The European Antitrust Review 2012

Transcription

1 The European Antitrust Review 2012 Published by Global Competition Review in association with Allen & Overy Studio Legale Associato Bingham McCutchen bpv Braun Partners bpv Hügel Rechtsanwälte CMS Adonnino Ascoli & Cavasola Scamoni Compass Lexecon DLA Piper Spain SL Eisenberger & Herzog Epstein, Chomsky, Osnat & Co Gide Loyrette Nouel AARPI Homburger Hunton & Williams LLP K&L Gates LLP Kirkland & Ellis International LLP Lademann & Associates GmbH Latham & Watkins LLP Marques Mendes & Associados Motieka & Audzevic ius Popovici Niţu & Asociaţii SJ Berwin LLP Squire Sanders Steptoe & Johnson LLP Sullivan & Cromwell LLP Szabó Kelemen & Partners Attorneys Taylor Wessing Vogel & Vogel

2 Private Equity and EU Merger Control: When Simple Turns Complex Craig Pouncey, Kyriakos Fountoukakos, Hanna Anttilainen-Mochnacz and Lisa Geary* Introduction Private equity transactions 1 have an increasingly important role to play, especially in the current financial climate. Many companies face financial difficulties and private equity injections are sorely needed. The conventional view may be that private equity transactions are simple from a merger control perspective: if a private equity fund with no pre-existing activities in a sector decides to make an investment by buying a business in that sector, how can this raise competition issues? Such a deal sounds simple in principle. However, when the EU Merger Control Regulation (EUMR) 2 applies to such a deal and a filing must be made to the European Commission (the Commission), the ostensibly simple can easily become complicated. First, it is important to recall that the EUMR system of merger control makes few, if any, concessions for the fact that the majority of private equity transactions represent a purely economic investment, take place in unrelated sectors and do not raise substantive competition issues. Even where no horizontal overlaps or vertical links occur between the activities of the private equity buyer and the target, a number of issues can arise from a procedural perspective with the potential to adversely affect the timing of the transaction. Such issues include an assessment of whether the EUMR applies in the first place (a task involving a detailed and complex calculation of relevant turnover), and preparation of the necessary EU filing, which, even under the simplified procedure, can require significant information to be provided upfront. Second, although such cases represent a minority of private equity transactions, it is clear that substantive competition issues may arise where a private equity buyer already controls companies that are competitors of or have vertical links with the target company. Such issues are more likely to arise in respect of private equity buyers who seek to concentrate their investments in particular market sectors rather than maintain a diverse investment portfolio. Such horizontal overlaps or vertical links, or both, can raise the prospect of significant delays for the transaction timetable, the potential for substantial divestments to ensure merger control clearance or, in the worst case scenario, prohibition of the transaction. It is clear that the implications of a lengthy merger control review will be particularly keenly felt in the context of a private equity transaction where investment is often made for a finite period and time is even more of the essence. In addition, the Commission s practice and statements in recent times indicate that minority shareholdings and incidental overlaps will face heightened scrutiny going forward. This will have a further impact on the future analysis of private equity transactions where the private equity buyer already owns minority stakes in companies in a given sector. This article examines the following specific issues that can serve to complicate and delay the merger control process for private equity transactions and considers how private equity buyers can limit the impact of such issues: calculating turnover for the purposes of the EUMR; use of the simplified procedure and Short Form CO; examination of substantive (horizontal and vertical) issues; and consideration of minority shareholdings by the Commission. Statistics Concentrations involving private equity buyers represent a significant proportion of transactions falling within the scope of the EUMR. Over the past three years (2008 to 2011), transactions involving financial investment companies (including private equity funds, investment funds and pension funds) have represented 15 to 20 per cent of the approximately 900 transactions that have been notified to the Commission under the EUMR. Approximately 80 per cent of these transactions were considered under the simplified procedure. Of those cases requiring a full Form CO, only one went to Phase II 3 and one case was referred to the Office of Fair Trading in the UK. 4 Calculating turnover for the purposes of the eumr Calculation of turnover of the undertakings concerned in a merger ( concentration 5 in EU terminology) is necessary to determine whether the concentration meets the thresholds set out in article 1 of the EUMR and hence whether it falls to be notified to the Commission under the EUMR. Every transaction not only private equity deals that is considered a concentration for EUMR purposes will therefore involve calculation of turnover for the purposes of assessing jurisdiction. However, there are various aspects that complicate turnover calculation in private equity deals. Identification of the relevant undertakings party to the transaction In every transaction, when assessing whether the transaction falls within the scope of the EUMR, the first step is to identify the undertakings concerned, that is the undertaking(s) acquiring control and the target undertaking. In a straightforward acquisition of company A buys company B, this is often simple. Private equity investments, however, are structured in a variety of complex ways, often involving minority stakes or a number of acquirers getting together for a consortium bid and can therefore raise significant complexities in determining which undertakings are the undertakings concerned on the acquiring side (the exact scope of the target also needs to be identified but this would be done in the same way as in any transaction and is not considered further here). In each case it will be necessary to carry out a careful analysis of the facts of the transaction and the particular structure of the private equity buyer and its management arrangements in order to decide which entities are a relevant party to the transaction for merger control purposes. The key to identifying the relevant acquiring party to any transaction is the concept of control as set out in article 3(2) EUMR. As noted earlier, control is defined as the possibility of exercising 28 The European Antitrust Review 2012

3 decisive influence over an undertaking. This possibility can exist on the basis of rights, contracts or any other means and can, as such, occur on a de jure or de facto basis. 6 A particular complexity arises in situations where the acquisition is made by a private equity fund (hereinafter referred to as an investment fund). The investment fund (structured as a limited partnership) is the usual vehicle for a private equity transaction and is controlled/managed by the private equity firm (hereinafter referred to as the investment company). In private equity transactions involving investment funds it is not always clear which entity is actually taking control over the target as a result of the transaction: is it the fund or the investment company behind the fund? The Commission is aware of the potential complexities of identifying the undertakings concerned in the case of such transactions and has devoted a specific section in its Consolidated Jurisdictional Notice (Jurisdictional Notice) 7 explaining how it will analyse such transactions. Acknowledging the complexities involved, it states that it will analyse structures involving investment funds on a case-by-case basis, although it notes that some general principles may be discerned based on the Commission s past experience. 8 The Commission notes that: Investment funds are often set up in the legal form of limited partnerships, in which the investors participate as limited partners and normally do not exercise control, either individually or collectively. The investment funds usually acquire the shares and voting rights which confer control over the portfolio companies. Depending on the circumstances, control is normally exercised by the investment company which has set up the fund as the fund itself is typically a mere investment vehicle; in more exceptional circumstances, control may be exercised by the fund itself. The investment company usually exercises control by means of the organisational structure, eg, by controlling the general partner of fund partnerships, or by contractual arrangements, such as advisory agreements, or by a combination of both. In such circumstances, the investment company (eg, a private equity firm) normally acquires indirect control within the meaning of the EUMR and has the power to exercise the rights that are directly held by the investment fund. 9 It will therefore be considered as the acquiring undertaking for EUMR purposes. Calculating turnover of private equity buyers Once the relevant undertakings concerned have been identified, the next step is to calculate the turnover of those bodies in order to assess whether the turnover thresholds set out in article 1 of the EUMR are met. Turnover calculation needs to follow the precise rules set out in article 5 of the EUMR and the guidance provided in the Jurisdictional Notice. This involves: (i) identifying the group of the undertaking(s) concerned as the turnover of the whole group needs to be counted; (ii) identifying what income/revenue needs to be taken into account; and (iii) allocating the turnover geographically. Calculation of turnover of private equity buyers can raise tricky questions in particular with regard to steps (i) and (ii). Allocation of turnover geographically also raises some complexities, which we consider briefly below. Identifying the group of the private equity investor Article 5(4) EUMR sets out specific criteria for identifying undertakings whose turnover can be attributed to the undertaking concerned (the acquirer). In short, the whole group of the undertaking concerned needs to be identified and the turnover of the whole group to be taken into account. The EUMR does not include a definition of group but sets out specific rights or powers, which, if an undertaking concerned directly or indirectly has over other companies, those are to be regarded as controlled by it and part of its group for purposes of turnover calculation under the EUMR. Parent companies that have those rights over the undertaking concerned and subsidiaries of the parent companies (ie, sister companies) are also included in the group. The criteria for this notion of control are whether an undertaking: owns more than half of the capital or business assets; has the power to exercise more than half of the voting rights; has the power to appoint more than half of the members of the supervisory board, the administrative board or bodies legally representing the undertakings; or has the right to manage the undertaking s affairs. The last criterion covers only a de jure right to manage the portfolio company s affairs. 10 It is to be noted that the criteria for determining a group under article 5(4) and the notion of control as set out in article 3(2) EUMR are different. The Jurisdictional Notice (paragraph 184) explains that the difference is due to the fact that there must be some sort of precision and certainty in the criteria used for calculating turnover so that jurisdiction can be readily verified, whereas the question of whether a concentration arises as a result of a change of control can be investigated much more comprehensively. For example, if the investment company (through one of its funds) owns more than half of the capital or business assets of a portfolio company, the investment company will be considered as controlling the portfolio company for the purposes of turnover calculation even if no control exists in the sense of article 3(2) EUMR. 11 The above test is complicated in itself. When it comes to private equity deals it becomes even more so. This is because an investment company owns a large number of companies in its portfolio (portfolio companies) and the arrangements through which it controls such companies are complicated. It is therefore not always self-evident whether a portfolio company is controlled by the private equity buyer for the purposes of calculating turnover. This is one area where the simple may become complex. A detailed analysis of the portfolio companies and their relationship with the private equity firm may therefore be necessary to determine whether they are considered as part of the group for the purposes of the EUMR. In the case of an acquisition involving investment funds in particular, it is also crucial to identify whether the investment company (the private equity firm) indirectly has the powers and rights referred to in article 5(4) held by the investment fund itself in the portfolio companies. The investment company may control (directly or indirectly) a number of different investment funds through a common control structure (often indicated by a common brand for the funds), in which case all of those investment funds and all of the portfolio companies that are controlled by those investment funds would be considered to belong to the investment company party to the transaction. This is regardless of the fact that the different investment funds may have different investors

4 Another complexity that is particularly acute in the case of private equity transactions is calculation of turnover of portfolio companies that the investment company jointly controls together with other parties as a joint venture. Joint-ownership is a frequent occurrence in private equity portfolio companies. In such situations, the EUMR specifies that, if two or more parties control a portfolio company within the meaning of article 5(4), a portion of the turnover of that company is allocated to each of the controlling parents in proportion to the number of controlling parents. 13 Which income/revenue to take into account There are two types of income that generally need to be taken into account for private equity buyers: direct income: fee income, commission income and dividend income: the direct income received generally consists of either income derived from any non-controlling minority investments or from, for example, the general partner or fund manager s own revenues (eg, its fee and/or commission income). This type of income should be allocated to the country in which such income is received. 14 indirect income: the turnover of portfolio companies: indirect income is the turnover of companies over which the private equity buyer has control within the meaning of article 5(4) of the EUMR (as explained above). The turnover of these portfolio companies within the group is taken into account as turnover of the private equity buyer. The turnover of portfolio companies should be attributed to the country in which the customer of that portfolio company resides (eg, if a private equity buyer has control over company X via its funds and X derives its turnover from sales to customers in France, Germany and the UK, the turnover should be allocated to France, Germany and the UK as per the sales made). Any dividend income received from the portfolio companies over which the private equity buyer has control must then be deducted from the total to avoid double counting (since that income is essentially already included in the portfolio company s turnover). 15 Simplifying turnover calculation in private equity deals The Commission recognises in the context of financial holding companies that the calculation of turnover can be complicated and onerous. A strict and detailed calculation of turnover is therefore only necessary when the turnover is likely to be close to the EUMR thresholds. 16 The same applies, in our view, to private equity buyers and their portfolio companies. If, for example, it is clear on the basis of, say, nine portfolio companies clearly controlled by the private equity buyer that the EUMR thresholds are met, it should not be necessary to determine whether the private equity buyer actually has control over further portfolio companies for the purposes of turnover calculation. (Clearly, however, companies over which the private equity buyer has control and which are active in markets that overlap horizontally with the target company or are active upstream or downstream from the activities of the target company and thus could raise potential competition issues would need to be taken into account.) Another practical approach is simply to include the turnover of such companies anyway, if this makes no difference to the substantive analysis. Given the complexities involved in turnover calculation and the fact that time is always of the essence when doing private equity deals, it is generally recommended that, to save time in a transaction scenario, private equity firms with complex group structures (in particular investment companies investing through funds over a large number of portfolio companies) keep an, annually or more often updated, list of the portfolio companies forming part of their group (for EUMR purposes) with a running total of the turnover of those portfolio companies at least on both a worldwide and EU-wide level. This will almost certainly result in significant savings of time. Finally, it is worth noting another practical implication of the complexity of turnover calculation in private equity deals. In such acquisitions it is very difficult for the seller to make an independent assessment of which merger control regimes might be caught by the transaction. Most private equity buyers are fiercely protective of their turnover information. This raises practical issues in a bidding situation because the seller becomes dependent on the private equity buyer s assessment as regards regulatory clearances required (depending on the amount of data in the public domain/merger clearance precedents involving the buyer). Use of the Simplified Procedure and Short Form CO Making a notification using the prescribed Form CO is a very onerous task. The Commission is aware of the burden involved and has tried to simplify matters for companies involved in transactions that are unproblematic from a substantive competition point of view. As noted above, this is the case for most private equity transactions where the private equity buyer owns companies in a variety of sectors and its acquisitions do not result in any horizontal or vertical overlaps. The Simplified Procedure and Short Form CO For such unproblematic transactions, the Commission follows a socalled simplified procedure if certain criteria are met as set out in the Commission s Simplified Procedure Notice. 17 The criteria are: in case of a joint venture, the joint venture has no, or negligible, activities in the EEA; there are no horizontal overlaps between the activities of the parties to the transaction and where the parties are not active upstream or downstream from each other; there is a horizontal overlap between the activities of the parties but the combined market share is below 15 per cent or where the parties are active upstream or downstream from each other but the individual or combined market shares at either level are below 25 per cent; or a party is to acquire sole control of an undertaking over which it already has control. Under the simplified procedure, although the formal timetable before the Commission remains the same as under a normal merger clearance procedure, the parties can use the Short Form CO and thus provide far less data to the Commission than would be the case were the transaction to be notified under the normal merger clearance procedure. 18 The Short Form CO imposes a much less onerous burden on the parties in respect of the provision of information about the parties themselves or the relevant markets at issue. By way of example, the full Form CO requires parties to provide comprehensive information on each affected relevant product market for each of the last three financial years, including an estimate of the market share of all competitors with at least 5 per cent of the geographic market under consideration. 19 By contrast, under the Short Form CO, the requirement is to provide information for the year preceding the 30 The European Antitrust Review 2012

5 operation in respect of reportable markets identified in the Short Form CO. The obligation to provide information on competitors is limited to providing an estimate of the market share of the three largest competitors where there are horizontal or vertical overlaps between the parties. 20 Private equity deals and the Simplified Procedure Significant information required even under the Simplified Procedure The assumption in most private equity buyouts may be that the transaction can be notified under the simplified procedure as most private equity transactions involve acquisitions in unrelated sectors and thus fulfil the criteria of the Simplified Procedure Notice (no or minor horizontal or vertical overlaps). Sounds simple? Not necessarily so, as the Commission still requires a very substantial amount of information to be provided upfront in cases where there may be potential horizontal overlaps or vertical links, however minor. In such instances, private equity buyers are being obliged to submit increasingly more detailed information on the activities of their portfolio companies and those companies market shares on any potentially relevant markets simply to prove that they can use the Short Form CO. As private equity firms can own a very large number of portfolio companies, providing information (however basic) on the activities of those companies becomes a very time-consuming task. Gathering information is more difficult in the case of private equity buyers As, in our experience, private equity firms may not have information on the market shares of their portfolio companies to hand, they will be required to approach their portfolio companies for the relevant information. This raises two critical issues: the portfolio companies themselves may not have the information readily at hand and may resent having to spend time gathering such data (in complex structures where the portfolio company may be jointly controlled by a number of companies, one of which being the private equity firm, there may even be issues as to whether the private equity firm has the power to demand the portfolio company to provide such information); and the private equity firm may have underestimated the market shares of the relevant portfolio companies, which means, in the worst case scenario, an obligation to notify under the normal merger control procedure, using the full Form CO. Each issue may affect the transaction timetable in a different way. The first issue may result in an extension of the time required for the preparation of the draft Short Form CO, whereas the second will result in a lengthier pre-notification phase due to the detailed data requests from the Commission case team, which accompany the full Form CO. Added complexity in joint-control deals (consortium transactions/ so-called spill-over effects) Other complexities can arise in situations where the private equity buyer is taking joint control over the target with another buyer a frequent occurrence in private equity deals. An issue that can arise is the concept of spill-over effects, that is, where both private equity buyers control portfolio companies that compete with each other or have vertical links even if such companies are active in areas completely unrelated to the target of the acquisition in question. The Commission will wish to assess whether the creation of the joint venture could lead to coordination between the private equity buyers in respect of the competing portfolio companies (under article 2(4) EUMR). While the Commission may, understandably, wish to investigate the potential spill-over effects of a joint venture, it is debatable why the Commission sometimes (and here practical experience varies) scrutinises any overlaps or vertical links between the parent companies when those overlaps or links are unrelated (either horizontally or vertically) to the joint venture. For example, if two private equity buyers jointly purchase a target and one private equity buyer has a portfolio company that is active upstream from a portfolio company of the other private equity buyer, the Commission may request details of the market shares and potential seller-customer relationship of those two portfolio companies. One wonders why such information is necessary when neither portfolio company has any links to the joint-venture company (other than to technically fulfil the requirement of identifying reportable markets, which involves two or more parties to the concentration having a horizontal or vertical relationship). The necessity for private equity (and other) parties to provide such detailed information on overlaps or vertical links is often considered by such parties as disproportionate. In this regard, we submit that it may be beneficial for the Commission to consider amending the wording of the Short Form CO to explicitly exclude the provision of this type of information. 21 This could be achieved by clarifying that the notion of reportable markets refers to markets that are related to those in which the jointventure company is active (either horizontally or vertically). Markets where both parents (and their portfolio companies) are active but not the joint-venture company should not fall within the definition of reportable markets and any information and effects should be considered only under the relevant paragraphs on spill-over effects. Information could be provided to simply show that the markets in question are unrelated to the joint-venture company and that the creation of the joint-venture company (and the corporate arrangements in question) could not lead to any coordination of those unrelated parent activities. This could be achieved without having to provide substantive market share and other information on those activities. Substantive issues While in the majority of private equity cases, the Commission s competition assessment will not reveal substantive concerns in respect of horizontal overlaps or vertical links between the parties, this does not mean that problematic transactions will not arise. Competition concerns are particularly likely where a private equity buyer seeks to focus its investments in specific market sectors as it is clear that the Commission will scrutinise a transaction where a private equity buyer controls a competitor of the target company or an entity directly upstream or downstream of the target. It is important to recall that the Commission s review will also extend to any potential overlaps that arise between the target company and the portfolio companies of the private equity buyer. It is also noteworthy that a number of private equity transactions reveal both horizontal and vertical overlaps due to the extent of the overlaps and links between the various entities. Horizontal issues In the vast majority of private equity cases, horizontal overlaps will not result in competition concerns due principally to the parties low market shares and the small increments ensuing as a result of the 31

6 transaction. However, a small number of cases have required more detailed examination from the Commission, resulting in the provision of commitments. As in all cases involving significant horizontal overlaps, it is possible that substantial divestments will be required in order to obtain EUMR clearance in private equity transactions and careful consideration of the potential impact on the transaction timing and future market strategy is advisable. Arsenal/DSP 22 is the most recent Phase II transaction entailing a private equity buyout that required substantial divestments in order to address the Commission s competition concerns. The case concerned the proposed acquisition by US private equity firm, Arsenal, of sole control over DSM Special Products BV (DSP). The parties activities overlapped in the manufacture and supply of benzoic acid and the downstream product of sodium benzoate, while Arsenal also made the downstream benzoate plasticisers product. The Commission concluded that, as the parties would have represented the only two producers of solid benzoic acid in the EEA, the transaction would raise serious competition concerns in the EEA. In order to obtain EUMR approval, Arsenal was required to propose remedies that removed the entire overlap between the parties. In this regard, Arsenal proposed the full divestment of its upstream liquid benzoic acid plant, its downstream solid benzoic acid and sodium benzoate plants and its worldwide customers for those downstream products. In order to ensure continued supply of liquid benzoic acid to the merged entity, a long-term contract with the purchasers of the divested assets formed part of the commitments. However, one month after EUMR approval was obtained, the parties announced that the transaction would not be completed on the basis that the conditions required by the Commission meant that the intended sale was no longer feasible. 23 By way of further example, in Nordic Capital/Convatec, 24 a Phase I decision entailing commitments, the Commission considered the proposed acquisition by Nordic Capital (a group of private equity funds) of control over ConvaTec, a company that produced, inter alia, advanced wound-care products. The parties overlapped in this market as Nordic Capital s portfolio included a company (Unomedical) that was also active in the advanced wound-care market. The Commission assessed the transaction on the basis of a number of alternative narrower product market definitions within the moist advanced wound-care market. The Commission concluded that serious doubts as to the compatibility of the transaction with the common market arose in respect of the UK market for particular types of wound dressings (alginates and alginates/hydrofibres). In order to address the concerns identified by the Commission, Nordic Capital proposed the divestment of the entire wound-care business of Unomedical. Unomedical s ophthalmic business was also included as it shared a production site with the wound-care business. The Commission accepted the proposed commitments on the basis that the divestment would remove the entire overlap between ConvaTec s and Unomedical s wound-care activities in the EEA. Vertical issues It is important to note that the Commission will investigate in detail all potential vertical overlaps between the transaction parties, however minor they may initially appear. By way of example, in CVC/ Charden International, 25 the Commission considered the acquisition by investment manager CVC of a company active in vending machine services, a market that was downstream from CVC s portfolio company active in the production of sugar confectionary and chewing gum. Although the transaction resulted in affected markets in four countries, the Commission ultimately concluded that the parties lacked the ability to engage in either input or customer foreclosure. Similar issues arose in respect of a number of recent cases such as One Equity Partners/Constantia 26 (potential vertical link between flexible packaging and supply of muesli and cereal bars), TPG/IMS Health 27 (potential vertical link between health-related marketresearch services and the production of finished pharmaceutical products) and EQT V/Dometic 28 (potential vertical link between the provision of hotel accommodation and the provision of hotel minibars). It is also not unusual for private equity transactions to entail both horizontal overlaps and vertical links between the parties. By way of example, the proposed acquisition by private equity funds affiliated with Blackstone of the Hilton group of hotels entailed consideration by the Commission of horizontal overlaps at local level in two German cities where both the private equity funds and the Hilton Group owned hotels. 29 Vertical links also existed between the Hilton hotels and a Blackstone-controlled portfolio company that operated a global distribution system (an intermediary service between travel service providers and travel agents). Ultimately the Commission concluded that the transaction did not raise serious doubts from either a horizontal or vertical perspective. It is worth recalling that in the Arsenal and Nordic Capital cases above, the private equity buyer was required by the Commission to divest part of its pre-existing business (comprising the full overlap between the parties in the EEA) in order to address the Commission s competition concerns. While the private equity buyer will naturally benefit from the proceeds of any divestments, it is possible that the divestment will require significant alteration and reconsideration of the buyer s intended strategy for the market segment, particularly if the divested assets are of fundamental importance. In fact, in the Arsenal case, it became evident to the parties that the required divestments were so onerous as to override the commercial rationale for the transaction. While this is obviously a consideration in all merger control cases, the impact will undoubtedly be felt more keenly in a private equity context where investment is often made for a finite period with a view to achieving maximum return before exit. Therefore it is recommended that the private equity buyer give careful consideration at an early stage of the transaction to the potential strategic impact of substantial divestments. Minority shareholdings It is established that where a company simply acquires a noncontrolling (within the meaning of the EUMR) minority shareholding in a target company, the absence of control prevents the Commission from reviewing this transaction independently. 30 However, where there is a larger transaction involving a change of control within the Commission s jurisdiction and one or both parties have relevant existing minority interests or a non-controlling minority shareholding is acquired as part of the transaction, the Commission will consider such minority shareholdings as part of the substantive analysis. The Commission s Remedies Notice 31 envisages that divestiture of a minority shareholding in a joint venture or a competitor may be necessary in order to sever a structural link between the parties and competitors. Minority shareholdings and their assessment under the EUMR are of particular importance for private equity deals. This is because private equity buyers own a wide range of investments including minority stakes in a large number of companies. Scrutiny of such shareholdings below the level of control would therefore increase 32 The European Antitrust Review 2012

7 the potential for problematic horizontal or vertical links between the various companies in the private equity buyer s portfolio. A recent case involving the proposed acquisition by investment company IPIC of MAN Ferrostaal AG 32 illustrates how this issue might arise in a private equity context. IPIC had joint control of a company that produced melamine. While there was no horizontal overlap with the activities of MAN Ferrostaal, the Commission concluded that there was a potential vertical link on the basis of a 30 per cent shareholding by MAN Ferrostaal in Eurotecnica, a company that owned and licensed technology for the production of melamine. The Commission determined that the merged entity would have both the ability and incentive to foreclose Eurotecnica from licensing the relevant technology to competitor melamine producers. The Commission s decision was informed by the fact that MAN Ferrostaal enjoyed decisive influence on decision-making in Eurotecnica and could potentially obtain information about Eurotecnica s prospective clients. The Commission accepted IPIC s proposed commitment to divest the minority shareholding to remedy the competition concerns. It is irrelevant that in this context the minority shareholding at issue belonged to the target company as it is equally likely that the Commission would scrutinise similar minority shareholdings held by private equity buyers in their portfolio companies. 33 It is also possible that the Commission will in future focus on the gradual accretion by private equity buyers of minority shareholdings in several companies within the same sector (whether by design or as an incidental result of acquisitions). It is noteworthy that Commissioner Almunia has recently announced that the Commission will consider whether minority shareholdings should be directly assessed by the Commission within the context of the EUMR. 34 While any such legislation would primarily address the Commission s current inability to assess the simple acquisition of a non-controlling minority shareholding, it would clearly create additional scrutiny for the issue of minority shareholdings more generally. Conclusion It is clear that private equity transactions are not simple from a merger control perspective and that complex issues can arise even in cases that do not raise substantive competition issues. Private equity buyers can minimise the impact of merger control procedures on the timing and structure of their transactions through advance planning and preparation. In order to avoid unnecessary delays to the transaction timing due to the calculation of turnover for the purposes of the EUMR, it is recommended that private equity buyers maintain a list of portfolio companies that they control for the purposes of the EUMR rules on turnover calculation and keep a running total of the turnover of such companies. If private equity buyers were to maintain such a list on (at least) an annual basis, this could easily be updated in a short period of time in a transaction scenario and would also be beneficial for the completion of the Short Form CO. While perhaps a more onerous obligation it would also be beneficial, where possible, for private equity buyers to keep at least the minimum information required to assess a transaction from a substantive perspective (including whether Short Form CO or Simplified Procedure can be used). It is also recommended that private equity buyers give careful consideration at an early stage to the extent to which they are willing to offer divestments in order to obtain approval for the transaction. It is recommended that, in particular where private equity buyers concentrate their investments in particular market sectors, all potential vertical and horizontal overlaps (and indeed important minority shareholdings) are also considered at an early stage. While such actions may not necessarily make EUMR clearance simple for private equity buyers, they can certainly serve to reduce the impact of merger control on the transaction timetable and the strategic plans of the private equity firm. Notes * Craig Pouncey is the managing partner of the Brussels office of. Kyriakos Fountoukakos is a partner, Hanna Anttilainen-Mochnacz a senior lawyer and Lisa Geary an associate at (Brussels). All views expressed and any errors or omissions in the article are the sole responsibility of the authors. The authors wish to thank Jack Wooding and Maya Wodnicka for their assistance with the statistical research included in the article. Herbert Smith Central Plaza, Rue de Loxum Brussels Belgium Tel: Fax: Craig Pouncey craig.pouncey@herbertsmith.com Kyriakos Fountoukakos kyriakos.fountoukakos@herbertsmith.com Hanna Anttilainen-Mochnacz hanna.anttilainen@herbertsmith.com is a leading international law firm with a 1,350-lawyer network across Europe, the Middle East and Asia. Herbert Smith, with German firm Gleiss Lutz and Dutch-Belgian firm Stibbe created an alliance in The alliance brings together three leading law firms to advise clients on major cross-border activities across Europe and Asia. Each firm holds a top-tier reputation in its home markets, offers a full service and is renowned for the highest quality of work. Integrated teams of lawyers from the alliance firms work closely together across all practice areas: we pool our expertise and know-how to provide the tailor-made solutions our clients require. Combined, we offer clients over 1,800 fee-earners in 18 jurisdictions. Our EU and competition practice is highly regarded and has extensive experience in all kinds of competition and regulatory work, including merger control cases, market investigations, EU and national competition investigations, competition litigation, trade law, state aid, public sector and utility procurement. Our EU and competition specialists are located across our European and Asian offices and work together with competition specialists from our alliance firms to provide an integrated service across jurisdictions. Lisa Geary lisa.geary@herbertsmith.com

8 1 It is not easy to provide a precise definition of private equity. The British Venture Capital Association defines private equity as medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. Private equity funds essentially raise capital to acquire stakes in or outright control over target companies, with the aim of generating returns for their investors, in particular by improving the performance of and ultimately divesting the company in question. Wellknown private equity houses that engage in this form of activity include companies such as Blackstone and KKR. 2 Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings. 3 Case No. COMP/M.5153, Arsenal/DSP, decision of 9 January Case No. COMP/M.6131 Advent/Priory, decision of 21 February In brief under the EUMR a concentration arises when a transaction results in a change of control on a lasting basis.control under the EUMR is defined as the possibility of exercising decisive influence over an undertaking. (article 3 EUMR). 6 See paragraph 16 of the Commission s Consolidated Jurisdictional Notice. 7 Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings. 8 See paragraph 14 of the Jurisdictional Notice. 9 See paragraphs 14 and 15 of the Jurisdictional Notice. 10 See paragraph 57 of the Jurisdictional Notice. 11 While not a private equity transaction, the Commission s decision in Case No. COMP/M.4323 Arla/Ingman Foods, decision of 15 January 2007, provides a useful illustration of this point. There, Arla was acquiring sole control of Ingman Foods by virtue of the acquisition of a 30 per cent shareholding in the company which, albeit a minority stake, was considered to provide it with sole control. In determining whether the transaction had a Community dimension, the Commission considered that, in calculating the turnover of the target company, the turnover of the non-controlling parent (the Ingman Group) for the purposes of the turnover calculation ought to be taken into account as that parent retained a share of more than 50 per cent (70 per cent) in the target after the transaction. Even though this 70 per cent stake did not confer control within the meaning of article 3 it fell within the criteria of article 5(4). 12 See paragraphs 190 and 191 of the Jurisdictional Notice. 13 See paragraph 186 of the Jurisdictional Notice. 14 See paragraph 217 of the Jurisdictional Notice in respect of other financial holding companies. 15 See paragraph 218 of the Jurisdictional Notice, which considers the calculation of turnover of financial holding companies. 16 See paragraph 220 of the Jurisdictional Notice. 17 Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No. 139/ See Annex II, Regulation 802/2004 of 7 April 2004 implementing Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings and article 5, Commission Notice on a simplified procedure for treatment of certain concentrations under Council Regulation (EC) No. 139/ Section 7, Form CO relating to the notification of a concentration pursuant to Regulation (EC) No. 139/ Section 7, Short Form for the notification of a concentration pursuant to Regulation (EC) No. 139/ The Commission will also consider such information as part of the substantive analysis of the transaction. For example in Case No. COMP/ M.5968, Advent/Bain Capital/RBS Worldpay, decision of 14 October 2010, private equity buyers Advent and Bain Capital sought to acquire joint control of RBS Worldpay, active in merchant acquiring and payment processing services in the United Kingdom and Ireland. As part of the competitive assessment, the Commission noted a horizontal overlap between the two private equity buyers in the Italian outdoor advertising market. Ultimately, the Commission concluded that spill-over effects were unlikely on the basis that this market was unrelated to the target s market and the target represented a small proportion of the parent companies portfolios, making coordination unlikely. Similar analysis is evident in Case No. COMP/M.5974 Finavias/Abertis/Autopista Trados M-45, decision of 25 October 2010 and Case No. COMP/M.6053 CVC/Apollo/Brit Insurance, decision of 19 January Case No. COMP/M.5153, decision of 09 January htm (accessed on 18 July 2011). 24 Case No. COMP/M.5190, decision of 15 July Case No. COMP/M.5973, decision of 12 October Case No. COMP/M.5906, decision of 18 June Case No. COMP/M.5736, decision of 2 February Case No. COMP/M.6108, decision of 19 April Blackstone/Hilton, Case No. COMP/M.4816, decision of 19 October Case No. COMP/M.4439, Ryanair/Aer Lingus, decision of 27 June 2007; Order of the President of the Court of First Instance of 18 March 2008 in T-411/07 Aer Lingus Group plc v Commission. 31 Commission Notice on remedies acceptable under Council Regulation (EC) No. 139/2004 and under Commission Regulation (EC) No. 802/ IPIC/MAN Ferrostaal AG, Case No. COMP/M.5406, decision of 13 March See for example, Case No. COMP/M.3653 Siemens/VA Tech, decision of 13 July Speech by Commissioner Almunia, Merger Regulation in the EU after 20 years, IBA Antitrust Committee and the European Commission, Brussels, 10 March The European Antitrust Review 2012

9 about the authors New York (LLM). He has qualified as a Greek lawyer and as a solicitor in England and Wales. Kyriakos is fluent in English, Greek and French. Craig Pouncey Craig Pouncey is the managing partner of Herbert Smith s Brussels office and a member of the firm s EU and competition and regulation group. He joined Herbert Smith in 1987 and has been a partner in the firm since He has been based in the firm s Brussels office for 17 years and is widely acknowledged by peers as one of the most established individuals in the Brussels legal market. Craig is one of the leading competition specialists in Brussels and has extensive experience advising on all aspects of EU and UK competition law including merger control, cartels and behavioural issues. He has appeared on numerous occasions in cases before the European courts and the UK s Competition Appeal Tribunal and Competition Commission. Craig s current practice straddles high-level merger work for clients such as Tata, Warner Music Group and Arrow Inc, as well as cartel work for a range of clients. He is representing clients in a number of ongoing cases before the CFI and ECJ, including the British Aggregates Association in relation to their ongoing challenge on state aid grounds to the UK s Aggregates Levy, an environmental tax. In the UK, Craig has amassed considerable experience as a leading specialist in media mergers and has advised on the competition aspects of well over 20 transactions in the newspaper industry. Craig speaks widely on competition-related issues, and has contributed to a range of publications most recently on the public interest aspect of the recent UK banking mergers. Kyriakos Fountoukakos Kyriakos Fountoukakos is a partner in Herbert Smith s Brussels office. Kyriakos is a competition law specialist and deals with all aspects of EU and UK competition law including merger control, acquisitions and hostile takeovers, joint ventures, cartels, antitrust investigations and advice, abuse of dominance issues and competition litigation. He has advised major international companies in a broad range of sectors including media, telecommunications, IT, energy, financial services and insurance, pharmaceuticals, consumer goods and manufacturing. Kyriakos was formerly an EU official, having held positions as a European Commission official at DG Competition s Merger Task Force and then as a referendaire in the cabinet of the president of the General Court of the EU. Kyriakos is co-author of the mergers chapter in the current edition of the well-known textbook Faull & Nikpay: The EC Law of Competition; co-editor of Jones & Van der Woude s EC Competition Law Handbook; and sits on the editorial advisory board of the CPI Antitrust Chronicle. Kyriakos is recognised as a leading competition practitioner in major legal directories including the Who s Who of competition lawyers. Kyriakos has studied law and European studies at the University of Athens (LLB), King s College London (LLM), the University of Cambridge (MPhil in European studies) and Columbia Law School, Hanna Anttilainen-Mochnacz Hanna is a senior associate in Herbert Smith s Brussels office. Hanna is a competition law specialist, whose expertise covers all aspects of EU competition law, including merger control advice and notifications of complex mergers, cartels and other anti-competitive practices, abuse of dominance, advice to companies under regulatory and antitrust investigations and state aid. She has considerable experience of advising major international companies in the media, music, travel and leisure and paper sectors and various manufacturing industries. Hanna has worked in both the Brussels and London offices of Herbert Smith since Lisa Geary Lisa is an associate in Herbert Smith s Brussels office and has worked in both the Brussels and London offices of Herbert Smith since August Lisa is an EU and competition law specialist and deals with all aspects of EU and competition law, including merger control, cartels, antitrust investigations and advice, abuse of dominance issues, competition litigation, state aid and general EU law advice. She has experience of advising major international companies in the transport, financial services, consumer goods and manufacturing sectors. 164 The European Antitrust Review 2012

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