Mind the (Ryanair) gap

There is a strong case for the EU to be able to assess minority stakeholders’ impact on competition

The European Commission and the European Court of Justice have been involved in a long saga of legal cases involving the Irish low-cost carrier, Ryanair and its Irish rival, Aer Lingus. Most recently, in February, the European Commission’s directorate-general for competition blocked Ryanair’s third hostile bid for Aer Lingus. Then, at the end of August, there was news from London that the UK Competition Commission has required Ryanair to sell most of its shares in Aer Lingus. Why are the UK competition authorities involved?

In not quite those words, that is the question which the European Commission’s directorate-general for competition has asked in a consultation entitled “Towards more effective EU merger control”. Ryanair’s near-30% shareholding in Aer Lingus features in the introduction, as an example of a situation that the European Commission was unable to address under existing European Union rules. Ryanair bid for Aer Lingus in 2006, buying an initial stake in support of the public offer. The Commission blocked the bid in 2007, but determined that existing European Union rules prevented it from addressing Ryanair’s residual minority stake, because by itself that stake did not confer control of Aer Lingus.

Enter the UK authorities, after the EU’s General Court had upheld the Commission’s position. Routes between Great Britain and the island of Ireland are an important part of the overlap between the rival carriers. And in the UK, as in Germany and Austria, competition laws allow the review of minority stakes. In the UK, there is review of ‘material influence’ falling short of full control; Germany and Austria examine 25% stakes, and Germany also looks at any ‘competitively significant influence’. At the birth of the EU merger review in 1989, the decision was consciously taken to limit scrutiny to cases of full control. More than 20 years on, the Commission is now asking for views on whether it, too, should be able to deal with lesser forms of influence.

The UK Competition Commission’s report certainly suggests good reason why the EU should have had the power to deal with Ryanair’s shareholding from the very beginning. It found that “there is a tension between Ryanair’s position as a competitor and its position as Aer Lingus’ largest shareholder,” and that “Ryanair has an incentive to weaken its rival’s effectiveness as a competitor”. “Ryanair’s minority shareholding affects Aer Lingus’ commercial policy and strategy in various ways that could be crucial to Aer Lingus’ future as a competitive airline,” it said. It has required Ryanair to reduce its stake to 5% (Ryanair will now appeal against the ruling).

Hard cases make bad law, as the old saying goes. This has certainly been a hard case for Aer Lingus, but is it sufficient reason for a general extension of EU powers? In fact, the case is very far from unique. Minority shareholdings have often been problematic. BSkyB was forced to sell down an 18% holding in its rival ITV a few years ago. And the UK’s law was famously used in 1988 to dislodge Kuwait’s sovereign-wealth fund when it took advantage of a stock exchange crash to grab 22% of its rival BP. And had the situation been between US companies, Ryanair would never have been able to buy more than $70 million (€52m) worth of securities without advance permission.

Most minority shareholdings are, of course, acquired by consent, and often underpin a productive commercial relationship, such as exists between a supplier and customer. The Commission will be looking, in its reforms, to find the happy balance by which it can deal with problem cases, without imposing a whole additional burden of work – on itself, or on industry. The current trend in the debate is that companies should have the right to notify minority shareholdings to the Commission for clearance (unlike their obligation to notify full mergers), but that the Commission should have the power to act regardless of notification. Knowing that the authorities have the power to intervene has worked well enough, in the UK, allowing industry to decide for itself when to stop and check, and when to press ahead regardless.

Alec Burnside is the managing partner of Cadwalader, Wickersham & Taft LLP, Brussels office. He has been counsel to Aer Lingus since 2006.

Click Here: Golf special