European Commission Raises the Stakes for Undertakings to Comply with EU Merger Control Rules
On July 23, 2014, the European Commission (Commission) imposed a fine of EUR 20 million on Marine Harvest, the Norwegian salmon farmer and processor, after it acquired a 48.5 percent stake in its competitor Morpol prior to obtaining the required clearance from the Commission under the European Union Merger Regulation (EUMR). Pursuant to the EUMR parties to a transaction which falls within the scope of the EUMR are required to notify the transaction to the Commission and are restricted from implementing the transaction before the transaction is approved (the standstill obligation). This requirement is also known as the prohibition on gun jumping.1 The Commission’s decision, and the previous (identical) fine for gun jumping imposed on Electrabel, clarify that the Commission will apply the EUMR strictly even when the transaction concerned poses no risk to competition or if the voting rights obtained are not exercised by the acquirer prior to approval.
The Scope of the EU Merger Control Rules
Under the EUMR, undertakings are required to notify transactions that fall within its scope to the Commission. A transaction will fall within the scope of the EUMR if it constitutes a concentration and the turnover of the parties exceed specified jurisdictional thresholds. A concentration includes the acquisitions of both de jure and de facto control over an undertaking.2 Under Article 14 EUMR, the Commission has the power to impose a fine of up to 10 percent of the annual group worldwide turnover for failure to notify and for gun jumping, whether intentionally or negligently.3
Article 7(2) of the EUMR contains an exemption to the prohibition of gun jumping, however, it is only applicable to public bids and to a series of transactions in securities admitted to trading on a stock exchange whereby control is acquired from various sellers. Implementation of such transactions prior to notification and clearance will not result in a violation as long as i) the transaction is notified to the Commission without delay and ii) the acquirer does not exercise the voting rights attached to the relevant securities.
The Marine Harvest Acquisitions
On December 12, 2013, Marine Harvest acquired a 48.5 percent stake in Morpol, a company listed on the Oslo Stock Exchange. The transaction was completed on December 18, 2012 without any notification to the Commission. After this acquisition Marine Harvest made a mandatory public offer for the remaining 51.5 percent shares. A majority of these shares was acquired on March 12, 2013. With its notification Marine Harvest informed the Commission that it would not exercise de jure or de facto control pending approval, considering the transaction to be in line with Article 7(2) EUMR.
The Commission cleared the transaction, but raised its concerns that the transaction prior to the public offer breached the EUMR and opened an investigation into the issue. The Commission found that the acquisition of the 48.5 percent stake had already resulted in Marine Harvest acquiring de facto sole control over Morpol due to a stable majority at Morpol shareholder’s meetings, the wide dispersion of the remaining shares, and previous attendance rates at meetings. In 1994, the Commission investigated a similar situation in which the acquirer had already acquired de facto control before the notified transaction. In Ford/Hertz4, Ford was offered to purchase 5 percent shares of Hertz. Prior to the transaction Ford had de facto sole control as it was the single largest shareholder of Hertz with 49 percent of the voting shares. By buying 5 percent of Hertz, Ford acquired de jure control, however, this did not alter the decisive influence it had already attained and the transaction therefore did not constitute a concentration.
Marine Harvest mistakenly relied on Article 7(2) EUMR as a defense. The mere fact that a party has not exercised its voting rights does not obviate the need for a notification and this transaction involved a single seller, which excludes the application of Article 7(2) EUMR.
Deterrent Effect of the Imposed Fine
In the Electrabel5 case of 2009 the Commission had already indicated the serious nature of gun jumping as it undermines the fundamentals of the EUMR. In that case, both the Commission and the General Court of the EU stated that a breach that is negligent rather than intentional does not deprive it of its serious nature, neither does the nature depend on the question whether the transaction negatively affects the market or not.6 Electrabel was also fined EUR 20 million.
Even though the fine of EUR 20 million equates to a mere 1 percent of Marine Harvest’s 2013 turnover, the Commission stated that this amount was both proportionate and adequate to provide sufficient deterrence. In its decision the Commission stated that Marine Harvest, as a large company with previous experience and familiarity with the EUMR rules, should have been aware of its obligations to notify and await clearance. However, the Commission did take into account mitigating factors, such as the non-exercise of the voting rights by Marine Harvest prior to clearance.
The Marine Harvest and Electrabel decisions serve as an important reminder of the need for undertakings to carefully consider the application of the EUMR to all transactions. The facts of the cases demonstrate that the Commission is willing to impose high fines even where the assessment of control is complex, a negative effect on competition is absent or the acquirer does not exercise its voting right prior to approval. Additionally, the decision is important as the Commission has clarified that it may apply the EUMR to initial acquisitions of shares before the launch of a public bid.
At the moment the Commission is seeking views of possible improvements to the EUMR.7 One of the proposals is to apply the EUMR to the acquisition of non-controlling minority shareholdings. The rationale behind this is that the acquisition of non-controlling minority shareholding can harm competition and lead to a ‘signification impediment of effective competition,’ which cannot be adequately addressed under the EUMR in its current form. If this proposal is implemented the need for scrutiny will increase even more. But even under the current rules, parties need to be aware that the acquisition of a non-controlling minority shareholding could, technically-speaking, prompt regulatory authorities to investigate other breaches of competition law around concepts of illegal collaboration between competitors, etc.
1Article 7(1) of the European Union Merger Regulation.
2Article 3(2) of the European Union Merger Regulation.
3Article 14 of the European Union Merger Regulation.
4Case No IV/M. 452, Commission Decision of June 9 1994.
5Case No. COMP/M.4994 Electrabel/Compagnie Nationale du Rhone, June 10, 2009.
6Case T-332/09 para. 246. The General Court noted that ‘the Commission is correct to maintain that the ex post analysis of the lack of effect of a concentration on the market cannot reasonably be a decisive factor for the characterization of the gravity of the breach of a system of ex ante control.’
7European Commission, White Paper, Towards more effective EU merger control, COM (20140 449 final, July 9, 2014).