The European Commission (“Commission”) has approved without conditions Rosneft’s US$ 54.8 billion acquisition of TNK-BP. The Commission’s 8 March approval came two months after the Russian Federal Antimonopoly Service (“FAS”) announced that it had conditionally approved the merger. The Commission said that it examined whether Rosneft operates independently of the Russian state but that this question was “ultimately left open” since the transaction did not give rise to competition concerns in the EU. See “Russia Gives Go-Ahead to Rosneft’s Acquisition of TNK-BP,” Energy Newsletter, February 2013 available at www.kslaw.com/library/newsletters/EnergyNewsletter/2013/February/article2.html.

EU Competition Clearance without Conditions

TNK-BP was a joint venture between BP and a consortium of Russian billionaires. The Commission examined the parties’ overlapping activities in the exploration, development, production, and sale of crude oil and natural gas. As regards possible vertical effects, the Commission assessed the link between the development, production, and sale of crude oil and the production and supply of certain refined products. The Commission concluded that the merged group “would continue to face constraints from a number of strong competitors” and its customers would have the choice of switching to other suppliers and other transportation for their oil demands. The Commission therefore concluded that the transaction would not significantly impede effective competition in the EU and gave an unconditional approval under the EU Merger Regulation (“EUMR”).

By contrast, the FAS was faced with a transaction that reduces Russia’s oil companies from four to three. The FAS secured a remedies package including a requirement for Rosneft to sell TNK-BP’s petrol stations in Russian regions where the transaction increased the merged entity’s market share above 50 per cent. This divestment remedy was supported by behavioural commitments including obligations on Rosneft to refrain from discriminating between its own branded retailers and third-party petrol stations, prohibitions on refusal to supply retailers, and a requirement to obtain FAS approval for its pricing and distribution arrangements.

Impact of State Ownership

The Commission also examined whether Rosneft as a state-owned company operated independently of the Russian state, or whether there was scope for the state to coordinate the behaviour of state-owned companies in the sector. The Commission left this question open since it did not find any competition concerns.

The Commission stated that the assessment of the links between Russian state-owned companies in the same sector relied on “the same criteria as those applied for assessing mergers between European state-owned companies.” It will be interesting to see how the Commission articulates this reasoning in its published decision when it is available, while recognizing that the issue of state ownership was ultimately not determinative in this case.

Merger control in transactions involving states, state-owned enterprises (“SOE”), and former state monopolies applies in similar ways to merger control in other transactions involving purely private parties although there are some specific considerations to take into account.

In order for a transaction to be subject to the exclusive review of the Commission in the EU under the EUMR it must satisfy the turnover thresholds set out in EUMR Article 1. The relevant turnover is that of the undertakings participating in the concentration which may extend to their wider groups. The relevant group of companies under the EUMR is not necessarily the same as the group used for accounting purposes. [1]

In relation to an SOE, the concept of a group is to be read in accordance with recital 22 of the EUMR which provides that “[t]he arrangements to be introduced for the control of concentrations should, without prejudice to Article 86(2) of the Treaty, respect the principle of non-discrimination between the public and the private sectors. In the public sector, calculation of the turnover of an undertaking concerned in a concentration needs, therefore, to take account of undertakings making up an economic unit with an independent power of decision, irrespective of the way in which their capital is held or of the rules of administrative supervision applicable to them.

The practical effect of this provision is that only those undertakings that are part of the same economic unit having an independent power of decision will be considered. The Commission will therefore analyze whether the SOE has independent decision-making power. If so, it indentifies the ultimate state entity with an independent decision-making power and the turnover of that entity and all other undertakings controlled by that entity will be taken into account.

The Commission has applied this approach in mergers involving SOEs in relation to the calculation of turnover and in conducting its competition assessment. The application of this approach has come under scrutiny in relation to acquisitions by non-EEA SOEs due in particular to an increase in the number of mergers involving Chinese SOEs. In these cases, the Commission has left open many issues as to the implications of state ownership by non-EEA entities, both in terms of procedure and substance.

This approach echoes the general (inconclusive) statements of the Commission clearing the Rosneft acquisition of TNK-BP, namely that the Commission is applying the EUMR to transactions involving a non-EEA SOE regardless of nationality. The Commission has stated that its conclusions as to the competitive impact of the transaction remain unchanged whether or not other SOEs were taken into account. For example, in Petrochina/ Ineos/ JV [2], the Commission reviewed under the EUMR the creation of three ventures jointly controlled by Ineos and PetroChina as part of a single transaction. The Commission stated that its assessment “would remain unchanged also taking into account the market shares of the other Chinese state-owned companies active in the oil sector (i.e., Sinopec, and China National Offshore Oil Corporation) .

Conclusion

Having now secured EU approval, Rosneft may close its purchase of TNK-BP representing the world’s largest publicly traded oil group.

As with other merger cases involving SOEs from outside the EEA, particularly Chinese acquirers, the Commission adopted a flexible approach in considering whether Rosneft operated independently of the state. The Commission has stated that it treats such acquisitions neutrally under the EUMR. However, it would not be wise to assume that acquisitions involving state-owned parties are necessarily straightforward nor that they do not raise specific issues beyond the mainstream merger rules. It is therefore important that parties to such acquisitions, whether involving SOEs from Europe or outside, take account of EU merger control assessment.