What are the conditions of the test for control?
Merger Control (2nd Edition)
The UK merger control regime applies to transactions that result in two or more businesses – referred to as 'enterprises' – 'ceasing to be distinct', and which meet the jurisdictional thresholds set out below.
Businesses will cease to be distinct if they are brought under common ownership or control. This covers three distinct stages of control:
- Acquisition of a legal, controlling interest in the target. This will be the case where, for example, there is an acquisition of all, or the majority of the shares in the target.
- Acquisition of an ability to control the policy (i.e. the competitive conduct) of the target. This broadly corresponds to the concept of decisive influence under the EU Merger Regulation, and can arise on a de facto basis, e.g. where a 40% shareholding in a public company would allow the holder to exercise the majority of the voting rights because only 60% of the shareholders attend and vote at shareholder meetings.
- Acquisition of an ability to exercise 'material influence' over a target. The test for material influence is described in section 5 below.
An acquisition which causes the purchaser to move from one stage of control to a higher stage of control will be caught by the merger control regime, and will therefore be reviewable by the UK merger control authorities. So, for example, if a purchaser is able to exercise material influence over the target and then increases its stake so that it then has a controlling interest, that acquisition will be reviewable (provided the jurisdictional thresholds are met), irrespective of whether the earlier acquisition of material influence was reviewed by the CMA.
The notion of control is defined very broadly. In particular, control occurs when an undertaking has – on a de jure or de facto basis – the possibility to exercise, alone or jointly with other undertakings, decisive influence over another undertaking.
The Law is applied and interpreted consistently with EU competition law and principles (as stated in Art. 1(4) of the Law). The notion of control is thus consistent with the indications provided by the EU Regulation No. 139/04 and EU Commission Consolidated Jurisdictional Notice.
The following transactions do not qualify as “concentrations” and do not fall within the scope of Italian merger control rules:
- Purely financial acquisitions of shares by banks or financial institutions, provided that: (a) the shares are acquired, with a view to reselling them, when a company is incorporated or its share capital is raised; (b) the shares are resold within 24 months; and (c) the voting rights are not exercised;
- Transactions that have as their main object or effect the coordination of the business conduct of previously independent undertakings;
- Intragroup transactions;
- Acquisitions of (or mergers between) companies that do not perform, directly or indirectly, any economic activity;
- Acquisitions carried out by entities (e.g., a natural person) that neither perform any economic activity, nor control any undertaking.
Under the HSR Act, acquisitions of interests in non-corporate entities (like an LLC or LP) that meet the notification thresholds and are not exempt must be reported only if the acquisition results in ‘control’ of the entity. The control test for non-corporate interests is whether, as a result of the acquisition, the acquiring party will have the right to 50% or more of the profits or 50% or more of the assets upon dissolution of the non-corporate entity.
Acquisitions of voting securities do not use a control test for determining reportability. However, in order to determine whether a corporate entity is controlled (i.e., is part of an acquiring person or acquired person), the HSR Rules define control of a corporate entity as holding 50% or more of the voting securities of the issuer or having the contractual power to designate 50% or more of its board of directors.
Determining whether a non-US entity is a corporation or a non-corporate entity requires an examination of the shareholder rights. If the entity issues securities that allow the holders to vote for the election of a supervisory board of directors, then the entity is treated as a corporate entity for HSR purposes. If it does not, then the entity is treated as a non-corporate entity for HSR purposes.
There are several types of transactions which qualify for a concentration to be notified:
Test 1 – Acquisition of all or a substantial part of the assets of another undertaking: The acquisition of all assets of a company constitutes a concentration pursuant to ARC. If not all assets of an undertaking are acquired, the test is met if the assets acquired represent a competitive position of the seller on the market (e.g. the sale of a dedicated business or an outlet of the seller) and this position is transferred to the acquirer by means of the transaction. The actual means of acquisition, e.g. by merger, acquisition of assets or universal succession, is irrelevant. Obligatory rights to use (e.g. licence rights or alike) are not sufficient for this test but may confer control (see below).
Test 2 – Acquisition of control: The acquisition of direct or indirect control by one or more undertakings over the whole or parts of one or more other companies constitutes a concentration under German merger control. The assessment is very similar to the European merger control regime, since the test also covers both the acquisition of sole or joint control.
Control means the possibility to exercising a decisive influence on the activity of an undertaking. The mere possibility to exert control is sufficient. Control can be acquired by rights, contracts or other means which, individually or jointly, allow the possibility of exercising decisive influence. It has to be noted that control does not require ownership of the assets; mere long-term contractual agreements may be sufficient (e.g. agreements regarding the lease of a business) to confer control. In this context, all factual and legal circumstances have to be taken into account, in particular: ownership or rights in a whole or in part of the assets of the company, rights or contracts which have a decisive influence on the composition, deliberations or decisions of the institutions of the undertaking. The typical case for the acquisition of control is the purchase of a majority shareholding. However, control can also be acquired by minority shareholders (below 25%) if they acquire certain veto rights regarding strategic decision like the appointment of the senior management, the budget and/or the investment decisions of the target company.
The switch from sole control to joint control or vice-versa is also considered a concentration triggering merger control. The situation is unclear to some extent where only the number of companies jointly controlling the target is reduced, but the target will still be jointly controlled after the transaction. According to the publication of the FCO it seems to tend to consider such reduction of the number of companies jointly controlling the target company a change of control requiring a notification.
The object of the acquisition of control can either be a whole undertaking or parts thereof. If the acquirer buys only parts of another company, the test is fulfilled if the part acquired represents a competitive position of the seller on the market (e.g. the sale of a dedicated business or an outlet of the seller). This is equivalent to test No. 1.
In practice, a minority shareholding can confer (sole) control if the minority shareholder holds a secured majority in the annual general meeting of a stock company. Such situation is very common if there is a high degree of free float. In such cases, shareholdings below 50 % may be sufficient to exercise control in an annual general meeting where usually (i.e. within the last three years) the participation in such meetings is below 100 % and it can be assumed that the shareholding of the acquirer will also still constitute a majority in the annual general meeting.
Test 3 – Acquisition of 25 % or 50 %: The acquisition of either (i) 50 % or (ii) 25 % of the shares or the voting rights in another company constitutes a concentration under German merger control. Shares or voting rights previously held by the acquirer have to be included when assessing this test. Further, shares which are owned by another company but held on behalf of the acquirer are also taken into consideration. This test is of high relevance in practice, since it is one of the tests that covers the acquisition of minority shareholdings. The test is also fulfilled in case of a formation of a new company as long as the shareholding meets the threshold of 25 % or 50 % respectively.
Test 4 – Acquisition of competitively significant influence: This type of concentration covers the acquisition of minority shareholdings of less than 25 % of the shares or voting rights. The actual percentage of shares to be acquired is not decisive in this context so that even the acquisition of very minor shareholdings (e.g. less than 10 %) can trigger merger control. It has to be noted that competitively significant influence is less than control. But it requires – along the acquisition of shares – some plus-factors which confer this competitively significant influence. Such plus factors could be: e.g. the right to appoint a member of the supervisory board, superior knowledge of the market and the business of the target by the acquirer, information rights. In practice, this test usually requires a detailed analysis of the circumstances of the transaction and the competitive relationship between the acquirer and the target.
Test 5 – Creation of a joint venture: Apart from the acquisition of sole or joint control, which is already captured by test No. 2, the German merger control regime provides for another provision dealing with the creation of a joint venture. According to this test, the acquisition of 25 % or more of the shares or voting rights in the target will be considered as (partial) merger of all undertakings which hold 25 % or more of the shares or voting rights in the target company after the transaction. One of the effects of this test is that not only the acquirer and the target but all other undertakings with a shareholding of 25 % or more are considered as undertakings concerned. Therefore, their turnover has to be taken into account as well for the assessment of the financial thresholds.
German merger control covers both full-function and non-full-function JVs. Therefore, the creation of a non-full-function JV can also be notifiable in Germany.
If credit institutions, financial institutions or insurance companies acquire shares in another company for the purpose of reselling them, this does not constitute a merger as long as they do not exercise the voting rights of the shares and if the sale takes place within one year. This deadline may be extended by the Federal Cartel Office upon request if there is sufficient proof that the sale was unreasonable within the time limit.
Japanese merger control rules (i.e., Antimonopoly Act and its administrative rules) describe qualifying transactions without using the concept of control. A qualifying transaction occurs where:
- an undertaking acquires another undertaking’s shares and, as result of the acquisition, the holding ratio of voting rights governed by the acquirer’s group in the target exceeds either 20% or 50% (“share acquisition”);
- two or more undertakings merge (“merger”);
- an undertaking acquires the whole, or an important portion, of another undertaking’s business or asset (“business/asset transfer”);
- an undertaking de-merges its business and transfers it to another undertaking through a measure called a “company split” (“company split”); or
- two or more undertakings jointly establish their ultimate parent company through a measure called a “share transfer” (“joint share transfer”).
A transaction made within the same corporate group does not constitute a qualifying transaction.
The Cartel Act defines the term “concentration” legally and foresees five cases in which a concentration is realised.
A concentration always requires the involvement of two undertakings. The term “undertaking” is a very broad one. It is to be understood as an entity engaged in an economic activity irrespective of its legal form and means of funding. Even an insolvent and already closed business can be an undertaking. A natural person (shareholder) qualifies as undertaking if it can exert decisive influence over a company’s economic planning.
A concentration is considered to arise in the case of:
- An acquisition of an undertaking, wholly or to a substantial part, by another undertaking. A substantial part is acquired, if an existing market position is transferred. This can include business units, production sites, branches, and also established trademarks.
- An acquisition of management contracts or the like by an undertaking with regard to the business of another undertaking, which leads to a lasting change in the market structure.
- A direct or indirect acquisition of 25% or more, or 50 % or more of a company’s shares by another undertaking. A concentration is also brought about if particularly voting rights are acquired that resemble such as a 25% or 50% (capital) participation would normally confer. It should be noted that in case of the acquisition of minority shareholdings of at least 25%, the possibility to control is not required. If the 25% shareholding already confers control, however, the later acquisition of further shares does not need to be notified. If it does not, the subsequent acquisition of 50% or more of the shares constitutes a separate concentration.
- “Cross-management or supervision”: Acts that bring about the identity of at least half of the members of the executive or the supervisory board of two or more undertakings.
- Any (other) acquisition of a direct or indirect controlling influence over another undertaking. According to jurisprudence, already the opportunity to exercise controlling influence on the activities of another undertaking is sufficient. Whether a controlling influence is actually exercised is irrelevant. It should also be noted that the shifting from joint to sole control constitutes a concentration. Sole control means that the acquirer is able to decide on its own over the strategic competitive behaviour of the target undertaking. This can also be the case where there are veto rights concerning strategic decisions (“negative sole control”). Joint control is gained, if two or more undertakings together exert a controlling influence on what is then commonly referred to as a joint venture. Each undertaking must have the opportunity to influence strategic decisions in the sense that such decisions cannot be made without it. Strategic decisions typically are decisions on the budget, important investments, the business plan and the composition of the management.
As noted, intra-group transactions do not have to be notified.
Further, there are some noteworthy exemptions in the financial sector:
- Under certain circumstances, a bank does not need to notify the acquisition of shares of a target company for the purpose of selling those, doing a restructuring against the background of an insolvency situation or in case it acquires shares for the purpose of securing its claims.
- Undertakings the only purpose of which is to acquire shares and to exploit these shareholdings may also benefit from an exemption. However, jurisprudence has made it clear that the exemption only applies if the investment entity does not intervene in the operative management of the target company, but merely holds the shares as financial assets.
Transactions need not constitute an acquisition of control over the target to be caught by the merger control regime. The merger control regime sets out bright line tests for non-controlling acquisitions, which are described in greater detail below.
Separate from the merger control regime (i.e., the question of whether the transaction triggers a pre-merger notification requirement), a transaction must qualify as a “merger” in order for the Tribunal to have jurisdiction to block or remedy it under the merger provisions of the Act.
“Merger” is defined in the Act as “the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person.”
Generally, the Act defines “control” to be de jure control with respect to corporations. While the Act does not define a “significant interest”, the Bureau considers both quantitative and qualitative factors when assessing whether an interest is significant. Qualitatively, a significant interest is held when the person acquiring or establishing the interest obtains the ability to materially influence the economic behaviour of the target business. The Bureau generally will not take the position that an acquisition of 10% or less of the voting shares of a company constitutes the acquisition of a significant interest (i.e., a “merger”).
The types of transactions that are captured by the Canadian merger control regime are: (i) an acquisition of assets, (ii) an acquisition of voting shares, (iii) an amalgamation, (iv) a combination, and (v) the acquisition of an interest in a combination.
DL 211 doesn’t define ‘control’ or establishes explicitly a ‘control test’.
DL 211 does define operations of concentrations. It stipulates that operations of concentrations are facts, acts or agreements, or a combination thereof, that have as effect that two or more economic agents that are not part of the same group of companies and that are previously independent from each other, loose such independency in any scope of their activities by either:
(i) a merger, irrespective the corporate form of the merging entities or the entity resulting thereof;
(ii) an acquisition by one or more economic agents, directly or indirectly, of the rights to exercise, individually or jointly, decisive influence in the management of a third party;
(iii) an association, irrespective of the form, to establish an independent economic agent, distinct from them, that exercises their functions permanently; or
(iv) an acquisition by one or more economic agents of the control over the assets of another economic agent, irrespective of the legal title.
The FNE’s Guidelines on Jurisdiction provide further guidance on the concept of control. The Guidelines indicate thereby that: (i) ‘control’ and ‘decisive influence’ are synonymous concepts; and (ii) both terms relate to the possibility, de jure or de facto, to determine – or veto – decisions regarding the strategy and competitive behavior of an economic agent. Control, therefore, include both positive and negative control, individual and joint control, and de jure or de facto control.
According to the Guidelines, positive control is verified when the controlling economic agent has the possibility to determine decisions about the strategy and competitive behavior of the controlled economic agent. For example, when the majority of votes can be assured at a shareholders’ or members’ meeting and appoint the majority of directors, administrators or legal representatives, depending on the type of company; or when are hold preferred shares with exclusive prerogatives allowing them to execute any of said actions. On the other hand, negative control is verified when it has the ability to veto or block decisions on the strategy and competitive behavior of the controlled economic agent. For example, blocking decisions related to the entrance to new markets, the business plan, the approval of the budget, the appointment of managers and main executives and the authorization of certain investments; or when are hold preferred shares with exclusive prerogatives allowing to veto any of these decisions.
Agreements and acts that do not qualify as an operation of concentration, like non-structural joint ventures and the acquisition of non-controlling minority shareholdings, fall under the general provision of the in the Competition Act , which prohibits facts, acts or agreements that prevents, restrains or impedes free competition, or that tends to produce such effects..
‘Control’ is defined as control stemming from any rights, agreements or other means which, either severally or jointly, confer the possibility of exercising decisive influence over an undertaking through:
- ownership or enjoyment rights over the whole or part of the assets of the undertaking; or
- rights or contracts that confer the possibility of decisive influence on the composition, meetings or decisions of the bodies of an undertaking.
The Law provides for an exemption concerning investment companies, defined as those having as their exclusive object the acquisition of participation in other undertakings and the management and exploitation of this participation, without direct or indirect involvement in the management of these undertakings.
The following types of transactions constitute a merger in Denmark:
- two or more previously independent undertakings amalgamating into one undertaking;
- one or more persons who already control at least one undertaking, or one or more undertakings, acquiring direct or indirect control of the entirety of, or parts of, one or more other undertakings by an agreement to purchase shares or assets or by any other means; or
- the establishment of a joint venture that will perform on a permanent basis all the functions of an independent business entity.
The decisive criterion in determining whether a transaction constitutes a merger is whether there is a permanent change or transfer of control in an undertaking, i.e. a shift in the decisive influence on the operating activity of a business for a period of at least one year. Intra-group mergers, i.e. internal reorganizations, do not constitute mergers within the relevant merger definition, as there is no change of control in such situations.
Control can be obtained through the transferal of rights or agreements or in other ways that will, either separately or in combination, make it possible to exert decisive influence over the operations of the undertaking. Control over an undertaking will often be achieved through the acquisition of shares or assets, but may also be obtained on a contractual basis, e.g. where the parties agree that one party is to exercise control over an undertaking without transferal of any shares or assets, or through rights attached to shares or contained in shareholder agreements. See further in Question 9 concerning full-function joint ventures.
A concentration arises where a change of control on a lasting basis results from the merger of two or more previously independent undertakings, the acquisition of direct or indirect control of the whole or parts of one or more other undertakings or the creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity. Control could be constituted by rights, contracts or any other means that confer the possibility of exercising “decisive influence” on an undertaking. The change of control test is met if the concentration results in the acquisition of control or a qualitative change in the nature of control.
A transaction - acquisition, merger or creation of a full function joint venture, is reportable under French merger control rules if it leads to an acquisition or change of control, even a change in the quality of control. The notion of control is the same as in EU law and corresponds to the ability to exercise a decisive influence over an undertaking on a lasting basis. The appraisal of such control may be undertaken either on a de facto or de jure basis.
The Regulations define control as having the possibility of exercising decisive influence on an undertaking, in particular:
- through ownership or the right to use all or part of the assets of an undertaking; or
- through rights or contracts which confer decisive influence on the composition, voting or decisions of the organs of an undertaking; provided that even persons or undertakings not holding such rights or entitled to such rights under the contract concerned are deemed to have acquired control if they have the power to exercise the rights deriving therefrom.
The assessment of control is qualitative, not quantitative. Thus the DG will evaluate the potential existence of control on a case-by-case basis.
The test for control under the Norwegian Competition Act is identical to that under the EU Merger Regulation.
According to Competition Law no. 21/1996, an economic concentration implies a change of control on a lasting basis resulting from:
(i) a merger between two or several previously independent undertakings or parts of undertakings; or
(ii) the acquisition, by one or several undertakings or by one or several individuals already controlling at least one undertaking, of direct or indirect control over one or several undertakings or parts of undertakings, either through acquisition of shares or assets, or by contract or other means; this scenario also includes the creation of a full-function joint venture.
Control results from rights, contracts or any other elements which, taken separately or together and considering the factual or legal circumstances, grant the ability to exercise a decisive influence over an undertaking, in particular through:
(i) ownership rights or rights of use with respect to the whole or part of the undertaking’s assets;
(ii) rights or contracts granting a decisive influence over the structure of the undertaking, the vote or the decisions of the undertaking’s direction bodies.
KN: Control is defined as the possibility of exercising decisive influence on an undertaking. The general legal framework concerning control is closely modelled after the EU one and the European Commission’s Consolidated Jurisdictional Notice, including the rules on negative control (i.e. veto rights). Where there are no specific local rules prescribed the Competition Commission refers to the relevant EU rules and practice as persuasive authority.
When one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of a business of another firm, that transaction will constitute a merger.
There is no closed list of how control may be achieved. Broadly, a person controls another firm if that person, inter alia:
- beneficially owns more than one half of the issued share capital of the firm;
- is entitled to vote a majority of the votes that may be cast at a general meeting of the firm, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person;
- is able to appoint or to veto the appointment of a majority of the directors of the firm;
- is a holding company, and the firm is a subsidiary of that company; or
- has the ability to materially influence the policy of the firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control referred to in the first four bullet points above.
The first four bullet points above set out what are referred to as instances of ‘bright line’ or ‘legal’ control. The last bullet point provides a ‘catch-all’ to the effect that a person controls a firm if that person “has the ability to materially influence the policy of the firm in a manner comparable to the person who, in ordinary commercial practice, can exercise an element of control,” referred to in the first four bullet points. This covers instances in which a firm, without acquiring ‘bright line’ control, may acquire de facto control by being able to materially influence the policy of another firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of ‘bright line’ or ‘legal’ control.
Turkey is a jurisdiction with a suspensory pre-merger notification and approval requirement. Much like the European Commission regime, concentrations that result in a change of control are subject to the Competition Board’s approval, provided that they reach the applicable turnover thresholds. The turnover thresholds given in Communiqué No. 2010/4 are stated more fully in the upcoming sections.
Communiqué 2010/4 and the Guideline on Cases Considered as Mergers and Acquisitions and the Concept of Control provide a definition of ‘control’ which does not fall far from the definition included in Article 3 of Council Regulation 139/2004. According to Article 5(2) of Communiqué 2010/4, control can be constituted by rights, agreements or any other means which, either separately or jointly, de facto or de jure, confer the possibility of exercising decisive influence on an undertaking. These rights or agreements have decisive influence – in particular, in terms of ownership or the right to use all or part of the assets of an undertaking, or rights or agreements which confer decisive influence on the composition or decisions of the organs of an undertaking.
Pursuant to Article 6 of Communiqué 2010/4, the following transactions do not fall within the scope of Article 7, and are therefore exempt from board approval:
- intra-group transactions and other transactions that do not lead to a change in control;
- temporary possession of securities for resale purposes by undertakings whose normal activities involve conducting transactions with such securities for their own account or that of others, provided that the voting rights attached to such securities are not exercised in a way that affects the competition policies of the undertaking issuing the securities;
- acquisitions by public institutions or organisations further to the order of law, for reasons such as liquidation, winding-up, insolvency, cessation of payments, concordat or privatisation; and
- acquisition by inheritance, as provided by Article 5 of Communiqué 2010/4
The following types of transaction are caught:
- merger of entities or takeover of one entity by another;
- direct or indirect acquisition of control over an entity or a part of it;
- creation of a joint venture by two or more entities;
- direct or indirect acquisition of shares if such acquisition results in obtaining (1) 25%, (2) more than 25%, (3) 50%, or (4) more than 50% of votes in the highest governing body of an entity.
The parties must indicate the group of undertakings affiliated with them by the relations of control. As circumstances may require, the AMC may request the parties to provide additional documents and information with respect to the relations of control and recheck the parties’ position and arguments.
The following conditions are analyzed: Relevant market, concentration level and unilateral effects.
As for the relevant market, it is the process to identify the economic agents (both consumers and producers) that effectively react to and limit the decisions on price strategy, quantity, quality and other aspects of the company that the merger created. The tests applied to verify the relevant market are: Hypothetical Monopolist Test and Hypothetical Monopsonist Test .
Regarding the concentration level analysis, CADE evaluates the market participation of the involved players. The merging companies shall inform CADE the quantity of supplies sold to their competitors and, when applicable, how much of that margin can be reflected on their competitors’ market share. The test applied to verify the concentration level is the Herfindahl-Hirschman rate, which examines the causal link between the merger and the existing concentration.
The third and last condition to be analyzed is the unilateral effects, in which CADE will take up entrance analysis, competition analysis, analysis of the power associated and portfolio.
Furthermore, CADE will ascertain the possible efficiency gains – probable and verifiable benefits, well-being of the consumer, specific efficiency and externalities.
Other factors analyzed are: elimination of mavericks, potential competition, vertical integration Vs. horizontal overlapping; if the company engages in both sides of a specific market and partial acquisitions.