The EU merger control (EUMC) was set in place almost a quarter of a century ago. It is designed to allow the European Commission (EC) to prevent mergers with harmful effects on competition. Until now the EUMC is limited to the acquisition of control, which is typically a shareholding of 50% or more. Conversely, the acquisition of minority shareholdings requires approval only in exceptional circumstances, typically those in which additional rights are associated with the shareholding that allow the shareholders to co-determine strategic business decisions in the target (such as approval rights to the business or budget). “Pure” minority shareholdings are, in turn, below the radar of the EUMC.
While this approach has become a sort of a fundamental principle across the EU, the coverage of minority shareholdings is not “alien” to other merger control regimes. In fact, countries like the United States and Canada instead look at parameters such as the deal value to determine the competence of their competition watchdogs. Even in some EU Member States, such as Austria, Germany and the United Kingdom, non-controlling minority shareholdings are subject to competition review.
The EC has long felt that under its present system, acquisitions may escape its jurisdiction despite their being capable of having equally negative effects on competition. This is supported by economic theory, which indicates that minority shareholdings too can negatively impact competition. The presuming turning point, which led the EC to take initiative, was the Ryan Air saga, in which the EC felt “powerless” to challenge the minority stake that Ryan Air acquired in its competitor Aer Lingus.
The EC’s proposal with respect to minority shareholdings
Against this background and in the context of its commitment to regularly review the functioning of existing legislation (REFIT-Programme), the EC launched a public debate whether the scope of the EUMC should extend to non-controlling minority shareholdings.
The initiative was kicked off by way of a public consultation based on a Staff Working Document (Document) that sets out the main considerations of the EC and its thoughts on the way going forward.
In the Document, the EC leaves no doubt that the acquisition of non-controlling minority shareholdings (structural links) can lead to anticompetitive effects. It flags that structural links can result in the reduction of competitive pressure or facilitate coordination among competitors. The EC makes also clear that with its current “tool box”, it cannot challenge competitive harmful structural links.
While the EC is clear on these issues, it struggles to identify the appropriate criteria with respect to the selection of notifiable transactions and the procedures. It explores two options, but takes no position on them:
Under the first option, the current system of ex-ante merger control would be extended to non-controlling minority shareholdings (notification system). Structural links would have to be notified in advance and could not be implemented prior to the EC having cleared them.
Under the second option, the EC would have discretion in selecting the acquisitions of minority shareholdings that fall under its scrutiny (selective system). This could be achieved by either a self-assessment (self-assessment system) or a short information notice (transparency system). In the self-assessment system, the parties could voluntarily notify the transaction or instead proceed with the transaction, though at the risk that the EC will exercise its discretion and investigate the transaction upon learning about it from the market. In the transparency system, the parties would be obliged to file a short information notice to the EC that would be published in order to make third parties and Member States aware of the transaction.
What do we have to expect?
It is difficult to anticipate whether and when the EC’s initiative will translate into a piece of legislation, especially bearing in mind the upcoming EU parliament elections, which will result in a new composition of the EC. However, previous EC initiatives to overhaul the EUMC usually led to amendments. Given the drive behind the initiative within the EC and the back-up provided by economic theory, it is more likely than not that the initiative will bring non-controlling minority shareholdings into the EUMC’s scope.
This would have a significant impact on the M&A world in Europe, in particular if the EC decides to adopt the notification system. Even in the self-assessment system, undertakings will be faced with difficult evaluations and with legal uncertainty going forward. Moreover, the EC is a trendsetter in the world of the European competition authorities. Many national merger control regimes have been modeled after the EUMC and, in fact, revert to the jurisprudence and guidance which exists on the EU-level. An overhaul of the EUMC could trigger momentum within the Member States to broaden the scope of their respective merger control regimes. This would mean that on top of scrutiny on the EU-level for deals with EU-dimensions, minority shareholdings which are below EU-dimension could be caught on (various) national levels. All in all, the road ahead seems to lead us to more rather than less regulation.
As the EC is (typically) a trendsetter in the field of competition law, the proposal under consideration could trigger momentum in other EU jurisdictions to broaden the scope of their national merger control regimes to minority shareholdings as well.