Golden Shares and Airtours Cases Chip Away at EU Merger Regime

Two European legal decisions issued in June may have given U.S. dealmakers an incentive to look beyond the sluggish domestic m&a market – hobbled by accounting scandals and low valuations. The rulings in both cases are steps toward the realization of one of the European Union’s underlying principles, namely that capital should move freely among the 15 member nations. Participants and observers have said that taken together the two decisions represent a thaw in the European m&a regulatory regime. This could open doors for U.S. acquirers because the E.U.’s power to derail deals has traditionally gone beyond that of the U.S. Federal Trade Commission or Department of Justice. The E.U. can kill takeovers outright, while in the U.S. regulators must prove their case in court. Hence, to Barry Hawk, a partner at Skadden Arps Slate Meagher & Flom, the decisions are significant. “This has to open things up.” Hawk also notes that the cases reflect an increasing convergence between E.U. and U.S. merger regimes. In the first case, the European Court of Justice, Europe’s highest legal body, held that the French government’s use of a golden share in Total Fina Elf SA, the oil group, was illegal. Golden shares are holdings with special voting rights held by governments in privatized companies. They allow governments to veto takeovers and other major decisions in companies in which they no longer hold majority stakes. The U.K. government, for example, has golden shares in 26 companies, including the operator of the Channel tunnel, the national electricity grid, and the national air traffic control system. The decision does allow golden shares in cases where the government can prove its national interests are at stake and where its ability to exercise special powers is strictly limited. And although the golden shares decision applies to a relatively small number of companies in each country, they tend to be large ones since they had, by definition, significant levels of government participation until privatized. “The golden shares decision won’t set off an immediate wave of m&a, but it does signal another liberalization of the takeover culture in Europe,” notes Vincent Brophy, an m&a lawyer in the Brussels office of law firm Linklaters & Alliance. “You can no longer merely rely on a golden share to protect a company from acquirers,” Hawk says. Brophy says that the next battle in the golden shares arena is likely to come over the definition of national interest and whether a government’s control of a company can be deemed vital to the country. “Most people would agree that there is a need to ensure a continued energy supply, but do you require veto power to ensure that?” The second decision handed down in June amounted to a stinging rebuke for E.U. competition authorities and was the first-ever reversal of an E.U. merger veto. The European Court of First Instance, its second-highest judicial body, threw out the E.U. competition commission’s 1999 veto of Airtours PLC’s $1.3 billion bid for First Choice Holidays PLC. It found that regulators failed to prove that the deal would have “adverse effects” on the travel market. The companies have said they would not attempt to revive the deal. The court, using unusually blunt language, said that the European Commission’s rejection of the combination of the tour providers was “vitiated by a series of errors of assessment as to factors fundamental” to the decision. (The E.C. is the executive arm of the E.U.) The 67-page decision changes the playing field for E.C. objections to future mergers, considerably strengthening the burden of proof needed to knock down a merger on the basis of so-called “collective dominance,” which holds that companies will act like monopolies when two or more of them start to dominate a market. The decision is seen as a defeat for Competition Commissioner Mario Monti, who has been criticized in Europe and America for being too tough on takeovers. It was Monti who turned thumbs down on General Electric Co.’s $47 billion bid for Honeywell International Inc. last year after the deal had been approved by U.S. antitrust authorities. Monti said in a statement that “these cases will have far reaching implications for the creation of a single market for corporate control and for various aspects of competition policy, such as mergers and liberalization.” Another view of the effect of the Airtours decision on the European merger climate comes from Malcolm Nicholson, a partner at the London law firm of Slaughter & May, which represented Airtours. He says that the ruling will restrict the scope of action by the merger task force and will assist some borderline deals in getting approval. “After the Airtours decision, there will be fewer deals challenged because regulators will realize that they can’t carry the burden of proof if it is a close call,” he states. Nicholson cautions that the case should not be construed as a wholesale restructuring of E.C. merger policy. From an American practitioner’s perspective, Hawk says that the two decisions will certainly be factored into an ongoing effort to establish a Europe-wide takeover code. A previous effort to create an E.U.-wide merger framework collapsed in the face of opposition from German corporate interests. New guidelines, over 10 years in the making, are due in August. Hawk suggests that an appreciation of the political struggles over future E.U. merger policy was not absent from the Airtours decision. “The judges read the newspapers too,” he notes. “They sent a signal that even if it takes three years, we can adequately review a decision.”