The Key Principles of Merger Control rules in M&A Transactions: A Cyprus and EU Perspective
Merger control is an essential component of competition law, aimed at overseeing mergers and acquisitions (M&As) and preventing company consolidations that could dominate the market and reduce competition.
Within the European Union, the merger control rules ensure that large-scale transactions do not stifle competition, thereby protecting consumer interests and promoting a healthy market environment. Such transactions typically require review and clearance from relevant authorities to ensure they do not adversely affect the market dynamics.
Understanding the complexities of merger control rules is a crucial step for businesses aiming to ensure their merger and acquisition (M&A) transactions proceed smoothly.
This is equally significant for local deals within Cyprus as it is for cross-border transactions within the European Union (EU) that have a 'Community dimension', as this term is explained below.
As an EU Member State, Cyprus enforces its own anti-competition rules requiring mandatory notifications to the Cyprus Competition Authority for certain transactions taking place in Cyprus, contingent upon clearance. Similarly, the European Commission exercises exclusive oversight over transactions with a ‘Community dimension’.
The legal frameworks established by the Cyprus Merger Control Law (83(Ι)/2014) (the “Cyprus Merger Control Law”) and the EC Merger Control Regulation (Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings) (the “EC Merger Control Regulation”) set forth specific criteria to determine when a concentration must be notified to the respective competition authorities, underscoring the importance of these rules in maintaining fair competition and preventing market monopolies.
Cyprus Merger Control Law: When is Notification Necessary?
The Cyprus Merger Control Law in Cyprus specifies that a concentration must be notified to the Cyprus Competition Authority for approval if it cumulatively satisfies all of the following conditions:
Aggregate Turnover Threshold: The combined turnover of each of at least two of the participating undertakings exceeds €3.5 million; and
Domestic Turnover: At least two of the participating undertakings have turnover generated within the Republic of Cyprus; and
Aggregate Turnover in Cyprus: At least €3.5 million of the total turnover of all participating undertakings is achieved within the Republic of Cyprus.
A "concentration" refers to mergers, acquisitions of control, or the creation of joint ventures that perform autonomously on a lasting basis.
Calculating Turnover Under Cyprus Law
For the purposes of the Cyprus Merger Control Law, turnover is calculated as follows:
General Turnover Calculation: The aggregate turnover includes the revenue from the sale of products and services by the undertakings concerned from the preceding financial year, directly related to the undertakings' ordinary activities. This figure is net of sales rebates, value-added tax, and other taxes directly related to turnover.
Exclusion of Internal Sales: Transactions carried out internally within the group of participating undertakings are excluded from the turnover calculation.
Sector-Specific Adjustments: For banks and other credit institutions, the turnover is calculated as one-tenth of the balance sheet total. For insurance companies, turnover is based on the value of gross premiums, including reinsurance premiums, net of taxes and levies.
Group Turnover: The turnover calculation also includes the revenues of entities directly or indirectly related to the participating undertakings (e.g. undertakings in which the undertaking concerned directly or indirectly owns more than half of the capital or has more than have of the voting rights or has the right to manage the affairs of the said undertaking).
EC Merger Control Regulation: Defining Concentrations
The EC Merger Control Regulation meticulously outlines the circumstances under which a "concentration" is deemed to occur. A concentration is identified primarily through the merger of two or more previously independent undertakings, or the acquisition of direct or indirect control of whole or parts of one or more other undertakings. This can happen via mergers, acquisitions, or any other means that enable one or more persons or undertakings, already in control of at least one undertaking, to exercise decisive influence on another.
The concept of control encompasses rights, contracts, or any other means that, taken together and considering the facts and law involved, confer the ability to exert a significant influence on an undertaking. This includes ownership or rights over assets or contractual rights that influence the decision-making of the undertaking's governing bodies. Moreover, the establishment of a joint venture that operates independently and on a lasting basis as an autonomous economic entity also falls under the definition of a concentration.
However, there are exceptions, such as temporary securities holdings by financial institutions for resale or transactions carried out by liquidators or insolvency officers, which do not constitute a concentration under the regulation. This comprehensive definition captures a wide range of transactions, necessitating a detailed examination to determine whether they trigger notification requirements.
When Does a Concentration have a ‘Community dimension’?
Beyond the national scope, the EC Merger Control Regulation outlines when concentrations with a ‘Community dimension’ must be notified to the European Commission.
This regulation becomes applicable to concentrations that have a ‘Community dimension’ under the following scenarios:
First Threshold Criteria:
The combined aggregate worldwide turnover of all participating undertakings exceeds €5 billion; and
The aggregate EU-wide turnover of each of at least two of the undertakings is more than €250 million;
Unless, each of the undertakings concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same Member State.
Second Threshold Criteria (for concentrations not meeting the first threshold):
The combined aggregate worldwide turnover of all the undertakings concerned is more than €2.5 billion; and
In each of at least three Member States, the combined aggregate turnover of all the undertakings concerned is more than €100 million; and
In each of the afore-mentioned three Member States, the aggregate turnover of each of at least two of the undertakings concerned is more than €25 million; and
The aggregate EU-wide turnover of each of at least two of the undertakings concerned is more than €100 million;
Unless, each of the undertakings concerned achieves more than two-thirds of its aggregate EU-wide turnover within one and the same Member State.
These criteria aim to identify transactions that could significantly affect competition within the internal market, especially those that might create or strengthen a dominant position.
It is important to note that 'aggregate turnover' reflects the total revenue from the preceding financial year, after accounting for sales rebates and taxes directly related to turnover. This includes adjustments for any recent acquisitions or disposals to accurately represent the undertaking's financial activities.
The process of determining Community-wide or EFTA-wide turnover, alongside turnover within a single Member State, introduces complex considerations for allocating turnover across various territories. Typically, this allocation takes into account the destination of sales or the location where services were rendered, emphasising the geographical nexus of the transaction to specific markets.
For undertakings with accounts in foreign currencies, conversion to euros is essential and relies on the European Central Bank's official rates over the corresponding 12-month period. Furthermore, the turnover calculation adheres to sector-specific guidelines for banks, insurance companies, and other financial institutions. For these entities, the EU Merger Regulation defines turnover based on a blend of income, receivable commissions, and net profits, with insurance companies' turnover calculated from the gross premiums written.
The importance of determining if Merger Control rules apply nationally or at an EU-wide level
For businesses engaged in M&A transactions, whether within Cyprus or involving the wider EU market, it is imperative to understand these regulatory frameworks and what are the applicable notification requirements and processes. Early identification of notification requirements can facilitate a smoother approval process, aiding in strategic planning and ensuring that transactions do not run afoul of competition laws.
Navigating the merger control landscape requires a keen understanding of both the Cyprus Merger Control Law and the EC Merger Control Regulation. By ensuring compliance with these regulatory requirements, businesses can avoid potential hurdles, paving the way for successful M&A activities.
It is advisable for undertakings engaging in M&A transactions in Cyprus to seek expert legal counsel well-versed in both Cypriot and EU merger control regimes, ensuring thorough preparation and strategic alignment with regulatory expectations.
More information
For more information regarding your M&A transactions, our team is here to help. We can advise on whether your transaction requires a merger control notification, assist with the preparation and submission of notifications to the applicable competition authorities, and provide comprehensive support throughout the process. Please contact Aptus Legal by clicking here or send an email to info@aptuslegal.com.