- Merger filing analysis more than a mechanical exercise
- When do minority shareholdings need to be assessed from a merger control perspective?
- When are interrelated transactions treated as a single concentration?
- How and where should injunctions to notify be taken into account in planning and negotiating transactions?
- How to avoid these pitfalls and gun-jumping?
As M&A operations are driven by business considerations it is understandable that merger notification considerations are not at the forefront of transactions. Unfortunately, they are sometimes taken into account at quite a late stage of the process. If a transaction is notified to a wrong authority or if notification is accidentally neglected altogether, merger notification considerations can lead to significant delays in implementing the transaction and at worst to significant fines being imposed if a notifiable transaction is put into effect prior to the approval of competent competition authorities. If the requirement to notify is addressed mechanically by merely examining the amount of shares to be acquired or the turnover of the company or business to be acquired, there is a significant risk that an obligation to notify the transaction is overlooked and the acquirer(s) becoming exposed to a gun-jumping fine risk.
In this article we will cover some of the most commonly overlooked pitfalls which may lead to a mandatory merger notification being neglected or to unexpected delays before the transaction can legally be put into effect and the transaction closed. Such pitfalls are gaining de facto control over an undertaking despite lacking majority in the company in question, interrelated transactions which are considered to constitute a single transaction instead of several independent transactions, and the possibility of a forced notification in certain jurisdictions for transactions falling below notification thresholds.
Control without Majority
One of the necessary elements of a notifiable transaction is the fact that control over an undertaking changes. Control is defined by Article 3(2) of the Merger Regulation 139/2004 ("EUMR") as the possibility of exercising decisive influence on an undertaking and it can be sole or joint in nature. The most self-evident situation of sole control is acquiring the majority of shares and voting rights in a company. However, according to established case-law, even minority shareholders can under certain circumstances be considered to possess such a possibility of exercising decisive influence over an undertaking that they can be considered to have de facto sole control. This possibility of exercising decisive influence over an undertaking can emanate from an acquisition of shares or assets or from a contractual basis or from a combination of the two. For instance, minority shareholdings of as little as 25–30% have been considered to confer de facto sole control in cases where the nature of the remaining shareholding is dispersed and the attendance history of the other shareholders is scarce. Minority shareholdings can therefore lead to the need to assess other criteria of notifiable transactions, e.g. turnover thresholds also, in order to ensure that legal obligations to notify are met.
For example, in Anglo American Corporation/Lonrho
merger, the Commission considered that a 27.47% shareholding in a listed company was sufficient to give rise to decisive influence and therefore sole control.
In this case, the Commission analysed the shareholder's attendance in General Meetings of the past four years and concluded that a holding of 27.47% would be sufficient to consistently command more than 50% of votes cast. This was particularly due to the fact that the number of shares present at general meetings generally represented less than 55% of the share capital and the second largest shareholder after the acquirer only had a 3% shareholding.
There are also jurisdictions where a minority investment in itself, irrespective of control, constitutes a concentration. In Germany, an acquisition of a minority of 25% or more, constitutes a concentration as do smaller shares if they are accompanied by so-called "plus factors" enabling the acquirer to influence the undertaking in question. Also, the Austrian merger control regime defines a minority shareholding of a minimum of 25% as a concentration.
Sole control of a minority shareholder may also be based on contractual provisions. Articles of association, shareholder's agreements, or financial agreements may contain provisions which give the minority party the possibility to exercise decisive influence over the undertaking. Such contractual provisions have traditionally been considered to include e.g. the possibility to appoint the majority of the Board of Directors of the undertaking, control over the undertaking's budget and/or business plan, the appointment of senior management, and other critical business decisions. Control by a minority shareholder may also be based on the possibility to block strategic decisions of the undertaking and by having the possibility to exercise negative decisive influence over the company.
In the Canon/Toshiba merger, Canon acquired Toshiba Medical Systems Corporation ("TMSC") by using a so-called “warehousing” two-step transaction structure involving an interim buyer. In the first step ("Interim Transaction"), the interim buyer acquired 95% of the shares of TMSC for less than a thousand euros, whereas Canon paid EUR 5.28 billion for the remaining 5% of the shares and share options over the interim buyer's stake ("Ultimate Transaction"). The Interim Transaction was implemented without notifying the transaction to the Commission.
According to the Commission, the Interim transaction was necessary for Canon to achieve a lasting change of control
over TMSC within the meaning of the EUMR. Canon was the only party determining the identity of TMSC’s ultimate acquirer and bearing the economic risk of the Interim Transaction.
Having a direct functional link with the change of control over TMSC, the Interim Transaction contributed (at least in part) to the change of control over TMSC.
In exceptional circumstances, a change of control may arise as a result of actions taken by parties other than those gaining control. This is most likely to be the case where, at the outset, the party ultimately required to notify the concentration to the Commission co-owns a company with other undertakings. The obligation to notify arises when the party acquires (joint or sole) control due to another co-owner selling its shareholding. This was the case, for example, in RTL/M6 merger. RTL had exercised joint control over M6 with Suez Lyonnaise des Eaux ("Suez") on the basis of its shareholding. However, Suez sold its shareholding to a wide range of investors, leaving RTL as the only significant shareholder in M6. As a result, RTL's control of M6 changed from joint to sole and RTL was required to notify the concentration to the Commission even though it did not participate in the legal actions taken by Suez.
As one of the triggering events for merger control is a change of control situation, this logically entails that if no entity is in a position to exercise decisive influence over the undertaking to be acquired (e.g. a situation where the combinations taking strategic decisions varies according to the issue being approved i.e. shifting alliances), in a majority of jurisdictions there is no obligation to submit a merger notification. Naturally this does not apply to jurisdictions where there are other triggering events in addition to changes of control (e.g. Germany, Austria).
Transactions between the same buyer(s) and seller(s) may be carried out in two or more stages. Transactions by a buyer may also be closely related with other transactions made by that same buyer but from a different seller. Pursuant to the EUMR, interrelated (or interdependent) transactions may be treated and assessed as a single concentration provided that they are linked by condition. Recognizing when transactions are linked to each other in a way to be assessed as a single concentration is relevant for taking the correct entities into account while assessing the attainment of turnover thresholds, while assessing which is the correct competition authority to submit a notification to, and while assessing when control is acquired i.e. when the obligation to notify and the stand-still obligations are triggered.
Transactions are linked by condition if one transaction would not have been carried out without the other. In e.g. the Canon/Toshiba -merger the Commission found that the Interim Transaction and Ultimate Transaction constituted a single concentration, as the Interim Transaction was only undertaken considering the Ultimate Transaction, facilitating the acquisition by Canon of control over TMSC. The Commission also noted that Canon was the only party determining the identity of TMSC’s ultimate acquirer. Conversely in Mytilineos/Motoroil/Corinthos Power -case, where merely a future possibility of transferring control to another party was stated in the agreement giving effect to the transaction, the possible future transfer of shares was not considered to belong to the same transaction.
It should also be noted that the causality of the transactions leading to several transactions being considered as a single transaction logically precedes the EUMR two-year rule (i.e. the rule stating that for the purposes of calculating turnover, two or more transactions taking place between the same parties within a two-year period will be considered to constitute one and the same concentration arising on the date of the last transaction). This means that if e.g. an acquirer wishes to tailor the business to be acquired in a way to stay below the turnover thresholds and then, after two years envisages to acquire additional businesses from the same seller and the transaction agreements provide for a causality between the two transactions, the transactions will not be assessed according to the two-year rule and be considered as separate transactions. Instead, they will be assessed as a single concentration having taken place already at the stage of the first transaction. If the first transaction was not notified and was implemented before the second, the structure of the transaction will have led to an infringement of the stand-still obligation and will have subjected the acquirer to a significant risk of fines being imposed.
In Electrabel v Commission the ECJ upheld the fine imposed by the Commission of EUR 20 million due to failure to notify. Similarly, a fine of EUR 20 million imposed on Mowi (then Marine Harvest) was upheld by the ECJ in its judgement this March. In Canon/Toshiba merger, the Commission imposed a fine of EUR 28 million for breach of the notification requirement and the standstill obligation. As these examples show, the consequences for breaching the notification requirement and the standstill obligation are very severe. Therefore, merger control considerations should be assessed carefully already when planning the structure of the transaction.
Injunctions to notify below thresholds
In some Member States, in addition to mandatory notifications, competition authorities may under certain conditions issue an injunction to notify even if a merger falls below the general turnover thresholds. If this possibility is overlooked and an injunction is issued, the forced notification will at best lead to the closing being postponed and the cost of the transaction being inflated by notification and eventual termination costs or even possible contractual penalties. At worst, if the possibility of such an injunction is overlooked and the transaction can only be accepted after divestments or other commitments, the valuation can prove to be flawed to the extent to thwart the economic rationale of the transaction.
EU Member States in which a possibility to issue an injunction to notify exist are Sweden, Hungary, Ireland, Latvia and the UK. Being an EFTA-state and part of the EEA Agreement, Norway's merger control rules are very similar to those laid down in the EUMR and those applied in EU Member States. Norway also has a merger control system including a possibility to issue an injunction to notify a transaction. Furthermore, at least Finland and France have recently been considering empowering their competition authorities with such a power.
The Sector Alarm/Nokas merger investigated by the Norwegian Competition Authority (“NCA
”) in 2018–2019 may be given as quite an extreme example of unexpected injunctions to notify.
Sector Alarm first acquired a part of Nokas’ business named Small Systems Business and 1.5 month later 49.99 % of the shares in Nokas. The Small Systems Business deal was not subject to merger filing requirement, since the turnover thresholds in Norway were not met. A merger notification was not required for the share deal either as neither the stake nor the shareholder agreement gave Sector Alarm any (joint) control over Nokas.
The NCA, however, ordered a filing in both transactions. Pursuant to Norwegian Competition Act, the NCA may order a notification, even if the turnover thresholds are not exceeded, if there are “reasonable grounds to assume that competition will be affected”. The same power applies to acquisitions of minority shareholdings that do not confer control (the latter being a Norwegian peculiarity).
As a result of the NCA's investigation, Sector Alarm was forced to reduce its shareholding in Nokas to 25%, and to refrain from executing the acquisition of Nokas Small Systems.
In the light of the foregoing, the potential (adverse) competitive effects of a planned transaction in the said jurisdictions should be assessed even if it appears that the turnover thresholds are not exceeded. An obligation to notify is likely to be imposed if the market in question is fairly concentrated and the transaction leads to further concentration on that market, and especially if the buyer achieves significant market share / market power through the transaction. The possibility should be taken into account even for lesser effects on competition, as even if there is a possibility to appeal such a decision (which often there is not), the margin of discretion allowed for the competition authority to issue an injunction to notify can be expected to be quite large.
In such situations, it would be advisable for the buyer to contact the competition authority in advance for discussing the need/possibility for a voluntary notification. Even if the competition authority approved the transaction after issuing an injunction to notify, submitting a voluntary notification is likely to be a much faster way to get the final assurance for the implementation of the transaction.
How not to trip over merger control
As merger control rules form one part of an overall competition policy objective of effective and workable competition, it comes as no surprise to competition lawyers that the praxis of different competition authorities and courts has led to various legal terms such as "control" and "concentration" being interpreted quite broadly. This in turn means that assessing whether a transaction needs to be notified to one or several competition authorities is much more than a mechanical exercise of comparing turnover figures to applicable turnover thresholds in different jurisdictions.
Therefore in addition to turnover, the structure of the transaction and the terms of the transaction agreements should always be taken into consideration when assessing an eventual obligation to notify a transaction. As the agreement terms change and evolve during transaction negotiations, it is advisable to regularly re-evaluate the effects such amendments have on merger notification needs or at least to review the final versions of the transaction agreements. In some cases even past behaviour of other shareholders, the relative weight of a minority shareholding, as well as the competitive effects of the envisaged transaction may need to be taken into account while assessing the need to notify.
Irrespective of competition law provisions being almost identical in different Member States, there still exist national tendencies and areas of interest in applying merger control provisions. Some competition authorities e.g. almost mechanically assess veto rights over business plans as conferring control, whereas others take a more effects-based approach and assess the actual relevance of the business plan. There are also national differences relating to product markets deemed as problematic and therefore susceptible to enhanced scrutiny by competition authorities through e.g. injunctions to notify or information requests regarding transaction agreements. Bird & Bird and our international network of offices are well positioned to address these national specificities.
 Commission Decision Case No IV.M754 Anglo American Corporation/Lonrho, 23 April 1997.
 Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019.
 Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019, paras 133 and 142.
 Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019, para. 161.
 Commission Decision Case No COMP/M.3330 RTL/M6, 12 March 2008, paras. 10–12.
 Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019, paras. 118 and 176–179.
 Commission Decision Case No COMP/M.5445 Mytilineos/ Motoroil/Corinthos Power, 30 March 2009, para. 7.
 Case T-332/09 Electrabel v Commission  ECLI:EU:T:2012:672.
 Case C-10/18 P Marine Harvest v Commission  ECLI:EU:C:2020:149.
 Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019. The decision has been appealed and is still pending before the General Court (Case number T-609/19 Canon v Commission, Action brought on 9 September 2019).
 Konkurransetilsynet, vedtak V2019-17 28.03.2019.
 See e.g. the Sector Alarm/Nokas –case referred to earlier where after appeal the Competition Appeals Board assessed among other things the margin of discretion and stated that the threshold to issue an injunction to notify a non-notifiable transaction was not particularly high, and that the NCA enjoyed a wide margin of discretion. According the Competition Appeals Board, the NCA could not be subject to a high burden of proof taking particularly into account short period of time to intervene.