On 5 April 2019, the UK Competition and Markets Authority ("CMA") unconditionally cleared the proposed acquisition by RWE of a 16.67% stake in E.ON. The CMA found it had jurisdiction to review the transaction as RWE would have the ability materially to influence the policy of E.ON, as it would be the largest single shareholder by far and had status and expertise in the energy sector that could be used to influence other shareholders.
| what you need to know - key takeaways |
- UK merger control can apply when a company acquires material influence over another company's policy in the market. This is lower than the threshold of legal or de facto control in most jurisdictions.
- No single factor is used to assess material influence. A case-by-case analysis of the overall relationship between the acquirer and the target is required.
- Shareholdings of over 25% are likely to confer material influence as the shareholder can block a special resolution (which requires the approval of 75% of the shares).
- There is no presumption of material influence for shareholdings below 25%, but the CMA may assess potential material influence of shareholdings of over 15%, and exceptionally shareholdings of less than 15%.
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On 25 February 2019, CMA opened a merger inquiry into the proposed acquisition by RWE AG of a 16.67% stake in E.ON, which was part of a share and asset swap transaction between the Parties. The merger was cleared unconditionally at Phase 1 on 5 April 2019.
RWE and E.ON are both DAX-listed German energy companies. The rationale for the wider transaction was to enable RWE to focus on energy generation and E.ON to focus on energy distribution networks, retail supply of energy and customer solutions.
The turnover test for UK merger control was met, as E.ON had UK turnover exceeding £70m. However, the parties argued that the CMA did not have jurisdiction to examine the acquisition of the 16.67% stake, as it would not give RWE the ability to exercise material influence over E.ON. The Parties explained that:
- the minority shareholding was intended as a purely financial investment;
- the parties had entered a long-term Investor Relationship Agreement, which would limit RWE's ability to exercise material influence; and
- RWE's expertise and status in the sector would not lead to RWE having 'soft' influence over other shareholders to the extent that RWE acquired a blocking stake.
The CMA considered that a minority stake would give RWE the ability to exercise material influence on E.ON, as:
- RWE's stake would be more than twice that of the next largest shareholder;
- RWE could use its respected position and expertise in the energy sector to influence shareholders and/or affect policy formulation. E.ON's other shareholders were institutional investors with investments in utility firms, but lacked expertise and active involvement in the industry. RWE's views would be of particular interest to these other shareholders and could influence policies that required a special resolution, even if RWE could not itself block such a resolution; and
- the undertakings in the Investor Relationship Agreement would not prevent RWE from using its industry knowledge to influence voting of shareholders and affect policy formulation through meetings and discussions with shareholders.
Nevertheless, the transaction was ultimately cleared by the CMA because the swap transactions led to there being little horizontal overlap and the parties also had insufficient market shares in the upstream generation and downstream supply markets to raise vertical competition concerns.
Previous examples of material influence at low levels of shareholding
This case is a reminder that material influence can arise at relatively low levels of shareholding. There are a number of previous cases where material influence has been identified at low levels of shareholding, including:
- First Milk/Robert Wiseman (April 2005) - a 15% shareholding combined with the right to nominate one non-executive director to the board. The director would be the most experienced of the directors in raw milk procurement and it was concluded that his views would be accorded particular weight by the rest of the board.
- BSkyB/ITV (December 2007) – a shareholding of 17.9%. BSkyB would be the largest shareholder by a large margin and would in practice be able to block a special resolution or a scheme of arrangement. BSkyB's industry knowledge and standing could also influence other shareholders and might deter ITV from pursuing certain strategies.
- Centrica/Lake Acquisitions (August 2009) – a 20% shareholding combined with the power to veto non-strategic decisions and board representation.
- Scottish Radio/Kingdom FM (March 2002) – a 22.5% shareholding with no entitlement to appoint a director to the board or hold any special voting rights. It was found that Scottish Radio's expertise in the sector could enable it to convince other shareholders to follow a certain strategy.
- JCDecaux Concourse Initiatives and Media Initiatives (March 2012) – an agreement which provided JCDecaux with certain rights over the running of Concourse, including the right to appoint two out of three directors to the board and the ability to impose restrictions on Concourse's autonomy to carry out its business activities.
With thanks to Sophie Taylor of Ashurst for her contribution
