The impact of the European Community's merger rules on transactions involving investments by private equity funds

The European Community Merger Regulation (?ECMR?) was introduced over a decade ago and was drafted primarily to monitor traditional mergers and acquisitions and to ensure that such concentrations did not create a dominant market position likely to operate to the detriment of competition in the Common Market.

Regardless of the difference between private equity investments and more traditional acquisitions by trade players, the ECMR rules apply to private equity transactions without distinction. This fact has been widely criticised. The Commission considered these criticisms in its Green Paper on the Review of the ECMR.

Reforming the EMCR
The merger review has drawn the Commission's attention to the significance of private equity, and the Green Paper considers private equity deals in two main categories: transaction investments and growth capital/technology investments. The difficulty is how to identify which type of transaction is occurring.

Transaction investments are considered similar to traditional mergers and acquisitions, and normally involve the takeover of established, quoted or private companies. The review does not believe that such investments should be assessed differently and it is unlikely there will be any reform in this area. However, growth capital/technology investments have been seen in a different light and considerable thought has gone into the scope for amending the filing requirements for such arrangements. It has been suggested that this type of private equity should be seen as equivalent to traditional loan facilities provided by banks. The main difference between these two methods of financing is that private equity investors hold the shares in the business and typically have veto rights over the target and as such satisfy the ?control test? for jurisdiction. Banks, on the other hand, tend to take security over the assets of the business and only on default will they gain controlling rights. Such arrangements at the outset do not constitute control for ECMR purposes.

The Green Paper considers whether competition concerns arise through such private equity investments. The Commission remains open to enlarging the scope of Article 3(5) which at present gives a very limited exemption from the requirement to file to financial institutions who temporarily acquire control before divesting to a third party. However, the Commission recognises the great difficulty in defining the scope of a specific exemption – after all, there is no ?typical? private equity investor and there is unlikely to be any fixed deadline for divesting.

In its comments on the scope and impact of such an exemption the Commission recognises that care must be taken to ensure that the parties would not be left having to file a number of domestic merger submissions (thereby defeating the EC objectives of creating a one-stop shop under the ECMR).

Significant work has been completed by our firm in advancing the interests of private equity investors and in attempts to convince the Commission that the present arrangements are overly burdensome and disproportionate. A major exponent of the need for reform of the ECMR as it relates to private equity investors is the EVCA. The key aims of any amendments should in their view be to:

1. Preserve and, where appropriate, expand the ?onestop shop? principle upon which the ECMR is founded;

2. Reduce the regulatory burden upon private equity providers who currently have to make notifications which are, in the EVCA's view, unnecessary given that the transactions concerned rarely raise any competition law concerns and the burden of notification often works favourably for trade purchasers;

3. Improve legal certainty for private equity providers by clarifying the application of the ECMR to typical private equity transactions.

In light of this, the EVCA has suggested a number of options, which it sees as beneficial to the private equity industry and to the Commission. In principle, the following options are not mutually exclusive and the EVCA envisages two or more options working in combination:

  • ? Option 1: to amend the concept of concentration, to exclude private equity transactions from the ECMR;
  • ? Option 2: to introduce a specific private equity block exemption ;
  • ? Option 3: to introduce a simplified procedure for private equity notifications;
  • ? Option 4: to introduce a limited voluntary notification scheme;
  • ? Option 5: to disapply the standstill provisions permitting deals to close before ECMR authorisation; and
  • ? Option 6: to permit the undertakings concerned to obtain prior clearance for contemplated transactions.
  • Conclusion
    It is clear that due to the significant increase in private equity investments since the introduction of the ECMR the current application of the ECMR to private equity transactions is inappropriate and needs reform. The Green Paper recognises in particular the fact that growth capital/technology investments present few competition concerns and that the current regime may be hindering competition by allowing other parties (such as trade purchasers) to take a competitive advantage from the suspensory notifications that private equity investors must currently make. It is therefore possible that the current Article 3(5) exception contained in the ECMR may be expanded to include private equity investors. However, there may be problems in doing this given the difficulties of defining the scope of such an exemption. The Commission has a difficult balancing job to complete between the interests of industry, the demands of the Member States and its fundamental objective of ensuring competition is maintained and that the common market is not adversely affected by mergers which may create dominant positions. Crucially at this point the Commission has recently reviewed and blocked a private equity investment. In CVC/Lenzing the Commission blocked the deal as a step too far in the expansion into the EEA-wide markets for three types of viscose and the worldwide market for the production and processing technology of lycocell.

    Whilst the Commission may seek a compromise in the upcoming reforms to remedy the disproportionate impact of the ECMR on growth capital/technology investments, one can be certain that any amendments will be drafted so as to retain jurisdiction over all other merger activities of private equity investors. The challenge is to identify a ?fix?. In the absence of such a fix the status quo will be relied upon and the ECMR will continue to apply to all private equity activities regardless of its appropriateness.

    Michael Bryceland is a senior assistant in the European Competition and Regulatory Group at Clifford Chance in London.