EU Commission Publishes Merger Regulation White Paper on Minority Shareholdings
In the United States, merger control rules require notifications to be submitted to the Federal Trade Commission and Department of Justice in respect of certain acquisitions of non-controlling minority shareholdings.
In the European Union (EU), under the current Merger Regulation (Council Regulation (EC) No. 139/2004), the European Commission (Commission) only has jurisdiction to review transactions that result in a change of control. Specifically, reviews of acquisitions of non-controlling minority shareholdings (or “structural links”) can only be carried out post-transaction under the standard behavioral competition rules set out in Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).1 This constitutes what the Commission refers to as an “enforcement gap” in the EU. The Merger Regulation cannot be applied to non-controlling minority shareholdings, even if they may result in potential to harm competition, as was confirmed by the recent Ryanair/Aer Lingus case.2
Due to concerns about this perceived enforcement gap, the Commission initiated studies on the importance of minority shareholdings in the EU in 2011 and, as previously reported,3 launched a public consultation (Consultation Paper) in June 2013 on possible modifications to the Merger Regulation, including the expansion of merger control to cover a number of non-controlling minority shareholdings situations. The Consultation Paper considered different options for reviewing such shareholdings. The responses to the Consultation Paper generally revealed a lack of consensus about the existence and extent of the perceived enforcement gap.
On July 9, 2014, the Commission published a White Paper, “Towards more effective EU merger control” (White Paper), setting out its proposals on how to apply merger control rules to acquisitions of non-controlling minority shareholdings. Interested parties, which include companies, industry associations, and national competition authorities, have until October 3, 2014 to comment on the White Paper.
Proposed Review of Acquisitions of Non-Controlling Minority Shareholdings with a “Competitively Significant Link”
The previously issued Consultation Paper proposed regulating the acquisitions of non-controlling minority shareholdings either through a notification system, a transparency system, or a self-assessment system. The White Paper diverges from that proposal, recommending instead a consolidation of the self-assessment and transparency systems that is intended to be more “targeted.” According to the Commission, its suggested “targeted” system is designed to be the most practical means of achieving the Commission’s principal aims, which include ensuring that: potentially anticompetitive transactions are subject to review, the process used is not unnecessarily burdensome on companies and regulatory authorities, and is also aligned with the existing EU and national merger control regimes.
According to the White Paper, this targeted transparency system would be applicable to acquisitions of minority shareholdings in competitors of either: (1) at least 20 percent; or (2) between 5 percent and 20 percent, if the acquired stake is combined with “additional factors” such as a de facto blocking minority, a seat on the board of directors, or access to commercially sensitive information. In other words, the targeted transparency system is applicable to minority transactions that create a “competitively significant link.”
Proposed Control Procedure
The White Paper targeted transparency system would function on the basis of information notices. An “information notice” providing the Commission with basic information about the parties and the transaction would need to be submitted to the Commission with respect to any transaction involving the acquisition of a non-controlling minority shareholding creating a competitively significant link. The Commission would use the information notice to decide whether further investigation into the transaction is necessary. EU Member States may also request that a case be referred for further investigation.
Only if an investigation were deemed necessary, would the parties be required to submit a full notification to the Commission. However, parties seeking legal certainty would be permitted to submit a full notification voluntarily. Based on the information obtained in the full notification and investigation, the Commission would issue a formal ruling regarding the compatibility of the transaction in the usual way.
The Commission has also proposed a waiting period (of approximately 15 days) to provide the EU Member States with time to request referrals for particular cases. During the waiting period, which would begin with the submission of an information notice, the parties would not be permitted to close the transaction. Subsequent to the waiting period, the parties would be able to close the transaction if no EU Member State referred the case and the Commission determined that no further investigation was necessary.
However, even after expiration of the waiting period, the Commission would have the right to initiate an investigation at any time within six months after the information notice, regardless of whether or not the transaction had been completed.
The proposals regarding the application of EU merger control to acquisitions of non-controlling minority shareholdings are imperfect in several ways, as elaborated below.
First of all, the White Paper’s proposals leave significant legal uncertainty. Because of the proposal’s potential application to acquisitions of shareholdings of a low as 5 percent, a large number of transactions would have the potential to fall under the proposed merger control rules. However, because the proposal’s application of EU merger control to transactions of between 5 and 20 percent depends on the presence of one of numerous undefined “additional factors,” this may lead to significant legal uncertainty as regards the application of the merger control regime. Past experience in Germany and the United Kingdom has shown that it is often unclear whether any “additional factors” render a transaction notifiable. Thus, to avoid legal uncertainty, it might be beneficial to establish clear thresholds, such as the acquisition of shareholdings in excess of 25 percent. Doing so would minimize uncertainty as to the application of the merger control rules to minority acquisitions.
Second, the White Paper’s proposal would require that the parties to such transactions self-assess whether the transaction creates a "competitively significant link." Given that market definition is not an exact science, such a self-assessment may prove to be burdensome and result in defensive lawyering in the form of unnecessary just-in-case notifications. Indeed, the proposal, if adopted, may very well lead to legal uncertainty on various fronts, including: the obligation to submit an information notice, the obligation to respect a waiting period, and the potential that the Commission may commence a merger control procedure after the expiration of the waiting period.
Third, although a main objective of the White Paper is to reduce undue administrative burden, it remains unclear whether the information notice requirements or simplified procedures, would accomplish that task. Cases where parties are required to provide (alternative) market definitions and market data may still present a significant burden.
Fourth, the proposed waiting time, combined with the Commission’s ability to commence investigations after the waiting period’s expiration could prove to be problematic. Allowing the Commission to investigate after the waiting period will subject parties to a substantial degree of legal uncertainty. Even after the parties have spent the time and energy to submit an information notice and adhere to the waiting period, they would have no comfort as to the legality of their transaction.
Fifth, the White Paper’s proposal on case referrals by the EU Member States relies heavily on Member States that have competence within their national law to review the acquisition of minority shareholdings. However, a significant majority of Member States currently do not have that power. It is unclear how the Commission envisions the case referral request process for Member States that do not have the ability to do so pursuant to their national laws.
Considering these concerns, it is likely that the additional regulatory burden resulting from the implementation of the White Paper will be more significant than the Commission anticipates. Moreover, considering the small number of minority transactions with the potential to raise competition concerns, it is possible that the burden will significantly outweigh the anticipated benefit.
The Commission’s White Paper provides interested parties with an opportunity to express their views on the proposed changes until October 3, 2014. The responses to this consultation will allow the Commission to assess whether the White Paper’s proposed changes for the revision of Merger Regulation are satisfactory, and likely to pass political muster.
Only after the Commission has reviewed the responses will it be able to complete the legislative proposal, the timetable for which remains unclear. Any proposed reforms would require a decision by the European Council, which represents the interests of the EU Member States. Practically speaking, therefore, it will most likely be a number of years before changes to merger controls for minority shareholdings come into effect in the European Union.
1However, as part of a review of an acquisition of control, the Commission may also review existing minority shareholdings, when such are held by the parties to a notified transaction.
2COMP/M.6663 – Ryanair/Aer Lingus, decision of February 27, 2013.
3See EU Merger Control and Minority Shareholdings: Time to Plug the Enforcement Gap? Greenberg Traurig Antitrust Quarterly, Fall 2013.