Partner Andrius Ivanauskas
On 1 January, amendments to the Competition Law entered into effect; these amendments are specifically relevant to mergers and acquisitions. Even though the amendments do not eliminate the statutory merger clearance procedures, M&A transactions will require a permit from the Competition Council far less often.
The following are five key amendments to the Competition Law:
The previous version of the Competition Law provided for a very broad definition of an undertaking. Related undertakings were considered to be entities holding directly or indirectly through other persons 1/3 of all shares or more in a company that is a party to a particular merger.
The definition of the term of related undertakings has been changed in the wording of the Competition Law that took effect on January the 1st. Related undertakings are considered as the entities controlling more than one-half of the capital or assets in a business, or holding more than one-half of its voting rights. Consequently, this rule now provides a narrower and more specific definition of related undertakings and ensures the limited range of undertakings in order to avoid increasing of the joint income of the parties to a merger.
The limit for the presumption of control has been raised from 1/3 to 1/2 in the interest of clarity. This is in line with international practice because both under the EU law, and in many other EU Member States, related undertakings are considered to be entities who control more than one-half of the capital or assets in a business. This will assure more of a legal certainty and create a more favourable environment for business to develop.
One of the key amendments aimed to improve the efficacy of the supervisory procedure for mergers and acquisitions is the raising of the income thresholds that qualifies for notification of the transaction to the Competition Council. The decision to raise the income thresholds was made in the light of the economic developments of business so as mergers that will probably did not result in appreciable risk associated with restrictions of competition would be exempted from the supervisory procedure. As a result, according to the new wording of the Competition Law, the income thresholds of each company participating in a merger has been raised from EUR 1.45 million to EUR 2 million, and the thresholds of joint income of all entities participating in a merger when entities will be required to obtain a clearance from the Competition Council have been raised from EUR 14.5 million to EUR 20 million.
Considering that corporate income has been growing recently, and so has the gross domestic product, the Competition Council has had to consider a particularly large amount of cases of merger that, in the absence of a supervisory procedure, most likely would have not posed any risk of distortion of merger. With the new regulation in place, mergers and acquisitions of companies with relatively low income will save time, because there will be no need to wait for the Competition Council to examine the case of concentration.
The amendment to the Competition Law anchors a new procedure to calculate income for business that is poised to have a bigger effect than the above increase of the income ceiling.
Under the procedure that was in effect until now, different criteria were applied to calculate joint income of companies, which were based on the venue of incorporation of the company. Companies incorporated in Lithuania, shall calculate all income regardless of the territory of its operations that was considered, whereas for foreign legal entities, the calculation consisted only of the income received on the territory of Lithuania over the past year. The different rules of calculation of joint income reflected neither the essence of setting the ceiling of joint income (by failing to represent the power the company had on the Lithuanian market), nor the rules that applied in international practice. Many EU Member States, Latvia and Estonia included, only calculate the income of parties in a merger from operations on the national markets.
The new procedure to calculate joint income in place will both ensure that the principle of equality between companies incorporated in Lithuania and abroad is enforced, and will implement the good EU practice and harmonise the rules for businesses operating in Europe. With the new rules for income calculation in place, the number of merger to be notified to the Competition Council will most likely decrease as well.
Up until now the Lithuanian legislation did not contain any rule to consider several transactions concluded between the same entities over a brief period of time a single merger unlike the EU law and the national legislations of other Member States. In practice, there have been cases when companies in a bid to dodge the obligation to file a merger notification would break down a single M&A into several transactions, at least one of them free from the burden of notification to the competition supervisory body. The amendment to the Competition Law has closed the former gap and from now on, a situation when two transactions or more are closed between the same entities over a period of two years will have to be considered a single transaction.
The Competition Council has to examine the notifications of merger in a 4-month period, which has not been able to be suspended until now. This used to create the risk of a failure to examine a notification on time, should the filing entities refuse to cooperate with the Competition Council or delay presentation of any missing information. Furthermore, there have been situations when because of the short deadline, the Competition Council in certain cases was unable to investigate the commitments proposed by the parties in relation to eliminating potential issues regarding competition. The administrative procedure of merger notifications examination has been improved by entitling the Competition Council to suspend the aforesaid four-month period. This procedural possibility will ensure that a notification of pending merger will be considered consistently and in detail over the designated period and no one could have get the merger clearance before the notification examination procedure is completed.
By Andrius Ivanauskas, partner