On 9 July 2014, more than 10 years after the major overhaul of the EU Merger Regulation (139/2004) (the Merger Regulation), the European Commission published a White Paper setting out proposals for making EU merger control more effective.
The main proposals put forward by the Commission include:
- extending the scope of the Merger Regulation;
- simplifying the procedure for case referrals;
- excluding full-function, non-EEA joint ventures from the scope of the Merger Regulation; and
- empowering the Commission to exempt mandatory prior notification for certain categories of transactions that do not raise any competition concerns.
Parties have until 3 October 2014 to respond to the White Paper. Below is a summary of the main proposals.
Acquisitions of non-controlling minority shareholdings
Under the current regime the Commission can investigate only concentrations which have an EU dimension. A “concentration” is a change of control on a lasting basis resulting from either a merger or an acquisition. The control test asks, broadly speaking, whether the acquirer will have decisive influence over the strategy of the target. Acquisitions of minority shareholdings that do not confer control fall outside the Merger Regulation, meaning that the Commission cannot investigate them or intervene against them. This is in contrast to the position in some EU Member States (Austria, Germany and the UK) which allow national authorities to review certain such transactions, as well as the rules prevailing in other major jurisdictions like the United States and Japan.
The Commission’s views
According to the Commission, the experience of its own services, Member States’ and third countries’ authorities, as well as economic research, shows that the acquisition of a non-controlling minority shareholding may in some instances harm competition, and thus consumers. In particular, acquiring a minority shareholding in a competitor may lead to:
- non-coordinated anti-competitive effects because such a shareholding may increase the acquirer’s incentive and ability unilaterally to raise prices or restrict output;
- a position where the acquirer uses its position to limit the competitive strategies available to the target, thereby weakening it as a competitive force. This is more likely to be the case when a minority shareholding possesses some degree of influence over the target firm’s decisions; and/or
- coordinated anti-competitive effects by impacting a market participant’s ability and incentive to tacitly or explicitly coordinate in order to achieve supra-competitive profits.
In addition, the Commission takes the view that non-horizontal acquisitions of minority shareholdings that also confer material influence over the target may raise competitive concerns in relation to input foreclosure.
A new targeted transparency system
The Commission therefore believes that the most appropriate system to deal with acquisitions of minority shareholdings is by way of a “targeted” transparency system. Under such a system, parties would be required to self-assess whether a transaction created a “competitively significant link” and, if so, to submit a voluntary information notice.
A competitively significant link
Transactions that would create a “competitively significant link” would arise where there is a prima facie competitive relationship between the acquirer’s and the target’s activities, either because they are active in the same markets or sectors or they are active in vertically related markets.
According to the White Paper, only a transaction which meets the following cumulative criteria would fall within the definition of a “competitively significant link”:
- acquisitions of a minority shareholding in a competitor or a vertically related company (in other words, there needs to be a competitive link between the acquirer and the target); and
- the competitive link would be considered significant if the acquired shareholding were (1) around 20%; or (2) between 5% and around 20%, accompanied by additional factors such as rights which give the acquirer a “de-facto” blocking minority, a seat on the board of directors, or access to commercially sensitive information of the target.
A company contemplating a large scale transaction would need to self-assess whether its proposals could create a competitively significant link. If they could, the company would be required to submit an information notice to the Commission. The information notice would 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.
The Commission proposes a short waiting period (around 15 working days) following submission of the information notice. During this time, parties would not be able to close the transaction and Member States could request a referral back on the basis of the information notice.
The Commission would remain free to investigate a transaction, whether or not it had already been implemented, within a much longer time period of potentially 4 to 6 months. The Commission’s concept is that this would allow the business community to come forward with complaints and reduce the risk of the Commission initiating an investigation on a precautionary basis during the initial waiting period.
The White Paper suggests that the Commission would also have powers to issue interim measures where a transaction had already (fully or partially) been implemented.
A full notification would be required only if the Commission decided to initiate an investigation. However, in order to provide legal certainty (and not have to wait for the Commission to decide whether to investigate), the parties could chose to submit a full notification voluntarily.
Parties whose transactions do not meet EUMR thresholds but which do fall to be reviewed in three or more Member States may, with the consent of those Member States, ask the Commission to undertake the review on the “one-stop-shop” principle. Under the current rules (Article 4(5) of the Merger Regulation), such pre-notification referrals involve a two-step procedure: a “reasoned submission” followed by notification.
The Commission is proposing to abolish the current two-stage process by requiring the parties to notify the transaction directly to the Commission. The Commission would then forward the notification to the concerned Member States immediately and give those Member States 15 working days to oppose the referral. If a Member State opposed the referral, the Commission would renounce jurisdiction entirely and the Member States would retain jurisdiction.
The Commission proposes streamlining post-notification requests by Member States in order to avoid parallel national investigations.
Currently, under Article 22 of the Merger Regulation, Member States may request the Commission to examine a concentration which does not have an EU dimension but qualifies for review under national merger rules. There is again a fairly lengthy process which can result in the Commission reviewing the whole of the transaction (because all Member States having national jurisdiction agree to the referral) or the review being split between the Commission and Member States (because one or more concerned Member States refused the referral).
The Commission proposes to amend Article 22 requests by requiring a Member State to request a referral to the Commission within 15 working days of the date of a notification to it. The Commission would then decide whether or not to accept the referral request. If the Commission accepted a referral request, it would have EEA-wide jurisdiction, except that if one or more Member States having national jurisdiction opposed the referral, the Commission would renounce jurisdiction for the whole of the EEA and the Member States would retain jurisdiction.
The accompanying Staff Working Paper to the White Paper notes that the Merger Regulation could be amended so that a full-function joint venture located and operating totally outside the EEA could fall outside the scope of the EU merger procedures. In addition, the Commission could also be empowered to exempt from mandatory prior notification certain categories of transactions (such as those transactions which do not involve any horizontal or vertical relationships between undertakings that are currently being dealt with under a simplified procedure). Such transactions could fall under the “targeted transparency system” as described above.
The proposals put forward by the Commission are intended to allow it to deal better with non-controlling minority shareholdings which may affect competition and to make referral procedures simpler and faster. It may take some time before any of the proposals are implemented, not least because changes to the Merger Regulation require the agreement of EU Member States and the European Parliament. This should give the Commission enough time to deal with any likely opposition from Member States and businesses to the proposed reforms, most likely in respect of the Commission’s extended powers to investigate non-controlling minority shareholdings.