What are the conditions of the test for control?
In China, to determine whether a proposed transaction is notifiable or not requires a two-step analyses: the first prong of the test is to determine whether a transaction is a “concentration” transaction, and the second prong of the test is to determine whether the relevant revenue thresholds are met.
According to the relevant notification rules in China, a transaction is notifiable for merger filing only if it is a concentration of business operators, and a concentration of business operators means any of the following:
- merger between undertakings;
- acquisition of control over other undertaking(s) by an undertaking by way of acquiring shares or assets of the other undertaking(s);
- acquisition of control over, or the possibility of exercising decisive influence on, other undertaking(s) by an undertaking by way of contract or other means; or
- establishment of a joint venture which is jointly controlled by at least two undertakings.
The test for control.
Based on the relevant notification rules, a business operator acquiring control of, or being able to exercise decisive influence on, other business operators through a concentration transaction both belong to the situation of “change of control.” In general, the test for control will consider numerous legal and factual elements. Concentration agreements and the articles of association of the business operators are important bases for judgment, but the control test will also focus on whether there exists any de facto control.
In general, the following factors, among others, shall be taken into consideration when determining whether one business operator will gain control over another business operator through a concentration transaction:
- Purposes of the concentration transaction and future plans;
- The equity structure of the business operator both before and after the concentration transaction and the changes thereto;
- The matters for voting by the general meeting of the business operator, and the voting mechanisms, historical attendance and voting records of the general meeting;
- The composition and voting mechanisms of the board of directors or the board of supervisors of the business operator;
- The appointment and removal of the senior management personnel of the business operator;
- The shareholder-director relationship of the business operator, whether proxies are entrusted to exercise voting rights, whether there are parties acting in concert, etc.; and
- Whether there exist any significant business relationships, cooperation agreements, etc. between the business operator and the other business operator.
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.
For the purposes of the Competition Act, a merger or acquisition arises if any of the following events occurs:
- Two or more undertakings, previously independent of one another, merge;
- One or more individuals who already control one or more undertakings, or one more undertakings, acquire direct or indirect control of the whole or part of one or more other undertakings;
- The acquisition of part of an undertaking, although not involving an acquisition of a corporate legal entity, involves the acquisition of assets (including goodwill) that constitute a business to which a turnover can be attributed.
Control, for the purposes of the Competition Act, is generally commensurate with the concept of decisive influence under the EU Merger Regulation, i.e. that it gives the acquiring undertaking the ability to affect the strategic commercial direction of the acquired undertaking or asset. Although not bound to do so, the CCPC generally follows the approach to the concept of control as set out in the European Commission's Consolidated Jurisdictional Notice.
The definition of a "merger of companies" in section 1 of the Israeli Antitrust Law is an open one, which begins with the word "including". According to the Antitrust Commissioner's Guidelines for Reporting and Evaluating Mergers under the Restrictive Trade Practices Law, 1988 (the "Guidelines"), this implies that the "merger of companies" definition has a "wide and general aspect" which does not expressly appear in the definition and which includes "Any transaction that creates (or significantly strengthens) a substantial and continuous influence link between the decision-making mechanisms of the companies involved in the transaction, either directly or indirectly".
In addition to this general aspect, the Israeli Antitrust Law sets a definite presumption that the following create a "merger of companies":
- the acquisition of most of the assets of a company by another company;
- the acquisition of shares in a company by another company by which the acquiring company is accorded more than a quarter (25%) of one of the below:
- The nominal value of the issued share capital;
- The voting power;
- The power to appoint members of the board;
- Participation in more than a quarter of the company's profits.
The merger of companies definition applies whether the acquisition is direct or indirect or by way of rights accorded by contract.
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 buyer’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 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.
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.
For acquisitions of voting securities and assets, the HSR Act does not use a “control” test for determining whether a filing is required. Voting securities and assets acquisitions that meet the notification thresholds are reportable, regardless of whether they confer “control” of the acquired company. By contrast, acquisitions of interests in unincorporated entities (such as LLCs or partnerships) are only reportable if, in addition to the numeric thresholds being met, the acquiring party will hold 50% or more of the equity in the acquired entity as a result of the acquisition. The test 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 unincorporated entity.
The following transactions are covered by the Russian merger control regime (taking into the account that turnover/asset value thresholds are also met):
- mergers between Russian companies and incorporation of a new company in Russia, if the authorised capital of such company is paid by shares or production or intangible assets of another company;
- establishment of a JV in Russia by competitors;
- acquisition of more than a 33% or 50% or 66% share in a Russian limited liability company;
- acquisition of more than a 25% or 50% or 75% share in a Russian joint stock company;
- acquisition of a 50% share in or control over a foreign entity that has supplied to Russia, over the last year, goods or services worth more than RUB 1 bn;
- acquisition of control over a Russian company;
- acquisition of more than 20% of the company`s production and/or intangible assets located in Russia (for intangible assets, this means that they should be protected in Russia).
Acquisition of control means that the acquirer obtains the possibility of “determining the general conditions for the target to do business”. In particular, this could be achieved through a management or agency agreement made with the company or through acquisition of a foreign company that has a subsidiary in Russia. The latter constitutes the most popular grounds for filings in Russia made by foreign acquirers.
Please note, however, that the control test may formally also be satisfied by acquisition of de facto control, since the law does not provide a definition of the term “control”. In any case, however, such control should provide a possibility of “determining the general conditions for the target to do business”.
Please also note that the Russian merger control regime does not set rules for joint control, only sole control being covered. Consequently, if more than one entity acquires control over the target, this should be regarded as separate deals, which might require separate clearances.
The concept of negative control (when control is achieved through veto rights) does not in general trigger antimonopoly filing in Russia. In certain cases, however, such possibility need to be preliminary discussed with the FAS.
Please note that intragroup transactions are not covered by the merger control regime if the group is based on structural criteria. This means that the companies participating in the transaction should be directly or indirectly connected by holding a more than 50% share. All other intragroup transactions should be cleared in the ordinary way or by using a special procedure providing for the possibility of sending the FAS notification within 45 calendar days of closing.
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 later.
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 merger regime applies to “concentrations”, which are defined as transactions that bring about a lasting change of control. “Control” is defined as the possibility of exercising decisive influence over an entity’s activity, including by way of negative control (such as the exercise of veto rights) or de facto control.
A concentration therefore exists where:
- One or more individuals or entities acquire control over the whole or part of another entity or its assets.
- Two previously independent entities merge.
- A “full-function” joint venture is established by two or more undertakings, or the nature of control over a full function joint venture is changed.
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 lead 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.
A merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm. The term "firm" includes a person, partnership or trust.
The Competition Act provides that merger may be achieved in any manner, including through:
- purchase or lease of shares, an interest or assets of the other firm in question; or
- amalgamation or other combination with that other firm.
The Competition Act lists the following examples control:
- the beneficial ownership of more than one half of the issues share capital;
- the entitlement to vote a majority of the votes that may be cast at a general meeting, or the ability to control the voting of a majority of those votes;
- the ability to appoint or veto the appointment of a majority of the directors;
- for registered holding companies, over a subsidiary as defined in the Companies Act;
- for trusts, the ability to control the majority of the votes of the trustees, to appoint the majority of the trustees or change the majority of the beneficiaries of the trust;
- for close corporations, owning the majority of the members' interest or control of the majority of members' votes in the close corporation; or
- the ability to materially influence policy in a manner comparable, in ordinary commercial practice, to the forms of control listed above.
The above list is non-exhaustive and the Competition Appeal Court has given the term "control" the widest possible meaning so as to allow the relevant competition authorities to examine a wide range of transactions which could result in an alteration of the market structure.
In case law, the Competition Authorities distinguish between so called "sole control" and "joint control". In this regard, "sole control" refers to de jure control as contemplated in a) to f) above (also referred to as "bright line" control) while "joint control" is most often a reference to "material influence" as contemplated in g) above (also referred to as "negative" control – see also 3.2 below). Worth noting is the fact that South African merger control recognizes the fact that a firm may be subject to both "sole control" and "joint" (or "negative") control at the same time – as a result, the acquisition of sole control (so called "crossing a bright line") in circumstances where negative control by another party still applies will require notification. By the same token, removal of negative control (leaving only a sole controller unfettered by negative control) also requires notification, unless the acquisition of sole control was previously notified and approved. It should be noted that the distinction between sole and joint control is the product of developing case law and advice should be sought when dealing with more than one form of control and changes thereto.
The French merger control regime applies to “concentrations” which are defined as transactions leading to the acquisition of control, including a change in the quality of control. “Control” is defined as the ability to exercise decisive influence over an undertaking on a lasting basis, having regard to the legal and factual circumstances.
The following transactions may therefore be subject to notification in France:
- A merger between two or more previously independent undertakings;
- The acquisition of direct or indirect control by one or several persons, already controlling at least one undertaking, over the whole or parts of one or more other undertakings; or
- The creation of a full-function joint venture.
The FLEC defines “concentrations” very broadly by including reference to any merger, acquisition of control or any other act whereby corporations, associations, shares, equity parts, trusts or assets in general are joined by and among competitors, suppliers, clients or any other economic agents. Therefore, this definition includes joint ventures and acquisition of non-controlling interests, or similar commercial arrangements. Yet, acquisition of non-controlling shareholder may be exempted from filing obligations in very specific cases.
Likewise, when performing a very strict interpretation of the FECL, other specific cases such as the licensing of intellectual property rights or long-term supply agreements where one party acquires control over another could also follow under the scope of the FECL. Yet, these are very complex cases which should be analysed case by case.
The FECL also provides a narrow closed-list with exception cases that even if statutory thresholds are reached, filing is exempted. The cases are the following:
- Corporate reorganisations, where the economic agents belong to the same controlled economic group of interest and no third party participates in the concentrations;
- In the event the holder of shares or equity units or equity parts increases its relative participation in the capital stock of a company already controlled by such holder since incorporation or since approved by the competition authority;
- When creating administration or guarantee trusts or any other where the contribution of assets or shares has no purpose or consequence of transferring such assets or shares to a different company. However, the execution of a guarantee trust must be notified if the filing thresholds are met;
- Acts on shares performed abroad, related with non-residents in Mexico for tax purposes, as long as the companies involved do not acquire the control of Mexican companies, nor accumulate in Mexico shares, equity or assets in general, in addition to those already possessed, directly or indirectly, before the transaction;
- When the acquirer is a variable income investment firm and the transaction has, as its purpose, the acquisition of shares or other instruments with resources from the placement with the public of shares representing the capital stock of the investment firm, except when, as a result of the operations of the investment firm, it may have a significant influence in the decisions of the concentrated economic agent;
- In the acquisition of shares, equity or other documents representing (directly or indirectly) the capital stock of companies listed on a stock exchange in Mexico or abroad, when the acts or successive acts do not allow the purchaser to hold 10 per cent or more of such shares, equity or other instruments, and, in addition, the purchaser has no authority to:
- Appoint or revoke members of the board of directors, or managers of the issuer;
- Impose, directly or indirectly, decisions in stockholders meetings or similar bodies;
- Maintain the holding of rights allowing it to, directly or indirectly, exercise the vote of 10 per cent or more of the company in question; or
- Directly or indirectly instruct or influence the management, operation, strategy or the main policies of a company, whether through ownership, through contract or in any other manner; and
- When the acquisition of shares or equity or participation in trusts is performed by one or more investment funds with speculative purposes only, and has no other investments in companies or assets that participate or are employed in the same relevant market of the concentrated agent.
In addition to the foregoing and only for the telecom and broadcasting sectors, the Telecom Law also provides that as long as there is a preponderant agent in such sectors, concentrations with the following characteristics shall not require the prior authorisation from the IFT:
- They generate a sectorial reduction of the Dominance index, provided the HHI does not increase by more than 200 points;
- It results in an economic agent having a sectorial market shares lower than 20 per cent;
- A preponderant economic agent in the sector does not participate in the concentration; and
- The effects of the transaction do not reduce, diminish or impede the free competition processes in the corresponding sector.
The IFT has declared one preponderant agent in the telecommunications sector, and one preponderant agent in the radio/TV sector.
The following types of transactions qualify as concentrations under the ARC:
- Acquisition of all or an essential part of the assets of another business;
- The acquisition of direct or indirect control by one or more businesses by way of rights, contracts or other means;
- The acquisition of shares in another company provided that the interest alone or together with other interests already held by the acquiring party exceeds 25% or 50% of the capital or voting rights in the other company.
The notion of control under German merger control rules is essentially consistent with that under the European merger control system.
According to Italian merger control rules, a concentration arises in case of:
- merger between two or more companies;
- direct or indirect acquisition of sole or joint control of the whole or parts of a company;
- creation of a full function joint venture (see question 3.1 below).
In order to establish whether a transaction gives rise to change of control, Italian merger control rules make reference to the definition of “control” provided in Article 2359 of the Italian Civil Code as well as holding rights, contracts or any other means, which confer de jure or de facto the possibility of exercising decisive influence on an undertaking (e.g., the power to exercise more than half the voting rights; or appoint more than half the members of the supervisory or administrative board; or otherwise manage the undertakings' affairs, for instance by means of veto rights on the approval of the budget and/or the business plan).
There are, however, a few exceptions where a concentration is not deemed to arise, notwithstanding the transaction gives rise to a change of control – i.e.:
- the acquisition of shares with the sole purpose of resale, by banks and financial institutions, provided that they do not exercise the voting rights attached to the shares and sell them within 2 years from the acquisition;
- the acquisition of companies, which do not engage in any business activities;
- cooperative joint venture (see question 3.4);
- intragroup transactions.
The CCA prohibits the direct or indirect acquisition of shares in a body corporate or corporation, or any assets of a person or corporation, if the acquisition would have, or be likely to have, the effect of substantially lessening competition in a market in Australia. There is no specific minimum shareholding or level of 'control' required.
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.
‘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.