Proposed EU Merger Review of Non-Controlling Minority Shareholding Acquisitions: Challenges and Opportunities for Private Equity
At present, the EU Merger Regulation [Council Regulation (EC) No 139/2004] (the Merger Regulation) gives the European Commission (the Commission) jurisdiction to review transactions that lead to a change in control. However, a recently proposed plan to reform the Merger Regulation could expand the scope of transactions subject to prior notification. For the first time, minority shareholding acquisitions that do not lead to a change in control could be subject to prior notification to the Commission.
The proposed expansion of the Merger Regulation’s jurisdiction could significantly impact businesses, in particular private equity firms. Understanding the proposed reforms is critical to meaningful participation in the policy debate and to determining how best to manage the challenges it presents.
Why Amend the EU Merger Regulation?
The Commission has an extensive “tool kit” to regulate anticompetitive conduct. Its tools include the Merger Regulation, which enable theex ante review of transactions that result in a “change of control”. (Transactions must meet specific jurisdictional thresholds based on the parties’ worldwide and Community turnover.) Other tools include Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), which prohibit anticompetitive agreements and the abuse of a dominant position, respectively.
There are no specific tools designed for the review of non-controlling minority shareholding acquisitions, but the Commission is not without options to regulate them. The Court of Justice of the European Union confirmed that the Commission can use Articles 101 and/or 102 TFEU to review minority shareholding acquisitions, but these tools have rarely been used. (See Case 142 and 156/84 British-American Tobacco Company Ltd and R. J. Reynolds Industries Inc. v. EC of the European Communities,  ECR 1899.) The Commission can also review minority stakes already held by parties to transactions that require notification under the Merger Regulation concerning a separate acquisition of control, and in some cases has required the divestment of a pre-existing minority stake as a condition for clearing the separately notified transaction. (See Case M. 3653 Siemens/VA Tech (July 13, 2005); See also Case M. 3696 E.ON/MOL (December, 21 2005).)
Despite its available tools, the Commission has expressed concern that its inability to review ex ante non-controlling minority shareholding acquisitions has created an “enforcement gap.” Following a public consultation in 2013, the Commission concluded that it required additional tools to enable it to regulate ex ante non-controlling minority shareholding acquisitions. This led to the current proposed reforms to the Merger Regulation.
Proposed Amendments: Attempting to Close the Enforcement Gap
The current proposed reforms are detailed in a white paper issued on July 9, 2014, which covers non-controlling minority shareholding acquisitions and other proposed refinements to the Merger Regulation. A white paper is typically a blueprint for future legislative reform.
With respect to non-controlling minority shareholding transactions, the white paper intends to subject only those transactions that create a “competitively significant link” to advance notification. These are defined as minority shareholdings in direct competitors or vertically-related companies where the parties meet certain revenue thresholds and the acquired stake is:
Approximately 20 percent or
Between 5–20 percent, if it is combined with additional factors, such as a de facto blocking majority, a seat on the board of directors or access to the target’s commercially sensitive information
The combination of a shareholding and “plus” factors is similar to the approach taken in the EU Member States that review non-controlling minority shareholding acquisitions, including Germany, the United Kingdom and Austria, but the Commission’s proposal has a broader reach.
Under the Commission’s proposal, parties to a transaction resulting in a “competitively significant link” would be required to submit an information notice to the Commission. This submission would be made public in order to alert third parties to the proposed transaction. The parties would then be subject to a waiting period of 15 working days, during which they would not be able to close their transaction. The Commission would use that initial period to decide whether to challenge the transaction, and the EU Member States could decide whether to seek a referral to review the transaction themselves.
If the Commission decides to investigate the transaction during the initial 15 working days, the parties would be obliged to file a full, detailed merger notification, which would be followed by a waiting period during which the transaction could not be closed. In any event, after the first 15 working days, the Commission would retain the right to initiate a review of the transaction during a subsequent period of 4 to 6 months, regardless of whether the parties closed the transaction. The Commission has not yet specified the procedural details that will apply to investigations commenced during the four to six month period. However, the Commission has suggested that it could impose a “stand-still” obligation for any part of the transaction that has not been closed to ensure the effectiveness of the Commission’s ultimate decision under the Merger Regulation.
Challenges and Opportunities for Private Equity
Private equity firms are already subject to advance notification and approval of certain non-controlling minority shareholding transactions in certain European jurisdictions (Germany, Austria and the United Kingdom) and worldwide (e.g., the United States and Japan). For example, in the United States, the acquisition of voting securities valued at more than $75.9 million (adjusted annually) may need to be notified to the antitrust authorities, even if there is no change of control (which is defined narrowly under the relevant rules). This means that all transactions above this threshold may be subject to antitrust review, regardless of the level of influence the buyer acquires. A narrow safe harbour, however, exempts the acquisition of up to 10 percent of a target’s shares from antitrust review if the shares are held passively for investment purposes.
The Commission’s proposal, however, reaches acquisitions as small as 5 percent, and thus has a potentially broader reach than other jurisdictions that review minority shareholding acquisitions. This creates challenges that may particularly impact private equity firms—and, correspondingly, may create risks that beneficial investments will be foregone.
First, private equity firms are more likely to be impacted than others by the Commission’s proposed reforms because their business models more often involve non-controlling, strategic acquisitions. Although the Commission’s proposal involves a “lighter” information notice than for acquisitions of controlling shareholdings, it still requires information and analysis of the markets at issue and, therefore, may involve additional costs. The increased transactional costs of a minor investment may make the investment less attractive for private equity.
Second, the Commission’s proposal also entails a mandatory 15-day waiting period and publication of the transaction. Private equity firms often rely on confidentiality prior to closing a transaction in order to gain a competitive advantage. The potential for premature disclosure, combined with a waiting period of 15 working days during which the transaction could not be closed, could place this competitive advantage at risk.
In addition, even after expiry of the initial 15 working days, there would still be a 4 to 6 month period during which the Commission would be able to launch an investigation into the acquisition of the non-controlling minority acquisition and order that the incomplete steps of the transaction be suspended in the meantime. This could have the effect of deterring investors—especially if they are looking for legal certainty—because, even if they close their transaction, they will still have to wait four to six months until they know definitively whether the Commission will or will not investigate the transaction.
These challenges show that private equity firms have much at stake in this reform. However, awareness of these challenges creates opportunities as well. Notably, an appropriately tailored voluntary notification system with a reasonable, limited review period could enable private equity firms to obtain greater legal certainty for their non-controlling minority shareholding acquisitions. Such a system could thus promote productive and efficient investment. Yet, at the present time, the proposed reforms, as currently structured, could actually decrease legal certainty.
Nevertheless, the proposed reforms remain in an early stage, as of the date of this article, and it may be several months before they take concrete shape. This provides an opportunity for private equity firms to engage in the regulatory and political process, in which they can advocate reforms that create greater legal certainty without introducing procedures likely to deter investment.
For example, a better outcome for private equity firms could still be realized through the reform process, in particular through the resolution of issues surrounding the proposed reforms’ broad jurisdictional reach, the notification process, confidentiality and the open-ended review period after the first 15 working days. By working with the Commission and engaging in the subsequent political debate, it is still possible to both serve the Commission’s objective of closing the enforcement gap, while not chilling productive investment.
Ultimately, the proposed reforms to the Merger Regulation concerning non-controlling minority shareholding acquisitions are likely to create additional—and generally unwelcome—burdens for private equity firms, and may well discourage beneficial investment in Europe from some of the most active investors. This would be an unfortunate consequence of reforms designed ultimately to catch only a very narrow category of non-controlling minority shareholding acquisitions. Private equity firms need to engage in the legislative process to ensure that the reforms ultimately adopted are structured in a way to guarantee legal certainty and encourage investment.