European Union: Privatizations: Substantive and Procedural Implications Under EU Competition Law

Last Updated: 10 June 2012
Article by Kiran S. Desai and Margarita Peristeraki

Originally published Spring/Summer 2012

Keywords: Privatizations, Implications, EU Competition Law, consumers, economic growth,=

The term "privatization" refers to the sale of a state-owned business to private investors. In the 1980s and 1990s, there was a wave of privatizations in the European Union. Although views are divided as to whether these privatizations helped the economies of the respective countries, it is commonly accepted that they gave rise to a number of efficiency gains for consumers, such as lower prices, innovation and better sector regulation.

Recently, privatizations have come back into the spotlight following announcement of Greece's controversial privatization program, under which the nation is expecting to raise EUR 50 billion from the sale of state assets in order to fund its sovereign debt and to fuel domestic economic growth.

Privatizations are complex transactions involving an array of legal disciplines that need to be coordinated in a timely, orderly and efficient manner in order to achieve the desired end result. This article focuses on the most important privatization issues that are likely to arise under EU competition law and that both states and private investors should keep in mind.

Preliminary Remarks

Privatizations are driven by political decisions that are generally based on financial or policy considerations. For example, the state may wish to reduce spending by saving on maintenance and operational costs of the business, or to improve and modernize services by introducing new investors. In cases of state-owned monopolies, moreover, the state may decide to open and liberalize the relevant sector to competition in order to collect profits from the sale of the business.

Privatization of a state business can have a dramatic impact on the state's social and economic structures if not done appropriately. For example, in the United Kingdom, where privatizations were a crucial element of Prime Minister Margaret Thatcher's government, it was later accepted that privatization of the railway sector was badly done and was criticized by commentators as a disaster. In part, this was because the structure of the government's privatization efforts did not take into consideration the highly complex nature of the business, and the UK government was later accused of having the sole objective of privatizing the sector at all costs.

There are several elements that will shape the current privatization process. First, the objectives pursued by the state will determine the structure of the privatization. For example, the state may wish to sell the business but may want to retain ownership or some degree of post-privatization control. It may wish to put the business into the hands of one or more strategic investors, or to limit foreign ownership or control over it. The state may also want to keep the business as a single entity or to restructure or split it up.

Second, the nature of the business can also have an impact on the privatization strategy. For example, certain limitations on the state's agreement with the buyer may be imposed, depending upon elements such as the position of the business on the market (e.g., it may be a monopoly provider), whether the business holds special or exclusive rights, or whether it is considered an essential facility or a service of general economic interest.

The objectives and the nature of the business will determine the substantive assessment of the privatization under EU competition law and, consequently, the relevant process. Substantive and process issues under competition law will be considered under the EU's merger control regime, state aid frameworks and the overall rules for anti-competitive agreements.

The procedural complications of privatization under EU competition law consist mostly of timing issues and of the implications of any conditions agreed upon between the state and the buyer. Furthermore, if a transaction is implemented in breach of EU competition law, this may later bring heavy fines and may also render the relevant agreements unenforceable.

Merger Control Rules

Under EU merger regulation rules (EUMR), authorization is required prior to completion of the privatizing transaction. If a transaction does not meet the EUMR thresholds, it may have to be assessed by the competent authorities under the national laws of each country in which the parties have activities. Authorization will be granted only if a transaction "would not significantly impede effective competition" in the European Union, "in particular as a result of the creation or strengthening of a dominant position."

Privatizations are treated as transactions between private parties. They can take many forms and fall under the EUMR as long as there is a lasting change of control of the privatized business and certain turnover thresholds are satisfied.

The concept of control under the EUMR encompasses the "possibility of exercising decisive influence" over the business's activities, even without this possibility actually being realized. In the context of privatizations, decisive influence can be exercised by the prospective buyer over all or part of the privatized business on the basis of rights, contracts or other means and can be exercised by one (sole control) or more (joint control) entities. For joint control to exist after the transaction, there must be an agreement between the state and the buyer(s) on the strategic decisions of the privatized business, and the state must have a real possibility of contesting decisions taken by the buyer(s). If the state merely retains a minority shareholding with a view to exercise its prerogatives not as a shareholder but as a public authority in order to protect the public interest (i.e., "golden shares"), then the state will not be deemed to exercise joint control over the privatized business.

The change of control over a state business can be effected in one or more successive stages. It is often the case that the state will gradually transfer minority stakes to the buyer(s) prior to transferring all or part of its control over the privatized business. In such cases, it is important to determine the point at which the change of control occurs, since control can also be conferred by the acquisition of a minority shareholding, provided there are specific rights attached to it.

In terms of substantive analysis, it is often the case that privatized entities have the position of a legal monopoly or hold a dominant position on the market as a result of special or exclusive rights granted to them by the state. Under the EUMR, such cases call for special attention because of the possibly adverse effects they may have on the market. The substantive assessment in such instances will require that the privatization of such entities is accompanied by liberalization of the markets in order to avoid the replacement of a public monopoly with a private one. Competition concerns in such cases could also mean that the state should break up the business under privatization. Such remedies can be either considered voluntarily by the parties or imposed by the European Commission (Commission) in the form of structural remedies (e.g., divestments).

State Aid Rules

Privatizations often give rise to state aid concerns, mostly because of the inevitable involvement of the state in the process. EU competition law prohibits "any aid granted by the Member States or through State resources, in any form whatsoever, which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods" and that affects or is likely to affect trade between EU Member States.

It follows that for a measure to qualify as state aid under EU competition law, it must be financed from state resources. The form in which the aid is granted is not important. It can be a positive contribution (e.g., a direct grant) from the state to an individual operator, or it may take the form of a failure by the state to receive payment to which it is entitled (e.g., sale of a state asset at a lower-than-market price). In the latter case, the state foregoes revenues to the benefit of the buyer.

It is also necessary that the state aid confers an economic advantage to the beneficiary of the aid (e.g., in a privatization, this would be either the business to be privatized or the buyer) that could not have been obtained under normal market conditions. Also, state aid can only be found where the advantage grantedis selective; that is, the aid is attributed to a single operator or a distinct group of operators, as opposed to other similar or competing operators. Such measures can lead to unlawful discrimination between operators. Finally, a thorough competitive assessment needs to be undertaken to determine whether the state aid distorts competition in the European Union.

EU Member States are obliged to notify the Commission of their plans to grant state aid. The Commission will first examine whether there is state aid, and if so, whether such aid distorts competition in the European Union. If an instance of state aid is found to be unlawful, then the Member State will be ordered not to implement the aid. State aid will also be deemed unlawful if it is implemented without prior authorization by the Commission (save in cases where an exemption applies). In such cases, the state will be ordered to recover the aid from the beneficiary (i.e., the privatized business or the buyer), with the political, financial and practical difficulties this usually implies. The procedure before the Commission may take several years to complete.

In terms of substance, if the state, in granting its resources, behaves in accordance with the conduct expected of a rational private investor, then there is no state aid involved (the "market economy investor" principle). This is because the state aid requires an advantage to the beneficiary, and the fact that the same resources could have been obtained through normal market conditions suggests the absence of such advantage.

It is also understood that when the privatisation of a state business is effected by the sale of shares on the stock exchange, the privatization is generally assumed to be shaped by market conditions and not to involve aid. However, if the privatization takes place by means of a trade sale (i.e., by sale of the business as a whole or in parts to other companies), the following conditions should be cumulatively met:

  • A competitive tender (procurement) that is open to all interested parties must be held.
  • The tender process must be transparent and unconditional.
  • Bidders must be given enough time and information to carry out a proper valuation of the assets as the basis for their bids.
  • The company must be sold to the highest bidder.

If these conditions are met, then it is presumed that no state aid is involved in the privatization process and no notification to the Commission will be required. Conversely, state aid implications are likely—and a notification to the Commission will be required—if the state sells the business after negotiations with a single buyer or a number of selected buyers, even if the state and/or the buyer obtain independent expert evaluations of the business being privatized to set the correct price (the Commission considers these valuations only as second-best indicators of the market price of a privatized business). Similarly, concerns will arise when the sale is preceded by the writing-off of debt of the privatized business to the state; by the conversion of such debt into equity or capital increases; or when a sale is achieved under conditions that would not be customary in comparable situations between private parties.

Furthermore, the state may seek to impose non-economic conditions on the buyer (e.g., related to industrial policy considerations, employment requirements, maintenance of production targets or regional development objectives) that a private seller would not normally consider. Under state aid rules, such conditions are prohibited. More precisely, it is considered that such conditions are capable of distorting the competitive environment of the tender by leading to a tender process with fewer bidders and/or a lower sale price. This, in its turn, can cause the state to lose privatization revenue. In such cases, the Commission will likely find that there is state aid involved, conferring an advantage not to the buyer but to the privatized business. The aid to be recovered (if the privatization process is already completed) is calculated as the difference between the market value of the business and the price paid by the buyer to the state. Hence the privatized entity (and, consequently, the buyer after completion of the sale) will have to pay back the part of the aid that is deemed unlawful.

The state, moreover, cannot agree to liability clauses that, in case an unlawful instance of state aid is found, will allow the buyer to avoid repaying the aid to the state. However, where state aid has been authorized by the Commission, such a clause is permissible to protect the buyer in the event that the initial Commission decision approving the aid is overturned by the European Court of Justice. Consequently, the buyer must conduct comprehensive due diligence of the privatized business to determine whether there exists any state aid that might expose the buyer to risk.

Other Competition Law Considerations Applicable to the Privatized Business

Competition law prohibits agreements between independent entities that have as their object or effect the restriction of competition in the European Union. Similarly, it also prohibits entities that hold a dominant position on the market from abusing such position. Both these restrictions are relevant to the privatization process, which may involve long-term concession agreements or other commercial arrangements between the parties

Such concerns, although they will not impede the completion of the privatization process, may lead to an investigation by the Commission or by a national competition authority. Any agreement found to be anticompetitive is unenforceable, and any detected abuses will be stopped. Significant fines may also be imposed on competition law violators by the competent authority.

In the context of a privatization, for example, a state may agree with a buyer on specific commercial arrangements, such as an exclusive concession for several years. If the Commission determines that the concession is anticompetitive, then it may order the parties to reduce its duration, require that the exclusive character of the arrangement be curtailed in scope, or demand that the whole arrangement be abandoned. Such a decision will influence the buyer's interest in the business and, may also limit the value of the business from the buyer's perspective.

Another concern arises when a business is restructured and sold separately to multiple buyers. Following privatization, these new businesses must operate independently on the market and must maintain arm's-length relationships with one another. That may not be obvious, however, since these new businesses previously formed a single entity and shared a common corporate culture. In this case, the potential for information exchanges among the post-privatized businesses may give rise to concerns of collusion and other anticompetitive conduct.

Finally, if the privatized business can be deemed to be dominant on the market, then the state and the buyer should reconsider any special or exclusive rights granted to it, if these can be found capable of excluding competitors or exploiting customers. Furthermore, if the privatized entity is considered an essential facility, then access rights to third parties may also need to be considered. Failure to do so creates the risk of abuse of dominance, thus forcing the buyer to make major changes to the business and negatively affecting its value.

Conclusion

Privatizations are, in general, considered beneficial for the markets and consumers. However, due to their particular characteristics, they may also easily lead to situations where competition is significantly restricted. Competition law constitutes an important tool to ensure that the privatization will serve its beneficial role and secure consumer welfare. Competition law implications should not be underestimated, because they can lead to serious impediments to the completion of the agreed transaction in terms of timing and substance. Such complications may also mean that the expectations set prior to the privatization for both the state and the buyer cannot be met. Therefore, the parties should diligently ensure that all aspects of competition law are duly considered in advance.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2012. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.