The UK Competition Commission [CC] recently published its report requiring Ryanair to sell-down its 29.82% stake in its competitor Aer Lingus. While acquisitions of minority shareholdings generally do not raise competition concerns, the CC’s decision and the current European Commission consultation on reviewing minority shareholdings indicate that antitrust review of minority shareholdings may become more of a consideration for companies in the future.
Background
The European Commission blocked Ryanair’s first attempt to acquire Aer Lingus in 2007 but determined that existing European Union rules prevented it from addressing Ryanair’s residual minority stake. The UK authorities then initiated an investigation: the UK along with Germany and Austria are the only European jurisdictions with the power to review minority shareholdings. But why has the CC required Ryanair to sell down its stake and in general which shareholdings are likely to attract attention from antitrust authorities?
The Competition Commission decision
In its report the CC concluded that Ryanair’s shareholding gave it the ability to influence Aer Lingus’ commercial policy and strategy which would substantially lessen competition between the airlines on routes between Great Britain and Ireland. The CC considered a number of situations in which Ryanair’s shareholding could influence Aer Lingus’ effectiveness as a competitor:
- • Aer Lingus would likely have been – or would be in the foreseeable future – involved in M&A activity absent Ryanair’s stake. Any M&A activity would likely lead to synergies for Aer Lingus making it a more effective competitor to Ryanair.
- • Ryanair could hamper Aer Lingus’ ability to raise capital by issuing shares, and Ryanair’s ability to restrict it from doing so through blocking a special resolution would impede effective competition.
- • In certain situations Ryanair may be able to block an ordinary resolution. Any situation in which Ryanair could pass or defeat an ordinary resolution could have significant implications for Aer Lingus given the importance of company decisions put to a shareholder vote.
- • Ryanair’s minority shareholding increases the likelihood of further hostile takeover bids by Ryanair. Further bids could serve as serious distraction for Aer Lingus’ management resources and could have impeded, or could impede Aer Lingus’ ability to implement its commercial policy and strategy.
The CC concluded that a sell-down to 5% would remedy the competition concerns identified. At this level, Ryanair would realistically no longer be able to block a special resolution, block a squeeze-out of its minority shareholding following a public offer for Aer Lingus, or block an ordinary resolution or the disposal of Heathrow slots. The divestiture should be accompanied by obligations on Ryanair not to have board representation or acquire further shares in Aer Lingus.
Competition authority review of minority shareholdings
Most minority shareholdings are acquired by consent and often underpin a productive commercial relationship, such as between a customer and a supplier or when larger companies invest in start-up companies. However shareholdings which link competitors can raise competition concerns: in particular, the CC saw a clear conflict between Ryanair’s incentives as the largest shareholder in Aer Lingus and its position as Aer Lingus’ closest competitor on many routes.
The CC’s decision in this instance is not unique. In 2007 the CC ordered BSkyB to sell down its 17.9% holding in its rival ITV and the UK’s law on minority shareholdings was used in 1988 to force Kuwait’s sovereign wealth fund to sell-down its 22% stake in its rival BP. Whether the European Commission will soon have similar powers for reviewing minority interests in the wake of its current consultation remains to be seen.
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Alec Burnside is the managing partner of Cadwalader, Wickersham & Taft LLP, Brussels office. He has been counsel to Aer Lingus since 2006. David Boyle is an associate with Cadwalader, Wickersham & Taft LLP.