On June 20 2013, the European Commission (“EC”) consulted1 on proposed changes to its primary merger control law, the European Union Merger Regulation (“EUMR”).2 The proposed reform is the most important for a decade and, if carried through, will materially affect the timing and cost of qualifying European investment/deal activity. Many of the proposals are designed to streamline the merger review process, and are to be welcomed. In addition to reforming the transaction referral system between the EC and national competition authorities, however, the proposal that acquirers of non-controlling minority acquisitions may also have to notify the EC and await clearance before closing has the potential to chill investment activity — particularly for financial institutions frequently acquiring minority stakes in companies.
We hope that the EC will be dissuaded during its consultation process from requiring a detailed notification of such acquisitions and will instead opt for more proportionate and workable rules together with robust safe harbours. We are reviewing the implications of the proposed options for reform and aim to respond to the EC‘s consultation by the September 12, 2013 deadline. Please let us know if you wish to contribute to the response. In the meantime, we provide below further details and context for the EC's proposed options for reform, starting with the minority acquisitions proposals (section 1). We then summarise and consider the largely positive practical effects of the proposed technical and streamlining improvements to the EUMR, including the EC‘s proposed reform of the Simplified Merger Procedure, published earlier this year,3 which is pro-business because it will enable more transactions to be cleared faster and more cheaply (section 2).
1. Proposal to Extend EUMR to Non-Controlling Minority Acquisitions
Under the current EUMR, the EC only has the power to review acquisitions of control (“decisive influence”in EU parlance). This includes the acquisition of legal control (over 50 percent of the voting rights in a company) as well as certain lesser stakes where the acquirer has the ability to determine the company‘s strategic commercial behavior.4
Unlike the US, the EC does not have the ability under EUMR to review non-controlling minority acquisitions, even in the relatively few cases where they may reduce competition. Over the years, however, the EC has seen various non-controlling minority acquisitions giving rise to some material (rather than decisive) influence over a company, which the EC believes has reduced competition, such as market leader Ryanair holding a minority stake in its only effective competitor in the Irish passenger air transport markets. While the EC has been able to block Ryanair‘s proposed hostile takeover of Aer Lingus twice to date,5 it is powerless to order the divestment of Ryanair‘s remaining 29 percent stake because the EC only has jurisdiction to review an acquisition of a controlling interest.6 The EC believes that a stake as low as 20 percent in a competitor or supplier/customer (i.e., vertically related company) could potentially materially influence the competitive conduct of the parties. Having influence over the target’s decisions, for example, via a seat on the board, may reduce the parties’ incentives to compete because the acquirer shares the target‘s profits. In the same way, a minority stake owned by a firm in a company that supplies an important input to the acquirer’s competitors may lead to supply problems for those competitors.
Expansion of the EC‘s jurisdiction to such investments would be consistent with the UK, Austria and, most notably Germany, where the Bundeskartellamt7 has blocked or conditionally cleared a material number of minority acquisitions.8
The EC is therefore considering the following:
Finding the best option for business
While the Notification System would provide legal certainty,10 a blanket obligation to notify in detail all acquisitions, most of which would be benign, would be costly and time-consuming for acquirers, and could deter European investment activity. It could also prove unworkable for the EC, whose resources are scarce and already under pressure. The second proposal (Self-Assessment v Transparency) invites responses on whether companies should have the option to submit a voluntary notification to the EC thereby giving parties legal certainty in borderline cases. If so, the EC should provide guidance on problematic non-controlling minority acquisitions (or “structural links”) so that acquirers would know the types of investment situations that would be problematic. The EC would also need to set a limitation period if it decides to take jurisdiction over existing structural links.
In any event, the new rules should not require the submission of detailed information from parties in all non-controlling minority acquisitions. In order to ensure the least burdensome regime, the EC should provide detailed guidance on the types of transactions subject to or capable of notification, and should provide an option for parties to notify. To this end the EC also proposes “safe harbours” which might cover minority shareholdings falling below at least 20 percent and/or which are not linked to specific voting rights.11
2. Streamlining Merger Reviews and the Simplified Procedure
The other proposed reforms are to be welcomed as they are designed largely to reduce the information burden for businesses and accelerate EUMR reviews, making clearances quicker and cheaper. The first set of proposals would facilitate faster referrals of cases from Member States to the EC (section 2.1). The key proposed change to the Simplified Procedure is to extend its scope to more unproblematic cases so that more transactions are notified via Short Form and get a faster clearance. The EC estimates that such an extension could allow up to 70 percent of all notified mergers to qualify for review under the Simplified Procedure12 (section 2.2).
2.1 Faster Referrals
Pre-notification referrals of transactions by merging parties to the EC
Currently merging parties may request (on Form RS) EC jurisdiction of transactions which do not meet the EUMR turnover thresholds, where the transaction would be notifiable in at least three individual EEA countries (“Member States”).13 This referral mechanism has been used increasingly in recent years14 as merging parties take advantage of the EC “one-stop shop” for merger reviews, thereby avoiding the need to make costly individual merger filings in multiple Member States. However, the process is rather cumbersome, adding typically two months onto the EC merger review and material costs. It also gives potential complainants more time to strategize on how to undermine the merging parties' competitive arguments before the EC.
Sensibly, the EC is proposing to eliminate the need for a Form RS and the Member State consultation.
Instead the EC would have automatic jurisdiction unless a competent Member State opposes within 15 working days from receiving the notification. Only where one or more competent Member States were to veto EC jurisdiction would the EC have to renounce jurisdiction in favour of the original Member States.15
Post-notification referrals by Member States of transactions to the EC
The EC also wants to streamline the process for Member States referring notified transactions to the EC for review. This post-notification referral process has been used relatively rarely in recent years (as parties often utilise the Form RS upfront) and in practice only when transactions pose significant competition issues and have cross-border effects.16 The EC wants to fix the problems with the current system where a transaction may be referred to it while some national regulators continue to review the merger themselves and where the EC‘s review powers are limited to assessing the effects of the deal in the referring country (not at EEA level). Significantly, the EC would have powers to review a transaction as a whole, across the entire EEA, without national competition authorities deciding in parallel in their territory. However, as above, Member States would retain jurisdiction if at least one competent Member State opposed the referral.
2.2 Allowing More Deals To Benefit From The Simplified Procedure
EC merger reviews tend to be more time-consuming and expensive than reviews in other jurisdictions as the EC requires detailed information on affected markets, market share and revenue breakdowns for competitors, and data on customers and suppliers, as well as insisting on pre-notification discussions which can last for as long as six-nine months in complex cases. Transactions qualifying for the Simplified Procedure, however, only need to be notified on a Short Form, and generally require a shorter pre-notification period with EC clearance forthcoming between working days 21-25 (rather than on working day 25). As stated above, the principal proposed change is to extend the scope of the Simplified Procedure to more unproblematic cases so that more transactions are notified via Short Form and get a quicker clearance.
The proposed changes are pro-business as they will reduce the workload and costs involved in obtaining an EC merger clearance for notifiable transactions which do not raise competition concerns. As Simplified Procedure cases involve shorter pre-notification discussions and a slightly shorter review period, the changes should accelerate more review processes. The EC‘s proposed key changes are therefore a helpful development and, more specifically, comprise the following:17
1 European Commission Staff Working Document - “Towards more effective EU merger control,” published on June 20, 2013 and available at: http://ec.europa.eu/competition/consultations/2013_merger_control/index_en.html
2 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.
3 European Commission Draft Revision of Simplified Procedure and Merger Implementing Regulation, published on March 3, 2013 and available at: http://ec.europa.eu/competition/consultations/2013_merger_regulation/index_en.html
4 Such as veto rights over the appointment of senior management, the annual budget, and the company‘s business plan.
5 See, Cases COMP/M.4439 (2007) and M.6663 (2013).
6 At this stage the EC can only take pre-existing minority shareholdings into account in the context of a notified merger where the EC is competent to analyse a separate acquisition of control. By contrast, on May 30, 2013 the UK Competition Commission provisionally decided that Ryanair‘s stake could reduce competition on routes between Great Britain and Northern Ireland: http://www.competition-commission.org.uk/media-centre/latest-news/2013/may/ryanair-may-have-to-reduce-its-stake-in-aer-lingus
7 German Federal Cartel Office.
8 Minority shareholding reviews represented a significant proportion of prohibition decisions in Germany between 1990 and 2008.
9 Such information notice could contain, for example, information on the parties, the type of transaction and limited information on the economic sectors or markets concerned — not dissimilar from the Short Form currently used for Simplified Procedure transactions (see section 2. below).
10 As the EC would be able to review each non-controlling minority acquisition triggering the EUMR filing thresholds.
11 Certain jurisdictions also apply a more qualitative criterion such as “competitively significant influence” (Germany) or “material influence” (United Kingdom), which the EC may also consider adopting.
12 Approximately 10% more than today.
13 EEA Member States: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and United Kingdom (Croatia to become a Member State on July 1, 2013).
14 See, e.g., most recently, Case COMP/M.6873 ICE/NYSE (2013).
15 The EC would just publish a short decision stating that it is no longer competent to review the transaction. The merging parties would then notify the Member States in which their deal qualifies for review.
16 See e.g., Case COMP/M.6773 Canon/IRS.
17 The EC is currently reviewing responses to this consultation and intends to publish a response later this year.
This article was originally published by Bingham McCutchen LLP.