Controversial EC proposals to review certain acquisitions of non-controlling minority acquisitions are now out for consultation until 3 October 2014. The proposals, contained in a White Paper, come amidst continued opposition from businesses and the investor community, and are of particular concern to investors acquiring minority stakes in businesses active on the same or closely related markets, and to firms acquiring minority interests in joint ventures or other strategic alliances. Depending upon consultation feedback, the EC may put forward a legislative proposal to revise the 2004 EU Merger Regulation (“EUMR”) as early as next year under the new Commission, with entry into force sometime in 2016.
Prior notice requirement for minority stakes
Under the EC’s proposed “targeted transparency” notification system, acquirers would need to submit a notice to the EC for all acquisitions of stakes in competitors or vertically related companies (e.g. suppliers or customers) meeting the EU merger turnover thresholds where the acquisition a) exceeds “around 20%” of voting shares, as such shareholdings generally confer corporate rights and change financial incentives, OR b) between 5% and 20%, provided the shareholding is accompanied by certain rights — such as the right to nominate a member of the board, legal or de facto blocking rights, or rights to obtain access to the target’s competitively sensitive information — i.e. stakes which go beyond mere financial investment. It would be up to the acquirer to self-assess whether its investment is notifiable (as a so-called “competitively significant link”). There would be a “safe harbour” for shareholdings of 5% and below, where no self-assessment or notification would be required.
Examples of potentially notifiable investments include:
- An airline seeking to acquire a 20%+ stake in a company owning a competing airline (covering the Ryanair/Aer Lingus situation);
- A private equity house whose portfolio includes food companies, seeking to acquire a 9% stake in a German-based food packaging company, together with the right to nominate a member of the German company’s Board;
- An investment bank or hedge fund with various investments in pharmaceutical and medical device companies, increasing its stake in a hospital group or pharmacy chain to 6%, with access to commercially sensitive information on the target; and
- A TV broadcaster acquiring 17.9% in a competing TV company where its stake enables it to veto strategic management decisions relating to the target (the BSkyB/ITV situation).
Notice and Timing
The information notice that acquirer must make to the EC would be shorter than the Form CO/Short Form CO but must still contain “information relating to the parties, their turnover, a description of the transaction, the level of shareholding before and after the transaction, any rights attached to the minority shareholding and some limited market share information.”
Once the notice has been submitted to the EC, the acquirer would be able to complete the acquisition after a short waiting period (of around 15 working days). Exceptions to the waiting period may be made for series of acquisitions via a stock exchange, provided that voting rights are not exercised. The EC would nevertheless have a four to six month window to decide whether the transaction merits a full EUMR investigation (regardless of implementation). If the EC requires a full merger review, then the parties would need to submit a more detailed merger filing. The normal EUMR standstill obligation would apply from this point onwards and the EC may require the ring-fencing of assets/ “hold separate” measures. The transaction would then be assessed in the usual way, including the risk of unwinding the transaction/divestment down of the stake. In order to obtain legal certainty in deals involving major competitors, parties may choose to make a full EC notification before the deal is implemented.
Minimising the impact for investors and businesses
From meetings we have had with the EC it is clear that the EC is seeking to strike a fair balance between plugging the perceived enforcement gap (highlighted in the Ryanair/Aer Lingus case), and the interests of our clients and other investors and businesses, on behalf of which we are pushing to keep the administrative burden as light as possible. We continue our dialogue with the EC in order to limit disruption to investment activity, and minimise cost burden and publicity requirements. We are feeding our experiences of merger reviews in the UK, Germany, Austria and other “minority” merger control jurisdictions into our communications with the EC, including the point that the EC’s proposed 5% threshold is lower than that typically applied in these other jurisdictions.