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EU merger control reform targets minority stakes to combat potential collusion

30 July 2014

The European Commission (the Commission) is in the midst of a full-scale review of the merger control regime in the EU. 

The EU regime requires corporate M&A deals over a certain size in multiple member states to be notified to the Commission for clearance. 

On 9 July 2014, the Commission published a White Paper envisaging long-term harmonisation of the EU's rules into the national rules of all member states, among other reforms. 

However, in the meantime it is also proposing a significant addition to the regime, in the form of a power to investigate potentially problematic acquisitions of minority shareholdings.

Minority reporting - what will it mean for parties?

At present, the merger control regime only bites where there is an acquisition of control.

Except in limited circumstances where contractual provisions give an acquirer an additional stranglehold (such as through the appointment of majority membership on the Board of Directors), this will only arise through the purchase of a majority shareholding. 

The Commission is therefore concerned that the regime may be allowing potentially anti-competitive minority acquisitions to be going through without scrutiny.

The Commission sets out a number of examples in its White Paper of how the acquisition by one firm of a minority holding in a competitor (or a customer/supplier) could damage competition in the market, such as by increasing incentives for the acquirer to:

  • raise prices or lower production where it takes a minority stake in a competitor
  • limit the competitiveness of the competitor's business plan and strategy, which is a particular risk where the minority stake gives the acquirer influence over key decisions or special resolutions of the company
  • collude with the competitor, which is also made much more feasible by its presence as a shareholder (possibly with an accompanying boardroom presence), and
  • protect a target company active in the downstream market (eg where the licensor of an essential IT programme acquires a stake in a downstream target software solutions provider), leading to 'input foreclosure', as competitors of the target could be denied access to the inputs the acquirer provides (ie in the example mentioned, licences to use the key IT programme).

To combat these potential issues, the Commission is proposing a system whereby potentially problematic minority acquisitions can be targeted for scrutiny from their outset.

The Commission would focus on those transactions that create a "competitively significant link", which the Commission proposes will arise where a minority shareholding is acquired by a firm in a competitor (or a firm 'vertically related' to it) and that shareholding is either: approximately 20%; or between 5% and 20% and bolstered by rights such as a 'de-facto' blocking minority, a seat on the board of directors, or access to commercially sensitive information.

In any of these circumstances, the Commission is proposing that a would-be acquirer will need to file an information notice setting out details of the transaction, including notably the level of the acquirer's shareholding before and after completion and the rights attaching. 

The Commission will then decide whether it wants the case referred for an investigation. 

In addition, the Commission is mooting the idea of having a 15-day waiting period after submission of a minority acquisition information notice. The parties will only be permitted to complete the transaction once this period has expired. 

National competition authorities in the affected member states would have that period in which to decide whether they wanted to refer the deal to the Commission.

The Commission, meanwhile, would have a longer period (eg four to six months) from receipt of the information notice to decide whether to investigate the acquisition. The idea behind this is that it builds in time for potentially interested parties in the relevant sector to come forward with complaints. 

If the Commission decides to take up a case formally (whether on the back of a complaint or on its own initiative), the proposal is that a full notification will then be required. 

At that point, the full powers of the Commission to block or impose conditions (including on an interim basis, notably by way of 'hold separate' orders against parties implementing their deal) would come into play.

Warning: "staggered" deals and JVs will also be caught

From a practical perspective, it would also be important to note that:

  • where there is a staged acquisition of a steadily increasing minority holding, an information notice will only be required the first time a "competitively significant link" arises, and
  • where multiple parties are completing acquisitions as part of a joint venture, these will form one transaction for the purposes of the minority shareholding regime where they are conditional upon one another and/or are concluded simultaneously. 

Do also note that, in the latter circumstances, it could indeed even be the case that two parties together take a controlling interest, while a third then takes a minority stake, meaning that if these acquisitions are linked then the third party will have to join in a full merger notification - remember that unlike with UK-specific transactions, notification to the EU is mandatory.

This article was written by Rory Ashmore.

For more information please contact Rory on +44 (0)20 7427 1031 or rory.ashmore@crsblaw.com