“Yet back in spring, the Competition Council (CC) of the Republic of Lithuania started talking about the fact that examination of corporate acquisitions and concentrations might become more difficult and protracted due to the restrictions caused by the pandemic. This might be the outcome of greater difficulties experienced by the institutions in obtaining the information necessary for the case examination. As a result, we would advise those planning such transactions to expect a somewhat lengthier procedure of concentration examination”, says Lina Darulienė, an associate at law firm Magnusson ir partneriai.
Last year, it took the CC 17 working days on average to examine straightforward notifications of concentrations, whereas those requiring comprehensive legal and economic scrutiny took 76 working days.
Income thresholds determine the necessity of a permit
Not all cases when acquiring a business are subject to a concentration control procedure. It is applied in the event where the income of undertakings involved in the transaction leading to concentration exceeds the thresholds provided for in the legal acts. Currently, it is obligatory to notify the CC of the concentration and to obtain its approval, if the combined aggregate sum of income in Lithuania of all concentration participants in the business year before the transaction exceeded EUR 20 mill., and the aggregate income of each of at least two undertakings concerned in the business year preceding the concentration was more than EUR 2 million.
Where competition restrictions might arise due to the planned business acquisition, such concentration shall not be permitted. “In this case, the parties to the transaction have two options: to abandon the transaction or suggest to the authority the measures to eliminate the competition restrictions”, advises the associate.
Ms Darulienė assures that the pandemic not only turned into a challenge for businesses but also demanded unprecedented case analyses from institutions supervising the concentration transactions. The decision of the online sales giant Amazon to acquire a stake in the food delivery company Deliveroo represents one of such examples. The United Kingdom Competition and Markets Authority envisaged a risk that the transaction might be detrimental to competition; however, the parties involved argued that it was the only way to rescue the company that has suffered due to the effect of COVID-19.
The authority conducted a particularly broad investigation to analyze the effect of COVID-19 on the company’s operations and determined that the food delivery market was recovering much faster than expected in the beginning of the pandemic. Consequently, the company was capable of pursuing its operations in the market.
This notwithstanding, the approval was issued arguing that the purchase of a minority stake did not cause any competition issues in the market, however on condition that increases the control would trigger a new probe to examine potential anti-competition implications.
Important both for stock and assets purchases
Those who do not observe the obligatory competition control procedure face a fine up to 10 % of total annual income. Furthermore, if the transaction leads to competition issues, the company will additionally have to eliminate the negative consequences of concentration, for instance, to sell the business.
Ms Darulienė has on numerous occasions encountered an erroneous belief that the concentration does not have to be notified if one buys a non-competing business or the market shares are insignificant. “It is important to take into account whether the control of the business being acquired changes and whether the income of the companies entering into concentration goes above the thresholds of combined aggregate income specified in the legal acts. When deciding whether it is necessary to apply for the approval, activities of companies are not relevant; they become important in a later stage when assessing the effect of concentration on the markets”, explained the associate.
As often as not, companies believe that the concentration should be notified only when they purchase the shares of other companies. Nevertheless, concentration can be achieved by purchasing the assets or a part thereof too; what matters is that the assets should be treated as a business and generated a turnover in a certain market.
Companies might inadvertently skip the concentration control procedure when incorporating a new joint venture or acquiring joint control over a company. “Quite widespread is the mistaken belief that the incorporation of a joint company cannot lead to concentration, because a new company does not carry out any activities and thus has no income. However, in this case, companies founding a new business or acquiring control over it will be considered as undertakings involved in the concentration. Consequently, their income shall be calculated when assessing the necessity of the approval”, says Ms Darulienė.
Homework: assessment of the competitors’ activities
For those who plan to acquire a business and in particular a rival business, the associate suggests assessing two important aspects: the markets in which the undertakings involved operate and the implications on those markets following the transaction, and the competitors’ data.
“Identifying the markets whose competition will be affected by the transaction is the most important and simultaneously most complicated step. For this purpose, activities of the companies entering the concentration and simultaneously those of their groups have to be scrutinized. The key is to identify the activities and territories in which the companies operate as competitors or potential competitors, and supply relationships that link or might link them.
Moreover, it is important to take into account the countries in which the companies entering the concentration or companies comprising their group operate, seeing that then the approval for concentration might be necessary for several countries. Such prior assessment requires financial and time resources; however, it might prevent even greater expense, should it become impossible to close the transaction due to the approval denied”, says Ms Darulienė.
Analysis of the competitors’ data (turnover and scope of activities) is necessary for the assessment of the competitive effect. This will help to estimate the total scope of the appropriate market to the most accurate extent possible as well as the planned position of the companies entering concentration in them. This aspect is important because if the total market share following the transaction exceeds 40 %, this might be the first indicator of the anti-competition implications signalling that the approval for the transaction might not be given.
Ms Darulienė also draws attention to the fact, that Lithuania has embedded the right for the CC to initiate the competition control procedure even when there is no obligation for the companies to apply for the approval. Generally, this is the case when the CC has grounds to suspect that the transaction might lead to a dominant position in certain markets. The authority may exercise this right within 12 months from the transaction conclusion date, and, where competition restrictions are identified, it may lay the undertaking who acquired the business under obligation to eliminate them.
