Overlooked Issues in Merger Control

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.

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.

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[2], 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.

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.[5] 

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). 

Interrelated transactions

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[6]   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[7], 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.

In Electrabel v Commission[8] 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.[9]  In Canon/Toshiba merger, the Commission imposed a fine of EUR 28 million for breach of the notification requirement and the standstill obligation.[10]  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.

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.

^{[1] Commission Decision Case No IV.M754 Anglo American Corporation/Lonrho, 23 April 1997.}

^{[2] Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019.}

^{[3] Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019, paras 133 and 142.}

^{[4] Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019, para. 161.}

^{[5] Commission Decision Case No COMP/M.3330 RTL/M6, 12 March 2008, paras. 10–12.} 

^{[6] Commission Decision Case No COMP/M.8179 Canon/Toshiba, 27 June 2019, paras. 118 and 176–179.}

^{[7] Commission Decision Case No COMP/M.5445 Mytilineos/ Motoroil/Corinthos Power, 30 March 2009, para. 7.}

^{[8] Case T-332/09 Electrabel v Commission [2012] ECLI:EU:T:2012:672.}

^{[9] Case C-10/18 P Marine Harvest v Commission [2020] ECLI:EU:C:2020:149.}

^{[10] 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).}

^{[11] Konkurransetilsynet, vedtak V2019-17 28.03.2019.}

^{[12] 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.}