Joint control under Swiss competition law may be given even without technical veto rights of the minority shareholder if the majority shareholder is unlikely to exercise its casting vote in the event of a deadlock situation. This is the case, for example, if the majority shareholder is discouraged to do so by a lengthy settlement or escalation process or by a put option vested with the minority shareholder causing financial disadvantages to the majority shareholder.
The Secretariat of the Swiss Competition Commission (ComCo) recently issued advice in accordance with Article 23(2) of the Federal Act on Cartels and other Restraints of Competition (the Cartel Act) to two companies, Party A and Party B (collectively, the Parties), which are both shareholders in a jointly controlled joint venture.(1)
According to Article 23(2), the Secretariat advises undertakings on matters relating to the Cartel Act. As the Parties had planned to change the joint venture's structure, they requested the Secretariat to confirm that:
- the transaction would not constitute a change of control within the meaning of Article 4(3)(b) of the Cartel Act; and
- the transaction would therefore not have to be notified to the ComCo.
Party A and Party B each hold 50% of the shares of a joint venture. The transaction envisaged by the Parties proposed a change in the shareholder structure and certain changes in the governance structure. In particular:
- Party A would become the minority shareholder; and
- Party B would become the majority shareholder.
After the envisaged transaction, the joint venture's board of directors (the Board) would consist of five members: two from Party A (minority shareholder) and three from Party B (majority shareholder). The Board would take its resolutions with simple majority. However, certain strategic decisions, so-called 'important board matters,' would require the approval of at least two board members designated by Party A and Party B. In particular, the following matters relating to the joint venture would be considered strategic:
- approval of the joint venture's overall strategy that contains all determining factors for the strategic development and business behaviour of the joint venture;
- approval of the joint venture's annual budget, business plan and financial planning;
- any investment, capital expenditure or contractual obligation in excess of a certain amount, other than external growth or restructuring projects; and
- any substantial plans or agreements, other than those on arm's-length terms and/or in the ordinary course of business.
The Parties would also agree in a revised shareholders' agreement that the annual budget, business plan and financial planning of the joint venture should be in accordance with the overall strategy.
In case the Board failed to resolve important board matters, a specific decision-making process and an escalation procedure would be established: two meetings of the Board and a subsequent meeting of the management committee.
In case the management committee failed to reach an agreement during a cooling-off period, certain matters such as the approval of the annual budget, the business plan and financial planning could be decided unilaterally by Party B (majority shareholder). In case the management committee failed during a cooling-off period to resolve other matters such as the approval of the overall strategy and any substantial plans or agreements other than on arm's-length terms and/or in the ordinary course of business, a so-called 'deadlock situation' would arise.
In a deadlock situation, an additional escalation procedure would be put in place (so-called 'deadlock procedure'). Should the Parties fail to reach an agreement in the first phase of the deadlock procedure, an official sale procedure would be initiated in which Party B would have to acquire all of Party A's shares in the joint venture based on a current evaluation. However, this would constitute a significant financial disadvantage for Party B.
According to the Parties, this envisaged transaction would not vest sole control to Party B and therefore not constitute a change of control within the meaning of Article 4(3)(b) of the Cartel Act, despite the fact that Party A would become a minority shareholder.
The Secretariat confirmed that joint control is given when two or more undertakings can exercise decisive influence over the activities of a joint venture. Joint control therefore exists when controlling companies reach strategic business policy decisions (eg, decisions concerning the budget, business plan, major investments and composition of management), which does not necessarily require unanimity for all of these rights at the same time.
In general, the ComCo's practice referes to the corresponding practice of the European Commission, according to which joint control can lead to deadlock situations because each shareholder has the possibility to block strategic decisions. Such shareholders must therefore agree on the business policy of the joint venture and cooperate.
The Secretariat asserted that joint control is given when the parent companies must agree on all important matters relating to the joint venture. Where several parent companies have unequal stakes in a company, minority shareholders must have a right to veto decisions that are essential to the strategic commercial behaviour of the joint venture. Further, the veto right must trump the general one that minority shareholders have in order to protect their financial investments.(2)
Even without an actual veto right, joint control can be presumed if the majority of the voting rights of one parent company is limited in importance and effect through other mechanisms – for example:
- if the vote can be exercised only after a series of arbitration and settlement attempts or only to a limited extent;
- if the use of the vote is linked to a put option, which would result in a significant financial disadvantage for the majority shareholder; or
- if the interdependence of the parent companies makes it unlikely that a casting vote will be used.(3)
In the case at hand, Party B (majority stakeholder) would be able – after a multi-stage procedure to reach a mutual resolution – to unilaterally decide on certain important board matters. The Secretariat left the question open as to whether the escalation procedure was sufficient to establish joint control. It assumed that joint control would be given at least due to the put option of Party A (minority shareholder), which was linked to decisions on the broadly defined overall strategy containing all determining factors for the strategic development and business behaviour of the joint venture.
The sale of Party A's stake in the joint venture to Party B would be initiated if the Parties could not reach a mutual resolution in certain matters concerning the overall strategy after completing an escalation procedure. As the annual budget, business plan and financial planning must be in line with the overall strategy, a decision on the joint venture's overall strategy would be decisive for its strategic commercial behaviour.
The purchase of Party A's stake in the joint venture would lead to a significant financial disadvantage for Party B. Further, the sale could lead to merger control proceedings in Switzerland and other jurisdictions. Thus, it would be highly unlikely that Party B would use its casting vote.
The Secrtariat advised that the change in shareholder structure of the joint venture would not constitute a change of control of Party A and Party B by vesting sole control to Party B, and hence does not constitute a merger within the meaning of Article 4(3)(b) of the Cartel Act. Thus, the Parties are not obliged to notify the transaction to the ComCo.
The advice issued by the Secretariat is not formally binding. However, the Secretariat would be expected to maintain this legal position in an actual proceeding.
Endnotes
(1) RPW 2018/3, 505 et seqq para 1 et seqq.
(2) RPW 2016/1, 263 para 30 et seqq, Tamedia/Tradono Denmark/Tradono Switzerland.
(3) Consolidated Jurisdictional Notice under EU Regulation 139/2004 on the control of concentrations between undertakings, Correction, ABl C 43 of 21 February 2009, para 82.
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