The European Commission (the “Commission”) has produced a White Paper setting out proposals to improve and extend European Union merger control.
The White Paper makes two key proposals for reform:
- Bringing acquisitions of non-controlling minority shareholdings into the scope of EU merger control; and
- Streamlining case referrals to make the one-stop shop principle more efficient.
These proposals are explored in more detail below.
Bringing acquisitions of non-controlling minority shareholdings into the scope of EU merger control
Currently, the European Union Merger Regulation (the “EUMR”) only applies to transactions that result in the acquisition of control, (ie the ability to exercise a decisive influence over an undertaking). As such, the Commission is only empowered to review an acquisition of a minority shareholding when control is acquired.
The White Paper argues that the acquisition of a non-controlling minority interest may harm competition, for example, where it leads to coordination of competitive strategy between rivals.
The Commission had been considering three alternative proposals to vet non-controlling minority shareholdings. Of these, The White Paper advocates what it calls a “targeted transparency system” as being the most effective and proportionate review mechanism.
The proposed system: a targeted transparency system
Under this system the Commission would focus pro-actively on acquisitions of minority shareholdings which may create a “competitively significant link” between investors. Such a “competitively significant link” would arise when the following threshold test is met:
- The acquisition is of a minority shareholding in a competitor or vertically related company (i.e. there needs to be a competitive relationship between acquirer and target); and
- The competitive link would be considered “significant” if the acquired shareholding is (1) around 20%; or (2) between 5% and around 20% but accompanied by additional factors such as rights that give the acquirer a “de facto” blocking minority, a seat on the board of directors, or access to commercially sensitive information of the target.
The Commission’s proposal is that an undertaking would be required to submit an information notice to the Commission when seeking to acquire a minority shareholding that qualifies as a “competitively significant link”. 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 notice would be published on the Commission’s webpage and EU member states would be informed so that they can request a referral. However, undertakings will not be required to submit a formal notification on Form CO to the Commission in respect of the acquisition, unless the Commission considered a full investigation was warranted (see below).
The White Paper also proposes that the Commission could consider a 15 working-day standstill period following the submission of the information notice during which the parties would be prevented from completing the transaction. This period would allow member states time to determine whether or not to request a referral of the transaction.
The Commission would have a 4 to 6 month window from the submission of the information notice in which to decide whether or not to launch an investigation into the transaction, at which point the parties would be required to submit a full Form CO notification. Where the Commission initiates an investigation into an acquisition which has already been implemented, it is proposed that the Commission should have the power to issue interim measures (i.e. a hold separate order).
Streamlining case referrals to make the one-stop shop principle more efficient
The EUMR operates a “one-stop-shop” principle whereby concentrations with an EU Dimension are reviewed exclusively by the Commission. In 2004, the EUMR was amended to create a case referral mechanism that allows for cases to be “referred back” from the Commission to one or more Member States, where there are particular competition concerns in individual Member States, and for cases that lack an EU Dimension to be “referred up” to the Commission where appropriate.
The White Paper proposes further reform to this referral mechanism to ensure that cases are reviewed by the most appropriate authority.
Article 4(5) – Pre-notification referrals to the Commission by notifying parties
Article 4(5) EUMR allows the parties to make a pre-notification request for transfer of a case from one or more national authorities to the Commission. However, the White Paper acknowledges that the current process can be “cumbersome and time-consuming”. The current two-stage procedure requires the parties to submit to the Commission a reasoned submission (known as a Form RS) followed by a 15 working day waiting period to allow national competition authorities to object to the referral and then submission of a full notification on Form CO assuming no objection is made.
Under the new proposals, parties would submit a notification on Form CO directly to the Commission which would, in turn, immediately forward the notification to the relevant national competition authorities and provide them with 15 working days to reject the referral. Unless the Commission receives such an objection, the Commission would have jurisdiction to review the whole transaction.
If a national competition authority objects, the Commission would renounce jurisdiction entirely and the Member State(s) would retain jurisdiction. It would then be up to the parties to determine in which Member States they must notify.
Article 22 – Post-notification referrals to the Commission by national competition authorities
Article 22 EUMR allows one or more national competition authorities to request that a concentration without an EU dimension be referred upwards to the Commission for review. Under the current regime, referral requests have to be made within 15 working days after a merger has been notified to a national competition authority or, if no notification is required, the merger otherwise has been made known to the Member State concerned.
The general rule is that once the Commission has accepted a referral request, it investigates the case on behalf of the referring Member State(s). Ideally, this would lead to one investigation by the Commission as opposed to several investigations by different authorities. However, every national competition authority makes its own decision on whether to refer a case and this can lead to a scenario where the Commission reviews a transaction but certain parts are “left” with the national competition authorities.
The Commission proposes to reform the process to avoid such multiple reviews. Under the new regime, if the Commission accepts a referral request then it would have jurisdiction for the whole of the EEA. However, if one (or more) competent Member State(s) oppose the referral, the Commission would renounce jurisdiction for the whole of the EEA, and the Member States would retain their jurisdiction.
Article 4(4) – pre-notification referrals from Commission to Member State
Article 4(4) EUMR allows parties to request to have their case referred back from the Commission to a national competition authority, in whole or part, prior to notification. In such cases, the parties must show that the merger has a significant effect on competition in a distinct market, in one or more Member States.
This provision is used rarely as parties are reluctant to claim that a transaction results in a significant effect on competition as this claim may be perceived as “self-incrimination”.
To encourage the use of this provision, the Commission proposes modifying the substantive test in Article 4(4) so that parties would instead have a show that is likely to have its “main impact” in a distinct market in the Member State.
The proposed streamlining of referral mechanisms is welcome and should be seen as incremental improvements to enhance efficiency of the system.
By contrast, the proposals relating to minority shareholdings are more fundamental and may significantly increase the regulatory burden on business. The introduction of a 4 to 6 month period during which the Commission could intervene may act as a disincentive to such acquisitions of minority interests as the threat of retrospective review may be seen as reducing legal uncertainty. On the other hand, the Commission might reasonably counter that the period would apply only to a small number of cases in which a “competitively significant link” exists and that a similar procedure has applied to all qualifying mergers in the UK for many years. Given the small number of cases likely to be affected, perhaps a comprise might be to reduce the period from 4-6 months to 1-2 months. Parties concerned by the risk of subsequent investigation could also choose to file a full Form CO at the outset voluntarily to obtain a clearance decision in the normal 25 working day period.
The Commission welcomes comments on the White Paper to be submitted by 3 October 2014.