In May, the Federal Trade Commission (FTC) required Hikma Pharmaceuticals PLC to divest its 23 percent interest in Unimark Remedies, Ltd. and its US marketing rights to a generic drug under manufacture by Unimark as a condition to allowing Hikma to complete its acquisition of Roxane Laboratories. The FTC was concerned that Hikma’s continued holding of a 23 percent interest in Unimark after consummation of its proposed acquisition of Roxane would create the incentive and ability for Hikma to eliminate future competition between Roxane and Hikma/Unimark in the sale of generic flecainide tablets (a drug used to treat abnormally fast heart rhythms) in the United States.
The FTC’s divestiture requirement was unusual but not unprecedented. The Horizontal Merger Guidelines identify three theories of competitive harm associated with an acquisition or holding of a small but significant minority interest in a competitor:
- Minority ownership, and any associated rights, such as veto rights over the competing firm’s budget or strategic decisions, or representation on its board of directors, may allow the shareholder to forestall, delay or otherwise hamper the competing firm’s further development or marketing of competitive products.
- The holder of a minority interest in a competing firm has diminished incentives to compete aggressively with the competitor firm because the holder obtains an economic benefit from the success of the competing firm through its partial ownership of that competitor.
- The holder of a minority interest in a competing firm may have access to non-public, competitively sensitive information of the competing firm, and thus may be better able to coordinate its business decisions—such as pricing, output, or research and development efforts—with those of the competing firm, thus diminishing competition.
These theories of potential antitrust harm from minority interest acquisitions are not unique to the United States; other competition agencies, including the European Union’s competition directorate, accept and apply these theories when considering the competitive impact of a firm’s actual or proposed partial ownership interest in a competitor. However, the United States applies a significantly lower threshold than the European Union (and other competition agencies) for the pre-acquisition notification of an entity’s acquisition of a minority, non-controlling interest in another firm.
The US HSR Act Requires the Pre-Consummation Notification of the Acquisition of Minority, Non-Controlling Interests Unless an Exemption Applies
In the United States, the Hart-Scott-Rodino Act (HSR Act) requires an acquiring person to notify the FTC and US Department of Justice (DOJ) of the acquisition of voting securities of an issuer, and observe a 30-day waiting period prior to consummating the transaction, if the acquisition is valued in excess of a specific dollar amount unless an exemption exists and all other relevant jurisdictional requirements are met.
The HSR Act has many exemptions from its reporting and waiting period requirements. One that is often applicable to acquisitions of small but significant minority ownership interests is the exemption for acquisitions of the voting securities of an issuer where the acquiring person will hold no more than 10 percent of the issuer’s outstanding voting securities and the acquisition is “solely for the purpose of investment.” An acquisition is solely for the purpose of investment where the acquiring person has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” Two recent enforcement actions illustrate the very narrow conditions in which this exemption may apply.
- The FTC and DOJ alleged that Third Point LLC, an activist hedge fund, improperly relied on the exemption when it acquired voting securities of Yahoo representing less than five percent of Yahoo’s outstanding voting securities, but, at the time it was building its position “contacted … individuals to gauge their interest” in becoming the chief executive officer of Yahoo or a member of Yahoo’s board of directors; “took other steps to assemble an alternative slate of board of directors for Yahoo; drafted correspondence to Yahoo to announce that [it] was prepared to join the board of Yahoo; internally deliberated the possible launch of a proxy battle for directors of Yahoo; and made public statements that they were prepared to propose a slate of directors at Yahoo’s next annual meeting.” In a settlement with the DOJ, Third Point agreed not to rely on the exemption when it: (1) nominated a candidate for the board of directors of an issuer; (2) proposed corporate action requiring shareholder approval with respect to an issuer; (3) solicited proxies with respect to an issuer; (4) have, or are an associate of, a controlling shareholder, directors, officer or employee who simultaneously serves as an officer or director of the issuer; (5) is a competitor of the issuer; (6) inquired of a third party of his or her interest in a management role or board seat at the issuer; (7) initiated communication with an issuer regarding board or management representation by Third Point or persons associated with or advanced by Third Point; or (8) assembled a board or management slate with respect to the issuer.
- The DOJ alleged that VA Partners (ValueAct), an activist hedge fund, inappropriately relied on the exemption when it, among other things, acquired small but significant interests in two competing companies (Halliburton and Baker Hughes); discussed with Halliburton management a willingness to advocate in favor of the previously announced merger of Halliburton and Baker Hughes; indicated a willingness and ability to “help develop … new terms” for a revised deal, if the merger appeared unlikely to obtain antitrust clearance; considered proposing a revised executive compensation plan to Halliburton’s management; and, engaged in a strategy of “active, constructive involvement” with senior management at both Halliburton and Baker Hughes with respect to pre-closing operations of Halliburton and Baker Hughes and post-closing operations of the combined company. In a settlement with the DOJ, ValueAct agreed not to rely on the exemption if, at the time of an acquisition, it intended to, or its investment strategy identified circumstances in which it may propose to an officer or director of an issuer: (1) that the issuer merge with, acquire or sell itself to another person; (2) new or modified terms to, or an alternative to, a publicly announced merger to which the issuer is a party; or (3) changes to the issuer’s corporate structure that require shareholder approval or changes regarding the pricing of the issuer’s products, services, or to its production capacity or output. ValueAct also agreed to pay an $11 million civil penalty for its alleged failure to comply with the HSR Act’s notification and waiting period requirements.
The Notification of Minority Interest Acquisitions under the European Union’s Merger Regulations
In the European Union, shareholding interests are classified as “controlling” or “non-controlling” interests. The acquisition of a controlling interest is governed by the EU Merger Regulation. The acquisition of a non-controlling interest is not subject to pre-closing notification by the EU Merger Regulation, but can be reviewed post-consummation under the European Union’s cartel and Abuse of a Dominant Position regulations). Some rare individual member states (including Germany), however, regulate the acquisition of certain “non-controlling” minority shareholding and submit them to pre-closing notification. Because the acquisition of a non-controlling interest can raise competitive concerns, the European Commission has been criticized for failing to address an “enforcement gap” for minority acquisitions of non-controlling interests. See
The Ryanair / Aer Lingus controversy highlighted this enforcement gap. In 2006, 2008 and 2012 Ryanair launched public offerings to take over Aer Lingus. Each time, the attempts were prohibited by the European Commission. Nevertheless, Ryanair was able to build a 29.82 percent stake in Aer Lingus; because this interest was deemed “non-controlling,” it was not subject to the EU’s Merger Regulation. The UK Competition Commission subsequently investigated Ryanair’s series of acquisitions, requiring a divestiture down to a five percent share. The UK Competition Commission noted the harm to competition caused by Ryanair owning such a large stake in its competitor.
In July 2014, the European Commission published a white paper on potential reforms to the EU Merger Regulation to address the enforcement gap. The Commission proposed that the acquisition of non-controlling minority shareholdings be brought within the notification requirements of the Merger Regulation if there was a “competitively significant link” between the target and acquirer. A competitive link may exist in two scenarios: (1) when an acquirer and target are competitors or vertically related companies; or (2) when the ownership stake either exceeds 20 percent, or is between five percent and 20 percent in circumstances where the acquired stake is combined with additional governance rights, such as a de facto blocking minority, the right to appoint a director or access to commercially sensitive information.
Current Status of Changes to the US and EU Merger Notification Regulations
The proposals for change in the EU Merger Regulation are not yet formalized and do not seem to be the top priority of the new competition Commissioner, but this debate remains a hot topic within the European Union. In the United States, while the HSR Act’s requirement that even de minimis acquisitions be notified unless some exemption applies have been criticized as unnecessarily requiring the notification of tens of thousands of transactions that were not likely to violate the antitrust laws, proposals to reform the HSR Act to broaden the conditions under which the exemption for acquisitions solely for the purpose of investment will apply have not been adopted.See Bilal Sayyed, “A ‘Sound Basis’ Exists for Revision the HSR Act’s Investment-Only Exemption,” The Antitrust Source. April 2013.
However, this remains an area that corporations, private equity firms and activist investors should pay close attention to because of the possibility of changes to the relevant regulations and because of the significant potential for post-acquisition challenge to the acquisition of a significant but n