Just in time for the summer holidays, the European Commission (EC) has published the long awaited consultation paper on EU merger reform, “Towards Improving EU Merger Control.” The deadline for submissions is September 12, 2013. The EC is primarily seeking feedback on possible ways to deal with:
- The acquisition of non-controlling minority shareholdings, and
- The case referral system between the EC and Member States’ National Competition Authorities (NCAs)
Below, we examine the first point and discuss what the EC has in mind for non-controlling minority shareholdings.
The EU Merger Regulation captures concentrations that have a community dimension. The definition of a concentration includes the requirement that there is a “change of control on a lasting basis.” As confirmed by the General Court in a judgment that is part of the Ryanair/Aer Lingus saga, the EC does not have competence over transactions simply involving minority shareholdings that do not result in any type of change in control. As pointed out by many practitioners, while the EC’s hands are tied, NCAs may be permitted under national competition law to review such transactions (this is the case today for the UK, Austria, and Germany NCAs). This inability to act has been a rather sore spot for the EC, particularly since the US and Canada can also look at what the consultation paper refers to as “structural links,” which is just another way of saying that a company has a non-controlling minority shareholding in another company.
The EC is concerned that, in certain circumstances, structural links may:
- Reduce competitive pressure between competitors (“horizontal unilateral effects”). That is, the acquiring firm may soften competition against the company in which it has a financial interest.
- Substantially facilitate coordination among competitors (“horizontal coordinated effects”). The EC has in mind that the investment in a competitor may enhance transparency to such an extent that the parties may engage in tacit coordination.
- With vertical structural links, allow companies to hamper competitors’ access to inputs or customers (“vertical effects”). In this scenario, the EC is concerned that the investment in a supplier or purchaser may have exclusionary effects.
Similar to what some NCAs enjoy, the EC would like to be able to review transactions that result in structural links between competitors or in a vertical relationship and it feels that Articles 101 and 102 TFEU are not the best ways to go about it.
The EC offers two options, although the second option includes two possible methods:
A notification system:
- All relevant structural links would have to be notified to the EC in advance and could not be implemented before the EC has cleared them. The EC would decide in each case whether or not the transaction is authorized.
A selective process:
- Self-Assessment system: the parties would be able to complete the transaction, but the EC, either following a complaint or ex-officio, could launch an investigation at any time; or
- Transparency system: where a prima facie problematic structural link exists, the parties would need to file a short information notice with the EC (that would be published on DG COMP’s website and/or the Official Journal) prior to the transaction.
With regard to the “selective process” option, the EC is contemplating allowing parties to submit notifications voluntarily. In addition to the above, the EC will need to decide on a number of procedural aspects, such as applicable notification thresholds, safe harbors (e.g., no action for shareholdings less than 10%), and how to deal with joint ventures that are not full-function.
What Should the EC Do?
Each option has its pros and cons. The notification system provides more or less absolute certainty, which business always appreciates. However, such a system may be slow, expensive, and overly complicated. This is particularly true when, as the EC itself recognizes, “the number of cases creating problematic structural links seems to be rather limited.”
If the EC selects the transparency system, it will need to explain in relatively clear terms what should be considered a “prima facie problematic structural link.” Depending on if, and how, third parties respond to a notice, this option might be similarly burdensome.
This leaves the EC and the business community with the self-assessment option. When the EC did away with “comfort letters,” practitioners and industry got relatively nervous. However, after 10 years of modernization, everyone seems to have gotten used to and acclimated to the self-assessment system and it may make more sense to transpose an approach that already works well under Articles 101 and 102 TFEU.
The simplest way forward may be for the EC to issue guidance explaining what type of self-assessment it would like the acquiring and selling parties to carry out, including how they should address the three possible negative effects. For borderline cases, a voluntary notification would provide the necessary reassurance to the parties. From a process standpoint, this would not be so different from the situation where parties struggle to determine whether there has been a change of control or not – they may always engage in an informal dialogue with DG COMP.
The EC has come up with a number of ways to deal with what it considers to be a “gap” in the EU Merger Control regime. Since problematic structural links only arise from time to time and in fairly limited circumstances, the most practical and cost-efficient option may turn out to be a self-assessment system, coupled with optional notification for difficult cases. Such an approach should meet both business’ and the EC’s objectives. However, we are just at the beginning of the consultation process and it remains to be seen what the ultimate end point will be.