The EU’s competition watchdog, the European Commission, is seeking to upgrade its competition toolkit by giving itself power to review acquisitions of non-controlling minority shareholdings. While on the one hand stating a clear intention to make European
merger control rules simpler and less onerous, it may seem odd that the commission is simultaneously consulting on changes that could lead to significantly more private equity transactions triggering notifications in Brussels.
The commission’s current powers to review non-control- ling minority holdings – “structural links” – are limited. Its concern is that such links, specifically those between com- petitors and parties in vertical supply relationships, may significantly impede effective competition – for example, where there are common directors, or confidential infor- mation is made available which may result in co-ordination instead of competition between competitors.
This perceived “enforcement gap” was discussed in a case involving Ryanair and Aer Lingus, two European air- lines with Irish origins. In that case, the commission pro- hibited Ryanair’s 2007 takeover of Aer Lingus but had no power to order the divestment of Ryanair’s pre-existing minority shareholding. Under current EU law, only mergers that confer “decisive influence” are covered, providing the relevant turnover requirements are met. The Ryanair case was subsequently picked up by the UK competition author- ities, who were able to assess whether the 29.4% share- holding was problematic under the UK’s more expansive “material influence” test. The UK has provisionally found that Ryanair’s shareholding weakens its main competitor, although the final decision is awaited.
The commission has set out various options to expand its remit so that in future it would have jurisdiction to inter- vene in these cases. These include broadening the scope of the current mandatory notification procedure to catch all relevant structural links, or allowing the commission to investigate selected potentially problematic cases. This second option would allow a transaction to go ahead with- out prior clearance, but would either require the parties to file a short information notice, to be published on the com- mission’s website, or enable the commission to investigate if and when it became aware of the deal.
Each option could have a significant impact on many pri- vate equity and growth capital transactions, most of which are benign in competition terms. A mandatory pre-notification system would provide the most legal certainty, but is also the most disruptive – a transaction may not be able to
proceed if the standard “stand-still” obligation is to apply to such transactions, something the commission is consider- ing. Furthermore, even the more limited information notice will require considerable time and cost to complete.
The self-assessment and notice procedures are more targeted but entail a degree of risk and uncertainty, as the commission may decide to investigate following comple- tion. Instead of requiring divestment of a minority shareholding, the commission could adopt some of the US prac- tices, such as ordering the erection of firewalls to hinder information exchange between competing portfolio com- panies, or requiring the removal of directors present on both boards. Voluntary notification may be available for investors to obtain legal certainty, but this again would require information and time.
The assessment of structural links in Europe and else- where in the world is not new. Several national competition authorities already have the power to scrutinise the acquisition of structural links, most notably in Germany and the UK. But the EU’s proposals cannot be properly assessed until more details are available about which non- controlling investments would be caught, and how the new provisions would operate.
The commission is seeking comments on its consultation by September 12. No doubt, many respondents will argue that there is no compelling case for introducing a new filing obligation. These types of investments are almost invaria- bly benign in competition terms, and the commission itself acknowledges that the number of cases where structural links actually give rise to material competition issues is lim- ited. In the rare cases where there may be an issue, ample tools already exist to prevent the exchange of confidential information and co-ordination between competitors.
New filing obligations in such circumstances would seem both disproportionate and unnecessary and will push up the cost of doing business in the EU. If the proposals are adopted – and they are still at an early stage, so may be dropped or changed – the commission should at least provide a safe harbour provision, confirming that structural links below a certain percentage – say 10% of equity, the threshold in the US – fall outside the scope of the revised rules.