On 15 June 2012, the UK Office of Fair Trading (the “OFT”) announced its decision to refer Ryanair’s acquisition of a minority shareholding in Aer Lingus to the UK Competition Commission (the “CC”). The OFT is concerned that Ryanair’s shareholding may give it the ability to exercise “material influence” over Aer Lingus and that there is a realistic prospect that its shareholding may result in a substantial lessening of competition on a number of routes between Ireland and the UK. The CC’s investigation represents the latest competition law obstacle for Ryanair in its ongoing attempts to take over Aer Lingus.
Ryanair currently owns 29.82 per cent of Aer Lingus. Between 27 September and 5 October 2006, Ryanair acquired 19.2 per cent of the issued share capital of Aer Lingus. Ryanair subsequently made a public bid for the remaining shareholding. In 2007, following a second stage investigation by the European Commission (the “Commission”), the Commission prohibited the proposed concentration on the grounds that it would have harmed consumers by removing competition and creating a monopoly, or a dominant position, on 35 routes operated by the two airlines.
Ryanair applied to the European Court of First Instance seeking an annulment of the Commission’s prohibition decision. In 2010, the EU General Court dismissed Ryanair’s application. Once the matter had run its course through the EU Courts, the OFT proceeded with its investigation into Ryanair’s minority shareholding.
Ryanair appealed to the Competition Appeal Tribunal (the “CAT”), claiming that the OFT was out of time to consider the acquisition. The CAT adjudged the OFT to be in time to investigate the acquisition. Following further appeals by Ryanair, the Court of Appeal of England and Wales endorsed the CAT’s ruling and denied Ryanair permission to appeal. Following its initial investigation, the OFT decided to refer the matter for an in-depth investigation by the CC.
In accordance with the UK Enterprise Act 2002 (the “Enterprise Act”), the OFT has a duty to make a reference to the CC if it believes that it is or may be the case that a “relevant merger situation” has been created, and that it has resulted in, or may be expected to result in, a substantial lessening of competition within any market or markets in the UK.
Ryanair and Aer Lingus are, by far, the two largest scheduled airlines operating between Ireland and the UK accounting, together, for over 80 per cent of all passengers. Ryanair and Aer Lingus provide the only two scheduled services on five routes between Ireland and the UK and are the most significant scheduled operators on the Dublin-London route.
In particular, the OFT is concerned that Ryanair’s minority shareholding may:
- weaken Aer Lingus as a competitor, through use of its voting power to, for example, restrict Aer Lingus’ funding opportunities, influence Aer Lingus’ use of key assets (such as airport slots at London Heathrow), or block acquisitions above certain value thresholds;
- fetter Aer Lingus’ options to benefit from investment by other carriers which may, in turn, weaken Aer Lingus’ competitive position over time, including restricting its ability to expand and enter routes in competition with Ryanair; and
- reduce Ryanair’s own incentives to compete against Aer Lingus since it would be able to raise prices in the knowledge that a proportion of the profits of any passengers lost to Aer Lingus would be recouped through its shareholding in Aer Lingus.
The investigation of minority shareholdings and “material influence”
The acquisition of minority shareholdings is not uncommon and seldom problematic from a competition perspective. However, in certain circumstances, the exercise of the rights attached to a minority shareholding may permit a shareholder to influence, or indeed compromise, the commercial strategy and behaviour of a competitor.
Minority shareholdings will only be caught under the EU Merger Regulation where de facto control is found. This assessment is distinct from the tests applied in the UK and Germany, and which go beyond the scope of the EU Merger Regulation. For example, the Enterprise Act sets out varying levels of control or influence which may trigger a merger control investigation.
The first is ownership of a controlling stake in a target company (a minimum shareholding of 50 per cent is generally sufficient). De facto control occurs where a minority shareholder is likely to achieve, under the circumstances, a majority at shareholders’ meeting. Material influence occurs where there is a minimum 25 per cent shareholding, whereby the holder can block special resolutions. Material influence can be exercised with shareholdings lower than 25 per cent, for example, the CC previously found that BSkyB’s 17.9 per cent stake in ITV would allow BSkyB to exert material influence over ITV given past voting patterns, BSkyB’s position as ITV’s largest shareholder and BSkyB’s industry reputation.
Indeed, in certain circumstances, the mere existence of a shareholding may be sufficient to exert material influence where the Board of the target refrains from pursuing policies which would conflict with those of a minority shareholder. Ryanair’s current shareholding in Aer Lingus clearly exceeds the 25 per cent threshold for material influence. Whether the shareholding may lead to a finding of a substantial lessening of competition is ultimately a matter for the CC.
Recent developments and the CC’s investigation
On 19 June 2012, Ryanair announced its intention to make a revised €694 million cash bid for Aer Lingus. Ryanair has continued to emphasise in the media what it perceives to be the pro-competitive effects of the proposed tie-up and has also cited the recent pattern of airline industry consolidation (such as the tie-up between British Airways and Iberia and Air France’s shareholding in Alitalia).
However, it would appear that the competition concerns identified during the Commission’s previous investigation remain largely the same. Further, the structural and behavioural undertakings previously offered by Ryanair were not deemed sufficient by the Commission to address the competition issues identified. In particular, the proposed slot package offered as a remedy was, in the Commission’s view, unlikely to stimulate market entry of a size necessary to replace the competitive pressure exercised by Aer Lingus. In addition, the Commission considered that the efficiency claims made by Ryanair were not independently verifiable and relied upon very strong assumptions. This time around, the Commission will want to see that any claimed efficiency gains will likely be passed on to consumers in the form of reduced fares and that costs savings would not affect the quality of service. Aer Lingus’ routes into and out of mainland United States are an obviously attractive proposition and it may well be the case that a more extensive remedies package would be offered this time around.
Ryanair’s revised bid raises interesting issues in relation to the CC’s investigation. If Ryanair were to formally notify the Commission, it may well be the case that a new “relevant merger situation” would be created. In such circumstances, would the CC be required to stand down pending the outcome of the Commission’s assessment?
Presently, the CC is expected to complete its investigation by 29 November 2012.