Minority Acquisitions and Merger Control

What level of ‘minority shareholding’ can trigger an EU filing with the European Commission?

Under EC Merger Control rules, an acquisition of any percentage interest may be subject to a merger filing obligation and to prior approval by the European Commission if that acquisition gives the purchaser the ability to exercise control over the target company. A change in control in a target company can occur based on the acquisition of a minority stake if the rights attached to the minority shareholding (e.g. veto rights in respect of the target company’s annual business plan) and/or a series of factual circumstances (e.g. the existence of long-term supply agreements) are such that the investor is in a position to exercise decisive influence in respect of the target company’s strategic commercial behaviour. In this case, the transaction will be subject to prior approval by the European Commission if the relevant thresholds are met.

What level of ‘minority shareholding can trigger a filing with national merger control authorities?

The level of shareholding which can trigger a merger filing at national level (assuming local thresholds are met) varies from country to country. For example under German and Austrian merger control laws acquisitions of 25% or more of the shares of company, or 50% or more, will require filing and prior approval if the relevant turnover thresholds are met. In addition, in Germany, acquisitions of less than 25% shareholding can still require a filing if the acquisition enables the acquirer to exercise directly or indirectly a ‘competitively significant influence on another company’. Under UK merger control law, an acquisition of ‘material influence’ over a company may be subject to review by the UK competition authorities. Under this test, even an acquisition of board seats without a shareholding could be subject to merger review. Other examples of jurisdictions where minority acquisitions may be subject to merger filing include Canada (more than 20% of a public company or 35% of a private company), Mexico (no minimum threshold), Japan (acquisitions exceeding 10%, 25% or 50%) and Korea (20% or more).

Examples of competition assessments of minority acquisitions

Recently, the UK Competition Appeal Tribunal rejected an appeal by BskyB challenging a decision by the Secretary of State for Business Enterprise and Regulatory Reform ordering BskyB to reduce its stake in ITV from 17%.9 to 7.5%. The UK Competition Commission had found that BskyB’s acquisition of a 17.9% shareholding in ITV (with no board representation) allowed BskyB to exercise material influence over ITV’s strategic commercial policy mainly based on past shareholder voting behaviour showing low attendance at meetings which could give BskyB the possibility to block special resolutions proposed by ITV’s management. The Competition Commission also found that the transaction would substantially lessen competition in the UK TV market and concluded that to remedy this effect on competition, BskyB should reduce its stake to 7.5%, a recommendation which was adopted by the Secretary of State.

At EU level, in mid-2008, the European Commission approved subject to conditions, the acquisition by News Corporation of approximately 25% of the shares of the German pay TV channel operator, Premiere. Similar to the UK assessment of BskyB’s minority stake in ITV, the Commission concluded that based on the historic attendance rates at Premiere’s annual shareholders’ meetings, even News Corporations’ initial 24.2% shareholding in Premiere would have effectively given it a majority of the voting rights at those meetings and therefore effective control over Premiere. Unlike the UK system of merger control, which allows for implementation of a transaction prior to competition approval, transactions subject to European Commission approval must be suspended until approval is granted. In the case of public bids, shares can generally be acquired prior to Commission approval but the voting rights attaching to those shares can not be exercised until approval is granted.

Finally, a minority acquisition which is not caught by merger control rules may be investigated in the EU and elsewhere under general competition rules if the authorities are concerned that it will lead to a reduction of competition. However, such investigations are still rare and transactions not subject to merger control rules will generally not need to be notified to a competition authority and can usually be implemented without prior approval.

Conclusion

Given the wide differences between the many merger control regimes which are now in place globally, companies need to evaluate as early as possible when planning a transaction, the potential implications of filings on both the substance of the deal (likelihood that divestitures or other remedies will be required) and on the timing. As demonstrated in recent high profile decisions, even minority acquisitions without board representation can be subject to scrutiny under merger control laws and if considered problematic, can lead to requirements to divest, reduce the level of shareholding or other remedies which can address the competition concerns.

References/Footnotes

1. Cases: 1095/4/8/08
   1096/4/8/08
2. Case COMP/M.5121, 25 June, 2008