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Introduction
Burnside and Machiraju (2013, p. 1) states that the European Commission initiated consultative meetings with regards to possibly widening the coverage of the “European Union Merger Regulations (EUMR) to “non-controlling minority shareholdings.” The conference was simultaneous to the decision of the United Kingdom’s Competition Commission ordering Ryanair to reduce its Aer Lingus shareholdings from close to 30 per cent to 5 per cent. The recent ruling of the UK commission is indicative of the position that rigid policies obstructing EU commerce and trade regulators from intervening in transactions engaging the sale of minority shareholdings can significantly impair the capacity of a “competition regime” to regulate and prevent anti-competition policies.
Friend (2013) avers that the EC floated a tender for a research initiative to allow the EC to evaluate the economic significance of minority stakes in the context of the European Union. The specifications of the tender envisions the development of a data store that will hold information regarding “direct as well as indirect minority shareholdings” in companies operating in all of the 27 EU states. In addition, the EC is looking to engage the database to investigate the level of power held by minority parties. This is in regard to issues such as the distribution of the other shareholders and if the shareholder/s has a significant interest in the target, among others.
The primary cynosure of the EC’s database project seems to be inclined towards minority stakeholders in listed companies. Withal, it must also be noted that there are minority shareholdings in “joint venture” structures. One of the main foundations of the Merger Regulation (MR) is the premise that only undertakings that result in a change in control must be filed prior to its conduct and only the yielding of the dominant shareholders are considered in terms of jurisdictional evaluation (Friend, 2013).
Suitable jurisdictional thresholds assay a significant part in efficient analysis of the merger jurisprudence that is geared to be effective and transparent. According to the OECD Recommendation on Merger Review (2013) released by the Directorate for Financial and Enterprise Affairs Competition Committee (2014), there are two thresholds being used to establish the determination whether to subject a merger transaction to a review and notice requirements.
One, “notification limits,” referring to the range of the transaction or the parties in the undertaking and eliminates transactions that will not have any significant impact; two, the comprehension of a “merger transaction” which identifies business dealings that are appropriate for merger evaluations. Appropriateness is connected to the fact that merger investigations is a “one-off” examination procedure to establish whether a stronger amalgamation of previously self-operating assets will result in a change the incentive regime as to the manner that the assets are engaged during the competitive mechanism, that in turn can result in conflicting objectives opposed to the development of a “competition law regime.”
Jurisdictional restrictions must be able to forge a balance between eagerness to be abreast of majority of all transactions that are material to the regime and can result in damage to the competitive arena by way of more resilient changes in the market and the need to maintain predictability and manageability in the system and to keep costs for all the parties reasonable for all parties. The goal to forge the balance regarding the two possibly conflicting objectives framed within a cost/effectiveness standard is increasingly acknowledged in the context of the setting and the adjustment of the notification limits.
At present, it is understood that in some scenarios, minority shareholdings can be anti-competition if operated. The bearer of the minority share may be given the capacity to sway the target company to either lower its competitive activity, or to decrease its competitiveness in the market so that its financial claim in the target business will not be impacted. Even on a purely financial interest, the holder of the interest will have a motivation to unilaterally decide to lower its competitive activities so that the targeted business will have lesser competition in the industry.
In addition, the minority shareholder/s can reduce the attractiveness of the target to other investors, reducing the possibility that the target company will rise to be a dominant player in the industry. Various jurisdictions have taken to the issue in different manners; one of the more common approaches is the engagement of “fixed percentage thresholds” to establish the instance when the purchase of a minority stake in a company can be treated as a merger; another method considers whether the minority shareholder/s will be able to influence the target (OECD, 2013, pp. 6-7).
The approach towards regulating minority shareholdings under EU merger policies has long been an issue of debate and conflict. Friend (2013) avers that prior to the ratification of the 1989 Merger Regulations, the sole legal foundation for contesting a minority shareholding under the tenets of EU competition statutes was mainly done in the context of “anti-agreement falling” under TFEU art. 102 or “an abuse of a dominant position,” or as an “anti-competitive agreement” under TFEU article 101; however, the examination was not clear and instances were extremely few (Burnside and Machiraju 2013, p. 1).
Economics studies proffer that minority shareholdings can inflict similar anti-competitive harms akin to the effects of mergers. In the EU report (2014), the financial impacts of minority shareholdings on free enterprise is dependent first on the “financial interest” engaged or the purchasing company’s payment of its share of the revenues of the target company. Secondly, financial impacts are swayed by “corporate rights,” the purchasing company’s capacity to persuade the targeted company’s major corporate decisions.
For example, the 1984 Philip Morris Holland BV v Commission of the European Communities [1980] [730/79] decision of the European Court of Justice where the Court framed the restricted instances where the purchase of a minority share in a rival company can be regarded as a violation of articles 101 and 102. The Court ruled that the act of acquiring of a minority investment, by itself, cannot be regarded as an act that would constrict competition; however, this can nonetheless provide a method for swaying the business options of the competitor, and in this light, twist or pervert competition, specifically in the area of commercial collaboration, or in stages where the acquiring party can acquire the competitor in its entirety in the future (Buhart and Lasur, 2015).
Antonelli and Marinello (2013) cite the work of Spiegel on expounding the possible avenues where these harms to competition can actualize. The initial area is associated to the increased impacts of a minority stake purchase when there is other “cross holdings” already in place. The existing “cross holdings” can significantly change the nature of the incentives in the scenario; for example, when a number of small stakes in a rival company can amount to a significant share in the target company and result in a sizable price rise when factoring in independent horizontal harms. In this light, the determination of “safe harbours,” scenarios that are held to be bereft of anti-competitive impacts, will prove difficult.
The Philip Morris decision of the ECJ saw the Court affirming the EC’s diplomatic initiative to widen the implementation of Article 85 EC into “ownership structures,” incepting the momentum that ultimately allowed the EC to acquire the ratification of a tailor-made Merger Regulation by hesitant member states. The initial objectives of the Philip Morris decision saw the Commission become assertive in its holding that antitrust policies can be engaged to address issues on mergers.
However, as soon as the Merger Regulations were successfully adopted, the EC reversed itself on the concern, largely skirting the issue on the whole. The legacy of the Merger Regulation had been Philip Morris; regrettably, there has been no progress in the development of Article 101 as to its use and implementation on the matter. There are reports, though unverified, that unofficial policy orders given by the Legal Service of the EC was responsible for the reversal. The fundamental reasons being speculated upon is that Philip Morris will “open the floodgates” and allow parties to challenge the legitimacy of various existing minority shareholdings in the European Union.
The EC report (2014) avers that if the minority shareholdings were gained through anonymous sales in the stock market, using the Philip Morris case as a template, the ruling will have no juridical weight, with the shares being purchased from a plethora of sellers in the bourse. The power of the shareholder in a company is drawn from the constitution and bylaws of that company and is founded on its own distinct definitions of rights at every level of stakeholders, for example, the right to attend meetings, filibuster to stymie the achieving of a quorum, and to proffer resolutions and proposals. Specific corporate laws adopted at the national level clearly evince that the company’s fundamental laws are applied as an accord among the stakeholders and the company. If there is an “enforcement gap”, it was born by the Commission and not one that is founded on ineffectivity (Burnside, p. 1).
Withal, it is being debated among a number of legal circles that a possible divergence in EU competition law is slowly arising. In this context, Friend (2013) avers that there is a large “hole” in the legal arsenal of the EU in competition law; this is due to the factor that a minority shareholding that does not result in a change of control falls outside of the ambit of the Merger Regulation. In this light, the instance will fall under the scope of article 101 if the holding is designed to be a mechanism for collaboration between rival businesses.
However, a challenge founded on the same article will likely result in a drawn out legal tussle and without being able to establish the dominant position of the acquiring entity, a challenge based on article 102 cannot be developed. An addition difficulty is that though the EC is given the mandate to obligate the divestiture of a “non-controlling” minority shareholding when it rules against a merger that already has been consummated; the same is bereft of the mandate to move against a proposed merger as evinced in the case of Ryanair and Aer Lingus.
Here, the question being proffered by Friend is whether this case has any weight on the matter. The context given here is that it does; the MR is not applicable to minority shareholders whereas a number of national legal regimes- within the member states of the European Union as well as outside of the regional grouping-provides for mechanisms to assess these processes.
In the operation of current Council Regulation (EC) No 139/2004 (Merger Regulation), the agency is only allowed to examine transactions that will result in a change in operational control of the company. Moreover, the Commission is given the mandate to examine prevailing minority shareholdings in the possession of the parties to a “notifiable transaction” or one that will result in a change in control. Purchases of “non-controlling minority shareholdings,” or “structural links,” can only be carried out in a retrospective approach in the ambit of articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).
Simply stated, the operation of the Merger Regulations is geared to exempting purchases of minority shareholdings from review by the Commission unless the purchase of said shares will result a change in the administration of the company and these interventions can only be done solely in a “after-the fact” scenario under TFEU articles 101 and 102. This instance results into what is called at the level of the European Union as an “enforcement gap.” This in turn results in an ineffective application of the Merger Regulations (MR) with regards to the practice of minority shareholdings that can result in possible harms to competition as evinced by the Ryanair/Aer Lingus instance (Buhart and Lesur 2015).
The harm can be actualized in two ways: horizontal and vertical. Antonelli and Marinello (2013, p. 2) aver that one-sided horizontal impacts evince as the purchasing company incorporates into itself a portion/s of the profits of the target company; hence, the purchasing company has a reduced motivation to compete in the market. In addition, in certain instances where the purchase of the shareholdings will provide the company with unique corporate privileges, the target company’s critical business decisions can be swayed or altered by a competitor.
Here, “material influence” in this light point to a significant issue as a rise in price will be to the advantage to the acquiring business while the losses will be shared with the other shareholders of the target firm. The possibility of collusion is also impacted by minority shareholders. With respect to vertical impacts, owing to the associations between rival firms in various markets, there needs to be a distinction between “backward shareholdings” or a “downstream” company’s share in an “upstream” company, and “forward shareholdings” which is an “upstream” company’s limited share in a “downstream” company.
With regards to the former, the biggest concern is that the downstream entity could sway its target company to terminate its business dealings with other downstream entities. The remaining downstream business will fully benefit from reduced competition in the industry while absorbing negligible losses experienced by the upstream entity. This approach will vary in connection with the capacity of the supplier to contradistinguish among buyers and the influence expended by the downstream entity on the upstream company, hence, the prevalence of “material influence.”
The latter, for its part, is potentially perplexing as the upstream player can have the capacity to force the downstream company not to buy from rival providers. The shareholders absorb a small loss made by the downstream entity but gains the full benefits of an increase in the upstream sales (Antonelli and Marinello, 2013, p. 2).
Similar to a number of European states, American anti-trust regulators have the pliability to contest minority share acquisition cases. Burnside and Machiraju (2013, p. 4) avers that in the US regime, when a business seeks to purchase a “non-controlling” minority stake in an industry rival, American antitrust laws offers multiple layers of protection and safeguard competitiveness in the market. For one, if the acquisition will exceed a set investment threshold, the procuring party in the undertaking must comply with requirements under the Hart-Scott-Rodino (HSR) Act.
It must be noted that minority shares in a company do not automatically translates to gaining control over a business, and in this frame, not subject to examination by the EU. The powers of the EU are more focused on “concentrations” or complete business integrations designed to gain control of another business. Prevailing trade rules in the region states that the Commission is only allowed to visit a case if the parties declare a concentration with prior minority shareholding agreements in place in one of the participating parties. Here, the European Commission (2014) avers that in this approach, issues regarding minority shares will be bought to the attention of EC regulators under the ambit of the Merger Regulation. Nonetheless, the policy does not allow the EC to rule against the purchase of the minority shares.
In the work of Antonielli and Marinello (2013, p. 1) avers that the Commission, in the tenet of the EU merger policy, is not permitted to conduct self-initiated investigations, or examinations done solely by the Commission. Nonetheless, the Commission considers these in their decisions regarding the effects of a merger. Here, the mechanism seems deficient as the Commission is not given the power to intervene in instances when the part that is bought after the close of a merger and though shareholders have raised concerns in the area of competition.
In addition, EU antitrust laws only accord the Commission with circumscribed powers to address “anti-competitive” minority shareholdings on two grounds. One, in the operation of Article 101 of the TFEU, it is not explicitly stated that whether all types that result in “competitive harm” falls under the ambit of the Commission, particularly in cases that that an accord exists that curtails competition if a minority part is gained via the bourse or in cases whether the damage is the product of a change in the benefits in the wake of the acquisition of the minority stake. Two, under article 102 of the TFEU, the requirements therein states that the purchasing entity must be prevalent and the purchase comprise an abuse will restrict the power of the Commission; these will constrict the applicable range of the powers to extremely narrowly defined cases (Antonielli and Marinello, 2013, p. 1).
The conflict regarding the monitoring of minority shareholdings, according to Tzanaki (2014), to be considered as a “structural link” between two rival businesses is not new; the treatment of minority shareholdings, fragmented and divisive as it is, in the context of prevailing EU merger control policies is extremely perplexing. The ‘chasm’ in EU law can be attributed to a number of explanations; one, EU regulators have constricted powers to investigate and assuage “non-controlling minority shareholdings” that can result in concerns harmful to a conducive competition environment.
Desai, Jalabert-Doury, Klotz, Schmidt, and Sproul (2012) states that the output of the Green Paper released by the body evincing for a retooling of the EU merger policies states that though there is a dearth of extensive, verifiable data to associate minority shareholdings with interconnected directorships, it appears that a small number of these transactions will be liable to suggest fears on competition that cannot be adequately addressed under Articles 81 and 82 EC.
The Ryanair case pushed the issue of minority shareholdings to the table of the European Commission. The case emphasized the variances in merger administration powers between national bodies and the EU. It must be noted that at the level of the member state, for the countries that do not investigate these cases in the context of their respective merger regimes, these result in the development of a large portion of prohibition rulings.
The EUMR empowers the Commission to go over ex ante transactions that will result in a long term control change (“decisive influence”) and acquiesce to certain turnover limits. This complies with the “exclusive jurisdiction” given to the Commission over instances at the level of the EU; in this light, Tzanaki (2014) avers that this does not operate in purchases of minority shareholdings (European Commission, 2015).
A number of stakeholders contend that the issues on competition introduced by the purchase of minority shareholdings can be dealt with by the enforcement of articles 101 and 102 TFEU. In the opinion of the Court of Justice and cited by the EC report (2014), the purchase of a share in a competitor, whether a controlling or minority stake can be considered as an anti-competitive accord or an “abuse of a dominant position.”
It must be noted that Article 101 is applicable only to accords that have the goal or objective of constricting or limiting competition; i.e., the formation of cartels, for example. In instances of transactions for minority shareholdings, it is impossible to classify a relevant accord in cases such as transactions engaging the stock market or from a large anonymous set of traders.
Even with the operation of an existing share acquisition accord, these undertakings, taken at face value, are “competition neutral,” thus aggravating the difficulty of determining anti-competitive goals or objectives in the purchase. In a similar vein, contending parties would have to prove that the bylaws and other corporate documents are anti-competitive. For its part, Article 102 does not afford a clear method on addressing minority shareholdings.
For one, for a share purchase to fall as an “abuse of a dominant position,” the purchaser would have to be already holding a dominant position in the industry prior to the transaction. Two, the purchase of the shares would be regarded as an abuse when it is an initiative to abuse patrons or to deprive rival companies. In this light, the purchase of a minority shareholding will not significantly fall under the ambit of articles 101 and 102 TFEU (European Commission 2014).
With the ratification of the Merger Regulation, minority shareholdings that impute control have not been required to be circumscribed within the narrow interpretations of articles 101 and 102 TFEU. Nonetheless, these can still be examined in the confines of merger control processes and approaches wherein the parties acquiesce to the needed jurisdictional limits. Here, Friend (2013) avers that there is another class of instances traditionally regarded as “merger and acquisitions (M & A) transactions that do not implicitly engage the procurement of a minority share and where trade issues can arise.
This is due to the prevalence of minority shareholdings that do not assume a controlling stance. In a number of these cases, the merger control processes can provide a mechanism of ameliorating these issues. There are a number of instances where the amalgamating parties have planned beforehand to dispose or decrease their stakes prior or in the course of the initial administrative procedure.
Further Issues and Discussion
Tzanaki (2014) avers that the approach with regards to competition law and minority shareholdings finds its beginnings in the landmark Phillip Morris case and its procession to the Gillette case. In both scenarios, there is recognition of the precarious character of minority stake holdings in an environment prior to the enforcement of the EUMR. However, rather than act as a hindrance or obstacle, the case was used to motivate the members to adopt the policy. Withal, after the adoption of the EUMR, the EC has constantly evinced its reluctance and at times prohibition to actively pursue the action of restricting anti-competitive minority stake holdings grounded on articles 101 and 102 TFEU.
In this scenario, a de facto governing vacuum was established on the issue of minority shareholdings. The initial structured endeavour to examine the issue was in the EC’s Green Paper, released in 2001. The document was done in the course of the EU Merger Regulation that proceeded to its modification in 2004. Though the “potential structural effects” resulting from the purchase/s of a minority shareholding was identified, accurately determining and creating an appropriate legal response was seen as a tangible problem.
It was only in 2011 when Competition Commissioner Joaquin Almunia refocused attention to the “enforcement gap” with regards to merger restrictions in the EU. A financial research study on the significance of minority shareholdings was immediately initiated and succeeded by two public dialogues in 2013 and in 2014 on potential approaches that can address the gap. The result of these consultations and the study was the release of the 2014 White Paper wherein a proposed “transparency system” was designed to “fill in the gaps” in the EU merger control regime.
The EC report (2014) acknowledges the deleterious effects of minority shareholdings. However, there are at present limited potentials for these arrangements to be examined at the level of the EU. It is debatable then whether the “significant impediment to effective competition” standard as set down by the EUMR can adequately deal with the threat of possible damaging mergers and acquisitions. While there can be major damage inflicted upon competition in the area, the amount of cases worthy of evaluation and consideration will be relatively few. In this light, it must be stated that the evaluation system must be designed in such a way that it will serve only to afford the needed protection to the parties involved.
The proposed transparency system, as proffered in the White Paper EC, will identify and filter out the anti-competition undertakings, removes the redundant administrative encumbrances, and integrates into the prevailing system of merger policies both in the national as well as on the level of the EU. Nevertheless, the EC report (2014) avers that the system is only applicable to undertakings that are inclined to advancing competition concerns, ie, purchases that will evince a “competitively significant link” with the buyer and the target. Furthermore, the new system will reduce the administrative load on the parties in the undertaking as well as on the Commission compared to the complicated notification mechanism that applies to complete mergers under the tenet of the EUMR.
Complicated issues will still be faced and must be faced by the EC should the Commission opt to float a review of the EUMR. Among the issues that must be threshed out is the determination of the gap, and if it is proven that there is a gap, then the size and range of the gap must be established. In the approaches taken by EU member states that do exercise shareholder monitoring powers, two systems are open for the consideration of the EC.
Desai, Jalabert-Doury, Klotz, Schmidt, and Sproul (2012) avers that in the model practiced in the United Kingdom, the standard for jurisdiction is acquiesced with by the “ability to materially to influence the policy of the target firm.” This category is more pliant than the current EU regime and allows for regulators to examine transactions with as low as 15 per cent of the shares of the company. However, though the UK system is advantageous owing to its broad application and quasi-effectual character, it is burdened by an absence of certainty.
Another state, Germany, exercises the method that recognizes share purchases are considered as concentrations when the 25 per cent limit of the capital or voting shares of the targeted firm is attained; another scenario is when the share block gives the holder the power to implicitly or explicitly exert a “competitively significant influence” on a competing or rival company. Though similar to the UK model in lacking credence, the German structure allows regulators to examine and evaluate minority share purchases lower than 25 per cent.
However, Burnside and MacGregor as edited by Tzanaki (2014) aver that the EC’s prospective “targeted transparency” will not be the best solution to this concern. The authors agree that the EUMR must be applicable to difficult “non-controlling minority shareholdings” but in a manner digressing from the method espoused by the EC in the 2014 White Paper.
However, the imposition of merger restrictions even to “non-controlling” minority shareholdings, as proffered by McDermott Will and Emery (2015), may prove disputable and can result in the lowering of capital allocations in Europe. The lack of a clear and secure list of “additional factors” and the possible application of merger controls on share acquisitions as low as 5 per cent can lead in legal apprehension. Nevertheless, the EC has opened communication and dialogue lines to allow additional input for its final legislation draft. Regrettably, the delays and uncertainties among the region’s policy makers will ensure that any changes with regards to the treatment of minority share undertakings will not be evinced in the near future.
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