1 Regulating minority shareholdings and unintended consequences This article was first published in European Competition Law Review, Volume 33(6), and is republished here with kind permission. Mark Friend Partner, London Tel
2 *E.C.L.R. 303 Antitrust or merger control? The treatment of minority shareholdings under EU competition law has long been a matter of controversy. Before the adoption of the Merger Regulation in the only legal basis for challenging a minority shareholding under EU competition law was either as an anticompetitive agreement falling within what is now TFEU art.101, or (if the holder of the minority stake happened to be dominant) as an abuse of a dominant position, falling within TFEU art.102. But the analysis was not straightforward and cases were few and far between. In the celebrated Philip Morris judgment 2 in 1984, the European Court of Justice outlined the limited circumstances in which the acquisition of a minority stake in a competitor could amount to an infringement of arts 101 and 102. It held that although the mere acquisition of a minority stake could not of itself be said to amount to conduct restricting competition (i.e. for the purposes of art.101), it could nevertheless serve as an instrument for influencing the commercial conduct of a competitor, thereby restricting or distorting competition, in particular where the agreement provided for commercial co-operation, or where it gave the acquiring shareholder the possibility of taking effective control of the target at a later stage. The Court emphasised the need to consider not just the immediate effects of the transaction, but also the longer term potential impact. As regards the possible application of art.102, the Court held that the acquisition of a minority shareholding in a competitor could only amount to an abuse where it resulted in effective control, or at least some influence, over the target's commercial policy, although the judgment offered no guidance on what level of influence would be problematic, or how the assessment was to be carried out. Effectively the Court's formulation meant that, absent a co-operation agreement, or an option to acquire full control, or (in the case of a minority shareholder with a dominant position) a stake conferring effective control or at least some (unspecified level of) influence over the target's commercial policy, the possibilities for challenging minority stakes were very limited. In the Warner-Lambert v Gillette case, 3 the Commission successfully challenged Gillette's acquisition of a 22 per cent non-voting interest in the parent company of its major competitor, Wilkinson Sword, both as an infringement of art.101 and as an abuse of dominance. 4 The stake was coupled with various other commercial agreements, including an unsecured loan and the acquisition of certain trademarks outside the European Union and United States, but fell short of control. Warner-Lambert v Gillette 5 was an unusual case, involving a carefully engineered structure that was designed to avoid antitrust scrutiny, and can be seen as the high-water mark of the Commission's enforcement policy against minority shareholdings. Enforcement following the Merger Regulation Since the adoption of the Merger Regulation, minority shareholdings that confer control have not needed to be shoe-horned into the narrow confines of arts 101 and 102, but can instead be subjected to merger control scrutiny where the parties meet the relevant jurisdictional thresholds. There is also another category of cases, typically merger and acquisition (M&A) deals that do not directly involve the acquisition of a minority stake, where competition concerns may arise due to the existence of minority shareholdings, falling short of control, held by one or more of the merging parties in a third party. In some of these cases, the merger control process may offer a means of remedying those concerns. There are several cases where the merging parties have been prepared to dispose Regulation 4064/89 on the control of concentrations between undertakings  OJ L395/1, subsequently replaced by Regulation 139/2004 on the control of concentrations between undertakings  OJ L24/1. British American Tobacco Co Ltd v Commission of the European Communities (142 & 156/84)  E.C.R. 4487;  4 C.M.L.R. 24 at - and . Warner-Lambert v Gillette  OJ L116/21. The same fact pattern was treated as a merger under UK law, which was found to operate against the public interest (on competition grounds) following an investigation by the (then) Monopolies and Mergers Commission: Stora Kopparbergs Bergslags AB/Swedish Match NV, and Stora Kopparbergs Bergslags AB/The Gillette Company, A report on the merger situation (March 1991), Cm Warner-Lambert v Gillette  OJ L116/21
3 of, or reduce, their stakes either before or during the phase I administrative proceedings, so as to facilitate the process of obtaining unconditional merger clearance 6 ; there are others where the merging parties have given formal commitments to divest, as a condition of clearance. 7 *E.C.L.R. 304 An enforcement gap? However, it is argued in some quarters that there is a potential enforcement gap in the armoury of EU competition law, because a minority shareholding which does not confer control falls outside the scope of the Merger Regulation. Potentially it might fall within the ambit of art.101 if it is intended to be a vehicle for co-operation between competitors, but a challenge based on art.101 is likely to be a recipe for protracted litigation, and in the absence of dominance on the part of the acquiring shareholder, a challenge based on art.102 would not be possible. A further complication is that although the Commission has the power to require the divestment of a non-controlling minority shareholding when it prohibits a merger that has already been implemented, it does not have such a power when prohibiting an anticipated merger, as shown recently by the Ryanair/Aer Lingus saga. 8 Does any of this matter? The Commission seems to think so. In a speech given to the IBA conference marking 20 years of EU merger control on March 10, 2011, Commissioner Almunia noted that: The Merger Regulation does not apply to minority shareholders, whereas some national systems--both in the EU and outside--make room for the review of such acquisitions. I have instructed my services to look into this issue and see whether it is significant enough for us to try and close this gap in EU merger control. Commission to assess the economic importance of minority shareholdings in the European Union. 9 The tender specification envisages the creation of a database showing direct and indirect minority shareholdings involving companies throughout the 27 EU Member States. The Commission is also seeking to use the database to evaluate the level of influence held by the minority shareholder, having regard to matters such as the dispersion of the remaining shareholders, whether the shareholder is represented on the board of the target, and whether there is any management or other company officer representation. 10 More recently, in a presentation to an IBA conference on October 31, 2011, a senior DG COMP official, 11 highlighted the change in incentives that may arise when a company becomes a minority shareholder in a competitor, leading to a form of (partial) unilateral effects; he also noted the risk of co-ordination of competitive behaviour through sharing of strategic information. Possible ways of addressing these concerns suggested by the same official included ex ante control (i.e. mandatory pre-notification), ex post control (the ability to call in transactions after the event, possibly with the ability to seek prior clearance on a voluntary basis), and a revision to art.8(4) of the Merger Regulation to cover not just transactions that have already been implemented, but also anticipated mergers. These concerns about potential distortions of competition do not seem unreasonable as a mater of principle, although the scale of the problem is a matter of debate. 12 However, while the proposals outlined above to deal with them might go some way to closing the gap, they are not without their drawbacks, and may well lead to unintended consequences. On July 18, 2011, the Commission launched a tender for a study to gather data to enable the Examples include cases M.113--Courtaulds/SNIA (disposal of a 12% stake in a competitor); M Banco Santander/Abbey National (modification of co-operation agreement between Santander and RBS, including termination of reciprocal board representation and reduction of Santander's shareholding in RBS). Case M VEBA/VIAG (disposal of various minority stakes to address concerns about joint dominance); Case M IPIC/MAN Ferrostaal (divestment of MAN Ferrostaal's 30% stake in Eurotecnica, a company involved in melamine production technology licensing and plant engineering, to address vertical concerns). Aer Lingus Group Plc v European Commission (T-411/07)  4 C.M.L.R. 5, see in particular at -, -, . See [Accessed April 27, 2012]. See [Accessed April 27, 2012]. Mr Carles Esteva Mosso, Director, COMP A--Competition Policy and Strategy. His comments were made in a personal capacity. See for example Bojana Ignatovic and Derek Ridyard, Minority Shareholdings, Material Effects? (January 2012) (1) CPI Antitrust Chronicle.
4 Unintended consequences? The main focus of the Commission's database tender seems to be on minority stakes held in publicly traded companies, or private companies with dispersed shareholder bases. But minority stakes also occur in joint venture transactions, and this is an area that does not seem to have featured very much in the debate so far. A central building block of the Merger Regulation is the notion that only transactions which confer control are subject to prior notification, and only the turnover of controlling shareholders is taken into account in the jurisdictional assessment. Re-writing the rules so as to bring non-controlling minority shareholding within the ambit of the Merger Regulation would raise many questions about the threshold for intervention; it would also imply major changes to the current jurisdictional framework for determining which transactions are notifiable. Of course, that in itself is not a good reason for resisting change if there are legitimate policy concerns about enforcement gaps. But it does indicate a need for some caution before embarking on wholesale reform of a well-understood, and generally well-functioning system. Take the (very common) example of a joint venture in which only some of the shareholders have joint control, while others are simply regarded as passive minority investors (albeit with minority protection rights). There may be perfectly sound business reasons why the transaction is structured in this way that have nothing to do with merger control avoidance ; for example, reflecting the investment mandate of a pension fund which is prevented from playing an active role in management, or the fact that certain of the investors have particular sector expertise or are making a larger investment, and therefore want to have a more direct role in management. The Commission's Consolidated Jurisdictional Notice (Jurisdictional Notice) draws a distinction between veto rights over strategic business decisions, such as the budget and business plan, appointment and removal of senior management, and major investments (which indicate control), and veto rights which are seen as normal minority protections (such as those over the sale or winding-up of the company, changes in the company's *E.C.L.R. 305 statutes, or changes to the capital structure), which are not regarded as conferring control. 13 Although the dividing line between strategic and minority protection provisions can sometimes be blurred, and although the Commission's practice in the early days of the Merger Regulation was not always consistent, on the whole the distinction is well understood by the legal and business community, and in cases of doubt it is possible to approach the Commission for informal guidance. Departing from the established control test as the basis for jurisdiction implies that the turnover of (at least some) non-controlling shareholders would also need to be taken into account in determining whether the Merger Regulation applies. The question then is whether all the shareholders should be treated as undertakings concerned, and if not, where the dividing line should be drawn. This raises a fundamental question about the types of transaction that should be brought within the merger control net. An illustration of the problem would be a full function joint venture between four parties, A, B, C and D, with A and B each having 30 per cent of the equity, and C and D each having 20 per cent, and with all of them being represented on the board. Assume that under the shareholders agreement, the consent of A and B is required for the adoption of the budget and the business plan, whereas the veto rights accorded to C and D are confined to normal minority protection provisions. In this case, it is clear from the Jurisdictional Notice that A and B will be regarded as having joint control, but C and D will not. The application of the Merger Regulation will therefore depend on whether A and B meet the relevant turnover thresholds, as they alone are the undertakings concerned. 14 Under the current rules, the turnover of C and D is not taken into account. Re-writing the rules so that C and D should also be treated as undertakings concerned implies a major philosophical shift in the jurisdictional analysis of mergers at EU level and will require a thorough overhaul of the Jurisdictional Notice. What are the defining characteristics of C and D's interests in the joint Commission Consolidated Jurisdictional Notice under Council Regulation 139/2004 on the control of concentrations between undertakings  OJ C95/1 paras Jurisdictional Notice para.139.
5 venture which mean that their turnover should be taken into account in the jurisdictional assessment? Is it the fact that they have a certain level of shareholding (20 per cent), that they have board representation, or that they have minority protection rights? Would the answer be any different if they were active on the same market as the joint venture (or in a vertically related market)? Similar issues will arise for consideration in relation to joint ventures that are structured as changing coalitions or shifting alliances : these are situations where it is not possible to determine ex ante which shareholders will form a majority in the decision making organs of the company, and again it is clear from the Jurisdictional Notice that, absent strong common interests between shareholders that might point to de facto joint control, these kinds of transactions are not treated as concentrations under the current rules. 15 An example would be a four-way joint venture between A, B, C and D, where each shareholder has 25 per cent of the equity, but where the voting majority threshold for decisions relating to the budget and business plan is two-thirds. In this scenario, three out of the four shareholders would need to vote together in order to achieve a two-thirds majority, but no individual shareholder would have a veto. As it is not possible ex ante to determine which three shareholders are likely to come together to pass such a resolution, the merger control analysis under the current rules is that this is not a concentration. But moving away from the (relatively) bright line test of control as the basis for merger control jurisdiction potentially brings such transactions within its scope. What is the case for widening the net in this way? What are the defining characteristics of this type of transaction which should determine whether it is subject to merger control scrutiny? Conclusion If minority shareholdings are to be subject to a pre-notification requirement, there is a need for clarity on what the test for mandatory pre-notification should be. Legal certainty is important in the commercial world and businesses will want to know what sort of minority shareholdings are caught. Relatively amorphous concepts such as the United Kingdom's notion of material influence are not well suited to a mandatory pre-notification regime, as the recent UK Government consultation on reforms to the UK merger control regime seems to have implicitly recognised. 16 A test based on a pre-determined voting threshold (for example, 25 per cent) would probably not achieve the desired policy objective because transactions could easily be designed to circumvent the test (for example, giving investors in a joint venture a stake of 24.9 per cent). A test that applied only to acquisitions of stakes in (actual or potential) competitors, or companies with a presence in vertically related markets, could raise difficult definitional problems, especially in markets that have not previously been defined by the Commission. 17 Giving the Commission the power to review minority stakes ex post may seem superficially attractive, at least from the *E.C.L.R. 306 viewpoint of a competition authority, but is much less attractive to a business seeking to close a deal with the minimum of risk. It is likely to lead to extensive requests for informal advice being submitted to the Commission, and to more transactions being notified as a precautionary measure. As a minimum, the Commission would need to issue very clear guidelines setting out the types of transactions in which it would be likely to want to intervene, but even this may not satisfy a cautious investor who wants legal certainty as to whether his transaction is at risk of being challenged Jurisdictional Notice para.80. The same analysis applies where an existing company is acquired by a consortium (i.e. a newly incorporated special purpose company) over which none of the investors has control: the Jurisdictional Notice indicates that where the joint venture is merely a vehicle for the acquisition by the parent companies, it will be the parents who are the undertakings concerned (para.147); but this can logically only mean the parents who are acquiring joint control. Where the acquisition is made by a consortium which is not controlled by anyone, there is no concentration. Alternatively, one might argue that there is a concentration, but one involving only the special purpose acquiring company, and the target. Since the acquiring company will have no turnover, the turnover thresholds of the Merger Regulation will not be met. Mandatory notification was proposed for transactions resulting in an acquisition of control of policy, but not for transactions giving rise to material influence, which would be subject to ex post review, with the option of voluntary pre-notification. See Department for Business Innovation & Skills, A competition regime for growth: a consultation on options for reform (March 2011), para Cf. the concept of a competitively significant influence under German law, which is open to the same objection that it is not a bright line test.
6 The easy answer to this conundrum is to do nothing, on the basis that, if there is a problem, it is probably not a very big problem. It may be that the results of the Commission's database tender will enable a more informed view to be taken of the potential scale of the issue. The purpose of this short article is not to provide all the answers, but to ask some of the pertinent questions, in the hope that it may stimulate further debate.