On 28 July 2011, the UK Competition Appeal Tribunal (“CAT”) handed down its judgment in the Ryanair/Aer Lingus case. It decided that the UK Office of Fair Trading (“OFT”) was not out of time to investigate and refer Ryanair’s minority stake in Aer Lingus to the Competition Commission for detailed review, should it decide to do so.
This case has ignited an interesting debate because the result of the CAT’s judgment is that the OFT can (and will) investigate Ryanair’s minority stake in Aer Lingus three years after the European Commission’s decision to block Ryanair’s acquisition of Aer Lingus’s entire share capital, and four years after Ryanair started to acquire shares in Aer Lingus. At the same time, commentators have questioned whether the circumstances in this case are likely to be repeated. Indeed, the CAT stated that the facts were unusual and questioned how often they would recur in the UK. It added that the time bar problem which gave rise to the CAT hearing was bound up in UK legislation and unlikely to arise in the same form elsewhere in the EU.
While the facts are unusual, there are important lessons which businesses can draw from this case and potentially serious implications for companies acquiring shares in certain contexts.
In order for a merger or an acquisition to be reviewable by the Commission under the EU Merger Regulation (“the EUMR”), the transaction must constitute a “concentration”. A transaction qualifies as a concentration when there is a lasting change in the nature of control of an entity. Control is determined according to the “decisive influence” test. An entity exerts decisive influence over another when it controls its day-to-day commercial decision-making.
The EU one-stop shop principle means that member states cannot review and apply their own rules to a merger once the Commission has claimed or accepted jurisdiction.
There is no harmonisation of member states’ merger rules with the EUMR. Consequently, member states have different tests to determine control. The lowest control threshold in the UK is whether one entity has “material influence” over another – a lower threshold than the “decisive influence” required for EUMR purposes.
100% shareholding On 23 October 2006, Ryanair launched a public bid for the entire share capital of Aer Lingus and notified the proposed acquisition to the Commission under the EUMR. Following a detailed investigation, the Commission announced its decision on 27 June 2007 to block the merger. Ryanair unsuccessfully appealed the Commission’s decision to the General Court, which gave judgment on 6 July 2010.
Minority shareholding In the meantime, between September 2006 and August 2007, Ryanair had gradually increased its shareholding in Aer Lingus to 29%.
In July – and again in August 2007 – Aer Lingus made a submission to the Commission arguing that it should require Ryanair to divest its minority stake. The Commission concluded that it did not have jurisdiction because Ryanair’s minority stake did not constitute a concentration: its 29% shareholding did not confer “decisive influence”. Therefore, there was no relevant merger situation for review under the EUMR. Aer Lingus unsuccessfully appealed the Commission’s decision to the General Court, which again gave judgment on 6 July 2010.
On 29 October last year, the OFT announced that it had commenced an investigation into Ryanair’s minority shareholding (which it can do of its own volition where a merger situation exists under the UK rules).
Ryanair argued that the statutory time period for review by the OFT had elapsed and that the OFT should have begun its investigation in 2007 after the Commission’s decision to block the 100% share acquisition (when Ryanair’s shareholding was 25%). On 4 January 2011, the OFT issued a reasoned decision explaining why this was not the case. On 7 January 2011, Ryanair appealed to the CAT.
The CAT judgment
The CAT concluded that the OFT had a duty to avoid potential conflicts with EU law, based on the UK’s duty of sincere co-operation and the requirement under the EUMR that no member state shall apply its national competition legislation to a concentration in relation to which the Commission has accepted or claimed jurisdiction. It found that until the final determination of the appeals against the Commission’s decisions – ie 17 September 2010 – the OFT would have risked breaching EU legislation if it had commenced an investigation.
It is not inconceivable that similar circumstances could arise in the EU and its member states in the future. It is not unusual for shareholders gradually to increase their stakes in companies. Moreover, other member states, including those with mandatory filing regimes (as opposed to the voluntary regime in the UK) have lower control thresholds than decisive influence.
In particular, companies should look out for member states which have both (1) a low control threshold to determine whether there is a reviewable concentration, and (2) a deal/party size thresholds that are easily met.
Germany is an example of such a member state, being known to trigger filing requirements regularly because of its low turnover thresholds. It has two tests (among others) which present a lower threshold than decisive influence. If either is met, the transaction is reviewable (subject to meeting the turnover test).
The first is the acquisition of 25% of a company’s capital or voting rights. The second is the requirement to notify the acquisition of direct or indirect “competitively significant influence” over the target. In the 2008 A-Tec case, the Federal Cartel Office (“FCO”) ordered the dissolution of a merger that involved the acquisition of a 13.75% share in a company by a direct competitor. Although the acquirer did not have decisive influence over the target, the FCO held that the 13.75% share of a direct competitor was sufficient and provided an incentive to block decisions due to the typically low attendance at the shareholders’ meetings.
It is everyday practice to consider the merger filing rules in multiple jurisdictions when a company wishes to acquire all of the assets or shares in another. In the EU, it is less common to have to consider notifying the acquisition of minority stakes than, for example, in the U.S., where merger filing obligations are not always determined by the issue of control. However, perhaps the Ryanair/Aer Lingus case ought to serve as a reminder that the rules of individual member states can differ from those prescribed by the EU (as well as from each other). When a transaction does not qualify as a concentration for review under the EUMR, companies should not rule out the possibility of review under the rules of member states.