EU to escalate scrutiny of minority stake deals

The EU private equity industry fears the proposals would create a six month period of regulatory limbo for purchasers of non-controlling minority shareholdings.

Citing competition concerns, the European Commission wants to begin reviewing minority stake acquisitions, something the private equity industry says would throw a wrench into the dealmaking process for non-controlling minority stakes.

The Commission outlined the details of its proposals in a white paper released last week. Under the plan, a notification would have to be submitted to the Commission whenever a buyer purchases minority stakes in a business that creates a new “competitively significant link” between two companies in the same industry or alongside the same production path (known as vertical integration).

Once the notification has been submitted the buyer must wait 15 days before the deal can continue. During that period EU member states have the right to request the case be brought to their own national competition authorities. After that a six month clock is set, during which time the Commission can investigate the deal and force the buyer to sell its minority stake if it feels the acquisition raises too many competition concerns.

Ultimately that waiting period “creates a six month period of uncertainty for buyers and sellers,” according to a client alert from law firm King & Wood Mallesons SJ Berwin. The memo described the proposals as “an unnecessary and disproportionate administrative burden on funds” that hold minority stakes.

The Commission is soliciting comments on its proposals until October 3, 2014.

The white paper set forth a few thresholds for what constitutes a competitively significant link. Companies taking at least a 20 percent minority stake in a rival or vertically-related business would be subject to Commission review. Also notifiable are minority shareholding purchases between 5 percent and 20 percent if they are come with additional perks like a seat on the board of directors or access to commercially sensitive information of the target. In private equity, these thresholds are most likely to be hit during bolt-on acquisitions, the memo said.

However the proposals also state that any “acquisition of a minority shareholding by one company which itself does not compete with the target, but which already holds a minority stake (or more) in one or more other firm(s) competing with the target” must also notify the Commission. Accordingly this may require GPs to review their minority shareholdings across the entire portfolio before purchasing another minority stake.

When filing a notification the GP will have to submit information relating to the target, 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 paper also left an unanswered question regarding the implications of not filing a notification. The client alert said this could be significant as if it is similar to not filing a merger notification then massive fines could occur, such as Electrabel's €20 million fine for an acquisition without Commission approval.