Australia: Minority report: When are acquisitions of small shareholdings subject to antitrust scrutiny?

EU proposes to extend its merger control powers to cover acquisitions of smaller shareholders.

When one business acquires control of another – whether by public takeover, private share purchase agreement, or acquisition of assets – this is generally treated by antitrust and competition authorities as a "merger" which needs to be assessed for its effect on competition under the "merger control" regime in the antitrust/competition jurisdiction(s) affected. This is for the obvious reason that the two businesses were previously independent of each other, but are now under common control – so that, if they were competitors of each other on the same market or markets, the transaction eliminates competition between them and reduces competition on the market overall.

But what if a company acquires only a minority interest in another company – say, a shareholding of just 25 per cent? This, too, is potentially problematic in competition terms if the companies compete with each other, because:

  • The minority shareholder will have a financial interest in the success of the company in which it has the shareholding and therefore will be less inclined to compete so vigorously against it; and
  • The minority shareholder might have a degree of influence over that other company (e.g., through the ability to block certain resolutions at shareholders' meetings, or to appoint directors to the board), and might use that influence to procure that the other company's commercial strategy is aligned with its own, rather than competing vigorously against it.

For these reasons, many jurisdictions apply their merger control regimes to the acquisition of minority interests. The following are notable examples.

United Kingdom

The UK merger control regime applies to acquisitions of majority control over another company, but also to acquisitions of lesser shareholdings, including the acquisition of the ability to exercise "a material influence".

  • The concept of "material influence" has been developed over time in various cases, and is not strictly defined by a shareholding threshold, but by a combination of factors such as shareholdings, ability to appoint board directors, special rights attaching to the shareholding, and influence arising out of commercial and structural links such as being a major creditor to the company.
  • The fact that a shareholding above 25 per cent gives the holder the ability to block a special resolution at a shareholders' meeting (that is a resolution defined in UK companies law as requiring a 75 per cent vote among shareholders) entails that such a shareholding will normally be held to confer "material influence".
  • But it is clear that even smaller shareholdings can also confer material influence. Guidance on merger control from the new UK competition authority, the Competition and Markets Authority, states that:
  • "Although there is no presumption of material influence below 25 per cent, the CMA may examine any shareholding of 15 per cent or more in order to see whether the holder might be able materially to influence the company's policy. Exceptionally, a shareholding of less than 15 per cent might attract scrutiny where other factors indicating the ability to exercise material influence over policy are present".28

In an actual case, the acquisition by the pay-TV broadcaster BSkyB of a 17.9 per cent shareholding in the free-to-air TV broadcaster ITV was held by the UK competition authorities, in January 2008, to confer "material influence", and therefore to be a merger, and was prohibited because of competition concerns. BSkyB was required to sell shares such that its shareholding in ITV was reduced to a level below 7.5 per cent29.

Canada

In Canada, merger control is triggered by share acquisitions leading to majority control, but also by share acquisitions leading to:

  • A shareholding of more than 20 per cent in a public company;
  • A shareholding of more than 35 per cent in a private company; or
  • "Significant interest", which (like the UK's "material influence" – see above) could occur with very low shareholdings, or indeed no shareholdings if there are contractual or other rights that confer such influence.

United States

In the United States, acquisitions of minority shareholdings can trigger a requirement to make a merger filing (notification) under the Hart-Scott-Rodino Act. There is no shareholding threshold, but any acquisition that results in the acquirer holding voting securities in another company to the value of more than US $70.9 million (about GB £43.3 million or €53.0 million).30

Germany

In Germany, the acquisition of majority control constitutes a merger triggering a notification (filing) obligation – whether this is a shareholding above 50 per cent of voting rights, or de facto majority control (e.g., the ability to command a majority at a shareholders' meeting, even though one has less than 50 per cent of voting shares, because other shareholdings are widely dispersed and in practice their shareholders do not attend).

In addition, the acquisition of smaller minority shareholdings can give rise to notification obligations in Germany:

  • An acquisition resulting in an interest of 25 per cent or more constitutes a merger under the German rules; and
  • Acquisitions below 25 per cent that confer a "competitively significant influence" over the other company count as mergers. The existence of a "competitively significant influence" will depend on a variety of factors – such as the right to appoint members of the board, special rights attached to the shareholding, shareholder information rights, and so on. In one 2008 case, the acquisition of a 13.75 per cent shareholding, coupled with the right to appoint three out of 12 board members were held to be sufficient to confer a "competitively significant influence";31 the acquisition was prohibited, and the acquirer was obliged to sell its shareholding.

The current debate – the EU situation

The EU Merger Regulation considers that a merger (or, in its terminology, a "concentration") arises only with an acquisition of "decisive influence". The threshold for this is higher than the UK's material influence or Germany's "competitively significant influence", and arises on acquisitions of:

  • A majority of the voting rights;
  • A de facto majority of the voting rights – i.e., where, in practice, the shareholder is highly likely to achieve a majority at shareholders' meetings, because other shareholdings are widely dispersed and the holders are unlikely to attend; or
  • Veto rights over strategic commercial decisions such as approval of the business plan budget and/or the appointment and dismissal of senior management – whether held solely32 or jointly with other shareholders (for example, in a joint venture).

Acquisitions of minority shareholdings can count as mergers under the EU Merger Regulation where they are accompanied by the veto rights referred to above, or where they confer de facto majority control. A recent case shows that de facto majority of voting rights can be achieved with quite low shareholdings: in September 2013, the European Commission held that a shareholding as low as 26.51 per cent of voting rights conferred de facto majority control, on the basis that

"the historic voting pattern at shareholders' meetings and the position of other shareholders indicated that [the acquirer] is likely to have a stable majority of the votes at the shareholders' meeting."33

Nevertheless, the EU Merger Regulation will not catch shareholdings as low as those that can be caught under the UK's "material influence" test or Germany's "significant competitive influence" test. This is significant because most competition regimes within the EU adopt the EU definition of a "merger" ("concentration") – although, as explained above, not the UK or Germany – as, indeed, do a number of competition jurisdictions outside the EU.

Example: the Ryanair/Aer Lingus case in 2013

The limitations on the EU Merger Regulation's ability to "catch" acquisitions of minority shareholdings has been dramatically highlighted in the past year in the case of scrutiny by competition authorities of the proposed takeover by the Irish airline Ryanair of its main competitor, Irish airline Aer Lingus, and the pre-existing acquisition by Ryanair of a minority shareholding in Aer Lingus.

By way of background, the basic rule of merger control within the EU is that the European Commission has jurisdiction over transactions where the parties' turnover exceeds certain thresholds, and, where the European Commission does not have jurisdiction (usually because the parties' turnover is below those thresholds), national competition authorities within the EU may exercise jurisdiction. As we have seen, the definition of "merger" differs as between the EU merger control regime and that of the UK authorities. For Ryanair/Aer Lingus, the European Commission had jurisdiction to examine the proposed takeover (i.e., acquisition of full control),34 but the UK authorities were left to examine Ryanair's pre-existing 29.82 per cent shareholding in Aer Lingus, which conferred material influence.35 In other words, different authorities were examining transactions between the same parties because, in spite of the parties exceeding the EU turnover thresholds, the EU regime (unlike the UK regime) did not apply to Ryanair's minority shareholding acquisition.

It is this supposed "anomaly" that the European Commission is now proposing to address.

The European Commission's proposals for change

In June 2013, the European Commission published a consultation paper with several proposals for changing the EU Merger Regulation.36 The more important of these is that the concept of "merger" (or "concentration") in the EU Merger Regulation regime should be extended to cover a wider range of transactions, including minority shareholding acquisitions. Although the Commission did not propose a specific level, the proposal talks about "structural links".

  • By way of example, the European Commission contemplates a range of possibilities such as any shareholding above 10 per cent, any shareholding conferring special shareholder rights such as veto rights or board representation, or concepts such as the UK's "material influence" or Germany's "competitively significant influence".37
  • A problem with this approach is that, because the EU merger regime is a mandatory notification system (unlike the UK), unless there is a relatively "bright light" to define what constitutes a notifiable "merger" ("concentration"), parties risk facing significant penalties and other adverse consequences for non-notification when they did not realise that their transaction was a notifiable merger. (In Germany, there is also a mandatory notification system, although the notification burden is somewhat less than under the EU regime.) The European Commission consultation paper proposes a possible solution to this which is that for mergers that are purely based on "structural links" (i.e., meeting the new, wider definition, but not the old one), there would be a voluntary notification system as in the UK.

The debate on the European Commission's proposal continues. If the proposals contemplated by the European Commission take effect, they can be expected to result in many more transactions having to be notified to the European Commission.

Footnotes

28 UK Competition and Markets Authority, Mergers: Guidance on the CMA's jurisdiction and procedure – consultation document, CMA2con, July 2013, paragraph 4.20.
29 UK Department for Business Enterprise and Regulatory Reform, final decisions by the Secretary of State for Business, Enterprise and Regulatory Reform on British Sky Broadcasting Group's acquisition of a 17.9 per cent shareholding in ITV plc, January 29, 2008.
30 This figure is adjusted annually every February.
31 German competition authority (Bundeskartellant) merger decision, A-TEC Industries / Norddeutsche Affinerie, February 28, 2008.
32 European Commission merger decision, Case COMP/M.1920 Nabisco / United Biscuits, May 5, 2000, paragraph 5.
33 European Commission merger decision, Case COMP/M.6957 IF P&C / Topdanmark, September 23, 2013, paragraphs 7 to 11.
34 European Commission merger decision, Case COMP/M.6663 Ryanair / Aer Lingus III, February 27, 2013.
35 UK Competition Commission merger report, Ryanair Holdings / Aer Lingus Group, August 28, 2013.
36 European Commission, Staff Working Document, towards more effective merger control, SWD (2013) 239 final, June 25, 2013.
37 Commission Staff Working Document (as above), paragraph 3(a).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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