One might think that the need for a competition law assessment of transactions because of the possibility of exercising a material influence over a company is triggered by the acquisition of a majority stake or at least a majority at board level. However, competition authorities have shown an increased tendency to consider themselves as having jurisdiction to examine the impact on competition of acquisitions of minority interests in companies, particularly where the acquisitions involve competing undertakings, whether under merger control rules or under the prohibition of anticompetitive behaviour.
Merger control
The applicability of merger control rules should be taken into consideration even when a company acquires only a minority interest in another company. Indeed, even if the acquisition is limited to minority interests, some merger control authorities may consider themselves as having jurisdiction to review the case, either because the concept of decisive influence is interpreted extensively to apply to a minority stake or because some specific merger control legislations provide for rules broad enough to encompass the acquisition of minority stakes. In such cases the acquisition, despite its limited level, may trigger an ex ante mandatory merger control process that should be identified in the early stages of negotiations.
Decisive influence test
A concentration is defined in Article L430-1 of the French Commercial Code in terms very similar to those of the European concept. In its merger control guidelines, the Direction Générale de la Concurrence, de la Consommation et de la Répression des Fraudes (DGCCRF) expressly states that French law is based on EC Regulation 139/2004 and that it refers for its application to the Commission Notice on the concept of concentration. This notice is now included in the European Commission's Consolidated Jurisdictional Notice under Council Regulation (EC)139/2004 on the control of concentrations between undertakings.
When an investor acquires a minority interest in a company, the operation may nevertheless be considered as triggering a change of (joint or sole) control of the target and therefore a potential merger control process if there is a change of decisive influence on the target's strategy.
Indeed, French and EC rules consider that control arises from the right, contracts or other means that grant, alone or jointly and given the de facto and legal circumstances, the possibility of exercising a decisive influence over the activity of an undertaking.
Clearly, competition authorities refer in this context to a concept of legal and economic control, which may differ from company law criteria or from the concept of decisive influence used for accounting consolidation purposes.
From a legal perspective, control may notably be established where specific rights are attached to the minority shareholding, such as preferential shares entitling the acquirer to the majority of voting rights or where they confer the power to appoint the majority of board members. As a result, the minority shareholder acquires the power to determine the commercial behaviour of the company. In exceptional circumstances and if other control factors can be identified, the fact that a minority shareholder holds an option to purchase or convert shares in the target company may be seen as granting it exclusive control if the shareholder exercises those rights within a short period of time.
Other less obvious cases may also lead to a merger control review of minority acquisitions, either because the acquirer becomes entitled, if not to determine the strategy of the company then at least to block its strategic decisions with veto rights, or because the factual context of the acquisition is analysed and understood as conferring to the acquirer a decisive influence over the target.
Veto rights
The analysis of veto rights under merger control rules is now clearly established by French and EC competition authorities. In order to determine whether the acquisition of veto rights by a minority shareholder may trigger a change of control of the target and therefore a mandatory merger control process, one should examine whether these veto rights relate to the normal protection of the financial interests of a minority shareholder (in which case they are not deemed to be control-related), or whether they exceed such normal protection and confer power over the target's strategy.
Competition authorities generally view veto rights as being related to the normal protection of a minority shareholder's financial interests (and therefore not triggering a change of control). Veto rights concern, among other things, a change in the articles of association of the target, an increase or decrease of the capital of the target, the liquidation, sale or winding up of the target or the sale of the significant assets of the target.
Conversely, competition authorities consider that veto rights over decisions that have an impact on the target's strategy may lead to a change of control of the company. Competition authorities will in particular examine decisions related to the target's budget, business plan, appointment of senior management and strategic investments, among other things.
Change of control
The analysis of a de facto change of control may be even more complicated, because each situation should be analysed in its specific context and the simple analysis of the shareholders' agreement will therefore not be sufficient.
For instance, the Commission Notice states that a minority shareholder may be considered as having sole control "where the shareholder is highly likely to achieve a majority at the shareholders' meetings, given the level of its shareholdings and the evidence resulting from the presence of shareholders in the shareholders' meetings in previous years". In this situation, the authorities will not limit their analysis to the mere fact that the acquirer only holds a legal minority at shareholders' meetings, but will also analyse the stakes held by the other shareholders of the company (whether the remaining shares are widely dispersed), their history of attendance at the meetings, the likelihood that several shareholders vote together (because of their structural, economic or family links) and whether their activity is similar to that of the company or whether they behave like financial investors.
A de facto control may also arise because the minority shareholder intervenes as a lender to the target, has very privileged commercial relations with the latter (through exclusive commercial contracts, sharing brands, distribution networks or production units) or is the latter's main economic partner.
In this context, the DGCCRF states in its merger control guidelines that even a 20% minority shareholding may confer exclusive control if the concerned minority shareholder operates in the same sector as the target or in a similar sector and if the other shareholders are financial investors.
For instance, in the French 2001 CGST Save/Domoservices merger control decision, the GDF group was seen as exercising a decisive influence over CSGT Save, even though its shareholding was limited to 20% of the capital, given the addition of the following factors: it was the sole industrial operator with an interest in the capital, taking part in the making of important decisions, GDF's shareholding was consolidated and GDF had a preferential pre-emption right and different veto rights from the other minority shareholders.
Likewise, in the Gillette/Wilkinson-Eemland transaction, the French Conseil de la Concurrence considered that Gillette, even though it only held bonds convertible into shares that did not give it the right to vote or the right to be represented on the board of directors or the right to attend the general meeting of the shareholders in Eemland, acquired a decisive influence over the day-to-day management and the current and future commercial policy of Eemland subject to merger control. Because Gillette was the single industrial operator among the investors, it held pre-emption rights. Eemland was financially dependent on Gillette and Gillette controlled the sales policy of Eemland.
Common interest
In rather exceptional cases, joint control may also arise between several minority shareholders where the authorities identify strong common interests between them to the effect that they would not act against each other in exercising their rights in relation to the company. By way of illustration, the Commission has regarded as indications of the existence of strong common interests: the commonality of understanding between the parties established through their joint involvement in a previous operation and the pursuance of common objectives, the structure of the shareholding and voting rules that allowed the two parties to exercise joint control over the company, the high degree of mutual dependency as between two strategic investors regarding the success of their respective investments in the company or a common guarantee provided by each of the strategic investors for the benefit and reassurance of each other.
The French authorities, in 2007, found another opportunity to illustrate the complexities of the analysis of minority acquisitions under merger control rules. Indeed, on January 31 2007, in its Société France Antilles decision, the French Administrative Supreme Court (Conseil d'Etat) annulled a decision of the Ministry of the Economy because the former considered that the latter had improperly qualified the transaction as an acquisition of exclusive control, whereas the Conseil d'Etat considered that it involved an acquisition of joint control. The acquisition had been achieved through a holding company (EBRA) created to acquire the Delaroche company. The Est Républicain newspaper held a 51% stake in EBRA, the remaining 49% being held by the Banque Fédérative du Crédit Mutuel (BFCM), both companies being active in the industry.
The minister considered that the Est Républicain newspaper, with its 51% stake, exclusively controlled EBRA, whereas the Conseil d'Etat found the existence of a joint control of BCFM with Est Républicain because of BCFM's veto rights for the nomination and dismissal of EBRA's direction committee, because BCFM alone had financed the acquisition and because BCFM had the right to veto any increase in the target's equity capital.
These few examples illustrate the fact that the acquisition of decisive influence is interpreted by French and EC Competition Authorities as relating not only to the acquisition of majority stakes but also to the acquisition of minority interests in some circumstances.
Other jurisdictions rely on even broader concepts to define the concept of concentration. These should be the objects of specific analysis when the company acquired is active in the relevant countries. This is the case particularly in Germany, the UK and the US
Broader concepts of control
In the EU, Germany and the UK, merger control rules define a notifiable concentration with concepts broader than those applying to the acquisition of a decisive influence. US rules also provide for specific thresholds that focus more on the effect of the acquisition on the market than on the nature of the rights acquired over the target company.
It is useful to review these three jurisdictions, illustrating cases where acquisitions of minority stakes may trigger an obligation to notify, as well as in cases where the European Commission or French authorities might not have considered that there was an acquisition of decisive influence. These countries should therefore be the objects of specific analysis if the target is active there, even if French merger control rules are not applicable.
Germany
In Germany, an acquisition of a shareholding of as low as 25% will qualify as a notifiable merger, assuming the applicable turnover thresholds are met. This threshold triggers a filing obligation, irrespective of any finding of decisive influence.
Furthermore, the German competition rules (the German Act Against Restriction of Competition) provide for an alternative filing threshold according to which a transaction should be notified when it enables "one or several undertakings to directly or indirectly exercise a competitively significant influence on another undertaking", even if the stake acquired is less than 25%. In cases of shareholdings of less than 20%, the German Competition Authorities (FCO) usually only assume such a competitive influence where the parties are competitors or are vertically related and where there are additional elements such as, for example, personal relations or special voting rights, information rights and the right to nominate members of the (supervisory) board. In cases of between 20% and 24.99%, competitive influence has been assumed in the absence of strong additional elements. Energy cases in particular have been the object of a rather strict approach in the past, but, in practice, the FCO's analysis will depend very much on the particular circumstances of the case.
UK
In the UK, although merger control rules refer to the EU concept of merger situation, the competition authorities (the Office of Fair Trading, OFT) may also, with some level of discretion, claim jurisdiction to review the acquisition of material influence. On this basis, the OFT has decided that it may review cases where the minority shareholding is as low as 15% to determine whether or not the minority shareholder can materially influence the target. Using this concept, the OFT may deal with cases that are not considered to be concentrations under EU regulation.
The 2007 acquisition by Sky Broadcasting Group plc of a 17.9% stake in ITV plc provides a good example. In this case, the Competition Commission confirmed the OFT's view that the acquisition by Sky of 17.9% of shares in ITV plc gave it the ability to materially influence the policy of ITV. It concluded that remedial action should be taken by Sky to reduce its shareholding in ITV to a level below 7.5% and undertake to neither seek nor accept ITV board representation. On February 22 and 26 2008, BSkyB and Virgin Media, respectively, lodged appeals against the decision, which is still pending.
US
In the US, the Clayton Act and the HSR Acts, which define the scope of the Federal Trade Commission's (FTC) and the Department of Justice's (DOJ) jurisdiction for merger control includes all mergers and acquisitions of interests that may substantially lessen competition. The relevant test is therefore not so much focused on any acquisition of control over the target but rather on the effect of the acquisition of a minority interest on competition and, more specifically, whether the transaction may lessen competition. As a result, the FTC may control the acquisition of minority interests in competitors even where there would be no concentration according to EU or French tests. Even the acquisition of an amount as low as 10% may trigger a filing if the value is $63.1 million and no exemption applies .
These cases illustrate the need to examine on a case-by-case basis the legal, economic and factual context of any acquisition of a minority interest in a company in all countries where the target is active in order to assess whether or not a merger (often mandatory) filing is necessary.
Should the conclusion be that no merger filing is required, an analysis of the acquisition under behavioural competition rules will be necessary in order to ensure that the transaction will not lead to any coordination of competitive activity likely to be prohibited by competition law.
Behavioural analysis
The acquisition of minority interests in competitors may have significance under competition rules, even when the operation does not fall within the scope of merger control regulation. It may indeed facilitate the coordination of behaviour and the lessening of competition between competitors on the market. Parties to structural agreements that do not fall within the scope of merger control should therefore also ensure that they do not infringe competition law.
Unfortunately, related case law is insufficiently developed and complex, as the analysis of minority shareholdings is by nature at the border of merger control regulations. However, as stated by the French conseil de la concurrence in its decision on the TPS/CanalSatellite merger, "it would be unrealistic to consider that the investment of minority shareholders could only be financial when the shareholders are active in the same business sector".
Anticompetitive agreements
It should first be stressed that the acquisition of minority interests in competitors does not constitute an infringement of competition law. Nevertheless, the holding of a stake in a competitor may in practice generate anticompetitive practices if it allows competitors to lessen or distort competition on the market where both companies are competitors because:
- it gives the company holding a minority stake in its competitor access to the latter's confidential and strategic information;
- the acquirer can abuse the confidential and strategic information;
- the acquisition can lead to an express or tacit coordination of the companies' behaviour through the shareholder agreement, with the object or effect of lessening competition between the two companies, for example, through non-compete provisions that might have been considered acceptable in the context of a full function JV submitted to a merger control.
In France, we are not aware of any decision directly related to the acquisition of minority interests in competitors that has been analysed solely with respect to Article 81 or its equivalent in French Law and/or that occurred outside the context of a merger.
As explained below with respect to Article 82, the issue has only been analysed as a question at the borders of the scope of merger control and Article 81. It was first raised by the French conseil de la concurrence in an opinion given to the French Ministry of the Economy, acting as merger control authority in the Canal+/Vivendi case.
In its Canal+/Vivendi opinion, the Conseil de la Concurrence analysed the question of whether the minority interest held by Vivendi in its competitor BskyB could facilitate a reconciliation of both groups and develop synergies between their activities that could lead to a lessening of competition on the relevant markets. The Conseil de la Concurrence considered that the test that should be used is whether or not the coordination of behaviour of the two companies could arise independently of their capitalistic link. As was further stated by the minister in his TPS/CanalSatellite decision, which refers to this precedent, "merger control law is inapplicable when the risk of lessening of competition is not directly connected to the structure of the capital", and it was concluded that "the examination of minority shareholding appears to be performed only from the angle of prohibition of anticompetitive practices, unless the creation of a new entity and the participation of minority shareholders does not create a specific context seeking to develop synergies between their activities...leading to the lessening of competition in the markets where they operate".
Abuse of dominant position
If the acquirer of a minority stake holds a dominant position in the related market, its acquisition of a minority interest in a competitor could, in certain circumstances, be considered an abuse of its dominant position.
It should first be stressed that an undertaking in a dominant position has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market. A company in a dominant position should therefore be particularly careful to respect competition law when acquiring interests in a competitor.
In the BAT Reynolds case, the European Court of Justice stated that the acquisition by one company of a shareholding in a competing company can constitute an abuse of dominant position if that shareholding results in "at least some influence in its commercial policy".
This position was repeated by the Commission in the Gillette case, where it stated that "the change in the structure of the wet-shaving market brought about by Gillette's participation in the overall arrangement will have an adverse effect on competition in that market in the Community and therefore Gillette's involvement constitutes an abuse of its dominant position".
Although these landmark cases (BAT Reynolds and Gillette) concern facts before the entry into force of the European merger control regime, they include principles that are undoubtedly still applicable because:
- Paragraph 7 of the preamble to the EC Merger Regulation states that "Articles 81 and 82, while applicable, according to the case-law of the Court of Justice, to certain concentrations, are not sufficient to control all operations that may prove to be incompatible with the system of undistorted competition envisaged in the Treaty";
- the Commission's Green Paper relating to the revision of merger control regulation concludes that it "appears that only a limited number of [minority shareholdings or interlocking directorates] would be liable to raise competition concerns that could not be satisfactorily addressed under Articles 81 and 82. Following this assumption, it would appear disproportionate to subject all acquisitions of minority shareholdings to the ex-ante control of the Merger Regulation"; and
- decisions adopted after the implementation of the European merger control regime confirm the analysis.
In the BAT Reynolds case, the European Court of Justice stated that "although the acquisition by one company of an equity interest in a competitor does not in itself constitute conduct restricting competition, such an acquisition may nevertheless serve as an instrument for influencing the commercial conduct of the companies in question so as to restrict or distort competition on the market on which they carry on business". That would be true in particular where "the agreement provides for commercial cooperation between the companies or creates a structure likely to be used for such cooperation".
In the Gillette case, the Commission saw the pre-emption rights offered to Gillette as a new barrier to entry, with the competitors or potential competitors being deprived of the best way to limit the dominant position of Gillette.
Agreements designed not to infringe
European case law presents the way in which agreements on minority shareholding could be implemented in order to respect competition law.
In the BT/MCI case, the Commission was keen to determine whether the presence of BT at its competitor MCI's board could lead to a coordination of both companies because of, among other things, BT's access to confidential information relating to MCI. The Commission considered that the agreement was drafted in such a way that BT could not seek to influence or control MCI. First, the agreement provided for a 10-year prohibition against BT increasing its interest in MCI. Furthermore, BT undertook to refrain from influencing or controlling MCI. Finally, the Commission stated that US corporate and competition law prohibited BT's access to MCI's confidential information, or at least the abuse of it.
In the Olivetti/Digital case, the Commission considered that the acquisition by Digital of an 8% shareholding in Olivetti and the proportional representation of Digital on Olivetti's board of directors would not infringe Article 81 of the EC Treaty. The Commission reached this conclusion on the basis that:
- the shareholding would not give Digital control over Olivetti because Digital had agreed not to increase its stake above 10%, was prohibited from entering into voting arrangements with third parties and its shareholding conferred no veto rights; and
- Digital's representation on the board of directors would not lead to the co-ordination of competitive behaviour or to an exchange of competitive information because the board was not involved in decisions on the development of new products or their pricing.
The Phoenix/GlobalOne case is another illustration of the Commission's need to clear minority shareholding acquisitions in competitors. In the context of a complex commercial agreement called The Phoenix Operation, France Télécom and Deutsche Telekom both acquired approximately 10% of their competitor Sprint. The Commission concluded that the operation would not violate article 81 of the EC Treaty because:
- US corporate and competition law prevented Deutsche Telekom and France Télécom from having access to confidential Sprint information; and
- two confidentiality agreements expressly prohibited any abuse that could result from access to confidential information.
A company that acquires a minority stake in its competitors should therefore organise adequate warranties that it will not coordinate its commercial behaviour with its competitor and, more generally, that it will not benefit from confidential and strategic information. Various warranties may be envisaged to this effect:
- the minority shareholder may refrain from participating in the board and, for example, assign an independent trustee, at least when strategic commercial decisions are discussed;
- confidentiality agreements may be drafted and implemented between the two companies; and
- appropriate Chinese walls may be established where necessary between the competitors.
Even when an acquisition is limited to minority interests, a full analysis under competition law is necessary, particularly when the acquisition concerns a competitor.
Merger control may be required even if at first sight the buyer does not appear to acquire any control over the target.
In addition, the acquisition of minority interests in competitors should be analysed carefully in order to confirm that the operation does not lead to anticompetitive behaviour. If any risk is identified, guarantees must be provided in order to avoid an infringement of competition rules.
| Author biographies |
Olivier Fréget
Allen & Overy LLP
Olivier Fréget is the leading partner in the competition department of Allen & Overy Paris. Olivier dedicates his efforts to issues in the network industries, the media and the pharmaceutical industry. He has significant experience in the field of national and EU competition law for anticompetitive practices, as both plaintiff and defendant, before the Competition Council and the Paris Court of Appeal.
Florence Ninane
Allen & Overy LLP
Florence Ninane was promoted to partner in the competition department of Allen & Overy Paris in 2008. Florence regularly assists companies with their French, EU and multi-jurisdictional merger notifications. She also represents companies in competition law litigations before competition authorities and national courts. She has developed specific expertise in the energy, consumer goods and financial industries.
Charlotte Beauchataud
Allen & Overy LLP
Charlotte Beauchataud joined the competition department of Allen & Overy in 2002 after three years in the United States, where she practised competition law in a renowned American firm before studying American competition law at New York University (LLM). Charlotte is a member of the Paris and New York Bars. She is devoted to compliance programmes and external competition law training. |