Minority Shareholdings, Material Effects?
Bojana Ignjatovic, Derek Ridyard, Jan 10, 2012
In a speech delivered in March 2011, Commissioner Almunia indicated a concern that EU merger control, in contrast to some national merger control regimes, is unable to investigate minority equity stakes as mergers.He has instructed Commission staff to consider this "gap" in enforcement and whether it needs to be closed. As a result, the European Commission, in November 2011, announced its intention to conduct a study on the economic importance of minority shareholdings in the EC economy and on the need for the Commission to have the power to review the purchase of minority shareholdings.
The interest in this topic appears to have been ignited by the Ryanair/Aer Lingus merger case, which was blocked by the Commission in 2007, a decision subsequently upheld by the General Court in July 2010. However, the Court also agreed that the Commission was powerless to investigate the 29 percent equity stake that Ryanair continues to hold in Aer Lingus. In contrast, the Office of Fair Trading ("OFT") in the United Kingdom (which, along with Germany, is a Member State with powers to consider acquisitions that fall short of control) has announced an intention to investigate that situation-though currently its attempts to do so have been held up by a legal challenge concerning the long time delay that has elapsed since the Commission Decision. The OFT's desire to review the minority stake in Ryanair/Aer Lingus has nevertheless raised important issues about both jurisdictional and substantive analysis in such acquisitions.
It is clear that, in theory, minority shareholdings that fall short of conferring control are capable of reducing the incentives of the parties to behave independently of their competitors and can thereby harm consumer welfare. There are three quite separate mechanisms whereby this might occur:
- First, acquiring a shareholding of a competitor may change the competitive incentives of the acquiring firm. Absent such a shareholding, an increase in the price by the acquiring firm that resulted in a loss of sales to the target would be one of the factors that would discourage such an increase in price. After the acquisition, however, some of that customer loss will be re-captured by the acquirer ("internalized" in its price setting decisions) through its shareholding in the target firm. As a result, the acquiring firm might choose to raise its prices unilaterally.
- Second, the acquisition of a minority shareholding may, even absent control over the target, enable the acquiring firm to influence materially the decisions of the target company in relation to key competitive parameters such as price, quality, or strategic expansion so as to confer a competitive advantage on the acquirer's other interests in the market. As a result, the acquiring firm might succeed in forcing the target firm to harm its own commercial interests by competing less effectively, to the benefit of the acquiring firm.
- Third, cross-shareholdings across companies could also, in principle, facilitate coordination between competing firms if they enable information sharing in respect of confidential market information, or increase the ability of the acquirer to influence the target's competitive strategy. The potential adverse outcome in such cases would be a general (collusive) increase in the prices of both firms.
However, the mere fact that minority shareholdings could give rise to such effects is not sufficient to establish that the EU merger regime ("EUMR") must be changed to fill this gap. Rather, the justification for closing any enforcement gap should be informed by a practical judgment that the potential concerns identified are sufficiently material to warrant intervention, when set against the costs of so doing. These costs will include increased resource implications for competition authorities and regulatory burdens on businesses, which will be necessarily higher under the EUMR's system of mandatory notifications than, for example, the U.K.'s system of voluntary notification. In addition to the additional resource costs, extending jurisdiction beyond the clear-cut threshold of control to rather more nebulous "material influence" tests would add substantially to the regulatory uncertainties in merger assessment.
Given this background, this paper discusses the economic framework for assessing acquisitions of minority shareholdings and its implications for the appropriateness of widening the Commission's powers to intervene in acquisitions falling short of control. Since minority shareholdings are substantially less likely to give rise to competition concerns than fully-fledged mergers, and since the assessment of such concerns is likely to involve a high degree of subjectivity and create substantial uncertainty, we are skeptical that any such extension of EUMR powers will create a more effective EU mergers regime.