm's employees, and the National Property Funds of the Czech Republic. This contractual structure was dictated by the Czech Government's decision that the privatized business could not be dismembered. Since Nestl6 specialized in chocolate and BSN in biscuits, with neither having expertise in the other's sector, only a common project could enable them to pursue the economic policy objectives of privatization.48 Interestingly, although the agreement relating to the structure of the ownership of Cokoladovny could be terminated after seven years, when the commitments entered into by BSN and Nestl6 vis-a'-vis the Czech Government would come to an end leaving 46. The latter situation may test the independence of the relevant national antitrust authority from the national government in the assessment of a concefitration involving the outright or partial privatization of a company owned by the same state. 47. BSN-Nestl6/Cokoladovny, Case IV/M90, [1992] 4 C.M.L.R. 441. 48. BSN-Nestli/Cokoladovny, [1992] 4 C.M.L.R. at 441. The Commission eventually found that the transaction amounted to a cooperative joint venture, to be scrutinized pursuant to Article 85 of the EC Treaty, because of a risk of coordination between Cokoladovny and its parent companies. The Commission, however, expressly ruled out any risk of coordination between the parents. Id. It is submitted that if the Commission reviewed the same transaction now, it would conclude that it constituted a concentrative joint venture. Commission Notice, O.J. C 385/1 (1994). 1996] PRVATIZATION AMD EC COMPETITION LAW the parent companies free to determine the future structure and development of the joint venture, the Commission found that Cokoladovny would perform all the functions of an autonomous economic entity on a lasting basis. The Commission's finding was presumably influenced also by the fact that the transaction was a privatization where the government vendor sought to provide for an initial period of stability and residual involvement.49 Another example of a transaction whose structure was largely determined by the existing legislative framework concerning the privatization of the acquired entity was the acquisition of an important shareholding in Banco Totta & Agores ("Totta") by the Spanish banking and financial group Banco Espafiol de Cr~dito ("Banesto") directly and indirectly through Valores Ib~ricos ("VISA"), a holding company owned by Banesto, and certain Portuguese partners jointly operating through the holding company MSF.50 The transaction was carried out by way of a staggered subscription of shares within the framework of the two-stage privatization of Totta's capital, which started in 1989. To avoid exceeding the 10% ceiling on share capital acquisitions by foreign investors in the Portuguese privatization law, Banesto directly acquired a 9.4% stake and, at the same time, set up a holding company, VISA, whose sole activity was the purchase of the highest shareholding in Totta allowed by Portuguese legislation. Since undertakings in which the majority interest was held by foreign persons were treated as foreign investors by Portuguese law, Banesto subscribed for only 49% of VISA's share capital, with the remaining 51% belonging to a group of Portuguese partners jointly operating through the holding company MSF. Following gradual direct and indirect acquisitions, the total shareholding of Banesto and its partners in Totta rose to 46.5%. Since the rest of the capital was spread among more than 40,000 shareholders, with the exception of a 16.6% stake held by the Portuguese state, Banesto, MSF and VISA held, in practice, more than 60% of the voting rights at Totta's shareholders' meeting. In addition, they were empowered to appoint twelve out of the thirteen directors of Totta's Board. It is interesting that the notification made to the Com49. See Jonathan Faull, Case Note, 2 EEC MERGER CONTROL REP. 684.1 (Kluwer 1992). 50. BANESTO/Totta, Case IV/M192, [1992] 4 C.M.L.R. 542. mission concerned not the acquisition of joint control of Totta by Banesto and MSF, which had taken place a year before the notification, but the agreement entered into by the two companies to allow Banesto to consolidate Totta in its annual financial statements. To that end, it was agreed that seven out of the twelve directors would represent Banesto's interests in Totta, with only five representing MSF, and that Mr. Roquette, Chairman of Totta and VISA, would become a director of Banesto. 3. Different Forms of the Change in Control Brought About by Concentrations Involving Privatized Companies: In Particular, Concentrative Joint Ventures A state's disposal of all or part of its interest in a company to be privatized may result, depending on the relevant factual and legal elements of each transaction, in the acquisition of sole control by the acquirer or one of the acquirers,5" in the acquisition of joint control by a number of undertakings or persons,5 2 or even in the acquisition of both sole and joint control, where a single notification is made in relation to several acquisitions by and between the same parties.5 3 51. See, e.g., Elf Aquitaine-Thyssen/Minol, Case IV/M235, [1992] 5 C.M.L.R. 203; DASA/Fokker, Case IV/M237, [1993] 5 C.M.L.R. 18; Nestl/Italgel, Case IV/M362, [1993] 5 C.M.L.R. 311; Commission Decision, O.J. C 162/7 (1994) (GE/ENI/Nuovo Pignone (11)); Commission Decision, O.J. C 185/3 (1994) (Tractebel/Synatom); Commission Decision, O.J. C 249/3 (1994) (Tractebel/Distrigaz II); Commission Decision, O.J. C 280/3 (1994) (VAG/SAB). 52. E.g., BANESTO/Totta, [1992] 4 C.M.L.R. at 542; Air France/Sabena, Case IV/ M517, [1994] 5 C.M.L.R. M1; Kali+Salz/MdK/Treuhand, O.J. L 186/38 ( 1993 ); Commission Decision, o.J. L 158/24 (1994) (Pilkington-Techint/SWV); Commission Decision, O.J. C 189/5 (1994) (PowerGen/NRG/Energy Morrison Knudsen/Mibrag); Thyssen Stahl/Krupp/Riva/Falck/Tadfin/AST, Case IV/M484 (Eur. Comm'n 1994) (not yet reported); Commission Decision, O.J. C 181/17 (1995) (DOW/BUNA); Commission Decision, O.J. C 200/10 (1995) (Swissair/Sabena). 53. Commission Decision, O.J. C 23/13, 10-12 (1994) (Fortis/CGER). In analyzing the acquisition by the Group Fords ("Fortis"), controlled by AG Group and AMEV, of a 49.9% shareholding in ASLK/CGER Bank and ASLK/CGER Insurance from ASLK Holding/CGER Holding ("Holding"), a Belgian state-owned public-interest banking holding company that also retained a 49.9% interest in each of the two companies, the Commission reasoned that after the transaction Fords and Holding would have equal shareholdings and numbers of directors on the boards of ASLK/CGER Bank and ASLK/CGER Insurance. Id. The Commission, however, found that Fords would have sole control over ASLK/CGER Insurance due to its right to a casting vote in case of deadlock, whereas Fords and Holding would have joint control over ASLK/ CGER Bank because Fortis, in proposing strategic decisions, was obliged to obtain the agreement of the members of the company's management committee, whose composition is subject to the approval by the Belgian Banking and Financial Commission. Id. In the case of partial privatizations or privatizations carried out in stages, in which the entity concerned is subject to joint control, one of the persons exercising control may be the state itself, whose desire to retain a presence in the venture may be motivated by considerations of a financial, long-term strategy, or general interest nature rather than by a desire to maintain an effective role in its daily management. In such cases, the Commission has taken the view that, for joint control to exist, the state and its partners must be in agreement on the strategic decisions to be taken by the new entity and the state must retain a real possibility of contesting any decisions taken by the other 54 parent company. Moreover, the Commission has found that the acquisition of joint control of a privatized company does not give rise to the coordination of the competitive behavior of the state vendor and its partners, either among themselves, or between them and the joint venture,55 where the state, which by definition lacks expertise in the joint venture's economic sector, exits the joint venture's market in circumstances in which it could not foreseeably re-enter it and, at the same time, gives preeminent weight in management decisions to the other parent company, which itself continues to operate on the joint venture's market: the "industrial leadership" principle.56 54. See, e.g., Kali+Salz/MdK/Treuhand, O.J. L 186/38, at 39, 1 5-7 ( 1993 ). Treuhand retained 49% of the share capital and voting rights of MdK, but its approval was required for a number of market-related strategic decisions and it participated in drawing up a detailed five-year business plan for the joint venture together with the majority partner K+S. See Commission Decision, O.J. C 162/7, 6-9 (1994) (GE/ENI/Nuovo Pignone (II)). Since the veto rights conferred on the seller, the state holding company ENI, by the notified share acquisition agreement were temporary in nature and only concerned actions likely to have a social impact and not foreseen in the industrial plan put forward by the acquirer GE, the Commission found that ENI had no joint control over the combined entity. Id. See also Commission Notice, O.J. C 385/5, at 10, 36 (1994). 55. Merger Regulation, supra note 5, art. 3( 2 ), O.J. L 395/1, at 4 (1989). The absence of any coordination of competitive behavior is one of the two requirements that must be fulfilled under Article 3( 2 ) of the Merger Regulation for the setting up of a joint venture constituting a concentration. Id. 56. The Commission introduced the industrial leadership principle in a number of concentrations not involving a privatization. See, e.g., Thomson/Pilkington, Case IV/ M86, [1991] 4 C.M.L.R. 897; UAP/Transatlantic/Sun Life, Case IV/M141, [1992] 4 C.M.L.R. 1; Ericsson/Kolbe, Case V/M133, at 81 (Eur. Comm'nJan. 22, 1992) (not yet reported); British Airways/TAT, Case IV/M259, [1993] 4 C.M.L.R. 7; Linde/Fiat, Case IV/M256, [1992] 5 C.M.L.R. 2987; Commission Decision, OJ. C 305/11 ( 1993 ) (Arvin/ Sogefi). It is submitted that the industrial leadership principle "has links back to the Applying the industrial leadership principle, the Commission decided that the acquisition by Air France's newly created subsidiary, Finacta, of a 37.58% stake in the national air carrier Sabena from the Belgian State, which retained a 62.11% interest, created a concentrative joint venture between Air France and the Belgian State.5 7 Under the protocol of agreement, signed by Air France, Sabena, and the Belgian Government, that was notified to the Commission, Air France was granted rights that, the Commission stated, would go far beyond those ordinarily granted to minority shareholders for the protection of their financial investments. For example, not only would Finacta approve the designation of Sabena's President and Vice-President, but it would also, itself, appoint five out of the fourteen members of Sabena's Board. A three-quarters majority was required for Board decisions entailing substantial changes in the company's business strategy. Finally, Finacta would also appoint half of the members of Sabena's Executive Committee. On the other hand, the Commission noted that the protocol did not provide for any specific dispute resolution mechanism, so that the Belgian State, which remained the majority shareholder, had a preeminent position in the case of significant disagreements in Sabena's operation." In relation to the competitive relationship between the parent companies, and between each of them and Sabena, the Commission decided that the Belgian State could be ruled out as an actual or potential competitor since it had no involvement in any other airline and was highly unlikely to establish a new airline in the future. On the other hand, in the Commission's view, the possibility of effective competition from Air France was rendered remote by the preeminent influence Air France would exercise ,single economic enterprise' approach in Article 85 cases involving parents and their subsidiaries." 2 BUl-rERWORTHS COMPETITION L. VII/499 (Spearing & Brandeburger eds., 1994). For a critical view of this approach see Anand S. Pathak, Case Note on Ericsson/Kolbe, 2 EEC MERGER CONTROL REP. 656.1 (Kluwer 1992). The industrial leadership concept was apparently abandoned by the Commission since the 1994 Commission Notice on the distinction between concentrative and cooperative joint ventures, which replaced a previous notice published in 1990, makes no reference to it and clearly states instead that parent-to-venture coordination is relevant only insofar as it produces or reinforces parent-to-parent coordination. Commission Notice, o.J. C 385/1, at 3, 17 (1994). 57. Air France/Sabena, Case IV/M517, [1994] 5 C.M.L.R. Ml, 1 7-11. 58. Id. examined the aid's legality. Where a Member State failed to comply with such an interim decision the Commission could refer the matter directly to the Court, seeking interim measures under either the second subparagraph of Article 93( 2 ) or Article 169. The Commission has since made systematic use of this procedure and recently informed Member States that in appropriate cases it may, after giving the Member State concerned the borpepaocrhtuonfityprotocecdoumramlernetq,uoirredmerentht.e273recovery of aid paid out in D. State Aid to Public Undertakings It is in the context of these general developments in state aid law that the Commission's increasing scrutiny of the aid granted to public undertakings must be understood. As early as its first Competition Report in 1971,274 the Commission expressed its concern over state intervention to support ailing public undertakings. The main obstacle faced by the Commission in policing such state intervention was a lack of transparency. Often the Commission had no way of discovering financial transactions taking place between the state and public undertakings. In order to ensure the effective application of state aid rules to public enterprises, in 1980 the Commission issued Directive 80/ 723 on the transparency of financial relations between Member States and public undertakings under Article 90(3). ' 75 In essence, the Directive requires Member States to ensure that information concerning financial relations 'between public authorities and public undertakings is available to the Commission. In 1985276 and again in 1993,277 the scope of the Directive was extended to sectors not originally covered, namely: water, energy, postal services, telecommunications, transport, credit institutions, and manufacturing. The Directive defines both public undertakings and state aid broadly. Thus, not only the setting-off of operating losses but also the provision of capital and the foregoing of a normal return on funds invested may be regarded as state aid, and may, as a result, require prior investigation by the Commission.278 This has enabled the Commission to extend the application of the state aid rules to areas that were previously exempt from them. The Directive's validity has been confirmed by the Court,2 79 which, while acknowledging that the situations of public and private undertakings are not necessarily comparable, upheld the Directive, inter alia, on the basis that public undertakings may compete directly with private ones and should, therefore, be treated in the same way. In a communication to the Member States, the Commission summarized the so-called market economy investor principle by which the Commission determines whether a Member State's assistance of a public undertaking, for example, by way of capital injection, involves state aid.28 To apply the principle, the Commission examines whether a private investor seeking a reasonable return and ignoring all social, regional, and sectorial policy considerations would have been willing to make a similar investment. If not, the state assistance is deemed to be aid. This approach, which the Commission has applied consistently since it was announced, has been upheld by the Court in a number of cases. 281 Indeed, in Alfa Romeo, the Court developed the market economy investor principle, making a distinction between shortterm private investors and private holding groups with a longer term perspective.28 2 Public holding companies injected significant amounts of capital into Alfa Romeo, despite the fact that the company had been accumulating losses for twelve years and had not been restructured. The Court found that while the ent Directive was subsequently issued together with the Commission Communication 93/C307/03, O.J. C 307/3 ( 1993 ) (to Member States). 278. Commission Directive No. 80/723, art. 3, OJ. L 195/35, at 36 (1980). 279. France, Italy and UK v. Commission, Joined Cases 188 to 190/80, [1982] E.C.R. 2545. 280. 7 EC BULL., no. 9, at 94 (1984). 281. Belgium v. Commission, Case 234/84, [1986] E.C.R. 2280; Belgium v. Commission, Case C-142/82, [1990] E.C.R. 1-959 [hereinafter Tubemeuse]. 282. Italy v. Commission, Case C-305/89, [1991] E.C.R. 1-1603 [hereinafter Alfa Romeo]. 1996] PRiVATIZATION AND EC COMPETITIONLAW holding company of a private group might take investment decisions at the group level and in a wider economic context that would take into account the negative impact of short-term decisions on the group's reputation, the Commission had nonetheless been correct in deciding that the capital injected into Alfa Romeo qualified as state aid, since, even in the long term, no acceptable rate of return on the capital could be expected.2 83 The Commission, with the support of the Court, has applied the market investor principle and ordered Member States to recover aid, even where this has resulted in the public undertaking involved ceasing all economic activity.284 Boch 28 is a typical case. In Boch, the Court held that the Belgian Government was in breach of EC law for failing to recover state aid granted to Boch. The Court rejected the Government's submission that Boch's financial position was such that it could not repay the aid, indicating that the objective of abolishing the aid could be achieved by winding up the company, a process which the Belgian authorities could institute in either its capacity as shareholder or as creditor. The Commission's application of Directive 80/723 on transparency and the market economy investor principle, together with the systematic recovery of illegal state aid, has forced public undertakings to compete with private undertakings on equal terms. Consequently, Member States have been effectively prevented from pursuing non-economic goals through public undertakings. This has meant that much of the incentive for Member States to bear the economic burden of owning public undertakings has been removed. It has been suggested that this has led Member States, even if indirectly, to begin or to accelerate the process of privatization.2 16 While, in Italy, budgetary constraints were also an important factor, the pressure exerted by state aid rules is seen as one motive for the Italian privatization programs of the 19901s.27 The Agreement reached between the Commission and the Italian Government in 1993 on the indebtedness of Italian public enterprises clearly reflects this. 288 Under the Agreement, the debts of Italian public enterprises are to be frozen at the level reached at the end of 1993, and are to be gradually reduced between 1994 and 1996. Thereafter, the Government is to sell at least part of its interest in those enterprises wholly owned by it, so as to terminate the automatic state guarantee of their indebtedness. As illustrated by the compensatory contribution concept described above, the approval of aid, in particular in the context of restructuring, can be conditional on significant commitments from the aid recipient, such as closing excess capacity, reducing market share, or abandoning certain business activities.289 The principle of neutrality in Article 222 means that the Commission cannot officially seek a commitment to privatize a public undertaking as a precondition to approving state aid. Nonetheless, the Commission's approval of aid is often preceded by lengthy and intensive negotiations between the Member State granting the aid and the Commission. It is perhaps not uncommon during such negotiations for Commission officials to suggest that the donor state formally propose the privatization of the recipient public undertaking. This allows the Commission to avoid stating publicly that its decision to approve the aid was conditional on privatization. Although it is difficult to produce hard evidence that this occurs, the Commission's decision to approve aid to the French electronics group Bull 290 suggests that it does. In its decision, the Commission first referred to an independent consultants report finding that privatization was the only way for the Bull group to survive, the Commission then endorsed this view and stated that it was shared by the French Government, which then proposed to privatize the group.29 288. Commission Press Release Memo/94/67 of November 10, 1994 on Community State Aid Policy. See also Commission Notice, O.J. C 349/02 ( 1993 ) (agreement of aid from Italy to EFIM). 289. See Commission Guidelines, O.J. C 368/19, 1 3.2 et seq. (1994). 290. Commission Decision No. 94/1073/EC, O.J. L 386/1 (1994) (Bull). 291. Id. at 10 ("the Commission also recognizes the effect of Article 222 ... and, therefore, the Commission appreciates that it cannot request or oblige the privatization of Bull. However it is also apparent that the French Government itself wishes to privatize the group and has made this fact known to the Commission."). 1996] E. Constraintson PrivatizationImposed by State Aid Rules In recent years, the Commission has repeatedly stressed 9 ' the importance of liberalizing key sectors of the economy, which more often than not involves the privatization of those sectors. Aid that facilitates privatization is not exempt from the basic principle that state aid is incompatible with the common market, pursuant to the principle of neutrality in Article 222. Privatization aid can give the recipient an unfair competitive advantage that may prevent competition from developing, thereby defeating the purpose of liberalization. While Member States may chose to privatize public undertakings for policy reasons, in most cases, public undertakings are privatized because they have become a political or financial burden that the Member State can no longer bear. Where this is the case, the public undertaking involved will likely require some form of financial assistance in order to attract buyers. Such assistance, whether it is provided by the writing off of debts or by the conversion of debt into capital, will in most cases constitute state aid within the meaning of Article 92(1) and is, therefore, subject to investigation by the Commission. Because it may be difficult to determine whether the measures taken during a privatization constitute state aid, the Commission has established guidelines in a number of its decisions for determining when notification under Article 93(3) is necessary. 293 Where a public undertaking is sold on the stock market or is subject to an unconditional public offer involving non-discriminatory and transparent procedures the Commission considers that no aid is involved. If the sale is made via a restricted procedure, however, and is preceded by a debt write-off or is subject to conditions that would not be acceptable in a transaction between market economy investors, the sale must be notified as it may contain elements of state aid. The latter criterion is of particular interest in that it clearly implies that Member States should consider the winding up of an ailing public undertaking as an alternative to privatization, where this would be a cheaper alternative. In assessing the alternatives, the Commission disregards the costs a Member State may ultimately incur through the payment of unemployment or other social benefits. Since the Rover294 decision of 1988, the Commission has conditioned its consent to privatization aid on the establishment of a detailed and realistic restructuring plan enabling the undertaking to improve its long-term profitability, while at the same time reducing its production capacity. While the Commission will in most cases review privatization aid in accordance with the restructuring guidelines, 95 it will generally accept business plans drawn up by private investors without review, on the grounds that, unlike a Member State, a private investor will neither be tempted to bail out the privatized undertaking if the restructuring fails, nor have the financial capacity to do so. The Commission will not, however, clear privatization schemes that grant the private investor an unfair competitive advantage through overgenerous terms of sale, as was the case in Rover.296 On the same basis, the Commission held that the unlimited guarantee granted to the buyer of a joint-stock company from the state holding group EFIM was unlawful aid in the context of the privatization of public undertakings formerly owned by the state holding group EFIM.2 97 Although the Italian Government did not write off the debts of all privatized companies, Article 2362 of the Italian Civil Code 298 made the state holding company liable for all debts incurred by companies to be privatized.299 In 1993, a political agreement was reached between the Commission and the Italian Government imposing a strict ceiling on the debts of Italian State holding companies, thereby ensuring the effective application of EC rules to future Italian privatizations.3 °° The Commission also applied these criteria to the recent 294. Rover, OJ. L 28/1, at 92 (1989). 295. Commission Guidelines, OJ. C 368/19 (1994). 296. See Rover, O.J. L 28/1, at 100 (1989). The Commission decided that £331 million out of an envisaged aid of £800 million was incompatible with the Treaty and could therefore not be granted. Id. 297. Commission Notice, O.J. C 349/02 ( 1993 ) (agreement of aid from Italy to EFIM). 298. Art. 2362 C.c. (Italy). 299. Id. Article 2362 of the Italian Civil Code reads: "Sole Shareholder. For obligations of the company which arose during the period in which the shares are shown to have belonged to one person only, such person is liable without limitation in the case of insolvency of the company." Id. 300. Id. 1996] privatization programs of Greece 01 and Portugal. °2 Due to the severe economic situation in Greece during the privatization of the 208 undertakings owned by the Business Reconstruction Organization, the Commission approved certain state aids under Article 92(3) (b) as part of the privatization process. In doing so, the Commission may have adopted a generous approach to applying state aid rules, in the hope that privatization would mean that no further aid would be granted to undertakings involved. F. The Treuhand: The German Experience As well as creating problems for the Government of the Federal Republic, German unification raised a number of difficult issues concerning the extent to which the Commission could or should approve aid linked to the privatization of the undertakings formerly owned by the East German Government. At the moment of German reunification on October 3, 1990, the geographical scope of the EC Treaty was extended to cover the former East Germany. Although interim measures in relation to East Germany were granted in certain areas of Community law,313 state aid rules were applied with immediate effect. This point is worthy of note, since, in the accession treaties of most new Member States, transitional periods for the application of state aid rules were granted. In relation to East Germany, only two legislative changes were made, in relation to shipbuilding and the steel industry. A few months prior to reunification, the acting Government of East Germany set up the Treuhand, in cooperation with the West German Federal Government, as a holding company for all the undertakings previously controlled by the state, which were converted into either joint-stock companies or limited liability companies. After restructuring, the Treuhand held, at its peak, almost 10,000 companies and was the world's largest holding company. The law establishing the Treuhand. °4 stated that its aim was to restructure the economy of eastern Germany by privatizing formerly state-owned undertakings and financing necessary infrastructure investment with the proceeds of privatization. It soon became clear, however, that the rapid transition from a planned to a market economy, together with the loss of markets in the former COMECON 30 5 states, meant that virtually none of the companies then held by the Treuhand could survive without substantial investment. Thus, a number of measures, often including the financing of ongoing business operations, were necessary to prevent the economic collapse of entire regions and to prepare for a massive privatization program. The Commission indicated that the write-offs of debt incurred under central planning and exemptions from liability for environmental damage caused before July 1, 1990, would not be regarded as aid, since such measures did not confer any competitive advantage on the beneficiary.10 6 Furthermore, while credits and guarantees provided by the Treuhand to companies that remained under its ownership generally involved aid, the Commission decided to examine such cases flexibly, in view of the need to develop the economy of the former East Germany. °7 Although the Commission insisted on being notified of all measures that might potentially involve state aid, it announced that it would adopt a sensitive and flexible approach in the application of state aid rules3.0 8 In addition, the Commission unilaterally decided to speed up the procedure for reviewing notifications, reducing the time required from two months to fifteen or ten working days.30 9 Interestingly, the Commission cleared state aid under Article 92( 2 ) (c) in only two cases3."0 This mandatory exemption, which permits aid that compensates for economic disadvantages 1996] caused by the division of Germany, was not removed in the revision of the EC Treaty by the Maastricht Treaty, although the revision postdates reunification. In most cases, the Commission based its clearance of aid on Article 92(3) (c). Although it has by and large fulfilled its pledge to apply the state aid rules in a sensitive and flexible way, aid to sensitive sectors such as the automobile and textile industries was only permitted where privatization involved a reduction in the capacity of the undertaking concerned.3 11 The Commission's approach to privatization in eastern Germany may not, due to the particilar problems associated with the transition from a planned to a market economy, accurately reflect the Commission's approach to state aid granted in connection with privatizations in other regions of the European Union. It may indicate the Commission's approach, if other countries in transition, like Hungary, Poland, or the Czech and Slovak Republics, were to join the European Union before having fully converted to a market economy. 312 At the same time, the accession of such states is unlikely to raise as many state aid issues as German unification since they do not have the same financial resources as the Federal Republic of Germany. While the rules on state aid impose constraints on privatization, they are not intended to inhibit the privatization process, but to ensure that privatization does not distort competition. Moreover, the Commission perceives privatization as an important means of achieving greater efficiency and competitiveness and has used state aid rules effectively. Thus, while Article 222 declares the European Union to be neutral as regards public ownership, the structure of the EC Treaty and, in particular, the provisions concerning state aid mandate an economic environment conducive to private undertakings and a market economy. Article 222 must be understood in the light of these provisions. 311. Peter Schfitterle, Die Rechtsgrundlage ffir Beihilfen zur fiberwindung der wirtschaftlichen Folgen der Teilung Deutschlands, Europdische Zeitschrift ffir Wirtschaftsrecht 715 (1994). 312. See Michael Schfitte &Jan-Peter Hix, The Applicationof the EC State Aid Rules to Privatizations:The East German Example, in 32 COMMON MKT., L. REv. 215 (1995). The Europe Agreement, concluded between the European Union and Hungary, Poland, and the Czech and Slovak Republics, provides for state aid rules analogous to Article 92 of the EC Treaty. Id. IV. FREEDOM OFESTABLISHMENT, INVESTMENT, AND NON-DISCRIMJNATION A. The Scope of the EC Rules and Their Impact on PrivatizationPrograms Measures taken by a Member State in relation to the ownership of public enterprises earmarked for privatization, such as the creation of special governmental powers, may be of such a nature as to imply the scope of Article 222 of the EC Treaty. According to Article 222, the EC Treaty will in no way prejudice the rules in Member States governing the system of property 3 13 ownership. Nevertheless, to the extent that such measures are applicable to EU nationals, they should comply with Articles 52, 58, 73(b), and 221 of the EC Treaty on the freedom of establishment and investment and the free circulation of capital3. 14 The 313. See also, EC Treaty, supra note 1, art. 223(1)(b), [1992] 1 C.M.L.R. at 711 ("any Member States may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the common market regarding products which are not intended for specifically military purposes"). 314. EC Treaty, supranote 1,art. 52, [1992] 1 C.M.L.R. at 613-14. Article 52 reads: Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be abolished by progressive stages in the course of the transitional period. Such progressive abolition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as selfemployed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 58, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital. Id.; see Steinhauser v. City of Biarritz, Case 197/84, [1985] E.C.R. 1819 (the right of establishment implies the equal treatment of nationals and citizens of other Member States, and thus any discrimination based on national laws, regulations, or practices should be forbidden); Micheletti v. Delegacion del Gobierno en Cantabria, Case C369/90, [1992] E.C.R. 4239 (the EU rules prevent a Member State from denying the right of establishment to a national of another Member State, who was also a national of a third non-EU country); EC Treaty, supra note 1, art. 58, [1992] 1 C.M.L.R. at 616 ("Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States."). "Companies or firms' means companies or firms constituted under civil or commercial law, including cooperative socieEC Treaty rules on non-discrimination and the freedom of establishment and investment in other EU Member States may exercise a significant influence on the national privatization programs of the Member States. The prohibition of discrimination on grounds of nationality is set out in Article 6 of the EC Treaty, formerly Article 7 of the EEC Treaty, and has been enforced consistently in a large and well established body of case law.315 In the 1963 Refrigerators case, 3 16 the Court established the principle that differing treatment of non-comparable situations is not automatically discriminatory. Instead, material discrimination consists either of treating similar situations differently or of treating differing situations identically. As the principle of non-discrimination is of a general nature, it affects the whole spirit and scope of the EC Treaty. As a result, both in relation to privatizations and in other circumstances, the principle of freedom of establishment for European Union nationals within the Union, in Article 52, extended by Article 58 to legal entities, must be interpreted in light of the non-discrimination principle. EU natural and legal persons have the right to establish themselves in Member States other than their own in order to engage in economic activity under ties, and other legal persons governed by public or private law, save for those which are non-profit-making." EC Treaty, supranote 1, art. 73(b), [1992] 1 C.M.L.R. at 621. Article 73(b) reads: 1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. 2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited. Id.; id. art. 221, [1992] 1 C.M.L.R. at 711. Article 221 reads: Within three years of the entry into force of this Treaty, Member States shall accord nationals of the other Member states the same treatment as their own nationals as regards participation in the capital of companies or firms within the meaning of Article 58, without prejudice to the application of the other provisions of this Treaty. 315. See, e.g., Italian Republic v. Commission, Case 13/63, [1963] E.C.R. 165, 177 (Refrigerators Case); Wilhelm v. Bundeskartellamt, Case 14/68, [1969] E.C.R. 1, 13; 316. ItalianRepublic, [1963] E.C.R. at 177, [ 4. the same conditions as nationals of the Member State of establishment. In relation to privatizations, these rules imply that national provisions that limit the ability of EU investors to establish themselves in another EU Member State by acquiring sole or joint control of a company to be privatized in that Member State violate Article 52 and/or Article 58, at least to the extent that they discriminate between nationals and non-nationals. 3 17 It follows that restrictions on foreign ownership, if applicable to EU nationals, infringe Article 52 and/or Article 58 and may only be justified under the public policy and public security exceptions in Article 56 of the EC Treaty, 3 18 which are restrictively interpreted. 1 9 317. The relationship between privatization and non-discrimination has not, to date, generated a substantial amount of case law. In Commission v. France, Case 270/ 83, [1986] E.C.R. 273, the Commission argued that the French Republic failed to grant to branches and agencies of insurance companies from other Member State set up in France the benefit of the shareholders' tax credit known as "avoir fiscal" from which corresponding French undertakings benefit. This omission, and the discrimination resulting from it, was alleged to be a breach of Article 52 of the Treaty. In upholding the Commission's argument, the Court ofJustice stressed that Member States are obliged to grant EU nationals equal opportunities to participate in foreign undertakings, and held that establishment in a Member State may be achieved via the acquisition of a company. 318. EC Treaty, supra note 1, art. 56, [1992] 1 C.M.L.R. at 615-16. 1. The provisions of this Chapter and measures taken in pursuance thereof shall not prejudice the applicability of provisions laid down by law, regulation or administrative action providing for special treatment for foreign nationals on grounds of public policy, public security or public health. 2. Before the end of the transitional period, the Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament, issue directives for the coordination of the afore-mentioned provisions laid down by law, regulation or administrative action. After the end of the second stage, however, the Council shall, acting by a qualified majority on a proposal from the Commission and in cooperation with the European Parliament, issue directives for the coordination of such provisions as, in each Member State, are a matter for regulation or administrative action. 319. G. AMORELLI, LE PRIVATIZZAZIONI NELLA PROSPETTIVA DEL TRATrATO ISTITUTWO DELLA COMUNITA ECONOMicA EUROPEA 257 ( 1992 ). In Commission v. Luxemberg, a case concerning Luxembourg legislation requiring that EU nationals be resident in Luxembourg before being entitled to Luxembourg maternity allowances, the Court stated that the national legislation at issue failed to comply with the Treaty provisions concerning the freedom of movement of workers and with Article 52, explaining that all forms of discrimination, whether overt or implicit, are illegal and, therefore, prohibited. Commission v. Luxembourg, Case 111/91, (Eur. Ct. J. Mar. 10, 1993) (not yet reported). In MargueriteJohnston v. Chief Constableof the Royal Ulster Constabulary, which concerned a request for a preliminary ruling relating to the equal treatment between men and women as regards job opportunities, the Court held that the ability of Member States to impose restrictions in the name of public safety must be interpreted nar1996] In addition, Article 221 on the freedom of investment makes it unlawful for a Member State to restrict the ability of natural or legal persons established in another Member State to acquire minority interests in companies that it is privatizing. 3 20 In attempting to maintain domestic control of privatized undertakings, states generally adopt one of the following devices: (1) fixing a ceiling on the proportion of corporate capital that can be held by foreign investors, whether individuals or companies controlled by foreign nationals; and/or ( 2 ) stipulating that the board of directors and management must include a given proportion of nationals. These systems have been adopted with a number of slight variations in the privatization programs of several Member States. The conformity of such systems, however, and in particular those adopted by the United Kingdom and France, with the EC Treaty rules on non-discrimination and freedom of establishment has been questioned. An in-depth survey of the legislation of all Member States on this issue would clearly be beyond the scope of this Article. It may, nonetheless, be worthwhile to describe some of the principal features of the national legislation whose consistency with rowly, and that it would not be correct to conclude that the Treaty creates any reservation in favor of measures motivated by the protection of the essential interests of state security. Marguerite Johnston v. Chief Constable of the Royal Ulster Constabulary, Case 222/84, [1986], E.C.R. 1684. In particular, the Court held that: the only articles in which the Treaty provides for derogations applicable in situations which may involve public safety are Articles 36. 48, 56, 223 and 224 which deal with exceptional and clearly defined cases. Because of their limited character those articles do not lend themselves to a wide interpretation and it is not possible to infer from them that there is inherent in the Treaty a general proviso covering all measures taken for reasons of public safety. Id. 26. 320. EC Treaty, supra note 1, art. 221, [1992] 1 C.M.L.R. at 711. Commentators have taken the view that the right to make investments, in Article 221, is part of the right of establishment, and thus implies the right to make investments abroad. Id. The principle of freedom to make direct investments is confirmed by a Directive of June 1988. Council Directive 88/361, art. 1, O.J. L 178/5, at 6 (1988). This Directive implemented Article 67 of the EEC Treaty (now Article 73(b) of the EC Treaty), which reads in relevant part, "Member States shall abolish restrictions on movements of capital taking place between persons resident in Member States." EC Treaty, supra note 1, art. 73(b), [1992] 1 C.M.L.R. at 621. See also R. Kovar, Nationalisations- Privatisationset Droit Communautaire,inJ. SCHWARZE, DISCRETIONARY POWERS OF THE MEMBER STATES IN THE FIELD OF ECONOMIC POLICIES AND THEIR LIMITS UNDER THE EEC TREATY 100 et seq (1988); E. DEL CASALE, LE PRVATIZZAZIONI IN EUROPA 151-52 (1987); G. AMORELLI, supra note 319, at 256. the EC rules on freedom of establishment and non-discrimination has come under scrutiny. B. The United Kingdom Approach The United Kingdom has introduced a form of indirect control through the "golden share" system. This system is intended to ensure that some degree of domestic and governmental control is maintained over the governing bodies, shareholder base, and principal decisions of privatized companies. The U.K. "golden share" rules are not statutory provisions, being instead contained in the privatized companies' articles of association; a golden share is, in effect, a special share held by the Government or its nominee. Certain decisions, as specified in each company's articles of association, can only be put into effect with the golden shareholder's written consent.321 The powers allowing the Government to control the proportion of foreign ownership of capital include veto rights, which allow the Government to limit the proportion of the privatized company's capital held by foreign investors, as well as to prevent transfer of the company's business or its liquidation. 2 It may be worth mentioning that, at the time of their privatization, the articles of Britoil and Enterprise Oil contained golden share provisions aimed at protecting these companies from hostile takeovers. In particular, they provided that, in given circumstances, the golden share holder would have the right to exercise voting 5 23 majority. In addition, the golden share rules may also grant the Government the right to monitor the composition of the board of directors. In the case of certain strategic privatized companies, 3 24 British citizenship is a requirement for appointment to a 1996] top executive position. C. The French Approach The limits on foreign investment in privatized companies originally enacted by French law were of an even stricter nature. The French law of 1986325 created the "action sp~cifique,"3 6 a variant of the U.K. golden share, which was intended to grant the Government a number of special powers to protect the national interest. These powers included: a requirement that the Ministry of the Economy approve any purchase of shares in the privatized companies in excess of certain statutory thresholds; the right to appoint one or two members of the board of directors or of the surveillance committee of such companies; and the power to veto any transfer of the company's business that could be deemed to jeopardize the national interest. In response to objections raised by the EU Commission, the French law was amended in 1993. The 1993 amendments repealed, as regards EU nationals, the prohibition on the purchase by foreign investors of more than 20% of the shares of privatized companies, although they maintained the requirement that the Ministry of' Economy approve purchases by foreign investors, including EU nationals, of more than 5% of the corporate capital of companies operating in strategic sectors. Commentators 327 have questioned the legality of both the U.K. and French legislation to the extent that they discriminate between national and foreign investors on the grounds that they may potentially be inconsistent with the principles of freedom of establishment and investment. One commentator 328 has suggested that, whereas the U.K. legislation could be regarded as a legitimate protection of national interests, the amendments of 1993 to the French law of 1986 were necessary, even in the absence of any formal challenge to it, because the original legislation differentiated, without apparent public policy justification, between national and foreign investors in a manner inconsistent 325. Law No. 86-912 of August 6, 1986 (Fr.), amended &yLaw No. 92-923 ofJuly 19, 1993 (Fr.). 326. Law No. 86-912 of August 6, 1992, art. 10 (Fr.). 327. See, e.g., Abate, supra note 239; Amorelli, supra note 319, at 256; TURRINI, PR1VATISATIONS ET DROIT COMMUNAUTAIRE, IN REVUE DES AFFAIRES INTERNATIONALES 823 ( 1993 ). 328. AMORELLI, supra note 319, at 256. with the wording of Article 52 of the EC Treaty. Even after the 1993 amendment, it is questionable whether the French privatization law can be regarded as in full compliance with the EC Treaty. D. The ItalianApproach A somewhat different approach has been taken by the recent Italian legislation on privatization.3 29 Law No. 474 provides that the sale of shares held by the State or by public entities must normally take place by public offering, through direct negotiations, or through a combination of the two."' If a sale is carried out by direct negotiation, the Government can select certain investors with adequate entrepreneurial capacity to establish a core group of strategic shareholders. 3 ' As to public interest companies, such as those in the sectors of defense, transportation, telecommunications, energy sources, and other public services, Law No. 474 stipulates that, before the State transfers control in them, they must adopt in their by-laws a golden share clause, the precise contents of which is to be defined in a governmental decree, granting the Minister of the Treasury a number of special powers, including requirements that the Minister approve significant capital participations, certain shareholders' agreements regulating voting, and the transfer or purchase of shares, as well as powers to veto transfer of the business or dissolution of the company, and powers to appoint at least one director and one auditor.3 3 2 The Italian law on privatizations appears not to contain any provisions with overt or indirect discriminatory intent or effect.3 3 3 In particular, Law No. 474 does not discriminate on grounds of nationality nor does it hinder foreign investment. The principal objectives of the Law include the prevention of "creeping acquisitions" after the Government has relinquished control through a public offering of shares, which may disadvan329. Law No. 474 ofJuly 30, 1994 (Italy). 330. Id. art. 1.2. 331. Id. art. 1.3. 332. Id. arts. 2.la-2.1d. 333. Same conclusions can be drawn as to the German privatization law. According to § 3 of the Treuhandanstalt by-laws, the Treuhandanstalt should let both national and foreign investors participate in the shareholdings of the companies to be privatized. tage small investors and avoid paying any premium to the State. To this end, the Law provides that equity ownership limits iiitroduced in the by-laws of privatized companies may be exceeded only through a public offering for the purchase of the majority of the company's shares. Law No. 474 also attempts to enhance "shareholders' democracy" in privatized companies, for instance, by creating the possibility of voting by mail and reserving at least one-fifth of the seats on the board of directors for minority shareholders.334 Prominent Italian legal scholars333 have nonetheless criticized certain aspects of the Law that appear notto be fully consistent with established principles of Italian corporate law. The Commission for its part, appears to have taken the view that, since the Law reserves a significant margin of discretion to the Government in its implementation, there is a risk that the Law might be applied in a discriminatory manner. If that were to occur, however, the infringement of EC law would clearly result from the Italian Government's application of the Law, rather than from the Law itself. V. PUBLIC PROCUREMENTISSUES A. The Scope of the EC Directives on Public Procuremznt The adoption of measures intended to establish Community-wide competition in the public procurement sector constitutes an important part of the completion of the internal market. 36 Community legislation in the field of public procurement is specifically designed to prevent government authorities, other bodies subject to public law, and public and private undertakings carrying out services of public utility from discriminating 334. Law No. 474 art. 4 (1994) (Italy). 335. See G. Rossi, Privatizzazioni e Diritto Societario, RIVISTA DELLE SOCIETA 390 (1994). Criticism has been directed at the Italian "golden share" system. Id. See also R. Costi, Privatizzaionee Diritto delle Societd per Azioni, GIURISPRUDENZA COMMERCIALE I 77 (1995). 336. See Commission of the European Communities, Completing the Internal Market: White Paper from the Commission to the European Council, COM(85) 310 Final, at 23 (June 1985). See also L.A. CARSWELL, & X. DE SARRAu, LAW & BUSINESS IN THE EUROPEAN SINGLE MARKET ( 1993 ); I. Van Bael, PublicProcurementand the Completion of the InternalMarket: Law andPractice, 1 LEGAL IssUEs EUR. INTEGRATION 21 (1989); Laurence Gormley, Some Reflections on Public Procurement in the European Community, EUR. Bus. L. REv. 63 (Nov. 1990); J. Winter, Public Procurementin the EEC, 28 COMMON MKT L. REv. 741 ( 1991 ). against contractors from other Member States. 3 7 The Commission's 1985 White Paper acknowledged the need for amendment of the public procurement directives then in force and the extension of their limited scope. The White Paper identified specific problems in opening up procurement in the utilities sectors, however, such as water, energy, transport, and telecommunications, since the entities involved in awarding contracts in such sectors included not only bodies organized under public law or otherwise government-owned, but also private companies with special or exclusive rights. The approach adopted by the Council in a new set of directives governing public procurement 33 8 was to apply the public procurement rules to both types of organization. 339 The public procurement directives apply to contracts for pecuniary interest concluded in writing between a provider of supplies, services, or construction works and a contracting authority.3 40 When awarding public service, public supply, and public works contracts, bodies and authorities to which the public procurement directives apply are, in principle, obliged to follow the procedures set out in the directives, which are intended to ensure that public contracts are awarded in a non-discriminatory and pro-competitive manner. B. The "GeneralDirectives" and the "Excluded Sectors Directive" A distinction should be drawn, however, between the scope 337. Commission v. Ireland, Case 249/81, [1982] E.C.R. 4005. The Court of Justice confirmed that buy-national policies that partition markets are incompatible with the free movement of goods and Community law in general. Id. 338. Council Directive No. 92/50/EEC, O.J. L 209/1 ( 1992 ) (relating to the coordination of procedures for the award of public service contracts); Council Directive No. 93/36/EEC, O.J. L 199/1 (1993) (coordinating procedures for the award of public supply contracts); Council Directive No. 93/37/EEC, O.J. L 199/54 ( 1993 ) (concerning the coordination of procedures for the award of public works contracts); and Council Directive No. 93/38, O.J. L 199/84 ( 1993 ) (coordinating the procurement procedures of entities operating in the water, energy, transport and telecommunications sectors). 339. See E.M.F.Temple & P.F. Clarke, Public Procurement Contracts, IRCL, 1995, at 32 (Explaining that, as to utility sectors, "there were two choices, either an approximation of the two types of organization within the directives, or an approach via Articles 85, 86, and 90, the competition Articles of the EC Treaty. In the event, the EC Commission chose the former"). 340. Council Directive No. 92/50, art. 1(a), O.J. L 209/1, at 3 ( 1992 ); Council Directive No. 93/36, art. 1(a), OJ. L 199/1, at 2 ( 1992 ); Council Directive No. 93/37/ EEC, art. 1 (a), O.J. L 199/54, at 55 ( 1993 ); Council Directive No. 93/38/EEC, art. 1(4), OJ.L 199/84, at 88 ( 1993 ). PR!VATIZATION AND EC COMPETITION LAW of Directives 92/50, 93/36, and 93/37 ("general directives"), and that of Directive 93/38 concerning procurement in the utilities sectors ("excluded sectors directive"). The main difference, for our purposes, between the two sets of provisions concerns the definition of the contracting authorities to which the directives apply. In the general directives, this includes the state, regional and local authorities, bodies governed by public law, and associations formed by one or more of such authorities or bodies governed by public law, regardless of the sector in which they operate. A body is considered to be governed by public law where it is established for the specific purpose of meeting needs in the general interest, meaning needs not of an industrial or commercial nature. All other legal entities, even if wholly or partly owned by private shareholders, established to meet general interest needs that are ultimately financed by or controlled by governmental authorities, are regarded as bodies governed by public law. 41 Article 1(b) of the general directives excluded from their scope of application the bodies having an "industrial or commercial character." It seems, therefore, that public procurement rules will not play a role in the privatization of state-owned manufacturing or commercial companies. It cannot be ruled out, however, that Member States will resolve to privatize a number of entities performing functions of general interest, currently organized as public bodies, such as the postal or the health services. Were this to happen, the companies in charge of providing such services to the public would no longer be subject to public procurement rules following privatization, unless they continue to rely on the state or local authorities as their main source of funding. The excluded sector directive covers the water, energy, transport, and telecommunication sectors and applies not only to public authorities and public undertakings,3 42 but also to pri341. Council Directive No. 92/50, art. 1(b), O.J. L 209/1, at 3 ( 1992 ); Council Directive No. 93/36, art. 1 (b), OJ. L 199/1, at 3 ( 1992 ); Council Directive No. 93/37/ EEC, art. 1(b), O.J. L 199/54, at 55 ( 1993 ). 342. Council Directive 93/38, art. 2, O.J. L 199/84, at 89 ( 1993 ). According to Article 1.1, " 'public authorities' shall mean the State, regional or local authorities, bodies governed by public law, or associations formed by one or more of such authorities or bodies governed by public law." Id. art. 1(1), OJ. L 199/84, at 87 ( 1993 ). Article (1)2 defines "public undertaking" as "any undertaking over which the public authorities may vate undertakings that operate on the basis of special or exclusive rights granted by the competent authorities of the Member States. To the extent that undertakings earmarked for privatization are not already organized in the form of a corporation, such reorganization is normally effected before privatization takes place. This implies that, even if undertakings entrusted with such activities were to be privatized, the fact of privatization would not affect the application of the excluded sectors directive, provided and to the extent that, the special or exclusive rights referred to under Article 2.1 (b) and described under Article 2.3 of the excluded sectors directive remain unaffected.343 An exception to the rules described above in the telecommunications sector is contained in Article 8.1 of the excluded sector directive.344 Public procurement rules do not apply to contracts that contracting entities operating public telecommunication networks or providing telecommunication services award for purchases, intended only "to enable them to provide one or more telecommunications services, where other entities are free to offer the same services in the same geographical area and under substantially the same conditions."34 5 Thus, to the extent that the provision of such services is liberalized, the public procurement rules should cease to apply. C. The British Telecommunications Case Guidance as to the precise meaning of Article 8.1 of the excluded sectors directive, the effects of which are potentially farreaching, is likely to be offered by the British Telecommunications case,346 which is currently pending before the Court of Justice. exercise directly or indirectly a dominant influence by virtue of their ownership of it, their financial participation therein, or the rules which govern it." Id. art. (1)2, O.J. L 199/84, at 87-88 ( 1993 ) The existence of a dominant influence exercised by a public authority may be presumed, if the latter holds the majority of the undertaking's capital, controls a voting majority or has the right to appoint more than half of the board of directors. Id. 343. Id. art. 2.3, O.J. L 199/84, at 90 ( 1993 ) ("For the purpose of applying paragraph 1(b), special or exclusive rights shall mean rights deriving from authorizations granted by a competent authority of the Member State concerned, by law, regulation or administrative action, having as their result the reservation for one or more entities of the exploitation of an activity defined in paragraph 2."). 344. Id. art. 8.1, O.J. L 199/4, at 92 ( 1993 ). 345. Id. 346. Italy v. Commission, Case 41/83, [1985] E.C.R. 873, 21-23. Reference for PRIVATIZATION AMD EC COMPETITIONLAW British Telecommunications ("BT") was privatized in 1984, and only 22% of its corporate capital is now held by public entities. 4 7 BT's privatization was immediately followed by the liberalization of telecommunications services, including voice telephony, in the United Kingdom. In the British Telecommunications case, BT is seeking judicial review of the application of the U.K. regulations implementing the excluded sectors directive. The regulations at issue deny BT the benefit of the "liberalization" exception, while extending it to all other licensed U.K telecommunications operators but one. The central issue to be addressed by the Court is the interpretation and definition of the notion of freedom to offer the same services on equal conditions. Two interpretations of this notion may have been suggested, with opposite consequences as to the impact of public procurement rules on privatization. A more formalistic but straightforward reading of Article 8.1 is that the freedom to provide services refers only to the legal freedom introduced by EC directives and/or domestic legislation enacted in connection with the privatization of the local telecommunications operator, to offer competitive telecommunications services. A more sophisticated interpretation, but also one likely to be more difficult to apply, is that the concept of freedom to provide services requires de facto equality of competitive conditions. This is the interpretation supported by the Commission and the U.K. Government, which rely for support on recitals 9, 11, and 13 of the Directive." 8 Were the Court of Justice to uphold this a Preliminary Ruling, The Queen v. the Secretary of State for Trade and Industry, ex parte: British Telecommunications plc, Case C-302/94, O.J. C 380/3 (1994). 347. See R. Arrigoni, Regolazione e Gestione nelle Public Utilities:Principiodi Separazione e Libera Concorrenzanell'Applicazione di PrincipiCostituzionali e Comunitari, RvIsTA TRIMESTRALE Dt Dutr-ro PUBBLICO, 1995, at 96; see also Flynn, supra note 321, at 183. 348. See Council Directive 93/38, O.J. L 199/84, at 84-85 ( 1993 ). Recital number 9 reads: "[W]hereas the need to ensure a real opening-up of the market and a fair balance in the application of procurement rules in these sectors requires that the entities to be covered must be identified on a different basis than by reference to their legal status." Id. Recital number 11 reads: Whereas, among the main reasons why entities operating in these sectors do not purchase on the basis of Community-wide competition is the closed nature of the markets in which they operate, due to the existence of special or exclusive rights granted by the national authorities, concerning the supply to, provision or operation of, networks for providing the service concerned, the exploitation of a given geographical area for a particular purpose, the provision or operation of public telecommunications networks or the provision of public telecommunications services. latter interpretation, privatization and liberalization of the utilities sectors would not terminate the applicability of public procurement legislation, if the former state-owned monopolist continued to enjoy a dominant position. CONCLUSION The neutral stance originally enshrined in the EC Treaty between public and private ownership has given way to an environment more conducive to privatization in Europe, a movement that raises issues primarily under two sets of Treaty rules. The first, Articles 90(1) and 86 of the EC Treaty have significantly influenced most of the processes of liberalization in the Community. Secondly, the rules on state aids, applied with renewed vigor, have become a powerful force driving the Member States toward privatization. The existing competition rules of the Community, especially the Merger Regulation and Articles 85 and 86 of the EC Treaty, can potentially be used to control the entire privatization process. If these rules are strictly enforced, that process offers a historic opportunity to modernize and render more dynamic the structure of the European market. In sum, liberalization and privatization are two different aspects of the same complex process and EC competition rules may serve as a means of strengthening the link between them. In particular, while liberalization has been made possible in Europe thanks to the application of the competition rules, via Article 90, privatization should be shaped both by applying competition rules and, above all, by the need to ensure the complete and effective liberalization of markets. 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 mission ..................................... 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 NonDiscrimination ....................................... 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 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 4. See EC Treaty, supra note 1, art . 86 , [ 1992 ] 1 C. M.L.R. at 627- 28 . 5. See Council Regulation No. 4064 /89, O.J. L 395/1 ( 1989 ) (setting forth control of concentrations between undertakings), amended by O . J. L 257 /13 ( 1990 ) [hereinafter Merger Regulation]. 6. EC Treaty, supra note 1 , art. 5, [1992] 1 C. M.L.R . at 591. 7. GB-INNO v . ATAB, Case 13 /77, [1977] E.C.R. 2115 . 8. EC Treaty, supra note 1 , art. 85 , [ 1992 ] 1 C. M.L.R . at 626. 9. See Meng , Case C-2/91 (Eur. Ct.J. Nov. 17 , 1993 ) (not yet reported); Bundesan- stalt ffir den Gfiterfernverkehr v . Gebrfider Reiff, Case C-185/91 (Eur. Ct. J. Nov . 17 , 1993 ) (not yet reported) [hereinafter Reiff]; Ohra Schadeverzekeringen , Case C- 245 / 91 ( Eur. Ct .J. Nov. 17 , 1993 ) (not yet reported) [hereinafter Ohra] . See also Germany v. Delta Schiffahtrs- und Speditionsgesellschaft , Case C- 153 /93, [1994] E.C. R. 1- 2517 . 10. RTT v. GB-INNO , Case C - 18 /88, [1991] E.C. R. 1 -5941 (holding that state mea- nance of equipment violate Articles 90 ( 1) and 86 of Treaty). 11 . See , e.g., H6fner v. Macrotron, Case C- 41 /90, [1991] E.C. R. 1 -1979 (stating that cruitment services could result in violation of Articles 86 and 90(1) if mere exercise of right would oblige monopolist to abuse its dominant position, for example, where it 22 . EC Treaty, supra note 1 , art. 222 , [ 1992 ] 1 C. M.L.R . at 711 . 23. See Sacchi , Case C- 155 /73, [1974] E.C.R. 409 , 14 . As established by the nature relating to the public interest . Sacchi, [1974] E.C.R. 409 , 1 14 . Moreover, the Treaty does not prohibit the creation of all state monopolies , since Article 37 ( 1 ) only ENEL, Case 6 / 64 , [1964] E.C.R. 585 , 598 . 24. See DEWOST ET AL., 15 LE DROIT DE EA COMMUNAUTt ECONOMIQUE EUROPEENNE 423 ( 1987 ). 25 . Leigh Hancher & PietJan Slot , Artide 90 , 11 EUR . COMPETITION L. REv . 35 , 36 ( 1990 ). 26 . See , e.g., PIERRE GUIStAIN, LES PRIVATISATIONs 71 ( 1995 ). 27. EEC Treaty, supra note 1 , 298 U.N.T.S. 11 , 1973 Gr.Brit. T.S. No. 1 . 273. Commission Communication , OJ. C 156/05 ( 1995 ) (to member States advis- counteract infringements of Article 93) . 274. COMMISSION OF THE EUROPEAN COMMUNITIES , FIRST REPORT ON COMPETITION POLICY 1971 , at 192 ( 1972 ). 275 . Commission Directive No. 80 /723, O.J. L 195/35 ( 1980 ), amended by O .J. L 229 /20 ( 1985 ) (Transparency of Financial Relations Directive) (concerning trans- parency of financial relations between Member States and undertakings ). 276 . Commission Directive No. 85 /413, amending Commission Directive No. 80 / 723, OJ . L 229/20 ( 1985 ). 277 . Commission Directive No. 93 /84, amending Directive No. 80 /723, O.J. L 254/ 16 ( 1993 ). An earlier Commission Communication had been annulled by the Court, 273/2 ( 1991 ); France v. Commission, Case C 325 /91, [1993] E.C. R. 1- 3283 . The pres283 . Commission Guidelines, O.J. C 368 /19 ( 1994 ). 284 . Tubemeuse , Case C- 142 /87, [1990] E.C. R. 1- 959 . 285 . Commission v. Belgium, Case 52 /84, [1986] E.C.R. 100 , 104 . 286. Abate, supra note 239, at 35 . 287. Id . For further reference to Gobbo-Cazzola, see Privatizzazionie concorrenza ,in AcQuIsIZIONI FuSIONI CONCORRENZA 64 ( 1993 ). 292. COMMISSION OF THE EUROPEAN COMMUNITIES , XXIIIRD REPORT ON COMPETI- TION 2P9O3.LICCYom19m93is , siaotn31 , 37 ( 1994 ). Notice, O.J. C 253/3, at 4 ( 1993 ) (Portugal decision) (advising other Member States and interested parties concerning Law No 11/90 of 5 April 1990 on the program for the reprivatization of enterprises nationalized after 25 April 1974 in Portugal) . 301 . See Panayotis Bernitsas, State Aids and Public Undertakings, in Harden, STATE AID: COMMUNITY LAW AND POLICY ( 1993 ). 302 . See Commission Notice , O.J. C 253/3 ( 1993 ). On October 10 , 1995 , the Com- petrochemical company. CNP, created in 1972, has been a public sector company since 1982. Id. 303 . Commission Regulation No. 2761 /90, O.J. L 267/1 ( 1990 ); Council Regula- tion No. 3569 /90, O.J: L 353/7 ( 1990 ). 304. BeschluB zur Grfindung der Anstalt zur treuhdnderischen Verwaltung .des Volksverm6gens (Act on the Establishment of the Institute entrusted with managing the peoples assets) of March 1 , 1990 , Gbl. (DDR) I Nr . 14 , p. 10 7 . 305. Council for Mutual Economic Assistance. 306. COMMISSION OF THE EUROPEAN COMMUNITIES , XXIsT REPORT ON COMPETITION POLICY 1991 , at 157 , 249 ( 1992 ). 307 . Id . 308 . The Community and German Unification, Communication presented by the Commission to the Council on August 22 , 1990 , in E.C. Bull. Suppl . 4 /90, at 27 . 309. COMMISSION OF THE EUROPEAN COMMUNITIES , XXIID REPORT ON COMPETITION POLICY 1992 , at 212 , 349 ( 1993 ). 310 . Commission Regulation No. 2611 /92, O.J. L 263/9 ( 1992 ) (Potsdamer Platz); Commission Press Release, IP (94) 300 ( 1994 ). Sotgiu v . Deutsche Bundespost, Case 152 /73, [1974] E.C.R. 153 , 162 ; Knoors v. Secre- tary of State for Economic Affairs, Case 115 /78, [1979] E.C.R. 399 , 407 ; Oebel, Case 155 /80, [1981] E.C.R. 1993 , 2005 . 321. J. Flynn , British Report to the XVI FIDE Congress on Competition Law Impli- cations of Deregulation and Privatisation 175 - 77 ( 1994 ). See generally C.D . FOSTER, ( 1992 ) ; see C. VELIANOVSKY, SELLING THE STATE: PRIVATIZATION IN BRITAIN ( 1988 ) ERNMENT GOES PRIVATE: SUCCESSFUL ALTERNATIVES TO PUBLIC SERVICES ( 1988 ). 322 . See Kovar, supra note 320 , at 100; J. Vickers & V. Wright, Special Issue on the Politics of Privatisationin Western Europe, WEST EUR . POLrrICS, Oct. 1988 , at 29; DEL CA- SALE , supranote 320 . Seegenerally Flynn, supra note 321, n.4 (describing UK legislation) . 323 . Flynn, supra note 321, at 170- 71 . 324. E.g., Rolls Royce and British Aerospace, cited after Flynn, supra note 321 , at


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Mario Siragusa. Privatization and EC Competition Law, Fordham International Law Journal, 1995,