The European Commission yesterday published a consultation paper which invites comments on a number of options for reform of the EU Merger Regulation, which includes expanding the scope of its powers to review the acquisition of non-controlling minority shareholdings (structural links) and to streamline the case referral system between the Commission and EU Member States.

The proposed reform is the most significant in the last 10 years and could have a huge impact on many corporate transactions, particularly if the Commission is given new powers to review non-controlling minority shareholdings.

Minority shareholdings

Under the current EU Merger Regulation, the Commission only has the power to review transactions which lead to an acquisition of control. This contrasts with some other national jurisdictions round the world (such as Austria, Germany, the United Kingdom, Canada, and the United States) where national competition law does allow the review of non-controlling structural links.

The Commission believes that it does not currently have the tools to systematically prevent anti-competitive effects deriving from the acquisition of non-controlling minority shareholdings, and is therefore proposing to extend the current system. It has published as an annex to its consultation an examination of the economic literature on the potential anti-competitive effects of acquisitions of minority shareholdings. This identifies certain scenarios where the legal definition of control under the EU Merger Regulation would not be met, but the holder of a non-controlling minority shareholding might nevertheless be able to exert material influence over the target firm with potentially significant anti-competitive effects.

The Commission is considering the following two options.

Option 1 – "the notification system": all relevant structural links would have to be notified to the Commission in advance and could not be implemented before the European Commission has cleared them. The Commission would decide in each case whether or not the transaction could be authorised.

Option 2: the Commission would have discretion to select cases of structural links to investigate. There are two possible variants of this option:

  • The "self-assessment system": the obligation to notify a transaction to the Commission in advance would not apply to structural links. Parties instead would be allowed to proceed with the transaction leaving the option to the Commission whether and when to open an investigation.
  • The "transparency system": parties to a prima facie problematic structural link would have to file a short information notice to the Commission. This notice would be published in order to make third parties and EU Member States aware of the transaction.

Under both the self-assessment system and the transparency system, the Commission is considering if the parties to a transaction should have the possibility of making a voluntary notification.

The Commission is also considering which acquisitions of minority acquisitions should qualify as structural links that should be subject to review, and whether safe harbours could be defined. A second annex to the proposals considers examples of the Commission's and EU Member States' current practice with respect to cases involving structural links and its limitations.

It is foreseen that the substantive test currently used for the examination of "full" mergers (whether a transaction significantly impedes effective competition) will be applied to structural links, possibly with some additional clarifications in relevant Commission guidelines. For joint ventures, the Commission proposes to assess whether the non-controlling minority shareholding has the object or effect of coordinating the parents' conduct, in the same way as currently set out under the EU Merger Regulation for controlling stakes.

Technical improvements – joint ventures with no effects in the EU

The European Commission is also proposing a number of technical improvements. The most important of these relates to joint ventures with no effects in the EU. Under the current EU Merger Regulation, the jurisdictional thresholds can be met in the case of a joint venture solely on the basis of the EU turnover of two parents even if the joint venture itself has no turnover or assets in the EU. Whilst the Commission normally allows these transactions to be reviewed under the simplified procedure, parties still have to bear considerable unnecessary burden and costs in making a short form notification.

The Commission now invites comments as to whether it could withdraw from its jurisdiction "concentrations that do not have any effect in the EEA, such as the creation of a full-function joint-venture located and operating outside the EEA and that would not have any conceivable impact on markets in the EEA".

Referral system

The Commission is considering modifications to the referral mechanisms in relation to both pre-notification and post-notification referrals.

Pre-notification referral  

The European Commission is proposing to reform the system of pre-notification referrals, under which the merging parties can request, during the pre-notification period, the referral of mergers to the Commission that do not fall within the thresholds of the EU Merger Regulation but are notifiable in at least three Member States.

The Commission is proposing to drop the procedure of two submissions. Currently, parties have to submit a "reasoned submission" ("Form RS"). If no competent Member State opposes, the European Commission obtains jurisdiction for the entire EEA and the parties have to submit a notification to the European Commission ("Form CO"). The European Commission is proposing that the reasoned submission to the Commission and the subsequent consultation of the Member State as a preliminary step be abolished. The parties would be allowed to notify directly the Commission which would immediately forward the notification to the Member States. The Commission would have jurisdiction unless a Member State that is competent to review the transaction under national law opposes the jurisdiction of the Commission within 15 working days of receiving the notification. In a case when at least one competent Member State opposes the jurisdiction of the Commission, the Commission would have to renounce jurisdiction with Member States re-obtaining their original competence. The Commission would only adopt a decision stating that it is no longer competent and it would not have any discretion in this regard. As before, it would then be for the parties to determine in which Member states they have to notify.

Post-notification referral

The Commission is considering a number of changes to the post-notification referral system. Currently national competition authorities can refer those cases for which the Commission is the "more appropriate"/"better placed" authority to deal with even if parties did not or could not request a pre-notification referral of the case. Most appropriate for such a referral are cases which pose serious competition concerns and have cross-border effect. One of the most important suggested changes is that the Commission's decision to accept a referral will give it jurisdiction for the whole of the EEA (and not only competence for the Member States making or joining the referral request). However, if at least one competent Member State opposes the referral, the Member States retain their jurisdiction.

Conclusion  

Hogan Lovells will be considering in detail the Commission's proposals and will be submitting to the Commission a written response to its consultation.

Business needs to ensure that it takes full advantage of this early opportunity to influence the Commission thinking, particularly with respect to minority shareholdings and structural links, where it should ensure that any new rules do not lead to unnecessary burden and costs for dealmakers in the future. The consultation deadline is 12 September 2013.