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Joel Klein, like his boss, has left the building. With a new business-friendly Bush administration in place, the antitrust world’s center of gravity has moved to Brussels, Belgium, where European competition commissioner Mario Monti presides. In July, Monti famously flexed his muscle by halting the $42 billion acquisition of Morristown, N.J.-based Honeywell International Inc. by Fairfield, Conn.-based General Electric Co., even though the deal had already been blessed by Washington, D.C. As Hemingway put it in a slightly different context, for buccaneering dealmakers and antitrust lawyers alike, the earth had moved. The effects were obvious. The global economy had produced a true instance of global regulation. Antitrust practice, which had been comfortably contained between Pennsylvania Avenue’s Kinkead’s restaurant and Capitol Hill, was now an international event. And the comforting nicety known as American-style due process stopped at the water’s edge. GE is almost certain to appeal the rejection of the merger to the European Union courts in late September. GE’s lawyers can’t revive the merger, but they can try to clear the books of a precedent that would complicate future GE acquisitions. In the appeal GE’s lawyers will have the chance to revisit the facts of the case, but they also seem to be preoccupied by procedural kinks — particularly a commission task force’s acceptance, in an early stage of the proceedings, of a false affidavit filed by a competitor. As the first all-American merger to survive U.S. scrutiny but die in Europe, the GE-Honeywell case brings into focus the difference between antitrust law and, as it’s called in Europe, competition law. In Europe, courts have a much smaller role than they do in the U.S., and the concerns of competitors — sometimes expressed in private — are given much greater weight than in the American system. To trigger European Commission review, merging firms, whether they are based in Europe or are U.S. firms with operations in Europe, need annual European revenue of 250 million euros (roughly $217.6 million), and combined global revenue of 5 billion euros (roughly $4.35 billion). About 6 percent of mergers filed with the E.C. earn the hard look known as Phase II review, the quick and dirty four-month process where the GE-Honeywell deal came undone. During the first half of a Phase II review, a case team from the E.C. Merger Task Force gathers data from the parties and challengers. About midway through the process, the task force sets out the case against the merger in a “statement of objections.” In a typical case, the merging parties have two weeks to examine the case file (with business secrets redacted) and to file responses. A week later comes a two-day oral hearing. The merging parties may make compromise offers during the final month. Near the end, in a largely formal step, a committee of E.C. member-state competition cops vote on the merger. Finally, the College of Commissioners (the E.C.’s 20-person executive committee) issues its decision. There is no step for interlocutory judicial review. Aggrieved parties can go to the trial-level Court of First Instance and from there to the European Court of Justice in Luxembourg, but such review won’t revive a merger that has been killed. The review can take years. M&A lawyers may find solace in the fact that only 17 percent of mergers reaching Phase II are slain outright — since the E.C. began reviewing mergers in 1990, only 15 combinations have been blocked in Brussels. But those odds are little comfort to GE’s European lawyers, who say their experience with the E.C. has left them angry. “I can accept that I lost,” says one of them, Christopher Bright of Shearman & Sterling in London. “I cannot accept that the means justify the ends.” From the perspective of GE’s lawyers, the trouble began shortly after the commission stated objections to the merger on May 8, in a routine part of the merger review process. One item the E.C. did not initially share with GE was the “Robinson affidavit,” a document destined to become the focus of GE’s arguments at oral hearing and its likely arguments on appeal. The Robinson affidavit was given by James Robinson, an ex-president of Fairchild Dornier Corporation, a small “airframer” (a firm that puts together aircraft using engines from firms such as GE and avionics from firms such as Honeywell). Robinson now works for Hartford, Conn.-based United Technologies Corporation, GE’s rival as an engine maker, and also the firm whose bid for Honeywell was trumped by GE in the fall. Robinson’s testimony — the Robinson affidavit — supported a central E.C. worry, which was that GE would pressure airframers into signing exclusive contracts for GE-Honeywell components by promising later to order finished aircraft through its finance arm, GE Capital Aviation Services. GECAS is the world’s largest purchaser of aircraft by volume; its business is to buy a fleet of airplanes from airframers and then lease those planes to airlines. In the affidavit, Robinson swore that when Fairchild Dornier was taking bids on a new engine platform in 1998, GECAS had signed a secret side agreement with Fairchild to buy 50 of its planes. This agreement, the affidavit said, was “the deciding factor” in Fairchild’s selection of GE over UTC as the exclusive engine supplier for its new model. GE’s lawyers became aware of the document in mid-May, during a meeting with the E.C. team reviewing the merger. During the meeting, as recalled by both Bright and fellow GE lawyer Simon Baxter of Clifford Chance’s Brussels office, team leader Enrique Gonzalez-Diaz told GE that an important reason that the E.C. was confident of its case against the merger was the affidavit — which, he noted with a rhetorical flourish, was “signed on pain of perjury.” “What affidavit?” asked one of the GE team’s members. Gonzalez-Diaz looked at this staff and then back at the GE team. “It’s in the file,” he replied. “No, it’s not.” “Well, we’ll check,” Gonzalez-Diaz responded. The next day the affidavit was faxed to Baxter’s office. “We were fairly aghast when we read the affidavit,” says Baxter. “We knew it couldn’t be true because we’d been through the same allegations with the [Department of Justice] and had checked extensively.” Such a deal would be impossible and irrational, GE says. GECAS didn’t order planes from Fairchild until two years after Fairchild ordered GE engines. Moreover, the GE engine was the only engine of the right weight already in production. Finally, GE says, buying 50 planes is too small an inducement to swing an order for 1,000 engines. GE told UTC that it was sure that the affidavit was untrue. In short order, Robinson swore out a new affidavit in which he backtracked but tried to keep the sting of his charge intact. “I now realize that we did not enter into a purchase agreement with GECAS until after we selected GE’s engine,” the new affidavit said. “Nevertheless, the representation by GE [Aircraft Engines] that it would work with GECAS to try to obtain an order from these aircraft from its sister company GECAS, and my belief that we would lose GECAS as a potential buyer if we chose the [UTC] engine, were very important considerations and heavily influenced my decision to favor the selection of GE engines.” On May 16 current Fairchild Dornier chairman Charles Pieper more strongly denied the existence of a quid pro quo. “In no way was the purchase by GECAS of Fairchild Dornier aircraft a factor in the decision to use GE � engines to power [Fairchild Dornier's aircraft],” he wrote in a note to Monti. What, if anything, should the E.C. make of Robinson’s revised affidavit? This was the subtext of the E.C.’s oral hearing on May 28 and 29. There is no American equivalent to the oral hearing. Though it has no formal effect and features few safeguards, the hearing has evolved into a dramatic set-piece, trial by combat before a jury of Europe’s merger police. On the first day, the merging parties present their case, and on the second day the challenging parties present theirs. This was the time for GE’s rivals to salvage the Robinson affidavit and buttress it with other evidence. Bright opened the duel over the affidavits with a sarcastic thrust. Robinson “seems to have changed his mind,” he said, between GE’s challenge to the first affidavit and his filing of the second. Speaking on behalf of Robinson, UTC attorney Mark Leddy of Cleary, Gottlieb, Steen & Hamilton’s Washington, D.C., office parried with dignity: “This was an honest mistake of memory and nothing more,” he said. When a current Fairchild executive denied the existence of a quid pro quo with GECAS, his own veracity was questioned. A German antitrust official at the hearing asked why Fairchild was testifying for GE rather than as an independent party. E.C. case team leader Gonzalez-Diaz fired off 11 questions, trying to show that the executive couldn’t be sure about his denial. Gonzalez-Diaz’s voice rose, and he chopped the table with his hand, ending with a clipped “Thank you very much.” In Baxter’s view, “Enrique engaged in what’s known as badgering the witness.” The witness was shaken, but basically stuck to his story. Then UTC presented its argument for denying the merger. It was not based on Robinson’s claims, but instead on the structure of the market. GECAS was known to use GE engines exclusively on its planes. GE had won all recent bids for regional jets and for the Boeing 777x. GECAS later placed significant orders for all those planes. Finally, UTC’s economists showed that GE’s purchasing bias shifted engine market share toward GE, so, UTC argued, it would only be rational for GECAS to extend its bias from GE engines to Honeywell avionics. GE rivals, unable to compete, would abandon product lines. This logic did not impress GE’s economists. GECAS, with at most 10 percent of the market for purchasing aircraft, is too small to exert a vertical effect on the markets for components, they said. And surely GE’s rich rivals, if challenged, would innovate rather than surrender. At about 11 a.m. on the second day, the room was cleared for confidential testimony from the servicing arm of Lufthansa Airlines. Lufthansa was one of 15 airlines to have given confidential evidence against the merger, but was the only one to make its identity known at the hearing. Whispering in the halls, the evacuated lawyers speculated that the airlines were unhappy with the pressure that GECAS exerts on airframers to use GE components. GE received only a one-page summary of the 15 airlines’ objections. How persuasive the airlines were, GE’s lawyers could only guess, since they had no opportunity to cross-examine the witnesses. After the oral hearing, the deal’s fate was probably set. False hopes rose in June as the two sides traded offers. Essentially, the E.C. wanted GE to divest itself of enough of GECAS to cede management control. GE wanted to maintain enough control to preserve the huge tax losses generated by GECAS’s leased asset depreciation. They were unable to find a structure that would establish GECAS’s independence while clearly preserving GE’s tax advantage. On July 3 the European Commission declared the GE-Honeywell merger kaput. Under E.C. practice, the decision itself would not be released to the public for weeks. GE argues that it was ambushed by a false affidavit and anonymous evidence. Is that sufficient grounds for appeal? Under the European Merger Control Regulation, which establishes the E.C.’s merger-approval process, “infringement of an essential procedural requirement” is grounds for appeal, and parties have the right to examine all relevant documents and to express views on all objections raised against them. But to prevail, GE has to show that the suspect evidence materially influenced the E.C.’s thinking. Bright believes that the first Robinson affidavit swayed the E.C. decision makers and irrevocably convinced them that GECAS’s practices would be anticompetitive, if the merger proceeded. “The competitors threw mud, and in the Commission’s eyes, some of it stuck,” he says. After all, case team leader Gonzalez-Diaz stressed the importance of the document during the meeting in mid-May and gave it zealous attention at the oral hearing. As for the secret evidence from the airlines, an E.C. official’s public statements provide reason to believe that it was persuasive. E.C. case team member Laurent Petit was quoted in The Wall Street Journal as saying that the Robinson affidavit was corroborated by anonymous evidence. Monti himself emphasized the impact of the anonymous evidence in a speech in London on July 9. But judicial review is not a free-ranging search for intent. Courts review only the decision and the statement of objections — not the oral hearing, let alone comments to the media. The statement of objections did not rest on either Robinson’s affidavit or secret airline evidence and, according to a senior E.C. official, neither does the decision. “We have not based our case on this affidavit,” the official says. “Anonymous statements are of very much limited significance. One could never build a case on these kinds of things. They are just used as confirmation.” But even though the E.C.’s procedure might seem suspect to American eyes, it’s tough to challenge. To prevail, GE needs to show not only that the E.C. relied on tainted evidence to conclude that GECAS threatened competition, but also that it lacked independent evidence to reach that conclusion, and that the conclusion was an essential reason in the denial of the merger. Structural market logic arguably gave the E.C. independent grounds upon which to conclude that GECAS’s buying practices would be anticompetitive. And it’s unclear whether the E.C.’s decision rests mainly on the GECAS argument. Bright and Baxter read the decision that way, but an E.C. official says that the decision rests on an “ensemble of arguments.” Inevitably, an appeal would fold out into a full reargument of facts and law as set out in the decision and statement of objections. GE sees plenty of soft spots; and even a finding of harmless procedural error could embarrass Monti — which may be motivation enough. The lawyering in the GE-Honeywell case points up major differences between antitrust and competition law. In the U.S., the government must sue to kill a merger; in Europe, the government kills mergers by fiat, subject to judicial review only after the fact. That’s why the anonymous airline witnesses, who were unwilling to stand up in court, had very little effect in the Department of Justice’s review of the deal. In Europe, by contrast, anonymous parties can share their worries with the case team knowing that the merging parties will see only a brief, vague summary and enjoy no right of confrontation. The lack of interlocutory judicial review in Europe also explains why Bright had nowhere to go with procedural gripes. Bright complains, for instance, that the E.C. case team leader controls the merging parties’ access to the case file without accountability. The way the E.C. proceeded “wouldn’t fly anywhere with a developed legal system,” he says. “Checks and balances have been extinguished.” On the plus side, merger review in Europe is generally much faster. In the U.S., competitors’ testimony is scant, but the E.C. relies heavily on competitors because it lacks adequate staff, especially economists. In large measure, it delegates its basic duties to investigate and crunch data to the merging and challenging parties, claiming that it knows how to discount for bias where appropriate. The result is that the same complaint about Fairchild went much further in Europe than in the U.S. Robinson, as both an ex-customer and a rival, highlights the dilemma of antitrust investigation: Customers know the dirt, but it’s the rivals who have the incentive to dish it. Indeed, customers often have an incentive to hide the dirt, either because their interests are aligned with the merging party, or because they’re scared. Robinson embodies Europe’s solution to this dilemma: It lets competitors voice the customers’ complaints. To observe that the E.C. relied on a competitor’s affidavit and anonymous evidence, where the U.S. would not, is not to prejudge either system’s merit. One view is that GE’s rights of defense were trampled and that the E.C. was naive in accepting a tainted affidavit from a person with a motive to mislead. But one could argue that the American approach obstructed the airing of important views, and that, therefore, Europe saved the world from a bad merger. Did Robinson’s and the anonymous airlines’ views deserve to be heard? “It’s an interesting philosophical question,” says a GE rival’s lawyer. By listening to competitors and tolerating no right to confrontation, Europe smoked out customer complaints that the U.S. couldn’t or wouldn’t have. “Maybe,” the rival lawyer continues, “the U.S. system doesn’t get to the bottom of merger cases.” In Brussels, the race to the bottom has begun.

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