Joost Haans Tom Jenkins October 3 2013 Should EU merger control cover minority shareholdings? Baker McKenzie | Competition & Antitrust - European Union Joost Haans, Tom Jenkins Competition & Antitrust IntroductionExisting positionTheories of harmLessons from national lawsCommission proposalsImpact on national merger control proceduresCommentIntroductionOn June 20 2013 the European Commission announced a public consultation on proposals to reform the EU merger control regime, including streamlining the process by which cases are referred between the commission and member states, and – more controversially – potentially requiring the notification of minority shareholdings to the commission under the EU Merger Regulation.This update examines the various review mechanisms with which the commission has proposed to address minority shareholdings and identifies some of the issues which these will create. It considers whether requiring the notification of minority shareholdings would place a disproportionate burden on both business and the commission's already strained resources, in view of the relatively minor impact that such shareholdings have on competition as a whole.The commission purports(1) to justify such a proposed policy shift based on the fact that:"at least 53 merger cases have been identified from 1990 where structural links were relevant for the competitive assessment of the transactions... structural links were found to create competition problems in at least 20 of these cases."This represents a total of 0.37% of all notified cases up to July 31 2013, which hardly supports the existence of a significant or growing problem. Rather, the commission's proposal seems to be based on, or heavily influenced by, the specificities of a single yet high-profile case (Ryanair v Aer Lingus), which has already been adequately addressed under UK national merger control law. It is thought that the proposed inclusion of minority shareholdings within the scope of the merger regulation is liable to add a significant and disproportionate burden to corporate and M&A activity in Europe.Existing positionAs in the vast majority of jurisdictions in the European Union and around the world, since its inception in 1989 the existing merger regulation applies only to transactions which result in the acquisition of joint or sole control over one or more undertakings. The acquisition of a minority shareholding not conferring control is outside the scope of the regulation and therefore does not require notification and prior approval from the commission.While minority shareholdings – also referred to as structural links – do not confer control over an undertaking, the commission notes that they may in some cases lead to anti-competitive effects. The commission points out that at present it has the possibility to take pre-existing minority shareholdings into account in the context of a notified merger only where the commission is competent to analyse a separate acquisition of control. In such a case, the commission could order the divestiture of the (pre-existing) minority shareholding. Where a minority shareholding is acquired after the commission has examined a concentration, the commission lacks competence to review the minority shareholding acquisition. The commission is therefore concerned that it does not have existing tools to review such structural links and prevent them where they may harm competition.In the commission's view, the scope of Articles 101 (agreements restricting competition) and 102 of the Treaty on the Functioning of the European Union (abuse of dominance) does not always cover the acquisition of minority shareholdings. For example, a structural link may not constitute an agreement between the acquirer and the target (particularly if the shareholding is obtained through the stock exchange), and thus Article 101 would not apply. Outside the scope of merger control, Article 101 would of course continue to apply to agreements or concerted practices between the minority shareholder and the target (as separate undertakings) in relation to the exercise of the minority shareholding – for example, the exchange of commercially sensitive information.An acquisition of a minority shareholding can only constitute an abuse of dominance if the acquirer has a dominant position at the time of the acquisition, removing minority shareholding acquisitions by non-dominant companies from the scope of Article 102.Theories of harmThe theories of harm identified by the commission are that a structural link may:reduce competitive pressure between competitors (horizontal unilateral effects);facilitate coordination between competitors (horizontal coordinated effects); orforeclose competitors from access to suppliers or customers (vertical effects).Moreover, the commission believes that it is unlikely that structural links between competitors generate efficiencies that could outweigh restrictive effects on competition. With respect to vertical links, the commission considers it more likely that this may generate efficiencies (eg, better alignment of supply and demand where a supplier acquires a minority shareholding in a wholesaler).Lessons from national lawsThat the commission is more concerned about horizontal structural links is clear from its explicit reference to Ryanair v Air Lingus, which seems to be a key driver behind this initiative.While in 2007 and again in 2013 the commission prohibited Ryanair from acquiring control over Aer Lingus, it could not prevent Ryanair from taking a non-controlling minority stake of 29.4% in Aer Lingus, despite Aer Lingus' claims that Ryanair used its shareholding to restrict competition between the two carriers. On August 28 2013 the UK Competition Commission did what the European Commission could not do: it required Ryanair to reduce its shareholding in Aer Lingus to 5%. That a national authority has the means to address competition concerns resulting from a minority shareholding must be taken into account when assessing the need for bringing minority shareholdings under EU merger control.In the Commission Staff Working Document, the European Commission refers explicitly to national merger control rules in countries such as Austria, Germany, the United Kingdom, the United States, Canada and Japan that do offer national competition authorities the possibility to review structural links (provided, of course, that the national filing thresholds are satisfied).Commission proposalsThe commission is considering several mechanisms to investigate and, if necessary, intervene against anti-competitive structural links. The substantive test would be the same as under the merger regulation (ie, whether the transaction is likely to significantly impede effective competition).Notification systemThe first option proposed by the commission is simply to extend the scope of the regulation to include the acquisition of a minority shareholding. This would mean that an acquisition of a minority shareholding would be subject to prior review by the commission if the filing thresholds were met (the notification system). The acquisition could be implemented only after the commission had approved the acquisition, as is the case with existing notifiable concentrations.The notification system is virtually certain to result in a significant increase in merger filings to the commission. Given the time and expense involved in seeking regulation approval for transactions, this approach represents the least proportionate and most burdensome of the proposed mechanisms.Selective systemThe second option would involve the commission selecting cases for investigation (the selective system). This could be through a system of self-assessment, whereby a party self-assesses whether the minority shareholding that it intends to acquire may restrict competition. The parties would be able to implement the acquisition, but the commission would have discretion to investigate the transaction – for example, on the basis of a complaint. This system would not burden the parties with making a notification and suspending implementation until approval was obtained; but in the absence of existing EU precedents, the parties and their legal advisers lack the precedent necessary to undertake such an assessment with any degree of certainty. If the commission eventually opts for the self-assessment system, it would be imperative to publish clear guidelines on which parties can rely. This should not only allow for proper self-assessment, but also ensure a sufficient degree of legal certainty. Legal certainty also requires that any ex poste review be subject to a limitation period after which it can no longer act against the acquisition of a minority shareholding.Transparency systemAn alternative mechanism would be to oblige parties to inform the commission of a structural link if it is prima facie problematic by filing a short informal notice (the transparency system). This notice would be published to make third parties and member states aware of the transaction. It is unclear what information this notice would include, but it should allow third parties and authorities to make a proper (preliminary) assessment and therefore the information in the notice should not be too general. To be sufficiently informative, completion and submission of the notice may still present a significant burden on companies that could be considered disproportionate. An additional concern is that establishing whether a structural link is prima facie problematic also requires self-assessment by the companies concerned. Again, it would be imperative that the commission provide guidance to allow for self-assessment and ensure legal certainty.Under both types of selective system (ie, the self-assessment and transparency system), the commission is considering allowing parties to make a full voluntary notification, instead of relying on a self-assessment. The key rationale is that this would enable parties to obtain legal certainty. This procedure would be suspensory – the parties could not implement the minority acquisition before receiving commission approval. Given the burden of preparing the notification, and that pre-notification periods are already long (eight to 10 weeks in an average case) on top of the formal review periods, it is unlikely that many businesses will find this route attractive.Safe harbourRegardless of what system might be adopted, it appears advisable to introduce a safe harbour for reasons of both legal certainty and practicality. This safe harbour would allow parties clearly to establish which structural links fall outside the commission's scrutiny. This could be in the form of a level of shareholding (eg, 10% as under the US system) or a substantive criterion, such as competitively significant influence (Germany) or material influence (United Kingdom). However, the commission should provide additional clear guidance as to how the safe harbour should be interpreted and applied.Non full-function joint venturesFor structural links in the context of a non full-function joint venture, the risk that these links could result in coordination between the parents can usually be addressed under Article 101 of the treaty. In exceptional circumstances (ie, where a joint venture is not the result of an agreement between the parents), the minority shareholding by one of the parents in the joint venture cannot be assessed under Article 101. The commission proposes broadening the scope of the regulation to cover this discrete scenario, which is likely to apply only to a small number of cases.Impact on national merger control proceduresIt is unclear how these proposed changes to the EU regime would affect national merger control rules. For example, would member states be able to ask the commission for a referral back of a minority shareholding transaction, even though this would fall outside the scope of the national merger control regime?CommentWhen it launched this consultation, the commission stated that:"The proposal aims to make EU merger control even more business-friendly by cutting red tape and streamlining procedures. This initiative is part of the Commission's overall effort to make administrative procedures less burdensome for business, thereby stimulating growth and making Europe more competitive."The proposals may fail to live up to this lofty ideal. All of the measures proposed are likely to place a significant burden on companies, as well as increasing the workload of the commission and national authorities. In most cases, minority acquisitions will have no anti-competitive effects. Where this is not the case, Articles 101 and 102, as well as national merger control laws, will typically provide an appropriate means of scrutiny.For further information on this topic please contact Joost Haans or Tom Jenkins at Baker & McKenzie by telephone (+32 2 639 36 11), fax (+32 2 639 36 99) or email ([email protected] or [email protected]).Endnotes(1) See Annex 2 of the Staff Working Paper which accompanies the public consultation.