A commonly held view is that merger control filings are not relevant for minority investments.
On Friday, 5 July 2019, the UK Competition and Markets Authority (CMA) announced that it had issued an order to hold separate to Amazon.com Inc and Roofoods Ltd (trading as Deliveroo). We understand that Amazon had made an investment for a minority of shares in Roofoods (though the exact size of Amazon’s stake has not been revealed).
The UK has a voluntary merger control regime. This means that even where a merger meets the notification threshold, there is no obligation to notify the CMA. However, the CMA has a market intelligence function and can investigate mergers of its own accord up to four months after a deal has come into the public domain. If a merger has already been completed when the CMA investigates, it is usual practice for the CMA to issue an order to hold separate while its investigation is carried out. This means that parties cannot integrate in any way (nor usually act outside the ordinary course of business) without the CMA’s permission (known as a derogation).
Where transaction structures are complicated or minority stakes acquired, it can be difficult to assess when there is a change of control or if merger filings will be needed. Under UK and European Union rules, you do not have to own a majority of shares in order to control a company. You can have control through rights that you have in relation to the commercial policy of the undertaking – for instance, veto rights, the power to appoint the board of directors or having a decisive influence over the strategy of the business.
The CMA has said that it has reasonable grounds to suspect that the investment made in Roofoods means that Deliveroo will cease to be distinct from Amazon. During its investigation, the CMA will undoubtedly look at the rights that Amazon has acquired as a result of the minority investment.
At the European level significant fines for ‘gun jumping’ (where a transaction is closed before mandatory merger clearance is given) have been handed out in relation to minority investments. Two examples of this are Electrabel/Compagnie Nationale du Rhône (CNR) (2009) and Marine Harvest/Morpol (2014). Marine Harvest and Electrabel were both fined €20 million. Electrabel had failed to notify that it had gained de facto control over CNR until four years after completion and Marine Harvest failed to notify its acquisitions of 48.5 per cent of shares in Morpol. In relation to both cases the European Commission gave unconditional merger control clearance – so the fines were not related to competition issues but a failure to notify the minority investment.
The key issue to consider is what control rights are being acquired and when. On 27 June 2019, Canon vowed to appeal its €28 million gun jumping fine from the European Commission in respect of its acquisition of Toshiba Medical Systems Corp, which was implemented through a two-step ‘warehousing’ process. The first step of the transaction was the acquisition of the target by independent financers and the second was the acquisition by Canon. Canon’s view is that it did not acquire control until the second stage was completed. However, the Commission took the view that the transactions should be seen together not separately.
Minority investments and complicated transaction structures should be closely reviewed at the outset of a deal – it is important to remember that merger control may need to be considered for minority investments as well.