European merger rules

Europe's anti-trust laws have become an increasing headache for private equity firms. Guest comment from SJ Berwin.

Calls for reform of Europe's anti-trust laws have been getting louder in recent years, and last year was a particularly controversial one for Mario Monti – the European Competition Commissioner – and his Merger Task Force. But it is not just industrial giants who find the rules problematic: as private equity portfolios have continued to grow, those rules have become an increasing headache for fund managers.

The problems are on two main fronts. First, the competition law implications of any sizeable buyout are a vital part of the due diligence process. An assessment is needed of the immediate competition law implications of the deal itself, and of the ability to make acquisitions in future – and there are examples of private equity houses being required to divest certain parts of target groups to allay competition concerns. At this level, the impact of European competition law is legitimate. The only real grounds for complaint are those shared by all those acquiring businesses in Europe, which is not to deny that those complaints are important and manifold.

However, there is a second concern which is peculiar to private equity investors. The fundamental problem is that the structure of European competition law, and particularly the assumptions which are made about the level of control exercised by various entities within groups, are not designed with private equity in mind – and an application of the rules to many venture capital and buyout transactions can lead to an obligation to notify and await clearance for a deal, when it ought to be obvious that no competition law issues are raised by the proposed transaction. In some cases (where a syndicate of investors is involved), a tiny venture capital investment can be caught by the rules.

At the end of last year, the European Commission published a wide ranging discussion document on its merger rules. That document has been criticised for not being radical enough in many areas, but it should open an important dialogue on many fundamental issues. However, the document is significant for the private equity industry in particular, in that it acknowledges the existence of, and (cautiously) acknowledges the validity of, their particular concern. This is welcome, and is in no small measure a result of concerted lobbying by, among others, the European Private Equity and Venture Capital Association.

That said, there is much to be done before the industry's concerns will have been dealt with. The Commission's document identifies various difficulties of defining the scope of venture capital transactions which should be outside the notification and clearance rules, and highlights the problem that national competition laws can also create difficulties for fund managers. They are proposing an extension of the simplified notification procedure, which they say might alleviate some of the delay and expense, and they are inviting comments on how an existing exemption for financial institutions can be enlarged to cover what they call 'growth capital/technology investments'. The industry should – and will – respond to this request, and tackle some apparent misunderstandings of the precise nature of the problem which emerge from the paper.

Getting the issue on to the Task Force's (packed) agenda is, however, a very positive step in the right direction.

SJ Berwin is a European law firm with a particular focus on private equity. The above comment is taken from the firm's weekly e-bulletin, Private Equity Comment, which provides commentary on legal and tax developments which affect the European private equity community. For comment or to subscribe to these bulletins, please email