Over the summer the European Commission (EC) published a white paper – Towards More Effective EU Merger Control – and supporting materials. The EC is primarily seeking feedback on possible ways to deal with: (i) the acquisition of non-controlling minority shareholdings and (ii) the case referral system between the EC and Member States’ National Competition Authorities (NCAs). Below, we look at what the EC has in mind for non-controlling minority shareholdings. The deadline for submissions is October 3, 2014 (see our previous briefing on the 2013 consultation on EU merger control reform).
Austria, Germany, and the United Kingdom, as well as certain third countries including United States, Japan, and Canada, have legislation that clearly permits the relevant competition authorities to review minority shareholdings. In contrast, the EC does not enjoy such a clear mandate via the EU Merger Regulation (EUMR). However, the EC would like to be able to review ex ante transactions that result in structural links between competitors or in a vertical relationship, and it believes that an ex-post control via Articles 101 and 102 TFEU are not the best ways to go about it.
In its 2013 Staff Working Document, the EC floated three possible ways to deal with minority shareholdings:
- A notification system: all relevant structural links would have to be notified to the EC in advance and could not be implemented before the EC has cleared them. The EC would decide in each case whether or not the transaction is authorized.
- A selective process:
- Self-assessment system: the parties would be able to complete the transaction, but the EC, either following a complaint or ex-officio, could launch an investigation at any time; or
- Transparency system: where a prima facie problematic structural link exists, the parties would need to file a short information notice with the EC (that would be published on DG COMP’s website and/or the Official Journal) prior to the transaction.
The Preferred Option: a “Targeted” Transparency System
It appears that the EC is favoring a “targeted” transparency system because such a system will do what the EC needs it to do: (i) capture potentially anti-competitive acquisitions of non-controlling minority shareholdings; (ii) avoid any unnecessary and disproportionate administrative burden on companies, the EC and NCAs; and (iii) fit within the existing EU and national merger control regimes.
Under the proposal, if a transaction meets the EUMR turnover thresholds and creates “competitively significant links,” the parties would need to submit an information notice to the EC. A “competitively significant link” would exist if:
- A party acquires a minority shareholding in a competitor or vertically related company (i.e., there must be a competitive relationship between the acquirer and seller); and
- The acquired shareholding is:
- approximately 20% or
- between 5% and approximately 20%, but accompanied by other rights that give the acquirer a de facto blocking minority, a seat on the board of directors, or access to commercially sensitive information about the target.
The Proposed Procedure
Step One: An acquirer would need to evaluate whether its proposed shareholding purchase would create a “competitively significant link” with the target. If the purchase would create such a link, the acquirer would submit an information notice to the EC. The submission would include: (i) information about the parties; (ii) the parties’ turnovers; (iii) a description of the transaction; (iv) pre- and post-transaction shareholding levels; (v) an explanation of any rights attached to the proposed shareholding; and (vi) market share data.
Step Two: The EC and Member States would have approximately 15 working days to act on the submission, pending which the parties would not be able to close their transaction. The EC would review the information and decide whether it would like to further investigate the proposed transaction. The parties would only have to submit a full notification if the EC decided to initiate an investigation. Member States would also be able to decide whether to request a referral. During the waiting period the parties would not be able to complete the transaction.
If the authorities have not acted on the information notice during the 15 day waiting period, the parties could complete the transaction. After the 15 day waiting period, the EC would still be able to investigate the transaction for four to six months. During the investigation, the EC would have the power to issue interim measures if the transaction has already been (at least partially) implemented.
The EC maintains that the proposed system is best for everyone and that it would not affect the liquidity of the private equity market or companies’ restructuring efforts. While the EC maintains that only 20 – 30 cases per year are likely to meet the requirements for an information notice, the reality is that the new proposed requirements will more generally slow down a larger number of transactions, which will need to be assessed. It will also introduce new uncertainties for investors, not least because they will have to look over their shoulders for the next six months to see if their transactions are going to be investigated.