Although a growing number of jurisdictions have adopted a merger control regime, there is no uniform approach to the acquisition of noncontrolling minority shareholdings.

Many merger control regimes, including the EU merger regulation (EUMR) and most EU Member State national regimes, apply only to transactions leading to a change in control. They do not apply to the acquisition of minority shareholdings that are not conferring (joint) control to the acquirer. As a general rule, “control” is defined as the ability to take or veto strategic decisions concerning the target company, such as budget, business plans and the appointment of management personnel.  

In other jurisdictions, a minority shareholding may fall within the scope of the regime if it is above a certain level of shareholding, or even independent of the level of the shareholding, provided that certain other thresholds are fulfilled. This is the case notably in Germany, the United Kingdom and the United States.

Case Study: Germany

The German Act against Restraint of Competition applies to the acquisition of shareholdings leading to a shareholding of more than 25 per cent or more than 50 per cent, regardless of when the acquisition was made, independent of the question of control. This has the advantage of being a simple, clear criterion. In addition, German merger control is relatively light on information requirements. Unlike the Hart-Scott-Rodino Act filing requirement in the United States, or the “Form CO” used by the European Commission, a not i f icat ion in Germany may—in straightforward cases—amount to not much more than a few pages describing the transaction, the activities of the parties and market shares based on preliminary market definitions. Therefore, although the German merger control regime covers a large number of transactions, in many cases the relevant authority and businesses can deal with the notification requirement relatively easily.  

There is, however, one complicating factor: an additional test makes a notification compulsory in cases where the acquisition of a minority shareholding leads to a “competitively signif icant inf luence”. While it has been established that this covers influence below the level of control and can apply to the acquisition of shareholdings even below 10 per cent, depending on additional factors, the exact scope of the test remains unclear. A similar situation arises in the United Kingdom, where a test of “material influence” catches those transactions that fall below the threshold of control. This leads to uncertainty for businesses around the world as to whether they would have to notify the German competition authority of the acquisition of minority shareholdings in Germany and often even expert counsel cannot give a definitive answer.  

Many market commentators have argued this test should be abandoned in favour of the general trend of only investigating controlling shareholdings under merger control rules.  

Non-Controlling Minority Shareholdings: An “Enforcement Gap” in Europe?

The EU Commission has long advocated restricting merger control to the acquisition of controlling stakes. However, the tide seems to now be turning. The Commission has recently taken a closer look at the competitive concerns relating to the acquisition of non-controlling stakes.  

In November 2011 the Commission announced its intention to conduct a study on the economic importance of minority shareholdings in the European Union. As a first step, the Commission wants to create a database that maps out existing minority shareholdings that it could then use to identify a potential enforcement gap. If there is an enforcement gap, the Commission’s second step would then be to determine whether it should be enabled to review transactions involving minority shareholdings.

Competition Concerns Relating to Minority Shareholdings

At least in theory, there may be competition concerns relating to minority shareholdings that fall short of conferring control, as they are still capable of reducing the incentives of the parties to behave independently of their competitors. Examples include the following:

  • Minority shareholdings could create incentives for the acquiring firm to raise its prices unilaterally.
  • The acquiring firm may still influence materially the decisions of the target company in relation to key competitive parameters such as price, quality or strategic expansion, so as to confer a competitive advantage on the acquirer’s other interests in the market.
  • Cross-shareholdings across companies could also, in principle, facilitate coordination between competing firms if they enable the sharing of confidential market information.

Is a Regulatory Response Needed?

It is clear the Commission does not have the relevant and effective means to address potential competition issues relating to minority shareholdings that fall below the existing threshold of control. But this does not automatically mean the Commission should be given those means. Rather, in deciding whether or not to take action to fill this “enforcement gap”, the pro-competitive effects of regulatory intervention must be balanced against the costs:  

  • Competition authorities would need more resources. Given the very limited amount of transactions that may actually raise competition issues, the resources needed to review all of them are unlikely to be worth the cost.
  • There would be an increase in the regulatory burden placed on businesses. This burden would be higher under the EUMR’s system of mandatory notifications than, for example, the United Kingdom’s system of voluntary notification, or the US and German systems that are substantially lighter on information requirements.
  • Extending jurisdiction beyond the clear-cut threshold of control to a vague “influence” test would add substantially to the regulatory uncertainties in merger assessments. One important benefit from the current system is clarity: the concept of “control” is clear enough to give businesses and regulators guidance on which transactions require a notification to the Commission.

The Commission should limit the review to acquisitions above a certain fixed threshold (e.g., 25 per cent) and not introduce a vague “material inf luence” or “competitively significant influence” test. Furthermore, the Commission should introduce a special form for the review of shareholdings below the threshold of control that would require as little information and analysis as possible, so businesses and regulators do not spend time discussing the notification of harmless financial investments.