|September 11, 2013|
Previously published on September 2013
Last week the UK Competition Commission (CC) required airline Ryanair to reduce its 29.8% shareholding in rival Aer Lingus to 5 per cent. The CC ruled that Ryanair’s gradual acquisition of its existing minority shareholding (i) created a relevant merger situation and (ii) had led or may be expected to lead to a substantial lessening of competition between the airlines. The decision follows the prohibition by the European Commission (EC) of Ryanair’s third attempt to acquire Aer Lingus. It highlights the difference in treatment of minority shareholding acquisitions under EU and UK merger laws and reminds companies to tread carefully when acquiring even small stakes in a competitor.
The European saga: three unsuccessful bids but minority shareholding intact
Ryanair built up a stake of 19.2% in Aer Lingus before launching its first public offer for the airline in October 2006. It continued to build its stake, to just over 29%, only for the EC to block the deal under EU merger law. Ryanair appealed this decision to the EU General Court. During the EC’s merger review, Aer Lingus asked the EC to force Ryanair to sell its minority shareholding should the merger be prohibited. However, the EC ruled that the acquisition of the minority shareholding - including the shares acquired following the bid announcement - did not trigger the application of the EU Merger Regulation (EUMR) and that it therefore did not have the power to require a sale of the shares. Aer Lingus, anxious to rid itself of a rival it believed interfered with its business, appealed that decision. After a long delay, the General Court rejected both Ryanair’s and Aer Lingus’ appeals in 2010.
Meanwhile, Ryanair increased its stake in Aer Lingus to 29.8% and launched a second bid for the remaining shares in December 2008 only to drop it the following month after the Irish Government, Aer Lingus’ second largest shareholder, indicated its opposition.
In July 2012 Ryanair notified the EC of a third bid for Aer Lingus. The EC again blocked the deal, in February 2013. Ryanair has appealed that decision to the General Court.
EUMR vs UK merger control
Following the 2010 General Court ruling upholding the EC’s decision that Ryanair’s acquisition of a minority stake had not triggered the EUMR, the UK Office of Fair Trading (OFT) asserted jurisdiction on the grounds that the stake created a “relevant merger situation” for the purposes of UK merger control. The EUMR provides a one-stop shop for qualifying mergers giving the EC, with limited exceptions, exclusive jurisdiction over merger control within the EU. However, where the EUMR is not triggered, national merger control rules come into play.
This case highlights the difference between the EU and UK merger control regimes as to what constitutes a notifiable merger. Under the EUMR, assuming certain annual sales tests are met by the merging parties, the acquisition of a minority shareholding will only be notifiable if it confers “decisive influence,” for example where special rights are attached to the minority stake, such as veto rights over strategic commercial decisions. The EC is powerless to review simple minority shareholdings under the EUMR.
Unlike the EUMR, national merger control in some Member States - notably Austria, Germany and the UK - gives the local competition authority greater scope to review minority shareholdings. Under UK law, the OFT has jurisdiction over a transaction where (i) two enterprises cease to be distinct and (ii) either the turnover or share of supply tests are met. Ryanair and Aer Lingus between them account for more than 25% of passengers flown between the UK and Ireland. This met the share of supply test. Two enterprises will cease to be distinct if they are brought under common ownership or control. Three levels of control are recognized:
(a) a controlling interest (de jure control);
(b) the ability to control policy (de facto control); and
(c) the ability to materially influence policy (material influence).
The OFT will presume that a shareholding of more than 25 per cent confers material influence, because under UK law law it generally enables the holder to block special resolutions.
The OFT raised concerns about Ryanair’s 29.8% stake and referred its investigation to the CC for an in-depth review. The CC confirmed that Ryanair had the ability materially to influence Aer Lingus, in particular by blocking special resolutions and the sale of slots at Heathrow airport.
Substantial lessening of competition on routes between Great Britain and Ireland
The CC confirmed that Ryanair's minority shareholding had led or may be expected to lead to a substantial lessening of competition between the airlines on routes between Great Britain and Ireland. It found that Ryanair would have the incentive to use its influence to weaken Aer Lingus’ effectiveness as a competitor, in particular by impeding or preventing Aer Lingus from merging with another airline. In addition, the CC found that Ryanair’s minority shareholding could affect the commercial policies and strategies available to Aer Lingus by limiting its ability to manage its portfolio of Heathrow slots, and restricting it from optimizing its route network and timetable across London airports.
The CC considered that these concerns could be addressed by a partial divestiture of Ryanair’s shareholding in Aer Lingus to a level which, taking into account historic voter turnout and voting patterns at shareholder meetings, would remove the risk that Ryanair could block a special resolution or otherwise restrict Aer Lingus’ commercial policy. It set that level at 5%, together with a ban on Board representation.
This is not the first time UK merger control has applied to low minority shareholdings. The previous most notable case occurred in 2007 when the CC held that BSkyB’s acquisition of a 17.9% share in rival broadcaster ITV gave it material influence and might be expected to result in a substantial lessening of competition. BSkyB was required to divest its shares to a level below 7.5%.
The BSkyB and Ryanair cases are exceptional insofar as the low shareholdings they were permitted to retain reflect particular concerns arising from the fact that they were investing in competitors. Such concerns are less likely to arise in a typical private equity minority investment. Nevertheless, companies seeking to buy a minority stake should always make sure that they do not trigger merger control laws and if they are investing in a competitor extra care should be taken to assess the likely impact of that investment on the target company.
The CC’s decision does not mark the end of the Ryanair / Aer Lingus saga. Ryanair will appeal the CC’s decision and already has an appeal pending against the EC’s prohibition of its full takeover of Aer Lingus. In the meantime, the EC is consulting on extending the scope of the EUMR, to enable it to extend its jurisdiction over the acquisition of non-controlling minority shareholdings. If its jurisdiction is extended in this way, merger control in Europe may become even more of a tangled web than it is today.