In the current economic climate it is becoming more usual for banks to convert some of their debt in weaker companies into equity stakes or to take on new equity. The primary driver for the banks is that they are more likely to see a return, whilst for the company the aim is to render it a more viable business.
One of the issues that such swaps can give rise to and that is easily overlooked are merger control reviews by competition authorities either at national or at European level. In most jurisdictions filings are mandatory irrespective of whether there are substantive issues. Failure to notify can expose the business to fines (as well as the negative publicity).
When do transactions need to be notified? This typically depends on the turnover of the companies involved and the level of control exercised by those companies. However, there are a number of general pointers worth bearing in mind.
First, the merger control process can kick in at shareholdings of significantly below 50% (above 10% can also be sufficient especially if combined with board representation and/or certain veto rights). Second, where two financial institutions participate with significant stakes this will increase the potential for filing requirements. Third, even if the target is active only in one country, the fact that a number of finance providers have activities elsewhere could trigger filing obligations in a number of countries.
The European Commission's recent approval of Barclays' and RBS' debt-for-equity swap in USP Group is an apt example of lenders having to go through such a mandatory merger clearance process. The banks increased their stake in a medical services firm which seemed to operate only in Spain. Yet an EC filing obligation was triggered by a combination of the banks' veto rights and the level of their respective turnover. The clearance process took around a month from the date of notification.
Considering potential competition issues early would allow the banks either to structure the deal so that it avoids a filing altogether or to obtain clearances in time for the anticipated completion.
John Schmidt is a partner specialising competition and regulation with leading UK law firm Shepherd and Wedderburn LLP.