Minority shareholdings: possible major extension of EU merger control

United Kingdom

The European Commission (“Commission”) launched a consultation process on 20 June 2013 to seek views on new proposals for the European Union Merger Regulation (“EUMR”), which aim to improve merger control in the EU by increasing the scope of the EUMR and streamlining some of its processes.

The main proposed change is an extension of the EUMR regime to cover minority shareholdings or “structural links” currently escaping mandatory EUMR notification because they involve no acquisition of control over the target business.  The Commission believes that it has identified a gap in its powers to protect competition on the basis that it is unable to regulate structural links which may have anti-competitive effects and that extended enforcement of its merger control rules is the way to close that gap.

The new proposals are merely a consultation draft and it is not certain that the current rules will be amended in this way.  However, a reinforced EUMR regime would have a major impact on M&A activity, with more transactions caught and a greater need for consideration of EUMR issues in the early stages of deal negotiations.

Additionally, the Commission is proposing to reduce the burden on merging businesses by streamlining the referral mechanism by which they can refer a merger to the Commission which would not normally be caught by the rules. The proposals include the option to refer directly to the Commission a merger that would be notifiable in three Member States, without first consulting the Member States.

Further information about the Commission’s proposals on the referral mechanism, together with the proposed significant widening of the scope of the Commission’s powers of review under the EUMR, and their potentially controversial implications, can be found below.  Businesses have until 12 September to make their views heard.

Minority shareholdings or “structural links”

Of the two proposed changes, the introduction of more enhanced scrutiny of minority shareholdings (which the Commission calls “structural links”) is the most significant and could have a very large impact on the merger control aspects of a number of transactions. The Commission has long held the view that its current enforcement powers do not allow it to catch certain minority shareholdings that could have an anti-competitive effect. Its consultation document sets out a number of “theories of harm” to explain how an anti-competitive effect might arise. A high profile example, to which the Commission’s documents refer, amongst others, is the recent Ryanair/Aer Lingus case where the Commission was precluded from remedying what it perceived as the anti-competitive effects of a minority shareholding held by Ryanair in Aer Lingus. In part, the Commission is mindful of the more generous powers available to national regulators, such as the Office of Fair Trading in the UK, which can review a minority shareholding that gives “material influence” over the target (a lower threshold than the Commission’s own “decisive influence”).

With all of this in mind, the Commission is proposing what it calls an “upgrade to its merger control toolkit”, which would allow it to deal with structural links under the EUMR. The Commission sets out two main options as to how this could be achieved:

1.    The first option would be to extend the current EUMR system so as to include structural links, meaning that transactions that would result in the creation of a structural link would have to be notified to and approved by the Commission in advance, as full mergers are currently dealt with under the EUMR (the “notification system”). 

2.    The second option would be to give the Commission the power to select cases of structural links to investigate, either by:

(a) obliging parties to a prima facie problematic structural link to provide enough information to the Commission for it to decide whether or not to investigate (the “transparency system”, which would effectively represent a reduced notification system); or

(b) allowing the parties to proceed with the transaction without any obligation to notify, but granting the Commission the option to open an investigation on the back of its own market intelligence or complaints that it has received (the “self-assessment system”).

For each of these options, the Commission proposes adopting a similar system to the current EUMR as to the thresholds for a transaction to be caught, and to the substantive test for finding an anti-competitive element.

Although a significant enhancement of the Commission’s powers, it is not yet clear which structural links will be liable to investigation. The Commission recognises the importance of having legal certainty as to its powers, and so proposes certain “safe harbours” within the notification system, within which transactions would not be liable to Commission investigation. Such safe harbours could be in the form of de minimis shareholdings, e.g. 10%, as is adopted in the United States, or by reference to subjective criteria, such as a “competitively significant influence”, as in Germany, or (again) “material influence”, as in the UK.

However, within the self-assessment or transparency systems, the uncertainty surrounding what constitutes a “prima facie problematic structural link” could grant the Commission wide scope to intervene in transactions as and when it sees fit without the possibility of effective push-back from companies or Member States, without the protection of defined “safe harbours”. In addition, the Commission proposes a system of voluntary notification which could sit within either of the self assessment or transparency systems and which may include a standstill obligation upon the parties.

Our comments on this proposed change to the EU Merger Regulation can be found in the conclusion below.

Proposed changes to the merger referral mechanism

Under Article 4(5) of the EUMR, parties can request that a merger be referred to the Commission where it does not meet the thresholds of the EUMR, but is notifiable in at least three Member States. However, the process by which this is achieved is considered burdensome and time consuming, as it involves the submission of a “reasoned submission” before the notification of a referral, which allows Member States 15 days to assess whether or not they accept the referral request.

Under Article 22, Member States can refer a merger to the Commission where they believe that it is more appropriate that the Commission act, rather than the Member State. However, this too can be burdensome, as the Commission’s competence is limited to reviewing the effects of the transaction in the Member State that has made the referral, and other Member States who are not competent to review the transaction can oppose the referral to the Commission.

The Commission is proposing to lighten these burdens and streamline the referral procedure by reforming both Article 4(5) and Article 22.

With regard to Article 4(5), the Commission proposes to abolish the requirement for a “reasoned submission”, and instead allow Member States to directly refer a merger to the Commission. Under the current system, Member States have 15 days from the ”reasoned submission” to object to the referral before it can be notified; under the new proposals, the Member States would have up to 15 days to object to the referral, as they currently do, but from the date that the Commission has received the notification of the referral, thereby significantly speeding up the referral process as there would be no mandatory waiting period, and time would be saved on drafting the reasoned submission.

With regard to Article 22, the Commission proposes to expand its jurisdiction so that if it accepts a referral, it will have competence to review the transaction throughout the whole of the EEA, rather than merely in the jurisdiction of the referring Member State. This will bring the Article 22 process in line with that of Article 4(5), and enhance the “one-stop-shop” principle of the Commission. In order to increase the legal certainty of the process, the Commission also proposes that only Member States which are competent to review the merger may refer it to the Commission.

Like the proposals above on minority shareholdings structural links, the Commission’s proposals to amend the merger referral mechanism significantly expand the Commission’s jurisdiction, in particular in relation to Article 22. However, the proposals should also go some way towards accelerating the referral process and thereby reducing the burden and delay involved in multi-jurisdictional mergers.

Comment on proposed regulation of minority shareholdings

In putting these proposals out to consultation, the Commission has signalled a clear intent to broaden the scope of its powers in relation to merger regulation. Depending on the outcome of the consultation, in particular on whether the Commission sets out clearly defined “safe harbours” where they would not be able to investigate a structural link, these new powers could substantially increase the competence of the Commission. What this means in practice for businesses looking to make minority investments (above all in another player in the same or an overlapping market) will not be clear until the Commission finalises and begins implementing its proposals. In fact, the Commission has acknowledged that there is only limited empirical evidence on the effects of structural links, and so may need to adopt a new method of analysing the effects on competition. However, the potential is that a great number of transactions would potentially fall within the scope of the Commission’s extended scrutiny, with the ultimate risk that these transactions could then be unwound by the Commission at a later date.

It is clearly arguable that, in some cases, minority shareholdings may result in a potential weakening of competition. However, it is vitally important that the Commission, in acting to deal with structural links, does so in a way that not only best protects competition and consumers within the relevant market, but also combines an effective, efficient solution with legal certainty for all parties involved. If not, the Commission runs the risk of undermining the confidence of entities looking to acquire minority shareholdings, with fear of investigation deterring potential investment into target companies.

As such, the chance to submit your view on what will likely be a controversial expansion of the Commission’s merger review powers is a valuable opportunity. As the Commission is likely to adopt, in some form, the notification system or either the self-assessment or transparency system for structural links, understanding the issues involved and preparing for the new regulations is likely to be a focus for businesses in the near future.