The Competition and Markets Authority (CMA) can open an investigation and impose initial enforcement orders where it has reasonable grounds to suspect that two or more enterprises have ceased to be distinct.(1) This includes circumstances in which an acquirer purchases only a minority shareholding in the target business because, under the UK merger control regime, two or more enterprises cease to be distinct where they are brought under "common ownership or common control".(2) Three levels of control are recognised in this regard:
- de jure control, which generally arises where the acquirer has a shareholding conferring a majority of the voting rights in the target business;(3)
- de facto control, where the acquirer controls the commercial policy of the target business in the marketplace, despite not having a majority of voting rights (eg, where the acquirer controls more than half of the voting rights that are actually exercised);(4) and
- material influence, where the acquirer can materially influence the commercial policy of the target business in the marketplace (eg, as a result of a minority shareholding).(5)
In practice, the CMA will treat de facto control and material influence as de jure control for the purposes of a Phase 1 investigation.(6)
In assessing material influence, the CMA will consider all of the circumstances of the case, including:
- the extent of any voting rights conferred by any shareholding held by the acquirer;
- the acquirer's ability to influence the board of the target business; and
- any other aspects that are considered relevant by the CMA.
While the CMA does not apply a list of exhaustive criteria in relation to voting rights conferred by a minority shareholding, there are some general rules.
Shareholder voting rights of more than 25%
As a general rule, the CMA is likely to view the acquisition of shareholder voting rights of more than 25% as conferring material influence, given that this level of minority shareholding would typically allow the acquirer to block decisions requiring a special resolution.(7)
Shareholder voting rights of 15% to 25%
The CMA may examine acquisitions of shareholder voting rights of 15% to 25% in order to consider whether these might enable the acquirer to exercise material influence over the commercial policy of the target business. For example, by reference to:
- the distribution of the remaining voting rights;(8)
- patterns of voting at recent shareholder meetings; and
- any special voting or veto rights attaching to the minority shareholding.(9)
Shareholder voting rights of less than 15%
At levels of shareholder voting rights below 15%, the CMA may exceptionally choose to examine acquisitions where other factors indicate that material influence may arise.
With regard to the board of the target business, depending on the circumstances of the case, board representation alone may be sufficient to confer material influence or may be considered among other factors when assessing material influence.
When considering the significance of board representation, the CMA is likely to examine aspects including the expertise and experience of the acquirer's board nominee.(10)
The CMA may also consider a range of other relevant factors, including:
- the target business's financial dependency on the acquirer;(11)
- the possibility that the parties may become more closely involved in the future;(12) and
- the extent to which the acquirer's status and expertise more generally may enable it to influence the commercial policy of the target business (eg, where the target business is reluctant to pursue strategies that would be likely to cause conflict with the acquirer).(13)
Parties can anticipate that the CMA will take a holistic approach when considering whether the acquisition of a minority shareholding would give rise to (at least) material influence, and result in "two or more enterprises ceasing to be distinct" for the purposes of the UK merger control regime.
- "Competition and Markets Authority's ability to investigate completed transactions"; and
- "Use of IEOs in completed transactions".
(7) See, for example, the Ryanair/Aer Lingus merger inquiry, in relation to which Ryanair's acquisition of a 29.8% stake in Aer Lingus was investigated under the UK merger control regime, with Ryanair subsequently required to sell its stake in Aer Lingus down to 5%.
(9) See, for example, ME/1316/03 completed acquisition by VB Autobatterien GmbH, in which Robert Bosch GmbH has material influence of Optima Batteries AB and certain assets and companies constituting Johnson Controls Batterien, OFT decision of 26 September 2003, which provides that "Bosch's existing 20 per cent shareholding in VB, and the fact that Bosch has the ability to veto strategic commercial decisions, is in our view sufficient to confer on Bosch the ability to materially influence VB".
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