United States: The (Unexpectedly) Long Reach of Foreign Merger Control Laws

Background

In any transaction, buyers and sellers have much to consider, including pricing, structure and other material terms, such as regulatory approvals and filings. If you own assets outside the United States, however, you may also need to consider one of many far-reaching foreign merger control laws that can complicate, delay, and in some cases prohibit a proposed transaction.

Among these foreign merger control laws and required regulatory approvals are:

  1. the EU Merger Regulation ("EUMR"), which requires prior notification to, and approval of the European Commission with respect to transactions including mergers, acquisitions and certain joint ventures (whether or not the transaction in question has anything to do with the EU),
  2. the Competition Commission of the Common Market for Eastern and Southern Africa ("COMESA"), a group of 19 African member states with a regional competition policy and a supra-national merger control regime, and
  3. the Anti-monopoly Law of the People's Republic of China, issued and enforced by the Chinese Ministry of Commerce.

Given that there are many other countries with similar laws and approval requirements, such laws and required approvals should be a significant focus of due diligence for any such transaction. This is particularly important given that many foreign merger control laws and approval requirements are implicated by transactions whose only nexus to the country in which the laws will be enforced is that each of the parties to the transaction owns assets in that jurisdiction.

The EUMR

The EUMR, which is one of the more far reaching merger control laws, is applicable to transactions anywhere in the world that result in "concentrations" and which have a "community dimension." In order for a transaction to have a "community dimension," the combined aggregate worldwide revenues of all the parties involved must be greater than €5 billion; and at least two of the parties involved mush each have aggregate EU-wide revenue arising from the same Member State. Even in instances where these thresholds are not met, there are conditions, if the parties involved in a transaction have a large enough presence in multiple EU Member States, the EUMR may still apply.

In the event the thresholds are satisfied, then you look at the transaction itself to determine if the transaction would result in a "concentration." A concentration occurs when a transaction results in the acquisition of "control", directly or indirectly, over one or more companies or assets.

Control is generally measured by the ability of one or more of the shareholders to exercise "decisive influence" over a company or asset through the ability to control the outcome of a vote (for or against), particularly with respect to material commercial issues, including: (i) budgets, (ii) business plans, (iii) appointment of senior management, and (iv) investments.

By way of an example:


Party A

Is a multinational company with operating subsidiaries in Germany, UK, US and New Zealand and worldwide income of more than €4.5 billion.

Party B

Is a multinational company with operating subsidiaries in US, Canada and has a minority interest in a small company in an EU Member State and worldwide income of more than €0.6 billion.

Proposed Transaction

Party X agrees to sell a majority interest in a US operating subsidiary to Party Y.

EUMR Consideration

Even though one party's nexus to the EU is miniscule and the transaction involves only a US entity, because the parties together meet the revenue threshold and control of the target entity will pass to Party B, the EUMR would require that the parties file for and receive approval of the transaction prior to its consummation.


The European Commission recently adopted a package that it claims is designed to simplify procedures under the EUMR; it became applicable as of January 1, 2014.

If You Fail to Comply

Failure to comply with these laws can have significant negative consequences if a regulator later learns of the transaction and concludes that approval was required. Regulators have the ability to levy large fines and in extreme cases, can unwind transactions long after they have been consummated.

Like domestic anti-trust filings, foreign merger control laws can be successfully navigated with the help of experienced counsel. Like any significant barrier to the completion of a transaction, the earlier in the process that you consider the reach of these laws and if your transaction falls within them the more smoothly any required approval process will go.


Andrea Satty is a Partner in Stroock's Energy and Project Finance Practice. Ms. Satty's practice focuses principally on corporate and project finance transactions in the energy industry. She represents major energy companies, private equity firms and financial institutions on numerous corporate and securities transactions and financings, including mergers and acquisitions, capital market transactions and greenfield development.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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