Ryanair v Aer Lingus: when competition law can bridge gaps in company law

The long-lasting battle between Ryanair and Aer Lingus did not end with the 2013 judgment of the UK Competition Commission (CC). However, this judgment  illustrates how competition law can be strategically used by firms to take initiative to protect their commercial interests that under company law they may not be allowed to take.
In short, the first attempt of Ryanair  to buy Aer Lingus in 2006 was blocked by the European Commission, which also prohibited a latter attempt in 2013. In the meantime, the Ryanair stake in Aer Lingus grew up to 29,8%. Believing that a large shareholding of a fierce rival such as Ryanair may harm its commercial interests, Aer Lingus asked first the Commission and then the EU General Court to force Ryanair to sell its shares. Those applications were eventually rejected. The General Court (case T-411/07) ruled that a 29% stake constituted a minority shareholding. Therefore the Ryanair acquisition of it did not fell within the concept of concentration pursuant to EC Regulation 139/2004 with the result that the European Commission had no jurisdiction on the transaction.
Therefore, the then UK Office of Fair Trading (OFT) opened a merger investigation on the transaction. Importantly, under the UK Competition Act the acquisition of a minority stake amounts to a relevant merger operation. The OFT referred the transaction to the CC that hold that it might result in a substantial lessening of competition in two ways. First, Ryanair may weaken the effectiveness of Aer Lingus. Second, it could influence Aer Lingus commercial policies, especially as for management of slots at Heathrow airport and optimization of London routes. Therefore, the CC order Ryanair to reduce its stake in Aer Lingus to 5%.
Looking at this judgment from the viewpoint of a company lawyer, it is uncertain whether the same outcome could be achieved relying on company law tools. According to a general principle of company law, members of a company must exercise their votes in good faith for the benefit of the having said that, does the resolution of the board of directors empowering the majority to buy out minority shareholders comply with that principle?
The position of the UK courts is not clear on this question. In Sidebottom v Kerskaw, Leese & Co, the Court of Appeal approved a resolution enabling the directors to require shareholders with an interests in firms competing with the company to sell their stake at a fair value to nominees of the directors. Yet, some weeks later, in Dafen Tinplate Co v Llanelly Steel Co, the court took a more stringent approach. It quashed a resolution enabling the majority to buy out any shareholder as they thought proper. Though the resolution was passed to deal with a shareholder involved in a competing firm, it found the resolution to be drafted too widely. Therefore, the powers given to the majority were wider than it was necessary in the interest of the company.
In sum, company resolution requiring minorities to sell their stakes have to been assessed by the members of the company and by courts. And the latter has generally taken a strict position on the validity of such arrangements (Gower and Davies, Principles of Company Law, 8th edition, 655-656). Logically, in jurisdictions where merger control provisions apply to the acquisition of minority shareholdings ( UK, but also Germany and Austria) for firms wishing to get rid of minority shareholders that are also competitors it may be easier to invoke such provisions rather than company law provisions. Unlike company law, competition law does not require firms to prove that they acting in good faith. What matters for competition law is whether the acquisition of minority stakes may restrain competition. In conclusion, competition law can bridge a gap in company law, giving majority a tool to lawfully discipline minority members they think may harm the interests of the company. It remains whether also the EU law will allow that by extending the concept of concentrations to acquisition of minority stakes (see here for the ongoing debate).



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