Divestiture is often used as a structural merger remedy. Competition authorities regularly prefer structural remedies over behavioural remedies because merger control is aimed at preserving competitive market structures and because an order to divest certain subsidiaries, production facilities or other assets does not require constant subsequent monitoring by the competition authority.
For instance, the EU Commission cleared the proposed acquisition of SABMiller, the world’s second largest brewer, by AB InBev, the world’s largest brewer. The Commission had found, inter alia, that the merger would remove an important competitor in the beer market in several Member States, and that it would facilitate tacit price coordination among brewers in the EEA through an increase in the number of multimarket contacts. AB InBev offered to divest the whole of SABMiller’s business in France, Italy, the Netherlands and the UK to the Japanese brewer Asahi. To dispel the Commission’s concerns AB InBev also offered to divest SABMiller’s business in the Czech Republic, Hungary, Poland, Romania and Slovakia. In sum, the commitments were aimed at selling practically the entire SABMiller beer business in Europe. The Commission approved the merger conditional upon full compliance with these commitments in 2016.
In contrast, divestiture may be used in the EU only as a last resort remedy to address violations of the cartel prohibition or the abuse of market power. Art. 7 Reg. 1/2003 (EU) states that structural remedies can only be imposed by the EU Commission “either where there is no equally efficient behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than a structural remedy”.
This rule, which is an expression of the principle of proportionality, has sometimes been relaxed in cases in which the EU Commission has accepted (and made binding by a decision according to Art. 9 Reg. 1/2003) divestiture commitments in order to address abusive behaviour by vertically integrated undertakings.
For instance, the Commission investigated possible violations of the prohibition against the abuse of a dominant position (Art. 102 TFEU) by the German energy provider E.ON. The Commission came to the preliminary conclusion that E.ON might have infringed Art. 102 TFEU in two ways: first, by deliberately refusing to sell the production of certain power plants that was available and that it would have been economically rational to sell, in order to raise prices (withdrawal of production capacity); second, by favoring its own production affiliate. In order to address these concerns, E.ON proposed to divest itself of about 5000 MW (more than 20%) of its production capacity, and to divest itself of its transmission system business consisting of an extra-high-voltage (380/220 kV) power grid network as well as system operations currently run by E.ON Netz. This was aimed at removing the incentive of the network operator to favor a particular (vertically-integrated) supplier. In 2008, the Commission made these commitments binding by way of an Art. 9 decision.
According to established competition law doctrine, the fact that an undertaking has acquired a strong market position or even a monopoly through internal growth based upon competition on the merits does not entitle competition authorities to divest such undertaking in order to create a more competitive market structure (cf. ECJ, 6.9.2017, C_314/14 P, ECLI:EU:C:2017:632, n°133 – Intel). Competition law is aimed at promoting competition and not at discouraging competition by punished successful undertakings.
Some systems of competition law permit, under exceptional circumstances, an “objective divestiture” of undertakings, that is to say the divestiture of undertakings which have not violated competition law or other laws. The best example of this is Part 4 of the UK Enterprise Act, which establishes a system whereby the Competition and Markets Authority (CMA) and the sectoral regulators may conduct a market investigation in order to discover whether any features of a market prevent, restrict or distort competition. If such a distortion is found, the CMA has a wide range of remedial powers which, as a last resort, include orders for an objective divestiture.
This power was applied to force the British Airport Authority (BAA) to sell three of its airports in 2009. BAA was privatised in 1987. A market investigation that had been performed from 2007 to 2009 found that BAA accounted for more than 60% of all passengers using UK airports. Heathrow, Gatwick, Stansted and Southampton accounted for 90% in south-east England. Edinburgh, Glasgow and Aberdeen accounted for 84% in Scotland. The investigation concluded that BAA’s common ownership together with other features of the relevant market created adverse effects on competition. CMA evaluated the effects of the divestiture order in 2016.
Provisions analogous to those in the UK have been adopted in various countries, including South Africa, Iceland and Mexico. The German government is considering introducing a similar provision as Sec. 32f in the German Act against Restrictions of Competition (ARC) by way of the 11th amendment 2023 to the ARC.
The term divestiture is closely related to (and sometimes used as a synonym for) the term unbundling. Unbundling measures are regularly applied in the field of regulatory law. They cover a wide range of remedies that are aimed at splitting up (vertically) integrated undertakings. Unbundling measures may range from accounting and informational unbundling via functional unbundling and legal unbundling to full ownership unbundling. Accounting unbundling requires the undertakings to keep separate accounts for their transmission and distribution activities; for other activities consolidated accounts may be kept. Informational unbundling stops the information flow between the transmission (net) branch and the other branches of a vertically-integrated undertaking. Functional unbundling involves independent management in terms of organisational independence, the decision-making powers of management staff and a compliance program to ensure non-discriminatory behaviour. Legal unbundling means the setup of independent network undertakings which, however, can remain as a member of the same group of undertakings or be owned by the same owner. Ownership or asset unbundling is the strongest form of unbundling. It involves, for example, the complete sale of a transmission business, where the transmission undertaking a cannot stay in the a group of undertakings that provide distribution services. For instance, a vertically-integrated energy supplier may be required, by law or by regulatory intervention, to unbundle its network business in order to enable competition on the transportation level and thereby competition in upstream and downstream markets.