Introduction

 Castren & Snellman has reported on the acquisition of Tuko Oy ("Tuko") by Kesko Oy ("Kesko") in December 1996. We have also reported that the Commission of the European Union prohibited the acquisition of Tuko by Kesko in its decision on 20 November 1996. This report is an analysis of the Kesko-Tuko case and its effects generally on acquisitions in Finland.

The Kesko - Tuko transaction was consummated between two Finnish companies operating mainly in the daily consumer goods sector. The acquisition in itself did not have Community Dimension, i.e. the turnover thresholds of Regulation 4046/89 were not met. However, the Finnish competition authorities submitted the case to examination by the Commission by using the so called "Dutch clause" of the Merger Regulation. In Kesko - Tuko the Commission prohibited an acquisition in the trade sector for the first time. This decision has led to a large domestic public discussion about the need for national merger control legislation and it has added momentum to the preparation of new legislation in Finland.

Structure of the Kesko Group

 The Kesko Group consists of central entities (Kesko and related companies) and the so-called K-retailers. K-retailers are, from a company law perspective, independent legal entities, but connected to Kesko in terms of sourcing, marketing operations, joint presentation of logos, the ownership by the central entities of retailing premises and different types of financial commitments.

Kesko - Tuko acquisition

 Kesko purchased the majority share holding in Tuko, its main Finnish competitor in the daily consumer goods and cash & carry sales of daily consumer goods sectors on 27 May, 1996. The purchase price exceeded FIM 2 billion (about USD 425 million). The net sales of Kesko amounted to FIM 26,4 billion and of Tuko to FIM 11,4 billion in 1995. The combined market share of Kesko and Tuko in the retail market for daily consumer goods was close to 60 %, whether assessed at local, regional or national level. After the acquisition Kesko ranked among the 20 biggest undertakings operating in the retail trade sector in Europe.

By the acquisition Kesko aimed at ensuring the competitiveness of its wholesale and retail trade. The main part of Tuko's business operations are carried out through its subsidiaries which are engaged in the same fields. The acquisition strengthened Kesko's position significantly in the trade of foodstuffs, hardware and builders' supplies as well as in the department store and mail order businesses.

Submission to Commission

 Since Finland has no national merger control legislation, the acquisition was not notified to the Finnish competition authorities. However, after the deal had been effected and made public, the Finnish Office of Free Competition decided that the acquisition should be submitted to the Commission for examination. It was expected that the Commission would impose conditions on the acquisition. A formal request for investigation under Article 22(3) of the EC Merger Regulation was made to the Commission on 26 June, 1996.

Kesko challenged this view and argued that the acquisition only contributed to an improvement in the structure of domestic trade in Finland and would not have the effects on trade between the EU Member States as referred to in the Merger Regulation. Kesko did not for this reason expect the Commission to interfere in this matter.

Commission's preliminary views

 The Commission issued a statement of objections on 17 September 1996 in which it stated as its preliminary view that the concentration could lead to a creation or strengthening of a dominant position through which effective competition in Finland would be significantly impeded. The Commission argued that the concentration might therefore be declared incompatible with the common market under the Merger Regulation. Having received the statement Kesko made a proposal to the Commission to sell parts of Tuko. According to the proposal Kesko would have reconstructed a wholesale company (TukoSpar Oy) into a wholesale, cash & carry and retail company for daily consumer goods and this wholesale company would have been sold outside the Kesko Group during 1997. The turnover of this company would have represented about 40 % of Tuko's turnover for 1995. This proposal did not, however, lead to an acceptable solution for competition purposes.

Prohibition decision by the Commission

 In its decision of 20 November 1996 the Commission found that the Tuko acquisition lead to a concentration incompatible with the common market and stated that as a result of the concentration Kesko Oy would acquire a dominant position on the Finnish markets for retail of daily consumer goods and cash & carry sales of daily consumer goods, which would significantly impede effective competition on the retail and cash and carry markets for daily consumer goods in Finland. Moreover, the Commission found that the operation would affect inter-state trade through its influence on the importation of daily consumer goods into Finland and the creation of barriers to entry for potential competitors from other Member States.

In the Commission's analysis the Kesko Group was considered as a centrally planned retailing organisation into which Tuko retailers were being integrated. The Commission found that the combined retail market share of Kesko and Tuko was at least 55% and that this position was further enhanced by their strength as regards large retail outlets, control of business premises, customer loyalty schemes, private label products, distribution systems and the considerable power of their central organs as buyers of daily consumer goods from manufacturers of such goods.

As the concentration had already been implemented, the Commission stated that it would, in a separate decision based on Article 8(4) of Regulation 4046/89, adopt appropriate measures in order to restore conditions of effective competition. It is expected that the Commission will take the separate decision not earlier than by the end of February 1997. In the meantime, Kesko will continue to look for suitable arrangements to eliminate the dominant position in the Finnish markets for retail of daily consumer goods and cash & carry sales of daily consumer goods. The general view of the public seems to be that a Finnish consortium is looking into the acquisition possibilities.

Drawbacks of the current system

 The Kesko-Tuko case has brought the lack of national merger control legislation in a new light. Representatives of industry and commerce have generally been happy with the lack of any obligation to notify mergers and acquisitions, but now also the drawbacks of the current system have gained a lot of attention. A problem is that there are no statutory rules as to when national competition authorities should take recourse to the "Dutch clause" and bring the matter to the Commission. Thus, it is difficult to assess whether a concentration will be subject to examination, which is not satisfactory.

According to Article 22(4) of the EC Merger Regulation a Member State has to make the request within one month after the date on which the concentration was made known to the Member State or effected. This period begins on the date of the first of these events. A problem is that if there is no national system of prior notification, the competition authorities may only get to know potential cases to be submitted to the Commission after the concentration has already been effected. Thus, the Commission will examine cases of already effected concentrations. This means that it is not possible for the parties representing the undertakings involved in the concentration to negotiate with the Commission before the acquisition in order to find an acceptable form for the concentration. The total costs of repealing a merger or acquisition which has already been implemented can be very high.

In other than the Dutch clause -cases falling under the Merger Regulation informal contacts with the Commission prior to the actual notification of a concentration are part of the normal practice. In the normal procedure it is possible to modify the arrangement to be acceptable to the Commission or give up the plan at a stage where the merger of business operations of undertakings has not taken place yet.

Immediate consequences of Kesko - Tuko case in Finland

 The experience in the Kesko - Tuko case has showed that even in the absence of a national merger control legislation undertakings planning a large acquisition or merger in Finland may have to notify the concentration informally to the Office of Free Competition before effecting it. This should be done in order to find out the authority's view on the possible use of the Dutch Clause, and in order to make the one month time limit for submitting the case to the Commission for examination running.

Merger Control legislation in preparation

 Now steps are being taken towards a national merger control legislation also in Finland. A committee working under the Ministry of Trade and Industry has published a report concerning national merger control.

The committee's proposal would bring mergers and acquisitions under the control of national competition authorities in case the deal results in a group with turnover of more than FIM 2 billion (about USD 425 million) and the turnover of the company to be purchased is at least FIM 200 million. The Office of Free Competition would be allowed to prohibit a concentration on grounds relating to the size of the concentration and the effect of the deal on competition.

If the thresholds are set on the planned level, the law would have to be taken into consideration when planning acquisition of around 400 of the biggest Finnish companies.

Due to the political atmosphere in favour for merger legislation in Finland for the moment, it seems likely that the report of the committee leads to merger control legislation. The Kesko-Tuko case has, for instance, had an impact on the views of the representatives of the Finnish Office of Free Competition. Prior to the Kesko-Tuko case the views expressed on behalf of the Office of Free Competition on the need for national merger control legislation were negative. However, due to the Kesko-Tuko case it has been realised that it would be better to deal with domestic cases in Finland. However, the committee's report has also met strong opposition, for example from the Confederation of Finnish Industry and Employers. Especially the 200 million FIM limit is considered to be too low, and the Confederation of Finnish Industry and Employers would rather see a lowering of the turnover thresholds in the EC Merger Control Regulation than the enactment of national merger control legislation.

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