(by Bruce Lyons) The European General Court has today announced two judgments in relation to the Commission’s prohibition of Ryanair’s hostile bid to acquire Aer Lingus. Both decisions support the Commission but only one judgment is based on good economics. That is the decision to uphold the prohibition. The worrying judgment is the one that allows Ryanair to retain a 29.8% stake in its rival duopolist out of Dublin airport.
The Court supported the Commission’s view that it could not force divestiture of a minority shareholding because 30% does not give ‘decisive influence’. Ironically, if Ryanair had actually bought 50% and then been required to divest, it would have had to sell all its shares in Aer Lingus. The legal point appears to be that there has not been a ‘concentration’ so there can be no remedy. This has even allowed Ryanair to increase its stakeholding by nearly 5% since the ‘prohibition’.
Recall that the UK Competition Commission decided in 2007 that BSkyB’s 17.9% shareholding in ITV meant it could have a material influence on its competitor, and was required to reduce its stake to 7.5%. In particular, the CC found that ‘BSkyB’s ability to block a special resolution would limit ITV’s strategic options, for example its ability to raise funds’. And what has Ryanair been doing with its near 30% stake? It has blocked a special resolution relating to an increase in Aer Lingus’s capital, demanded talks with the Aer Lingus management, and requisitioned two extraordinary general meetings with the aim of reversing strategic decisions. While none of these actions appears yet to have had ‘decisive influence’, they are clear attempts to influence. One of the purposes of the introduction of the EC Merger Regulation in 1989 was stop trying to use Art.101 in cases of minority shareholdings. I wonder how long it will be before Aer Lingus managers do talk to Ryanair then run to Brussels demanding leniency for a breach of Article 101?
Unfortunately, the outcome is likely to be worse for Irish flyers. Eventually, the management teams of both firms will find life more comfortable and profitable if they begin to coordinate so as not to fight too hard in the market. Consumers will lose out. This was also apparently the view of the stock market as shares in both firms rose on the news that Ryanair would not have to sell down its stake. The ECMR needs urgent revision to eliminate this loophole before others try the same tactic to intimidate rival management teams.