The European Commission recently announced that it is considering extending merger control rules to capture acquisitions of minority shareholdings. This development could considerably extend the scope of transactions subject to review by the European Commission, and may create a merger notification requirement for transactions that involve the acquisition of certain minority shareholdings. The majority of transactions involving the acquisition of a minority stake will not lead to competition concerns, but if required, such a notification requirement could nonetheless give rise to a significant burden for the private equity sector. This potential change in EU merger control rules should therefore be monitored closely.
Under the present system, private equity funds, pension funds and investment funds only need to obtain merger clearance from the European Commission where the shareholding acquired leads to the these funds obtaining “decisive influence” over the target (this would be typical, for example, of leveraged buy-outs), but not in situations where they acquired relatively modest stakes in companies (more typical of venture capital or growth capital investment scenarios).
However, some national merger control regimes, including the UK and Germany, DO already allow the assessment of certain minority shareholding acquisitions. This divergence in the merger control treatment of minority stake acquisitions has highlighted the possible “enforcement gap” in EU merger control rules, as the European Commission is NOT able to examine all transactions that could potentially pose a threat to effective competition within the EU.
This somewhat uncomfortable interplay between the EU merger control rules and national merger control regimes has been amply highlighted in the saga surrounding Ryanair’s acquisition of a minority stake in Aer Lingus. In 2006 Ryanair, who had been gradually increasing its shareholding in Aer Lingus up to 29.82 percent, launched a takeover of Aer Lingus, which required merger approval by the European Commission as it would clearly result in a change of control. Following an investigation, the European Commission prohibited the takeover, but considered that it did not have the jurisdiction to review Ryanair’s previously acquired non-controlling minority shareholding in Aer Lingus. In 2010, following the EU Court’s confirmation that the European Commission lacked jurisdiction to review Ryanair’s minority shareholding, the UK national competition authority (the OFT) commenced a merger investigation under UK merger control rules into Ryanair’s minority stake. This OFT decision to commence this investigation is currently under appeal before the Court of Appeal, with the undesirable result of Ryanair’s five-year-old acquisition of its Aer Lingus stake STILL being subject to review.
While some would say that the Ryanair/Aer Lingus case is exceptional, others would argue that it shows that the Merger Regulation needs to be reformed so as to capture these minority stake acquisitions. The Ryanair/Aer Lingus review not only illustrates the European Commission’s inability to examine minority share acquisitions, but it also shows how the current mismatch between national merger control regimes and the Merger Regulation can result in poor regulatory outcomes, as no merger review should last for over five years. Such concerns have prompted Commissioner Almunia to consider a potential re-haul of the Merger Regulation in order to close the perceived “enforcement gap”.
One way of extending its jurisdiction without creating a flood of notifications would be for the EC to change the rules by requiring the parties to carry out a self-assessment of the merits of the case at the outset…
It is clear that were the Merger Regulation to capture minority shareholdings the consequences for private equity firms would be significant, given that an increased number of minority share acquisitions (even potentially quite small ones) could become subject to a notification requirement, which will of course result in increased costs and delay for transactions. Considering the compliance cost, the European Commission should not pursue a jurisdictional test that significantly increases burden for business (and the European Commission’s workload) in order to capture isolated instances of potential concern.
One way of extending its jurisdiction without creating a flood of notifications would be for the European Commission to change the rules by requiring the parties to carry out a self-assessment of the merits of the case at the outset in order to decide whether or not to notify. For example, the acquisition by a company of a minority shareholding in a completely unrelated sphere may not trigger the European Commission’s jurisdiction, but the acquisition of a minority stake in a competitor could trigger the European Commission’s jurisdiction. The downside is, however, that these subjective elements will make the notification rules much more complex and less certain. While still at early stages, it is therefore likely that this potential reform of the Merger Regulation will be hotly contested by the international business community as well as by some Member States.
Partner Christian Riis-Madsen and associates Sophia Stephanou and Killian Kehoe are part of O’Melveny & Myers Antitrust and Competition Practice in the Brussels office. The authors would like to thank Ozlem Fidanboylu for her contribution to this piece.