At a Glance:
- The CMA’s conclusion that it has jurisdiction to review Amazon’s 16% shareholding in Deliveroo serves as a reminder that control can arise even at low levels of shareholding.
- Minority shareholders who enjoy significant influence on the company’s policy direction and strategic commercial decisions may be considered to have sufficient control to trigger a merger review.
- Jurisdictional tests vary between jurisdictions and care should be taken with minority shareholdings to ensure that merger filings are not missed.
Amazon/Deliveroo – an overview
On 4 August 2020, the UK Competition and Market Authority (CMA) published its final report, clearing Amazon’s 16% investment in Deliveroo following a detailed Phase 2 merger review. The investment was initially cleared based on a provisional finding that Deliveroo was a ‘failing firm’ that would have exited the market without the investment due to the impact of COVID-19.
A subsequent detailed assessment of Deliveroo’s financial position, as lockdown progressed, led the CMA to reverse this provisional finding and conclude that the company was not, in fact, likely to exit the market in the absence of Amazon’s investment. This meant that in its second provisional finding as well as the final report, the CMA focused on the effect on competition resulting from Amazon’s investment.
Minority shareholdings and merger control
The investigation is of interest because the CMA concluded that Amazon’s 16% shareholding, along with other factors, was sufficient to trigger jurisdiction for a merger review. For this purpose, the CMA considered the size of Amazon’s shareholding (both in absolute terms and relative to other shareholders), its right to appoint a director and observer on Deliveroo’s board as well as the possibility of current and future commercial relationships. It also considered Amazon’s position as a strategic investor with additional rights, which included a higher liquidation preference and ranking, that the CMA considered could allow Amazon to exert influence over any potential sale. In addition, the CMA found that Amazon’s status and expertise, specifically in the areas in which Deliveroo operates, might give it the ability to influence other shareholders and Deliveroo’s policy formation.
It can come as a surprise to companies and investors that merger control may apply when they are acquiring only a minority shareholding, particularly of less than 25%. In the UK, the relevant test for control, the acquisition of material influence, can apply even at low shareholding levels. The CMA’s jurisdictional guidance indicates that shareholdings above 25% are likely to give rise to material influence, whereas those below 15% will only exceptionally result in material influence. Between these levels, an assessment of other factors, as carried out in this case is key to determining whether material influence has arisen.
Although not commonplace, this is not the first time a shareholding slightly above 15% has led to a finding of material influence. For example, BskyB’s acquisition of a 17.9% shareholding was considered to give it material influence over ITV, a case in which the competition authorities ultimately identified concerns and required a remedy.
Substantive assessment and minority shareholdings
Whilst material influence may be sufficient to trigger jurisdiction for a merger review, the substantive assessment of the effect of a minority shareholding on competition also needs to take into account the size of shareholding and resulting effect on the parties’ incentives.
In its assessment of the effect of Amazon’s shareholding on competition between Amazon and Deliveroo, the small size of Amazon’s shareholding was significant in determining whether the transaction would alter Amazon’s incentives to re-enter the food delivery market or to alter its business in the online convenience grocery delivery market.
In particular, an important factor in the CMA’s considerations is that any action taken by Amazon that favoured Deliveroo would result in Amazon suffering the entirety of the downside, but only gaining a 16% share of any additional Deliveroo profits that arise. Accordingly, at this low level of shareholding, any effect on competition was much weaker than if the shareholding had been more significant. In its press release, the CMA noted that whilst the current scale of Amazon’s investment did not substantially lessen competition in both markets, if Amazon were to increase its shareholding in Deliveroo, the position might be different.
Amazon/Deliveroo highlights that a minority shareholding, even if small, can lead to a lengthy and detailed merger review. In the UK, where the merger regime is voluntary, the effects of the CMA subsequently deciding to review such an acquisition are more limited than in those jurisdictions with mandatory notification regimes, where substantial financial penalties may be imposed for failure to notify a transaction. Given the differing tests between jurisdictions for the lowest level at which a shareholding may trigger merger review, a careful review of merger control requirement is advisable even on the acquisition of minority shareholdings.