Merger Trigger

Undertakings Covered

Undertakings for the purpose of competition and merger law, cover bodies which are not necessarily profit-making. Provided they operate for gain, they constitute undertakings for the purpose of the legislation.

Many bodies in the public sector will be undertakings. Certain activities which appear to have minimal commercial aspects may be deemed to be undertakings.

Public bodies which are engaged in regulatory and administrative functions only are not undertakings under the legislation. Accordingly, government departments and regulatory agencies which do not operate for gain are unlikely to be undertakings.

Acquisition of Control I

The criteria for determining whether mergers legislation applies, is the acquisition of control.  Control may take a number of forms.  It may arise through the use of shareholdings or the control of assets.  Control may arise by other means, including through various means of effective economic dependence.

Control may be on a contractual or shareholding basis.  Control implies management of the resources of the undertaking.  A contract must be for an indefinite or at least a prolonged period without the prospect of early termination.

The mergers provision apply to the acquisition of direct or indirect control over the whole or part of one or more undertakings by one or more individuals and other undertakings who control one or more undertakings.

Generally, financial arrangements involving purchase and lease or sale back will not normally constitute a change of control.  Most franchise agreements will not give sufficient control to the franchisor over the franchisee\’s business.  Investment funds may acquire control, notwithstanding that they do not intend to actively trade.

Acquisition of Control II

The acquisition of direct or indirect control is covered.  The transfer of the goodwill of a business or client base may constitute a transfer of control.  The licensing of brands, copyright and goodwill may constitute a change of control.

A change of control may arise by way of outsourcing a service or function.  The outsourced service supplier may take over certain activities which were previously provided internally.  The Commission has taken the view that if the assets transferred do not allow the development of a market presence and the service is provided to the outsourcing customer exclusively, the arrangement may be viewed as a servicing agreement only.

A merger or acquisition is deemed to take place where one undertaking acquires the assets and goodwill of another or is in a position to replace the transferor in a business that it undertook prior to the transfer. There may be an acquisition of all the business assets or of a substantial part only for this purpose. There may be a transfer of a particular undertaking within the transferor only.

The acquisition of sole control may arise where an entity acquires the majority of the voting rights of a company.  However, the particular shareholding structure may be such that the acquisition of the relevant shareholding is not enough to exercise decisive control exclusively.  In other cases, the acquisition of much less than the majority of shares may be sufficient.

A change may occur where there has been an increase in shareholding from a minority to a majority holding. Control may be acquired by a minority shareholder on an effective basis.  This may arise in particular where the other shareholders are relatively small and may not be present, represented or organised at corporate meetings.

An option to acquire shares will not generally be enough, as it will not generally carry the right to exercise control.  In certain circumstances, it may lead to the actual effective exercise of control, in which case, there will be an acquisition or merger. An acquisition of control may take place in a series of linked or related transactions.  They may take place in unlinked cumulative transactions.

Joint Control

Joint control may arise by way of a legal change, such as the acquisition of shares, assets or undertaking. It may arise on an effective basis, where entities acquire the ability to exercise decisive influence over a business.  Joint control may arise through a joint venture or other shareholder’s agreement or arrangement.

Joint control may be by way of a positive right or a right of veto.  A power of veto may be sufficient to give control in some circumstances.  A decisive influence may be exercised by the acquisition of a minority shareholding, together with rights which give powers of veto and indirect control.  Control may arise through rights to appoint senior management and directors.  It will depend on the overall context as to whether this is sufficient to constitute the exercise of a dominant influence.

Parties may acquire control jointly, either through a legally binding joint venture or shareholders agreement or on a de facto basis.  Joint control may arise where there are strong common interests between minority shareholders. This may arise where there is mutual dependence.  Joint control may be based on a common interest or interests.

Joint Venture

The fact that one joint venturer has superior knowledge and the other plays a very modest role only does not preclude the possibility of joint control.  Even if one does not play any role in management, its presence may be motivated by long-term financial and strategic considerations.  Joint control is less likely where one party has a casting vote or has the ability to have an ultimate say in the decision-making process.

A change in control in respect of a number of entities who act jointly, from joint to exclusive control, is sufficient to be a merger or acquisition.  There has been a change in the identity of the party /parties who may exercise decisive influence.

The change from joint to sole control is sufficient to require a merger notification.  The addition of a further shareholder may be notifiable, notwithstanding that the business remains jointly controlled before and afterwards if one or more of the shareholders acquire sole or joint control by reason of the addition.

Full Function and Limited JVs

The creation of a joint venture to perform on an indefinite basis, all the functions of an autonomous economic entity is a merger.  Cooperative joint ventures are scrutinised under general competition law in relation to anti-competitive practices and abuses of a dominant position.  Full-function joint ventures are considered under mergers provisions.

In order to be a full function joint venture, it must have sufficient functions to enable it to operate itself in the relevant market.  It must have sufficient management, physical and other resources to undertake the business the subject of the joint venture on an indefinite basis.  If it takes over one function only without an independent presence on the market, it is not a full function joint venture.

Joint ventures undertaking production, R&D and other limited functions are not full function joint ventures.  Joint ventures which are for the purpose of holding assets or which are created for tax and financial reasons are unlikely to be full function joint ventures.

The fact that sales, particularly in the early phases are to a parent does not necessarily, negate full functionality.   This may be necessary in a start up in order to establish a joint venture in the market.  Full functionality generally requires more than 50% of turnover from third parties in the longer run.

If the entity by itself is set up to play a role in the market and is economically autonomous from an operational perspective, then it is fully functional..  In principle, the joint venture must supply goods and services to the entity that is prepared to pay the most in the market. If it does not,  it will be considered case-by-case, whether it has sufficient functionality and commercial independence.

An outsourcing joint venture which provides services to the establishing undertaking only and is dependent on it for services, it is unlikely to be a full function joint venture.  If, however, it is established for the purpose of significant market access, it may be regarded as a full function, provided that significant third-party sales emerge and it deals with its parents on an arms-length basis.

The joint venture should be intended to operate on an indefinite basis.  The fact that there may be provision for termination will not necessarily negate this intention provided it is capable of enduring for a sufficiently long period and there is a sufficient prospect of indefinite duration. In contrast, a joint venture for a limited period or a particular project is less likely to constitute a merger. It may raise other competition issues in terms of anti-competitive practices and arrangements and potential abuses of a dominant position.

EU Mergers

The criteria are similar under the EU mergers legislation.  Concentration involves a lasting change in the control of undertakings.  A shareholder may gain decisive influence by being able to bring decision-making to a deadlock.  This may be sufficient decisive influence.

Generally, more than 50% of voting rights are required in order to obtain decisive influence.  Where a shareholder’s agreement provides that key strategy decisions require a certain higher majority, acquisition of the majority shareholding may not suffice to acquire decisive influence.

A change from joint to sole control is deemed a merger because there is a change in the entities which may exercise decisive influence.  This may occur where a minority shareholder even if 50% shareholder, acquires complete control. Joint control arises where two or more undertakings have the possibility of exercising decisive influence over an undertaking.  It may arise where one entity has the right to veto strategic decisions.

EU Joint Control

Joint controls may exist between two equal joint ventures.  There need not necessarily be a formal agreement.  Control may also exist where two parties are required to make strategic decisions.  A joint interest in effect may be found in effect in a range of circumstances.  It may arise from a commonality of interest.  There may be no stable majority in the decision-making procedure, in which event, there will not be joint control.  A casting vote is generally inconsistent with joint control.  The decisive control must be sufficiently enduring.

A change in the nature of control may take place where there ceases to be joint control.  This may occur where there is an increase in the number of shareholders, thereby changing the balance of power.  Mere changes in the amount of shareholding, without a change of power, will not constitute a change of control. There may be a change in the nature of control if one or more new controlling shareholders enter or there is a reduction in the number of controlling shareholders.

A change from sole to joint control may be notifiable.  A change in the identity of one of the joint controllers or the addition of a joint controller may constitute a change in decisive influence and be accordingly notifiable.  The entry of new shareholders may amount to a change in decisive control if one or several shareholders acquire sole or joint control by reason of the change in shareholdings.

Exempt Mergers.

Certain categories of mergers are exempt from notification, notwithstanding that there is an acquisition of a dominant influence.  There is no merger by reason of a receiver or liquidator taking control of a business on enforcement or on formal insolvency.  The disposal of the business assets by the liquidator or receiver is subject to merger control.

There is an exemption where control arises from arrangements within groups of companies.  There is no merger or acquisition where all of the undertakings involved are directly or indirectly under the control of the same undertaking. The group exemption applies to both direct and indirect control in the above sense.

Similarly, there is an exemption for internal restructuring in the context of the EU Regulation on Merger Control / Concentrations.

The transfer of control arising on the death of a business owner, whether under a will, intestacy or by a survivor of a joint tenancy, is not a notifiable merger.

The Irish mergers control legislation does not apply to mergers which are within the scope of the EU Concentrations directive.

There are similar exemptions from the EU Concentrations directive.

Securities Exemptions I

There is an exemption for the acquisition by securities-based companies in the course of their business as holders and dealers in securities. This may be for their own account or an account of others. They must be undertaken in the context of that business and be held for a temporary period only.

The acquiring entity must be a credit institution or other financial services institution which carries on this type of activity. The securities must be acquired with a view to resale. Control must not be exercised over the company with a view to determining its strategic commercial behaviour.

Control may be exercised only for the purpose of preparation for a sale or the disposal of its assets or undertaking. There must be a disposal within one year, at least to a level whereby it is no longer in control.

The EU legislation exempts acquisitions of control by receivers and liquidators and equivalent office holders.

Securities Exemptions II

There is an exemption where control is acquired by an entity whose business is dealing in securities for its own account or on account of others. The control concerned must be acquired on a temporary basis pending arranging from the disposal, within a period, of all or part of the undertaking or its assets.

It must not be for the purpose of determining the manner in which activities are carried on by the entity concerned.  The period is to be less than one year from the date on which control is acquired.  Where the undertaking shows that it is not reasonably possible to dispose of the securities or assets concerned within one year, the Authority may allow a longer period of exemption.

The above provision is quite wide in scope. It may be used in the context of a wide variety of holdings. It may be, for example, used by an investment bank which acts in the disposal of securities. It may allow a temporary acquisition through an intermediary without obtaining mergers consent. The requirement for consent will arise on the acquisition from the intermediary.

Securities Holding Exemptions

There are other exemptions for financial holding entities which acquire securities and other interests without indirectly or directly becoming involved in management. It must be possible for a judicial or administrative authority to supervise compliance with these conditions.

Voting rights may be exercised only to maintain the value of the investment. They must not directly or indirectly determine the commercial conduct of the undertaking.

The exemption is limited in scope. It relates to the acquisition of shares and securities only. It does not apply if the transaction is part of a larger arrangement constituting a single merger in its own right, which is not exempted.