The European Commission (Commission) is consulting on amendments to the EU Merger Regulation (EUMR). These amendments come hot on the heels of the Commission’s recent consultation on the amendment of the merger implementation Regulation and the so-called “simplified procedure”, which allows firms requiring clearance of noncontroversial concentrations to opt for a shorter and less detailed filing. The two major amendments to the EUMR that are the subject of the consultation relate to the proposal to allow the Commission to review the acquisition of minority shareholdings1 and amendments to the procedure for transferring authority to review a transaction between National Competition Authorities (NCAs) and the Commission. The Commission believes that its inability to review the acquisition of minority interests is a lacuna in the law, but it recognises that merely extending the EUMR to cover such transactions would be cumbersome and disproportionate. As far as the second amendment is concerned, the Commission feels that the existing procedures for shifting cases between the Commission and Member States is unwieldy and inefficient.

Additionally, there are a number of apparently technical amendments are being proposed. While some are indeed technical, some are not and depending on how they make it into the new EUMR could give the Commission hugely expanded powers.

The Commission’s proposals are clearly influenced to a significant degree by its experience in the Ryanair/Aer Lingus case. Here, the Commission had been unable to do anything about Ryanair’s minority shareholding (because the interest was not big enough to be caught by the EUMR). Had it not been for the ability of the UK authorities (one of only three Member States whose law allows it to investigate and ultimately force divestment of anti-competitive minority interests), the Commission would have been forced to try and apply Article 101 to the situation.

Minority shareholdings

The most widely discussed proposal is the Commission’s suggestion that the EUMR be expanded to allow it to review proposed structural linkages between undertakings that allow the acquiring undertaking influence which could weaken competition (and possibly are designed to do so), while not triggering the EUMR as it currently stands.

The Commission makes constant reference to Ryanair/Aer Lingus in justifying the need for new powers. The Commission notes that, while it could reject the proposed acquisition of the entirety of Aer Lingus by Ryanair in 2007, it was unable to prevent the latter from retaining a 29.4 per cent shareholding. It was left to the UK competition authorities to order divestment and to the English courts to uphold the decision.

Indeed, on 28 August 2013, during the consultation period, the UK Competition Commission ordered Ryanair to divest all but five per cent of its shareholding, taking into account, among other things, the evidence that had been presented to the Commission during those proceedings. This decision raises a further issue: Ryanair is currently appealing the 2007 Decision in the European Court and once the inexorably slow wheels of EU justice finish turning there exists the possibility of contradictory decisions between UK and EU authorities, taken on very similar facts and issues. The English courts have already said the UK’s decision could be amended to reflect any revision of the Commission decision following a European Court judgment that is favourable for Ryanair.

Currently, the only options that the Commission has when seeking to control an anticompetitive minority interests are extremely thin, being:

  •  Do nothing – the NCAs of Austria, Germany or the UK (the only authorities currently able to review structural linkages) may intervene if they have jurisdiction.
  • Apply Article 101 to the acquisition. This is complicated because the notification system has been abolished for Article 101 and replaced with a selfassessment system.
  • Hope that a future transaction might give the Commission some leverage over the minority stake. This is what the Commission did in the Siemens/VA Tech case, when it required Siemens to sell its minority stake in SMS Demag, a competitor of VA Tech, in return for approving the acquisition of VA Tech.

The Commission suggests that its regulation of structural linkages could take one of two forms:

  • a notification system, expanding the existing ex-ante system of merger control to “structural links”; or
  • an ex-post system, in which the Commission would have the discretion to select cases involving structural links it would investigate.

The Commission suggests that it would either require parties to self-assess whether or not a structural link had been created with the Commission retaining discretion whether to investigate, or require parties with a “prima facie problematic structural link” to file a notice with the Commission, which would then be published. The Commission has also asked respondents to suggest whether or not parties should have the option of making voluntary notifications under either system.

Dentons’ view

When the EUMR was introduced in 1989, one of the main arguments was that most of the Member States applied merger control and that an EU system was required in order to be more effective and to eliminate multiple filings. This time the argument is different. A company may gain a significant advantage over a competitor by buying a minority interest, rather than competing, and previous transactions that were – according to the acquirer – designed in such a way as not to affect the ability of the competitor to compete have given rise to significant concerns (such as Sky/ITV and Gillette/Wilkinson Sword). On the other hand, the majority of Member States do not control minority shareholdings. The Commission, therefore, appreciates that requiring all acquisitions of minority interests to be notified to the Commission would be cumbersome and inefficient. This would even be the case in the UK, where the voluntary domestic notification system allows the vast majority of minority investors to ignore merger control issues safely. If a limited pre-notification system were to be imposed, the Commission would need to publish extremely clear guidance as to which minority shareholdings must be notified to it in order to prevent unnecessary delays to innocuous transactions.

The Commission’s consultation does mention a form of truncated procedure for minority acquisitions (potentially simpler than the existing simplified procedure) but it does not go into detail. Details of what the Commission has in mind would be useful in evaluating the potential impact of the measure.

Case referrals from NCAs to the Commission

Under the current regime, undertakings embarking upon a transaction that is notifiable in three or more Member States (but not reaching the turnover thresholds necessary for a compulsory EUMR filing) may seek to roll their multiple notifications into a single notification to the Commission. This is done by making a request of the relevant NCAs themselves, with a transfer to the EU process being allowed if the NCAs do not object within 15 working days.

Very few (under three per cent of transfer requests) are objected to by NCAs, so the Commission is proposing to ease the burden on notifying parties and allow them to embark on the EU merger process from the beginning. It would then be for NCAs to file their objections to the EU process, having been informed of the notification by the Commission. This process for objecting would run in parallel to the Commission’s own evaluation process for the merger. Theoretically, a merger filing with the Commission done optionally under the three Member States rule would take no longer and be no more complicated than a merger filing done compulsorily under the turnover threshold.

Under the current regime, NCAs also have the option to transfer merger filings to the Commission, if the latter is the more appropriate or better placed authority to handle the filing. However, the Commission must base its decision on the effect of the transaction in the Member State of the NCA making the transfer, not the EEA (or part of it).

The Commission proposes expanding this power to allow it to take the entire transaction out of Member States’ NCAs’ hands where one of them requests it to do so, therefore allowing it to base its decision on the effect of the transaction in the EEA. However, if an NCA objects, then the concentration must be decided by the NCAs, not by the Commission.

Dentons’ view

The reduction in the delay and bureaucratic burden associated with making a filing to the Commission in place of three filings in Member States is to be welcomed. It has always seemed somewhat counterintuitive that, because of this extra step, mergers between entities too small to meet the turnover thresholds could have a longer and more complicated (and therefore more expensive) EUMR merger approval process than those that met them.

The Commission’s power to take on a merger for the whole of the EEA does make sense. However, the ability of the Member States that are involved to veto the Commission’s involvement does suggest that the Commission is taking pains to preserve the principle that, below the turnover thresholds, the Commission’s involvement is strictly by invitation of the Member State only. This is even where a veto from an NCA causes detriment to the merging parties by requiring multiple filings. One way to preserve the rights of the Member State while reducing the burden on the parties would have been to allow the Commission the option of reviewing the whole of the transaction apart from the party that retained by the Member State that wants to retain jurisdiction.

Other proposed amendments to the EUMR

The Commission is also consulting on a number of what it refers to as “technical” amendments. After proposing some examples, it asks interested parties for additional suggestions of amendments that would make the EUMR more efficient.

Some of the proposals are indeed technical: the Commission suggests that it might want to lay down explicitly the methodology for calculating a joint venture’s relevant turnover in the EUMR, rather than just in its Consolidated Jurisdictional Notice. While the Notice is technically non-binding, the Commission invariably applies it and we can comfortably predict that, in the vast majority of cases, this change will make no difference whatsoever.

Another suggestion is to remove the requirement to notify full function joint ventures that could not have any conceivable impact within the EEA. Currently, parents must notify full function joint ventures between them under the current rules where they meet the turnover threshold in the EU, even if the joint venture between them is elsewhere (for example, a joint venture which will operate only in the Far East). This is something that should have been carved out, not only when the EUMR was last revised in 2004, but also in its previous incarnation in 1989. In the final two paragraphs of the technical section, the Commission proposals two amendments that could have far-reaching consequences:

Fining powers for misuse of information

The Commission proposes giving itself the power to sanction “parties and third parties that are given access to non-public commercial information of other undertakings” for merger proceedings but that then use or disclose that information for other purposes. This might cover a merging party to which the Commission discloses third party comments in the course of proceedings or a third party to which the Commission discloses information about the parties’ intentions for the purpose of eliciting comment from the third party. We believe that this is more than a technical amendment and the Commission should be asked to explain why this power is needed and how it would be used by reference to examples of past cases.

Dissolution of minority holdings purchased as part of a total takeover plan

Using rather opaque language, the Commission suggests that it might “want to modify the EUMR to bring the scope of the Commission’s power to require the dissolution of partially implemented transactions declared incompatible with the internal market in line with the scope of the suspension obligation”. The Commission goes on to explain what this actually means with reference to Ryanair/Aer Lingus. Not content with its ability merely to block the full takeover of Aer Lingus, the Commission is seeking the ability to order future Ryanairs to divest their existing minority shares following a negative decision, on the grounds that their purchases were part of a “partially completed transaction”. The Commission appears to be saying that, following a prohibition decision, the purchaser would be required to sell any shares it holds in the target (for example, in a public bid, it is common for the bidder to acquire a stake of under 30 per cent before launching its bid).

Granting the Commission the power to require any interest in the target to be divested on a prohibition appears to be control of minority shareholdings by other means. Furthermore, businesses would face extra uncertainty and risk when choosing whether or not to go ahead with a full takeover, as to do so would risk losing the stake they already held.

Conclusion

Please let us know if you agree with our view on the consultation and if there are any specific points you would like us to raise with the Commission.