Last week's Sony BMG merger ruling by the Court of First Instance (CFI), Europe’s second highest Court, caused fresh embarrassment for the Commission and uncertainty for the music industry.  In a surprise decision the Court cast doubt over the future of the 18-month merger between the two market leaders, stating that the Commission’s decision to give clearance was not supported by sufficient evidence. 

The Commission will now have to re-examine the case, and could either decide to give another clearance, this time supported with cogent evidence, impose ‘remedies’ on the deal, or issue a prohibition which would force the merger to be dissolved.  Perhaps the most likely outcome is that the Commission will give the same decision again, but will this time take pains to show that it is a justifiable and logical conclusion.  The merger can only be accepted if it is shown that it does not create unfair dominance within the industry by the merged entity, harm consumers, or hinder the participation of smaller independent labels

Although Sony BMG must carry on ‘business as usual’ for now, such uncertainty over their fate will have a significant impact on management, employees, and shareholders alike.  If the new entity were forced to dismantle a union that has existed for 18 months, the results would be extremely grave.  It is, however, a good result for independent labels represented by Impala, the trade association which asked the Court of First Instance to review the Commission’s decision. 

Analysis

This is the latest example in a string of cases where the competition regulator’s decisions have been overturned.  However, this is the first time that a merger clearance, rather than a prohibition, has been questioned.  The judgement by the Court of First Instance is highly critical of the Commission’s findings, branding them as imprecise, unsupported and in some instances contradictory.  The Commission’s investigation initially opposed the deal between the Japanese and German music producers, but after an unexpected u-turn they gave the merger their seal of approval.  Last week’s ruling found that there was insufficient evidence for this change of approach and that the entire investigation was unsatisfactory.

It was previously the case that clearance from the Commission was viewed as a reliable undertaking that a deal would be accepted, but last week’s ruling demonstrates that there are no guarantees.  Large multi-million-dollar mergers arranged by extremely complex transactions could, despite the competition regulator’s acceptance, later be forced to dissolve if the Court is not satisfied of procedural propriety. 

The ruling has also had a negative impact on other members of the music industry, such as EMI, whose proposed merger with Warner Music has now been thrown into doubt, causing EMI’s share price to drop.  They will now have to await the fate of Sony BMG before they can make definite decisions about the future.

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