The Debate over Minority Shareholdings Revisited: The Need for a better Harmonization with Corporate Law
| Author | José Baño Fos |
| Profession | Adjunct Professor IE University |
| Pages | 313-334 |
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Ver Nota1
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The European Commission (the “Commission”) announced on 2011 its invitations to tender for “a study on the importance of minority shareholdings in the EU“ and for “the provision of data for the assessment of the importance of minority shareholdings in the European Union”.2
The tender follows the concerns raised by Commissioner Almunia on March 10, 2011 indicating that “the Merger Regulation does not apply to minority shareholders, whereas some national systems – both in the EU and outside – make room for the review of such acquisitions. I have instructed my services to look into this issue and see whether it is significant enough for us to try and close this gap in EU merger control.”3
The question of whether the Commission should be empowered to assess minority shareholdings that do not provide its acquirer control over the target has been ongoing for the last ten years since the Commission’s Green
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Paper on the Review of Council Regulation (EEC) No 4064/89 where the Commission clearly acknowledged that “transactions involving the acquisition of non-controlling joint or sole minority shareholdings are not covered by the Regulation, and this is regardless of whether the minority stake is acquired by a competitor”.
At the time, the Commission recognized that such transactions may have a structural impact on the market, however, it highlighted the difficulty in sufficiently defining the transactions that would fall under this category for purposes of mandatory ex-ante notification and indicated that those transactions could be in any event assessed ex post under Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”).
Moreover, the Commission further highlighted that “it appears that only a limited number of such transactions would be liable to raise competition concerns that could not be satisfactorily addressed under Articles 81 and 82 EC [101 and 102 TFEU]. Under this assumption it would appear disproportionate to subject all acquisitions of minority shareholdings to the ex ante control of the Merger Regulation.”
As it is well known, the regained interest in minority shareholdings in the European Union is the direct result of the Ryanair / Aer Lingus decision where the Commission prohibited the acquisition of control of Ryanair over Aer Lingus on competition grounds although it declared itself incapable of ordering Ryanair to divest its initial acquisition of less than 30% of the share capital of Aer Lingus.
This decision, litigated and confirmed by the European Courts, has led to significant amount of controversy and fuelled an interesting debate as to the Commission’s powers in the assessment of the acquisitions of minority shareholdings and the need for reform.
Over the last years, the debate over minority shareholdings has focused on the study of the anticompetitive effects that might arise out of the acquisition of minority shareholdings and the different approach taken by the competition authorities in the United States, the United Kingdom and
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Germany vis-à-vis the European Union.4
The following article analyzes this debate from the corporate law perspective and more specifically under the lens of the European Directive on Takeovers. An approach we believe has been underestimated to some extent. This article shows the interaction that exists between competition and corporate law in the field of minority shareholdings; demonstrates how the alleged enforcement gap is de facto abridged by the mandatory bid rule of the European takeover directive; and advocates for a threshold for mandatory ex ante notification, if any, consistent with Member States corporate regulations.
The article is structured as follows. Section II describes the general legal framework of the Commission’s powers over minority shareholdings under the European Union Merger Regulation (“EUMR”).5 Section III provides an overview of the Ryanair/Aer Lingus litigation to explain with
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specific facts the limits of the Commission’s powers on the assessment of minority shareholdings. Section 4 compares the outcomes of the Ryanair/Aer Lingus case with the Tetra Laval and Schneider cases to underline the relevance of takeover regulations on shaping the Commission’s powers of review. Section 5 puts forward our arguments as to the relevance of corporate law on the enforcement of minority shareholdings under competition law. Section 6 concludes.
Minority shareholdings under European Law can, in principle, be assessed under three different legal norms: the EUMR,6 Article 101 and Article 102 TFEU.7This article focuses on the EUMR as it is within this ex ante analysis regime where the enforcement gap has been detected and the decisional practice of the Commission shows that the application of Articles 101 and 102 TFEU, although theoretically possible, has been actually quite limited in practice.8
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Under the EUMR, the Commission is empowered to review those concentrations that result in a change of control on a lasting basis.9
According to the EUMR a change of control occurs when - as a result of the acquisition of rights, the signing of contracts or any other means - a company can exercise “decisive influence” over another undertaking.
The Commission is, therefore, entitled to review the acquisition of minority shareholdings which provide the acquirer decisive influence over the target. The Consolidated Jurisdictional Notice10provides further clarification as to when a minority shareholding can grant decisive influence over the partially owned firm either through sole or joint control.
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Sole control can be established on a legal basis, when specific rights are attached to the minority shareholding (preferential shares granting a majority of the voting rights or rights enabling the minority shareholder to determine the commercial behavior of the firm, i.e. power to appoint more than half of the members of the board). In addition, a minority shareholder may also have sole control on a de facto basis, for example, where the dispersion of the shareholdings or the passivity of the shareholders makes it highly likely for a minority shareholding to grant the majority of the votes at the shareholders’ meeting.11
Joint control may exist where minority shareholders have special rights which allow them to veto decisions which are essential for the strategic commercial behavior of the joint venture. These veto rights may be set out in the statute of the joint venture or conferred by agreement between the parent companies. The veto rights themselves may operate through different means: a specific quorum required for the adoption of key decisions, caps on voting rights,12 conditioning strategic decisions to the approval by a specific body where the minority shareholders are represented and form part of the quorum needed for such decisions, etc.
Within this regulatory framework the Commission has addressed the issue of minority shareholdings under three different scenarios:13
? First, in those cases where the minority shareholding granted control,
i.e. decisive influence, over the partially acquired firm.
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? Secondly, in cases where a firm acquired control over a company and, in the context of the assessment of the transaction, the Commission also analyzed the minority shareholdings that the merging entities had in other companies.14
? Finally, in cases where a firm acquired or tried to acquire control over another company, the Commission did not clear the transaction and consequently the acquiring firm requested to keep a minority shareholding in the target.
Under the first scenario, the minority shareholding is considered to provide control over the company and, therefore, the Commission is entitled to review the transaction.15
Under the second scenario, the minority shareholding does not constitute the main transaction but it is a fact adjacent to the transaction which the Commission nevertheless takes into account given the possibility of anticompetitive effects arising out of minority shareholdings.16
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Under the third scenario, the Commission prohibits a transaction aimed at obtaining control over the target company and is compelled - by the EUMR or the parties - to make a decision as to those shareholdings which fall below the control threshold. This scenario is further segmented in two different situations depending on whether the acquirer did in fact complete the transaction, i.e. acquired a number of shareholdings conferring him control over the target (Tetra Laval and Schneider) or not (Ryanair / Are Lingus).
Aer Lingus is a public limited company incorporated under Irish law. Following its privatization in 2006, Aer Lingus’s shares became publicly traded on the Irish stock exchange. Before long, Ryanair announced its intention to launch a public bid for the entire share capital of Aer Lingus. However, prior to its announcement, Ryanair acquired, on the market, a shareholding of 25.17% in Aer Lingus (in three different stages 16.03%,
19.21% and 25.17%).
Following the notification the concentration, Ryanair informed the Commission that its share acquisitions (i.e. initial 25.17%)...
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