The European Commission recently published a consultation paper that invites comments on a proposal to allow review of the acquisition of noncontrolling minority shareholdings. The proposed reform is the most significant in the last 10 years and could have a huge impact on many corporate transactions.
Under the current E.U. Merger Regulation, the commission only has the power to review transactions that lead to an acquisition of control, in contrast with some countries, such as Austria, Germany, the United Kingdom, Canada and the United States, where minority investments can be reviewed.
The E.U. proposal arises in the midst of a U.K. Competition Commission investigation of Ryanair Holdings PLC's 30-percent stake in its principal rival Aer Lingus Group PLC, which it acquired in a failed takeover effort in 2006. In a provisional decision in May 2013, the Competition Commission found that Ryanair's minority interest has weakened Aer Lingus because the minority stake gives Ryanair the ability to influence Aer Lingus' commercial policy and strategy. Ryanair has committed to appeal any adverse decision. At the same time, a decision by the European Commission prohibiting Ryanair's proposed takeover of Aer Lingus is now on appeal to the European General Court.
In the United States, for example, the merger control regime covers the acquisition of noncontrolling minority interests. The filing regime for deals that meet the Hart-Scott-Rodino Act filing thresholds in the United States is mandatory and suspensory. The cost of an HSR filing (including the filing and attorney fees) can be significant. HSR filing fees alone this year range from $45,000 for the lowest threshold to $280,000 for the highest threshold, in addition to attorney fees. From the perspective of the U.S. authorities, this cost to private parties is far outweighed by the benefit to competition of the pre-acquisition review of deals involving noncontrolling minority interests.
Acquisitions of minority interests can be subject to the Clayton Act, the principal U.S. merger statute and, in addition, can be covered by the Sherman Antitrust Act and the Federal Trade Commission Act. There are three general categories of such arrangements that can trigger the U.S. antitrust laws: minority ownership; joint ventures/collaborations between competitors; and interlocking directorates.
The principle behind the U.S. position is that even noncontrolling minority interests can have a detrimental impact on competition. In the United States, the focus of the analysis of a minority investment is on the details of the parties' post-acquisition relationship and its effect on competition. Three concerns control this analysis: First, does the minority interest give the acquiring firm the ability to influence the conduct of the target firm? Second, does the minority interest reduce the incentive of the acquiring firm to compete aggressively because it too would suffer from any losses by the rival as a result of the competition or it will receive some of the revenue from diverted sales to the acquired firm? Third, does the minority interest lessen competition by giving the acquiring firm access to nonpublic, competitively sensitive information from the target? (See 2010 Horizontal Merger Guidelines. ) When the answer to any of these questions is "yes," the acquisition of noncontrolling minority interests may raise competitive concerns.
The U.S. agencies balance any potential anticompetitive effects with efficiencies and synergies, which are less likely than in mergers. It makes sense to have different tests for partial acquisitions than for complete acquisitions because minority interests do not eliminate competition between the parties. Rather, the issue is the degree to which the parties' competitive incentives change as a result of the transaction.
There are numerous examples of U.S. enforcement involving minority ownership, starting in 1998 when the U.S. Department of Justice Antitrust Division sued to block Northwest Airlines Inc.'s proposed acquisition of 14 percent of Continental Airlines Inc. on the ground that the investment would diminish their incentives to compete. The proposed Northwest-Continental deal was later abandoned. More recently, the consent decree in the Comcast Corp.-NBC Universal Inc. transaction included provisions that govern Comcast's acquisition of NBC's minority interest in TV joint venture Hulu LLC based on concerns that Comcast could use representatives on Hulu's board to undermine Hulu's online competition with Comcast's cable TV services. Minority interests acquired by private equity firms also have been reviewed and sometimes remedied, such as In the Matter of TC Group LLC, a 2007 matter in which the FTC required private equity firms Carlyle Group L.P. and Riverstone Holdings LLC to make their investment in Magellan Midstream Holdings passive and restrict flow of sensitive information after challenging the acquisition of Kinder Morgan Inc. by certain investors through private equity funds managed and controlled by Riverstone and Carlyle. Another fund managed and controlled by Riverstone and Carlyle held a 50-percent interest in the general partner that controlled Magellan Midstream Partners.
THE E.U. PROPOSAL
The European Commission believes that it does not currently have the tools to prevent anticompetitive effects derived from the acquisition of noncontrolling minority shareholdings, including in joint ventures. The commission also has published a review of the economic literature on the potential anticompetitive effects of acquisitions of minority shareholdings, which identifies certain scenarios in which the holder of a noncontrolling minority interest might be able to exert material influence over the target firm with potentially significant anticompetitive effects similar to those identified in the U.S. merger guidelines.
The commission is considering the following two options: Option 1 is the "notification system." All relevant minority investments would have to be notified to the commission in advance and could not be implemented before it has cleared them. The commission would decide in each case whether or not the transaction could be authorized. In this circumstance, an E.U. merger filing would be required, which imposes significant costs, burdens and delays on the filing parties that far exceed those of the U.S. HSR merger filing.
Under Option 2, the commission would have discretion to select cases involving minority interests to investigate. There are two possible variants of this option: The first is the "self-assessment system." Instead of an obligation to notify a transaction in advance, parties would be allowed to proceed with the transaction leaving the option to the commission whether and when to open an investigation. The second is the "transparency system." Parties to a minority investment that appears problematic on its face would have to file a short information notice to the commission in order to make third parties and E.U. member states aware of the transaction.
Under either system, the European Commission is considering whether the parties to a transaction should be able to make a voluntary notification.
The European Commission is also considering which minority acquisitions should be subject to review, and whether safe harbors could be defined. A second annex to the proposals considers examples of the commission's and E.U. member states' current practice with respect to cases involving structural links and its limitations as a basis for comparison with the commission's proposals.
It seems likely that the substantive test that the European Commission currently uses for the examination of "full" mergers (i.e., whether a transaction significantly impedes effective competition) will be applied to minority ownership, possibly with some additional clarifications in commission guidelines. For joint ventures, the commission proposes to assess whether the noncontrolling minority shareholding has the object or effect of coordinating the parents' conduct, in the same way as currently set out under the E.U. Merger Regulation for controlling stakes.
It is probable that the commission will implement some process that allows the review of minority ownership interests that might pose competition concerns. Doing so would bring E.U. law into greater harmony with several of the member states, as well as with the United States. But it also poses the potential risk of imposing significant burdens, costs and delays on parties to transactions.
Janet McDavid and Angus Coulter are partners at Hogan Lovells. McDavid, who works in Washington, focuses her practice on antitrust, competition and trade regulation. Coulter, who works in London, is in the antitrust competition and economic regulation practice.