The European Commission proposes reforms of the EU Merger Regulation
On 9 July 2014, the European Commission (the Commission) published a White Paper1 titled 'Towards more effective merger control', together with a staff working document and impact assessment. The Commission proposes to extend the European Union Merger Regulation (the EUMR) to cover certain acquisitions of non-controlling minority shareholdings and to streamline the rules for transferring merger cases from Member States to the Commission and vice versa. The Commission also proposes a number of procedural simplifications, including notably that joint ventures outside the European Economic Area (the EEA) would no longer require notification under the EUMR.
The White Paper proposals reflect comments submitted in response to the Commission’s June 2013 consultation (the 2013 Consultation) on possible reforms of the EUMR.2 The consultation closed on 3 October 2014.
EUMR coverage of non-controlling minority shareholdings
In the White Paper and the 2013 Consultation, the Commission argues that it needs the power to investigate acquisitions of some non-controlling minority shareholdings to be able to address all sources of possible harm to competition. The Commission says that it does not have the necessary powers under Articles 101 and 102 of the Treaty on the Functioning of the European Union (the TFEU), although the Commission has not chosen to investigate the effect of minority shareholdings under Articles 101 and 102 TFEU since the adoption of Regulation 1/2003, which eliminated the possibility for companies voluntarily to seek Commission review of potentially anti-competitive agreements.
In its 2013 Consultation, the Commission discussed three possible options for extending the EUMR to cover non-controlling minority shareholdings: the 'self-assessment system', the 'transparency system' and the 'notification system'. Under the self-assessment system, a company acquiring a non-controlling minority interest in another company would assess whether the acquisition could raise competition issues and choose whether to notify the transaction under the EUMR (assuming the turnover thresholds were met). If a party decided not to notify, the Commission would presumably have jurisdiction to require a notification, including after closing. Under the transparency system, the acquirer in transactions meeting certain criteria would be required to file a short information notice, which the Commission would then publish for public comment. The Commission would then have the option to require a full notification. Under the notification system, a full notification would be required from the outset for any transaction meeting the relevant criteria.
The proposed 'targeted transparency' system
In the White Paper, the Commission now proposes to introduce a so-called 'targeted transparency system'. This approach would require parties to file a short information notice in respect of transactions involving the acquisition of minority shareholdings in competitors or vertically related companies (the Commission calls this a 'competitively significant link'), where the minority shareholding creates a significant link, which the Commission proposes to define as a shareholding above 20 per cent or between 5 per cent and 20 per cent but combined with rights such as the right to nominate a member of the board, exert influence, or obtain access to the target’s competitively sensitive information.
When an information notice is submitted, the Commission proposes a two-step process.
- During an initial waiting period, possibly 15 working days, the parties would not be allowed to implement the transaction, and Member State authorities could request referral of the transaction to them.
- During a second 'prescription period', which the Commission suggests could be four to six months from filing, the parties could implement the transaction, but the Commission could open an investigation. In that case, the acquirer would be required to submit a full notification and any remaining implementation steps would be suspended.
The Commission could also adopt interim measures, such as hold separate orders. Alternatively, if the acquirer wanted legal certainty more quickly, it could file a notification immediately without filing an information notice and waiting for the Commission to decide whether to investigate.
In conducting its investigations, the Commission proposes to apply the EUMR’s substantive standard applicable to acquisitions of control - i.e. whether the transaction would significantly impede effective competition. Although the White Paper does not discuss the EUMR’s turnover thresholds, it appears that the thresholds for determining whether a transaction has a 'Community dimension' and therefore falls within the EUMR would remain the same. On the other hand, though the White Paper does not discuss the point, for the sake of consistency the definition of the 'undertakings concerned' included in the turnover calculation would presumably be broadened to include not only controlling shareholders but also non-controlling minority shareholders with shareholdings and/or rights whose acquisition would trigger an information notice requirement under the revised system.
The Commission’s proposals raise a number of practical and interpretive questions.
For one thing, the parties would have to assess whether they are competitors or have a vertical relationship to determine whether their transaction would give rise to a competitively significant link for purposes of the revised EUMR. The White Paper indicates that the term 'competitor' in this context should be interpreted broadly, rather than being limited to competitors in rigorously defined antitrust product and geographic markets.
The concept of 'vertical link' is also very broad. The Commission does not discuss the nature of the vertical relationships that would be deemed to create a competitively significant link, or whether a de-minimis threshold would apply. To avoid unnecessary information notices, it would seem appropriate to require vertical links to exceed certain thresholds. For example, a vertical link could be said to exist only if the parties’ purchases and sales exceeded both certain absolute values and minimum percentages of their total purchases and sales. An even better approach, but one that might be more difficult to administer, might find a vertical link only where the parties’ purchases and sales relate to key inputs.
The nature of the rights that would make a shareholding between 5 per cent and 20 per cent 'significant' is also unclear. Presumably the ability to 'exert influence' refers to veto rights that would not give rise to joint control for purposes of the existing EUMR, but this is not clear. Similarly, the right to obtain access to competitively sensitive information implies greater rights than general information rights under applicable corporate law, but again this is not clear.
Furthermore, although the Commission does not say, presumably the competitive significance tests would be applied on a group-wide basis. This could create a problem in the case of multinationals engaged in a wide range of activities or financial buyers, such as venture capital or private equity firms, who invest in companies in many different industries. In this context, the Commission’s assurances that the proposed system would not involve a significant burden, because 'benign' transactions would not trigger an information notice requirement, may be misplaced.
As noted, moreover, although the White Paper does not discuss the definition of 'undertaking concerned', for the sake of consistency, the final amendments can be expected to require the parties to take account not only of the turnover of all shareholders (and their groups) that exercise control over the target, but also non-controlling minority shareholders whose shareholdings create a significant link. If so, the number of undertakings concerned could be greatly expanded, potentially leading to many more transactions having an EU dimension.
Given the Commission’s broad and vague definition of competitively significant links, acquirers may err on the side of filing information notices to obtain legal certainty, even in cases raising no competitive issues. Similarly, if the Commission proposes to expand the notion of undertakings concerned to include non-controlling minority shareholders, many more transactions can be expected to meet the EUMR turnover thresholds. Thus, the Commission’s estimate that the proposed changes would result in an additional 20 to 30 notifications per year may be significantly too low.
Reform of the EUMR’s case referral mechanisms
The Commission proposes to eliminate the two-step process for referral of cases subject to notification in three or more Member States at the request of the notifying party, which currently requires filing of a Form RS, followed by submission of a notification on Form CO if the relevant Member States do not exercise their veto over the referral. Since such vetoes are very rare in practice, the Commission proposes to allow acquirers to notify their transactions to the Commission directly, without filing a Form RS. The Commission would immediately forward the notification to Member State authorities, who would still have 15 working days to oppose the referral, as under the current system.
In addition, the Commission proposes changes to the system of post-notification referrals to the Commission at the request of one or more Member State authorities. Unlike the current system, only Member States with original jurisdiction could request a referral. If no other Member State objects and the Commission accepts the referral, the Commission would have jurisdiction to review the transaction in the entire EEA, not only in the territory of the referring Member State (unless a Member State authority had already cleared the transaction in its territory before the Commission assumed jurisdiction).
Finally, the Commission proposes a number of technical changes to other pre- and post-notification referral procedures under the EUMR.
In addition to the main changes to the scope of the EUMR and the case referral mechanisms, the Commission proposes a number of procedural simplifications. The most important of these is to exclude extra-EEA joint ventures with no competitive effect in the EEA from the scope of the EUMR. The Commission is also considering further extending the simplified merger review procedure by eliminating the notification requirement entirely for cases that do not give rise to any 'reportable markets' and otherwise qualify for simplified review.
Finally, the White Paper proposes a number of other changes in relation to notification of share transactions outside a stock exchange on the basis of a good faith intention to acquire shares, the calculation of turnover of joint ventures, time limits for the Commission’s in-depth reviews of transactions, powers to order the unwinding of minority share acquisitions, the treatment of staggered and 'parking' transactions, sanctions for private parties’ use of confidential information obtained during merger proceedings and the power to revoke decisions where referrals are based on incorrect or misleading information.