Commission Publishes White Paper on Minority Shareholdings
Under the current Council Regulation (EC) No 139/2004 (the Merger Regulation), the Commission is only able to review transactions that lead to a change of control. The Commission also has the power to review existing minority shareholdings held by the parties to a notifiable transaction, i.e., one resulting in a change of control. Acquisitions of non-controlling minority shareholdings (also referred to as structural links) by themselves, however, can only be carried out retrospectively under Articles 101 or 102 of the Treaty on the Functioning of the European Union (TFEU). In other words, under the Merger Regulation, acquisitions of non-controlling minority shareholdings are not subject to prior review by the Commission unless they result in a change of control, and are only subject to after-the-fact enforcement under Articles 101 and/or 102 TFEU. This leads to what the Commission perceives as an “enforcement gap” at EU level, which results in the Merger Regulation not being applied to non-controlling minority shareholdings that have the potential to harm competition, as exemplified by the recent Ryanair/Aer Lingus case.
In contrast, some EU Member States, such as Germany, and some major non-European jurisdictions (including the United States and Japan) are empowered to review some non-controlling minority shareholdings under their national merger control rules. In these jurisdictions, the Commission would contend that no enforcement gap exists, since non-controlling minority shareholdings can be subjected to prior review.
In view of concerns about the enforcement gap, in 2011, the Commission organised studies on the importance of minority shareholdings in the European Union. Subsequently, in June 2013, the Commission launched a public consultation (the consultation paper) on possible modifications to the Merger Regulation, including the expansion of merger controls to capture certain non-controlling minority shareholdings. The consultation paper also considered different models for reviewing non-controlling minority shareholdings. The responses to the consultation paper generally revealed a lack of consensus about the existence and extent of an enforcement gap. Equally, the responses demonstrated that the need to change the Merger Regulation to address a perceived enforcement gap remained a hotly disputed topic.
The 9 July White Paper contains the Commission’s proposed actions in response to the consultation paper. It covers the issue of minority shareholdings and also looks at other areas where the Commission sees the need for a revision of merger control rules, including mechanisms for referring cases between the Commission and the EU Member States. The White Paper was published together with the Commission Staff Working Document and the impact assessment conducted by the Commission on the contemplated reform.
Proposed Review of Acquisitions of Non-Controlling Minority Shareholdings With a “Competitively Significant Link”
In the 2011 consultation paper, the Commission envisaged three systems for the control of the acquisitions of non-controlling minority shareholdings: a notification system, a transparency system and a self-assessment system.
In the White Paper, the Commission proposes a “targeted” transparency system, which combines the self-assessment and transparency systems. According to the Commission, this would be the most suitable solution to address the three concerns it identified:
Capturing most of the anti-competitive acquisitions
Avoiding unnecessary and disproportionate administrative burdens on companies and competition authorities (including the Commission)
Staying in line with the current merger control regime.
This targeted transparency system would apply to transactions that create a “competitively significant link”. According to the White Paper, such a link is created by acquisitions of a minority shareholding in a competitor or a vertically related company, where the acquired stake is
Approximately 20 per cent or
Between 5 per cent and approximately 20 per cent, if it is combined with “additional factors”, which include “rights that give the acquirer a de-facto blocking minority, a seat on the board of directors, or access to commercially sensitive information of the target”.
Proposed Control Procedure
Under the targeted transparency system, an undertaking that plans to acquire a non-controlling minority shareholding that meets the cumulative criteria of having a competitively significant link would have to submit an “information notice” to the Commission. This information notice should contain only “basic information”, i.e., information relating to the parties and their turnovers, a description of the transaction, the level of shareholding before and after the transaction, any rights attached to the minority shareholding and some limited market share information.
Based on the information provided in this notice, the Commission would then decide whether or not to investigate the case further and Member States will consider whether or not to request that the case be referred. The parties would only be required to submit a full notification if the Commission decided to initiate an investigation, at the end of which the Commission would have to issue a formal decision ruling on the compatibility of the transaction. On this basis, any parties wanting greater legal certainty could voluntarily submit a full notification.
The Commission also proposes introducing a waiting period of, e.g., 15 working days, during which the parties would not be able to close the transaction and the Member States could request a referral. Should the Commission not initiate an investigation during this waiting period, the parties could then close the transaction. The Commission would, however remain free to investigate a transaction, whether or not it had already been implemented, within a limited period of up to six months (prescription period) following the information notice and, if necessary, impose interim measures on transactions that were already implemented.
The Commission observed that the pre-notification referral laid out in Article 4(5) of the Merger Regulation is of little practical use. It therefore proposes to abolish this procedure so the parties would notify their transaction directly to the Commission, which will forward the notification to the Member States.
The Commission also proposes to amend the post-notification referral set out in Article 22 of the Merger Regulation. Once the Commission notifies the Member States, one or more Member State(s), that are competent under their national law to review a merger, may request that the case be referred to the Commission. Any other competent Member State can oppose the referral but, if none does so, the Commission has the discretion to accept or decline the request for referral. Its acceptance of the referral would give jurisdiction for the entire European Economic Area (EEA) to the Commission, without other Member States needing to join the request for a referral. This process would simplify requests for referrals to the Commission and extend its jurisdiction where there is no opposition to the referral.
Non-Problematic Transactions Currently Notifiable
The White Paper proposes to exclude from the scope of the Merger Regulation certain non-problematic transactions. These include the creation of joint ventures that will only operate outside the EEA and have no impact on the EU market.
It also envisages further reducing the notification requirements for other non-problematic cases currently reviewed under the “simplified” procedure, in order to diminish the administrative burden and cost where it is not strictly necessary. This could allow transactions that have no overlaps to be exempted from any notification requirement.
The Commission’s proposals concerning the application of merger controls to the acquisition of non-controlling minority shareholdings are problematic and may lead to a dampening of investments in Europe.
The absence of a clear and closed list of “additional factors”, and the potential application of merger control rules to non-controlling minority shareholdings of as little as 5 per cent would lead to legal uncertainty. This is because a large number of transactions could potentially fall under merger control rules, and past experience in Germany and the United Kingdom shows that is unclear whether or not “plus factors” are sufficient to lead to the application of merger control rules. The White Paper’s proposed limitation of the extension of merger control rules to transactions between competitors or vertically related companies does not provide for more legal certainty, in particular where market definitions are unclear. At the very least, a strict threshold, such as the acquisition of 25 per cent, would leave no question mark concerning whether or not merger control rules apply.
While the Commission anticipates that the proposed reforms would lead to the review of only a limited number of cases—between 20 and 30 per year—this does not take into account the number of cases that would require self-assessment by the parties and would lead to legal uncertainty with respect to i) the obligation to submit an information notice, ii) the obligation to respect a waiting period and iii) the possibility for the Commission to open a procedure even after the expiry of the waiting period. The problem is not the number of deals that will have to be reviewed under the proposed changes, but the number of deals where the parties have to waste time and effort in order to self-assess the applicability of merger control rules.
It is also questionable whether or not the limited market share information in the required information notice and the simplified procedure may still be very burdensome, particularly if the parties are required to provide (alternative) market definitions and market data.
The proposed waiting period, together with the possibility for the Commission to open an investigation after the expiry of that period, actually combines the worst of two worlds. Not only do the companies have to submit an information notice and make the expiration of the waiting period a condition for the closure of the deal, but they also do not even get legal certainty as a reward for their efforts. In addition, the parties would need to file a full notification if the Commission decides to investigate the case, which would significantly further delay the transaction or at least further delay the attainment of legal certainty.
It is also unclear how the Commission envisages the case referral request from Member States in those cases, which are currently the vast majority, where national law does not give national regulators the power to review the acquisition of minority shareholdings.
It is unlikely that the extra regulatory burden that would result from the implementation of the proposed reform with respect to non-controlling minority shareholdings would be as insignificant as the Commission expects it to be. It is likely that the burden will be disproportionate, given the very low number of non-controlling minority shareholdings able to raise significant concerns.
In contrast, the proposed steps for reviewing the referral system and alleviating the burden for the parties (and the Commission) in unproblematic cases are very much welcomed.
By outlining the Commission’s proposals for the reform of the Merger Regulation, the White Paper is testing the reaction of the Council to gauge whether or not it is timely and politically acceptable to make changes.
More generally, the Commission now seeks views from all interested parties by 3 October 2014. Once the consultation is closed, the Commission will review the comments and, probably, finalise its legislative proposal. The timing of this proposal is not, however, predictable. For example, in relation to antitrust damages actions, which also sparked significant debate, the Commission adopted a White Paper in 2008 and a proposal for a directive five years later. This was only adopted by the Parliament in April 2014 and is now waiting for the final approval of the Council of Ministers. Whatever the final changes to merger controls for minority shareholdings may be, they are unlikely to come into effect very soon.