On 14 October 2016, the European Commission published a “support study” prepared at its request to inform its review of the EU Merger Regulation (EUMR) relating to minority shareholdings.
This study feeds into the Commission’s ongoing review of the EUMR. The Commission is concerned about the existence of an enforcement gap in EU merger control in respect of the acquisition of non-controlling minority shareholdings, which currently fall outside the scope of the EUMR but may nonetheless be detrimental to consumers and competition. In 2014 the Commission published proposals in a White Paper, Towards more effective EU merger control, to bring acquisitions of non-controlling minority shareholdings within the EUMR. In particular, the Commission proposed a “targeted transparency system”, where a party acquiring a non-controlling stake which creates a “competitively significant link” between the parties would be required to provide an information notice to the Commission. Parties would then have to wait a certain period before closing, during which period the Commission could decide to open an investigation. Feedback from the consultation on these proposals in 2014 indicated that many stakeholders were concerned by the substantial additional burden of these new information requirements and the questionable proportionality of the targeted transparency system.
Against this background, the Commission requested this study to provide it with a comprehensive view of the position and practice of jurisdictions in which acquisitions of non-controlling minority shareholdings are subject to merger control, in various EU and non-EU jurisdictions, as well as the different levels of rights usually attaching to such shareholdings.
The Commission’s study looked at the current national merger control practices of the UK, the US, Germany, Austria, Japan and Brazil.
It identifies similarities between the approaches taken in these regimes, but also considers the differences between the legal test under each competition regime, such as the use of rebuttable presumptions (e.g. the UK) versus unambiguous legal thresholds (e.g. Germany) and the use of voluntary or involuntary notification procedures, with the UK being the only country of those studied using voluntary notification.
It also examined rights commonly attached to different minority shareholders in the UK, Germany, France, the Netherlands and the US.
The study identifies common themes found in the review of acquisitions of non-controlling minority shareholdings, including, amongst others:
- authorities take the level of shareholding into account to determine whether competition issues arise and therefore whether a review should be conducted; and
- a concept akin to the UK’s “material influence” is often used, in various forms, triggering the competition authority’s review.
There have been practical examples in these jurisdictions where such acquisitions were scrutinised, but the number of these acquisitions that raise competition problems is comparatively very low. For example, in the UK there have only been five acquisitions of minority shareholdings scrutinised in the last 10 years; there has been no such review in the US since 2007; and only one such review in Japan. The study therefore considers that the administrative burden on the Commission of reviewing such mergers at EU level would not be disproportionate. The study suggests that the number of acquisitions of non-controlling minority interests raising competition concerns is “very low” – this does not mean that there are not from time to time such acquisitions which are problematic, and which are not currently reviewed under EUMR.
Whilst the rights typically attached to non-controlling minority shareholdings cannot be neatly divided and will vary on a case-by-case basis, the study did reveal certain trends in the jurisdictions’ approaches:
- Generally at around 25% (and above), a shareholding would not be considered as passive: company law often allows such shareholders to block special resolutions, hold veto rights and/or materially influence company policy; and
- Generally at around 10% (and below), a shareholding would be considered as passive, with no ability across the jurisdictions to block special resolutions and in practice it would be rare for holders of shareholdings below 10% to hold any significant rights.
The study noted that it would not be possible to precisely define a threshold between 10% and 25%, where a passive shareholding becomes active and any such attempts would be unwise.
Assessment of minority acquisition cases by the Commission under the EUMR may be beneficial, given that certain Member States make no provision for the review of acquisitions of non-controlling minority shareholdings. A balancing act is essential here; any change to the EUMR should ensure that the problematic cases are caught, but in doing so the Commission must avoid imposing an undue administrative burden on businesses. The relatively light-touch approach taken by countries such as Germany, Austria and the USA was seen as a desirable model for the Commission to consider adopting if it were minded to extend its jurisdiction over non-controlling minority acquisitions.
Overall, the final report of the study concludes that the number of acquisitions of non-controlling minority shareholdings which raise competition concerns is very low, though it cannot be excluded that from time to time these arise. To the extent that Member States are not always able to review such acquisitions, the report concludes that “there may be some merit” in the European Commission being able to do so. Should the Commission decide to put forward a legislative proposal to bring non-controlling minority acquisitions within EUMR, the study recommends that it addresses the following issues:
- in the interests of legal certainty there should be a threshold above which the Commission would be able to review the minority shareholding acquisition, which could operate as a legal threshold or rebuttable presumption. The study considered that a threshold of 25% or above would be appropriate given the analysis of rights usually attaching to such shareholdings;
- there could be a “safe harbour” below which minority stakes would not generally be subject to review. The study suggested this could be set between 10 and 15% although it noted inherent difficulties in identifying a clear threshold between passive and active minority shareholdings; and
- the Commission should issue guidance on these concepts to help determine whether an acquisition should be notified.
The publication of this report comes a week after the Commission published a wider consultation seeking feedback on certain procedural and jurisdictional aspects of the EU merger control regime.