Passive investments and the EU Merger Regulation

Passive investments and 
cross-directorships among competing companies are common across numerous industries such as banking, airlines, energy and automotives. There are various motivations for these types of arrangements, such as a desire to invest in a familiar industry, or to spread risk, share know-how and form strategic alliances.

These passive investments often take the form of a minority shareholding. While the acquisition of minority shareholdings may be subject to review under UK merger control rules, they are not captured under the EU Merger Regulation (EUMR)1. The announcement on 30 May 2013 of the UK Competition Commission’s (CC) provisional findings in relation to Ryanair’s 29.82% shareholding in Aer Lingus has again raised the issue of when such shareholdings should be controlled. The CC’s provisional findings were that, without the Ryanair shareholding, competition between Ryanair and Aer Lingus may have developed differently and they may have been stronger.

This article explains the types of substantive concerns that can arise in relation to minority shareholdings and discusses the proposals for the EUMR to be adapted to regulate such acquisitions. It also provides more detail on the CC’s provisional findings in relation to Ryanair/Aer Lingus – which appear to provide a clear example of when concerns may arise in the case of minority shareholdings.


The acquisition of a passive financial interest in a competitor may alter the acquiring firm’s incentive unilaterally to increase prices. As in a full merger, the acquiring firm will ‘internalise’ part of the impact of a price increase, by considering the consequences of this decision on its financial stake in the target. For example, where the acquirer increases its prices, to the extent that sales are recaptured by the target, the acquirer can stand to benefit from its stake in the profits from the target. Further, the increase in the acquirer’s prices, may incentivise the target (and perhaps other competitors) to increase their prices. Alternatively, where the acquirer has some influence on the decisions of the target (rather than a mere financial interest), the acquirer may be able to raise the prices of the target and recapture the sales itself, for its own gain.

Other concerns may arise where other potential investors are dissuaded from making investments in the target company because of the presence of the other minority shareholders. Similarly, the target company may be unable to take advantage of other competitive opportunities to merge with other companies as a result of the presence of a minority shareholder.

It is also worth noting that concerns are not necessarily limited to situations in which the acquirer and the target company are actual or potential competitors. Concerns may also arise if the activities of the two companies are vertically related. For example the existence of a minority shareholding may operate as a disincentive for the acquirer to integrate downwards (or upwards as the case may be). Additionally concerns over foreclosure may be raised. However, given that foreclosure theories of harm are relatively rare even in a full merger context, this may appear to be a much less significant concern that the context of minority shareholdings.


The issue surrounding the inability of the EUMR to address the acquisition of minority shareholdings was highlighted in the 2001 Green Paper on merger review, which said:

‘… with regard to minority shareholdings and strategic alliances, while acknowledging the potential structural effects of such transactions, the paper describes the difficulties in drawing borderlines with sufficient legal certainty’.

Currently, the EUMR only captures minority shareholdings if they involve a change of ‘control’ (defined in terms of decisive influence). To the extent a transaction is not caught by this, Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) may be relevant. However, it is generally accepted that there are limitations in the ability of Articles 101 and 102 TFEU to capture potentially anti-competitive minority stakes. Although they can be used in relation to information-sharing concerns, it does not seem as likely that they can assist (and neither can the EUMR) with the anti-competitive incentives derived from a non-controlling minority stake.

In November 2012, Commissioner Almunia raised two possible options to remedy this issue: either ‘a selective system in which the Commission identifies the cases 
that may raise specific problems’ or ‘a mandatory notification system of the kind in use today for mergers involving the acquisition of control’.2

The next stage will be seen if the European Commission (the Commission) embarks on a public consultation process. There are a number of possible approaches to the regulation of the acquisition of minority interests under the EUMR. These might be regulated only above a certain share level and/or where they concern existing or potential vertical relationships and/or concern transactions involving competitors. Notification might be mandatory as for existing acquisitions covered by the EUMR, or voluntary.

Observers note that the Commission will to be careful not to create an undue regulatory burden, given that the vast majority of minority shareholdings will not pose any concerns. It may be that the power to act ex post and only in cases that are most likely to be problematic with well-defined safe harbours (eg in terms of market shares and minority shareholdings) may strike the right balance.


Minority shareholdings under UK law

In the UK, a merger situation arises where two enterprises come under common control. UK law recognises three levels of control: a controlling interest (an acquisition of 50% or more of the shares), the ability to control policy (de facto control or the ability to assert decisive influence), and the ability materially to influence policy. Each move up to the next level of control may be considered a merger situation.

The criteria used by the Office of Fair Trading (OFT) and the CC for evaluating material influence include: the size of the voting shareholding (in itself and relative to other shareholdings), any special voting rights attached to the shares, attendance and voting at shareholder meetings, and the ability to block special resolutions. In addition, the number of board members each shareholder is able to nominate, and the standing or influence those members have on the board, are also significant to the assessment. Industry knowledge, standing of the acquirer in the sector, 
and any supply arrangements or other contracts between the two companies (including financial arrangements) are 
also relevant.

A shareholding having at least 25% of the votes is presumptive of material influence in the UK. However, such influence has in practice also found in cases of shareholdings below this level. In BSkyB/ITV3, based on the assessment of several factors, the CC found that a shareholding above 7.5% would enable BSkyB to block special resolutions of ITV. An acquisition of 17.9% in ITV by BSkyB was ordered to be reduced to a shareholding below 7.5%.

The Ryanair/Aer Lingus case

Ryanair/Aer Lingus is one of the most recent and high-profile cases concerning the acquisition of minority shareholdings. In 2007 the Commission blocked the first attempt by Ryanair to acquire all the shares in Aer Lingus, its closest competitor on the Irish market. In October 2010, the General Court upheld the Commission’s prohibition decision, while also deciding not to order the divestment of Ryanair’s 29.3% stake.

After having acquired 29.3% of Aer Lingus, Ryanair has, since 2007, been trying to acquire the remaining shares in that company. Although the merger has already been blocked twice by the Commission, Aer Lingus continues fighting in the UK courts to obtain divestment of Ryanair’s ‘hostile’ shareholding. Frustration at the Commission’s inability to deal with the minority shareholding held by Ryanair in Aer Lingus is rumoured to be one of the driving forces behind Commissioner’s Almunia’s determination to extend the scope of the EUMR to the acquisition of some minority shareholdings.

In January 2013, Ryanair’s second attempt to acquire Aer Lingus was blocked by 
the Commission and this decision is now under appeal.

Separately, in September 2010 the OFT commenced an investigation in the acquisition of the minority shareholding. In January 2011 Ryanair contested that the OFT was out of time to make a referral to the CC, but the Court of Appeal rejected this claim in May 2012.4 Similarly, the Competition Appeal Tribunal (CAT) rejected Ryanair’s appeal in August 20125, and the Supreme Court refused leave to appeal. The referral to the CC followed in June 2012, giving the CC a decision deadline of 11 July 2013 to rule on the acquisition of the minority shareholding.

On 30 May 20136, the CC provisionally concluded that Ryanair’s 29.82% shareholding did give it material influence over Aer Lingus’ commercial policy and strategy. After having assessed the market definition, overlaps and counterfactual scenario, the CC has provisionally found that Ryanair and Aer Lingus impose a strong competitive constraint on each other on overlap routes between Great Britain and Ireland. Further, they are likely to impose a competitive constraint (although less significant) on each other through the threat of entry on routes between Great Britain and Ireland on which the two airlines were not currently both active.

On most overlap corridors, Ryanair and Aer Lingus do not, largely, face a competitive constraint from any other airlines. However, the CC has taken the view that, without Ryanair’s shareholding, competition during the period since 2006 (or in the future) may have developed differently and may have been stronger. The CC notes that it is required to consider not only whether the transaction has, to date, led to a substantial lessening of competition (SLC), but also whether an SLC might be expected in the future.

The CC’s provisional conclusions were that:

  • The shareholding would be likely to be a significant impediment to Aer Lingus’ ability to become a more effective competitor by being acquired by, merging with or acquiring another airline, scale being important for airlines. It could also make it more difficult for it to attract a strategic minority shareholding. This was a factor to which the CC gave particular weight. A number of significant synergies would be likely to arise from a combination between Aer Lingus and another airline, over and above those that might arise via looser forms of co-operation. Given wider trends in the airline industry, the pressure on Aer Lingus’ cost base, and the need for additional scale to remain competitive, are likely to become stronger over time.
  • Ryanair’s ability to block a special resolution gives it influence over Aer Lingus’ ability to issue shares, and might hamper Aer Lingus’ ability to raise capital, particularly if it needed finance for an acquisition in the future.
  • Ryanair would be able to influence Aer Lingus’ ability to dispose of some of its Heathrow slots in order to optimise its slot portfolio. This could increase Aer Lingus’ costs and restrict its flexibility with regard to its network. Given the value and strategic importance of Aer Lingus’ Heathrow slots, there could be a significant impact on Aer Lingus arising from its reduced ability to optimise its slot portfolio.
  • Ryanair could influence Aer Lingus’ commercial strategy, under certain circumstances, by exercising the deciding vote in the context of an ordinary resolution.
  • Aer Lingus’ effectiveness as a competitor is not affected by Ryanair’s rights (as shareholder) to request information, to call EGMs or propose resolutions at AGMs.
  • Ryanair’s minority shareholding increased the likelihood of it mounting a full bid for Aer Lingus, which could significantly disrupt Aer Lingus’ commercial policy and strategy.
  • It is unlikely that Aer Lingus would compete less fiercely with Ryanair 
in order to avoid antagonising its 
largest shareholder either now or in 
the future.
  • Given the closeness of competition between Ryanair and Aer Lingus, Ryanair would have an incentive to use its influence to weaken Aer Lingus’ effectiveness.
  • Although Ryanair’s financial success is linked with that of Aer Lingus through the shareholding, it is unlikely that Ryanair would compete less strongly with Aer Lingus because of its financial interest. Ryanair’s acquisition of its minority shareholding was part of its overall strategy of acquiring the entirety of Aer Lingus.
  • It is unlikely Ryanair’s minority shareholding in Aer Lingus would 
lead to co-ordinated effects.

Compounding the CC’s concerns, it provisionally concluded that substantial entry on routes between Great Britain and the Republic of Ireland is unlikely due to: early morning capacity constraints at Dublin airport and some UK airports; the need to establish a well-known brand and base in Ireland; the relative unattractiveness of the Irish market; the potential for an aggressive response by existing operators; and the level of taxes and airport charges. In summary, it considers that entry or expansion by other airlines would be unlikely to offset any SLC.

The CC is considering the following options:

  • Full divestiture. This would remove any ownership link between Ryanair and Aer Lingus. It is likely to be an effective remedy to all aspects of the SLC provisionally identified.
  • Partial divestiture (such as to a level that would prevent Ryanair blocking a special resolution).
  • Behavioural remedies to accompany a partial divestiture (such as remedies regarding voting behaviour and the solicitation or acceptance of board representation, and potential restrictions on the ability to acquire further shares in the future).

Ryanair has said that if the CC’s final decision maintains this position, it will appeal to the CAT and, if necessary, the Court of Appeal.


In conclusion, it is apparent from the experience in the UK that there is a substantive issue to address with minority shareholdings. Final decisions made in the Ryanair case are likely to be decisive for the EU. In the meantime, many open questions remain. If there really is a gap in the enforcement, is an alternative process required or it is the Commission that has simply failed to use the existing mechanisms of Articles 101 and 102 TFEU? If the Commission decides to change the EUMR, how can the process ensure that the potential benefits do not outweigh the costs and what exactly would the scope of the legal amendments look like?

By Susan Hinchliffe, partner, 
Arnold & Porter (UK) LLP.



  1. Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings.
  1. Joaquin Almunia spoke at the Conference of Competition Policy, Law and Economics, Cernobbio, Italy, 2 November 2012.
  2. Final decisions by the Secretary of State for Business, Enterprise & Regulatory Reform 
on British Sky Broadcasting Group’s acquisition of a 17.9% shareholding in ITV plc 
dated 29 January 2008 and British Sky Broadcasting Group Plc v The Competition Commission [2010].
  3. Ryanair v Competition Commission [2012], judgment of 13 December 2012.
  4. Ryanair Holdings plc v Competition Commission [2012], judgment of 8 August 2012.
  5. Competition Commission’s Summary of Provisional Findings, of 30 May 2013.