The UK Supreme Court has recently refused an application by Ryanair Holdings Plc (“Ryanair”) for permission to appeal a decision of the UK Court of Appeal requiring Ryanair to divest itself of the majority of its 29.82% shareholding in Aer Lingus Group Plc (“Aer Lingus”), by reducing its stake to no more than a 5% shareholding.
After investigating Ryanair’s minority stake in Aer Lingus, the UK Competition Commission (“UKCC”) found that the two companies had ceased to be distinct enterprises (for the purposes of the Enterprise Act 2002 (“EA02”)) as a result of Ryanair’s ability to exercise material influence over the policy of Aer Lingus, and that this amounted to a relevant merger situation. The UKCC concluded that: (i) this led, or may be expected to lead, to a substantial lessening of competition in the markets for air passenger services between Great Britain and Ireland; and (ii) Ryanair’s incentives as a competitor were likely to outweigh its incentives as a shareholder.
To remedy the substantial lessening of competition, the UKCC decided that a divestiture of Ryanair’s shareholding in Aer Lingus, sufficient to ensure that Aer Lingus would not be impeded in pursuing its own commercial policy and strategy, was required. To achieve this, the shareholding retained by Ryanair in Aer Lingus would need to be at a sufficiently low level to ensure that there would be no realistic prospect that Ryanair would be able to block a special resolution or to act in other ways to impede or deter a combination between Aer Lingus and another airline, or otherwise restrict Aer Lingus’ ability to compete effectively.
Within this context, it is also worth noting that one of the main proposals outlined as part of the public consultation on possible improvements of the EU Merger Regulation (that closed on 3 October 2014) was to increase the scope of the EU Merger Regulation to bring acquisitions of non-controlling minority shareholdings within its scope. Currently, the EU Merger Regulation does not allow the Commission to examine the effects if a company acquires a minority interest in a competitor (although the rules of some Member States (for example the UK) allow their national competition authorities to do so). Interestingly, in March 2015, Commissioner Margrethe Vestager, at a keynote address in Brussels, indicated that the proposals in the White Paper may need to be examined further.
In the UK, a relevant merger situation arises under the EA02 where:
- two or more enterprises have ceased to be distinct, or will cease to be distinct, as a result of being brought under common ownership or control; and
- one or both of the following tests is met
- the UK turnover of the enterprise being acquired exceeds £70 million; and / or
- the transaction brings about or increases a share of supply of goods or services of any description of 25% in the UK or a substantial part of the UK; and
- the transaction has not yet occurred, or it has occurred, but the authorities are still within the four month window within which they have an opportunity to intervene (four months from completion or – if later – the time the transaction was made public).
The EA02 distinguishes between three levels of interest that amount to ‘control’:
- De jure control or legal control arises where a controlling interest is acquired;
- De facto control arises where although the party does not have a controlling interest, it nevertheless controls the policy of the business; and
- Material influence arises where a party is not able to control the policy of the business, but is able to influence the strategic direction of the business (for example through exercise of voting rights or Board representation).
Both de facto control and material influence can capture the control of minority stakes in a company. Material influence will be assessed on a case-by-case basis and the Competition and Markets Authority will have regard to all the circumstances of the case including the size of the shareholding (there is a presumption of material influence above 25%), any specific voting and veto rights, and influence over other shareholders and / or the Board.
In Ireland, under the Competition Act 2002, a merger or acquisition occurs if –
- 2 or more undertakings, previously independent of one another, merge, or
- one or more individuals who already control one or more undertakings, or one or more undertakings, acquire direct or indirect control of the whole or part of one or more other undertakings, or
- the acquisition of part of an undertaking, although not involving the acquisition of a corporate legal entity, involves the acquisition of assets (including goodwill) that constitute a business to which a turnover can be attributed.
Control, in relation to an undertaking, shall be regarded as existing if, by reason of securities, contracts or any other means, or any combination of securities, contracts or any other means, decisive influence is capable of being exercised with regard to the activities of the undertaking and, in particular, by
- ownership of, or the right to use all or part of, the assets of an undertaking, or
- rights or contracts which enable decisive influence to be exercised with regard to the composition, voting or decisions of the organs of an undertaking.
While the ECJ recognised the potential for the acquisition of a minority interest to infringe antitrust / competition rules as far back as 1987, (Philip Morris case (Cases 142 and 156/84)), the holding of a minority interest in competitors now, at last, seems to be under real scrutiny by regulators. Therefore, companies holding, or proposing to acquire, minority interests in competitors would be well advised to seek antitrust / competition law advice. The Ryanair / Aer Lingus decision makes it clear that even if the holding / acquisition of a minority shareholding in a competitor does not lead to full control over that competitor it may nonetheless have significant effects on competition, which may in turn, depending on the powers available to the local regulatory body, trigger an investigation and a requirement to dispose of part of that shareholding!