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EU Merger Regulation Reform: Capturing Minority Acquisitions
On 20 June 2013 the European Commission launched public consultations on the proposed amendments to the EU Merger Regulation, in particular, extending the scope of the EU Merger Regulation to the acquisition of non-controlling minority shareholdings. In the last two years Joaquin Almunia, European Commissioner for Competition, has made numerous references to the existence of an "enforcement gap" in the control of minority acquisitions at EU level, and now public consultations aim to see whether and how this gap should be filled.
Currently, the EU Competition Authority, the European Commission, may only review transactions that lead to a change of control over an undertaking, leaving minority acquisitions outside the scope of EU merger control. The news on the expected reform raises some business concerns since, if adopted, the reform may result in significant administrative burden for both the EU and non-EU (including Ukrainian) companies that have sales triggering the financial thresholds in the EU. Additionally, such reform may lead to further review of merger control laws by national competition authorities across the EU and, in the medium term, may influence other competition authorities that follow EU practice (e.g. Serbia, Turkey, PRC, Hong Kong, and UAE). Against this background, we would like to first give a brief overview of the existing EU merger control system and its peculiarities. Then, we will examine the reasons for the reform and the suggested models of how the existing EU merger control may be changed. This analysis will assist in identifying the main reform-related prospects and concerns for businesses with a presence in the EU.
Merger control system in the EU
Currently, the application of the EU Merger Regulation is limited to acquisitions of controlling stakes only. Unlike Ukraine, where for example the acquisition of 25% or more voting stock constitutes a separate form of concentration, the EU merger control regime is focused on the notion of "control". A transaction should be notified to the European Commission only if it involves "a change of control on a lasting basis" and triggers one of the alternative turnover thresholds in the EU.
The control criterion is met if the transaction results in the acquisition of control or a qualitative change in the nature of control. "Control" is constituted by rights, contracts or any other means that confer the possibility of exercising "decisive influence" on the target. The concept of control in EU competition law covers both de jure and de facto types of control.
Leaving aside acquisition of 50% or more shareholdings, de jure control arises if a minority shareholding is accompanied with special rights, such as veto rights over budgets, business plans, appointments of senior management and other strategic commercial decisions (so-called negative control). As regards de facto control, it arises due to particular factual circumstances, for example, in the case of commonality of interests between the shareholders and/or economic dependence of the target via-a-vis its shareholders.
If the control criterion is not met, minority acquisitions fall outside the EU merger control regime, regardless of whether they may significantly impede effective competition. This is of particular importance in the case of minority acquisitions among competitors, which may lose the incentive to compete vigorously if they hold stakes in competing enterprises. For example, if there were a price increase by the target, commercial damages incurred due to the loss of customers can partly be recovered from the target's customers switching to products offered by the minority shareholder. In addition to such unilateral effects, there are also risks of coordination of competitive behavior and exchange of confidential strategic information between competitors, all of which bring about potentially anticompetitive effects.
The Ryanair saga
The case of the contemplated acquisition by Ryanair of control over Aer Lingus served as an example of minority acquisition arguably raising significant competition concerns and brought the issue of minority shareholdings to the European Commission's discussion table.
The saga started in 2006 when Ryanair, holding a non-controlling 29.82% stake in Aer Lingus, launched a hostile takeover bid for Aer Lingus3. Under the EU Merger Regulation, the transaction was blocked by the European Commission due to the potential negative effects on 35 routes to Ireland. However, the European Commission turned out to be powerless to require Ryanair to dispose of its shareholding in Aer Lingus upon the request of the latter. The Commission would have only had such a power if the shareholding had enabled Ryanair to control Aer Lingus by exercising de jure or de facto decisive influence over it.
Unlike the European Commission, the UK regulator has authority to examine minority shareholding acquisitions due to a lower concentration test in the UK. In particular, the Enterprise Act 2002 provides for a presumption of "material influence" over the "policy" of a company in case of 25% participation. And so in October 2010, the Office of Fair Trading of the UK (OFT) launched an investigation into Ryanair's minority participation in Aer Lingus, with the case being referred to the UK Competition Commission. The UK Competition Commission is currently considering the possibility of the divestment of Ryanair's 29.82% stake in Aer Lingus and a final decision is expected by 5 September 2013.
This case demonstrates important shortcomings in EU merger control. As a result of differences between the EU and the UK in approaches to merger review tests, two parallel examinations took place at the EU and the national levels. This runs counter to the "one-stop shop" and legal certainty principles of the EU Merger Regulation, and is certainly one of the reasons encouraging the European Commission to speed up an initiative on the reform of the merger control regime.
3 Case No.COMP/M. 4439, Ryanair/Aer Lingus, Commission decision of 27 June 2007, upheld by the General Court in Ryanair v Commission (T-342/07).
Key options for the reform
According to the public consultation documents, the European Commission suggests applying similar jurisdictional thresholds and a substantive test as provided in the Merger Regulation for the examination of concentration, i.e. whether a transaction "significantly impedes effective competition". The Commission envisages two main options for extending the merger control to minority acquisitions, which will be described in this chapter.
A. "Notification system"
Under this option all minority acquisitions would be subject to mandatory
ex ante merger control and a standstill obligation would apply. Should it be the case, the parties will be required to notify all minority acquisitions to the European Commission and could not implement the transactions prior to clearance. To soften the administrative burden, the European Commission is considering whether provision of limited information for the filing would suffice, similar to the Short Form which is used for merger notifications under the simplified procedure.
B. "Selective system"
The second option would provide the Commission with discretion to select minority acquisitions for investigation on a case-by-case basis. This could be implemented in one of the following ways:
1) Self-Assessment System
Under this system the parties would have no obligation of prior notification and the Commission would investigate the minority acquisitions that could potentially raise competition concerns based on its own market intelligence or complaints.
2) Transparency System In this scenario the obligation to notify the transaction would only apply to the parties of prima facie problematic minority acquisitions. Such parties would be obliged to file a short information notice, which would be published on the Commission's website in order to inform third parties about the transaction and receive their feedback. In addition, the Commission considers introducing a possibility of voluntary notifications in the interest of legal certainty for the market players.
In any case, should the Commission decide to investigate, the parties would need to submit a complete filing similar to merger notifications and would not be able to implement the transaction prior to clearance.
It seems that both the "notification system" and the "selective system" have their shortcomings. The "selective system" would at least avoid making all minority acquisitions subject to mandatory notification. It is clear that instances when minority acquisitions raise serious competition issues are quite rare and introduction of general obligation to notify every single minority acquisition would not be justifiable.
However, if the "selective system" is chosen, without further revisions, it may lead to uncertainty and unpredictability. To mitigate this shortcoming, the Commission would need to elaborate appropriate and detailed guidelines or at least define "safe harbors" for those transactions that do not merit the Commission's scrutiny. The "safe harbors" could be defined based on level of shareholding, e.g. 10%, and/or the absence of special shareholder rights (e.g. veto rights), as it is the case for example in the United States. However, it is also possible that the European Commission will go for a more substantive "safe harbors" approach as applied in certain EU member states, such as the UK, which uses a concept of "material influence" or Germany with a concept of "competitively significant influence".
Reform-related competition concerns
Whichever approach is taken, the reform will have direct implications, even on non-European companies which have sales and meet merger control thresholds in the EU. The anticipated change in the EU test for merger control may be quite surprising for Ukrainian companies, which are used to clear-cut and predictable local standards of merger control and do not consider acquisitions below 25% as concentrations. For example, if a Ukrainian company decides to purchase a single shareholding below 25% in a competing enterprise, unless the control ("decisive influence") is acquired, in Ukraine such an acquisition would be left outside the scope of merger control and normally would not require any in-depth notifiability analysis. At the same time, if the European Commission obtains powers to review minority acquisitions, and provided the financial thresholds are triggered by the parties, such transactions would require careful analysis of EU merger control requirements. Depending on how the EU Merger Regulation is ultimately revised, the implications on business may vary. If the European Commission introduces a compulsory ex ante "notification system", this would mean that Ukrainian acquirers would incur additional time and cost expenses related to EU merger control analysis and receipt of EU merger clearance. If the EU opts for the "selective system" currently envisaged, this would reduce the overall number of notifications, but may well result in a lack of legal certainty and a risk of further post-closing review of minority acquisitions at any time the European Commission deems it necessary.
Against this background, interested parties active on the EU/international M&A front should definitely take advantage of this public consultation opportunity to contribute to a constructive solution to ensure future minority shareholding review within the framework of the EU Regulation. Many EU market players, especially via various international business associations, are already engaged in preparing their comments, which can be submitted until 12 September 2013. No doubt the public consultation will address in one way or another existing regulatory "gap". However, in the absence of pragmatic and efficient solutions, EU market players, including Ukrainian companies, may be left with an additional regulatory burden or uncertainty and unpredictability for minority acquisitions that are currently outside the scope of EU merger control review.