The Competition Authority has, by decision No. 1/2011 which is published today, sets out detailed conditions for the acquisition by Framkvæmdasjóður Íslands slhf. (FSÍ) of Eignarhaldsfélagið Vestia ehf. (Vestia). The conditions are set with the aim of mitigating the harm to competition that may arise from FSÍ's ownership of the commercial companies over which the fund gained control through the acquisition.
With FSÍ's acquisition of Vestia, FSÍ gained control of Teymi hf., Húsasmiðjan hf., Plastprent hf. and Icelandic Group hf. The transaction also entails that Vestia's seller, NBI hf. (Landsbankinn), acquires a 25% stake in FSÍ.
The Competition Authority had, in the first half of 2010, reached the conclusion by means of a decision No. 7/2010 that NBI's acquisitions of Teymi, Húsasmiðjan and Plastprent distorted competition and that conditions were imposed on the acquisitions in order to prevent that distortion. Similarly, the NBI/Vestia takeover of Icelandic Group was under review by the Competition Authority, but that review had not been concluded when FSÍ's acquisition of Vestia was announced.
The Competition Authority has concluded that FSÍ's control over the aforementioned companies could, if left unaltered, distort competition and that it is necessary to prevent this by imposing conditions on the takeover. The Competition Authority therefore considers that the control may restrict competition in the markets in which the relevant business undertakings operate. Furthermore, NBI's ownership of a stake in FSÍ could distort competition in the relevant markets and cause an imbalance in competition in the financial market.
Particular attention is paid to the fact that the owners of the FSÍ, i.e. pension funds and NBI, and thus the fund itself, have a very strong position in Icelandic business under the current circumstances. This, among other things, creates a risk of undesirable concentration of power and the formation of blocs, which can limit competition in the long term. Furthermore, this arrangement can have an undue influence on the investment policies of the pension funds themselves.
In assessing the merger, the decision of the Competition Appeal Tribunal was taken into account, among other things. No. 18/2009 regarding NBI's acquisition of Teymi, which forms the basis for the aforementioned decisions. In the case, the Appeals Board held that the Competition Authority was authorised to impose conditions on the takeover, even though the takeover did not lead to market overlap or the creation of a dominant position, and there were no grounds to annul the merger. The Appeal Board considered that exceptional circumstances in the business sector justified this authorisation.
However, it is clear that the ruling does not address exactly the same issues, as it dealt solely with bank ownership of companies and the unfortunate situation where a bank owns certain businesses whilst also providing financial services in the relevant markets. In that respect, FSI's acquisition of Vestia has a positive effect, although it is accompanied by other competitive problems.
Negotiations with the merger parties have led to them entering into a settlement in the matter. FSÍ and its owners have therefore agreed to comply with the conditions set out in the decision of the Competition Authority.
The conditions are, among others, as follows:
- Acquired businesses must operate as independent competitors in the market. To this end, the law provides, among other things, for how the boards of the companies are to be constituted and prohibits companies under the control of FSÍ from directing their business to one another, unless on the basis of normal commercial considerations. This is to prevent the undesirable formation of business blocs. FSÍ shall formulate an independent ownership policy for each operating company and set a reasonable return requirement for them, in order to reduce the 'incentive problem' faced by the managers of these companies, as they may be tempted to relax operational standards given the strength of the companies' backers.
- It shall be ensured that NBI's ownership of a stake in FSÍ does not distort competition. To this end, provision is made for the appointment of NBI's own directors, strict limits are placed on the exchange of information between NBI and FSÍ, and it is stipulated that FSÍ conducts its business on a commercial basis, e.g. etc., that NBI's competitors enjoy full equality in relation to decisions on FSÍ's investments and the fund's purchase of financial services.
- It shall be ensured that the participation of pension funds in the ownership of FSÍ does not distort competition. This provides for, amongst other things, the appointment of pension funds to the boards of FSÍ and companies in which the fund holds an interest, as well as the establishment of an advisory board that operates in connection with the fund. This is, for example, to ensure that the pension funds' ownership of FSÍ does not affect the investments of individual pension funds.
- Efforts are being made to accelerate the sale of companies owned by FSÍ. To this end, it is stipulated that FSÍ shall draw up a specific sale plan for companies under its control, which is to be updated annually. The disposal plan is part of the regular information FSÍ provides to the Competition Authority, but the fund is also required to publicly publish general objectives for the sale of companies over which it has control. However, there is no basis for setting specific timeframes for the sale of individual companies, in a similar manner to how the Competition Authority has done in relation to banks' acquisitions of commercial enterprises. The very positive effect of the merger lies precisely in transferring control of the relevant companies from the hands of banks.
- FSÍ shall endeavour to sell companies through an open and transparent process. In this way, it counteracts undesirable concentration of power. Furthermore, it should be borne in mind that the sale of companies by FSÍ will be subject to investigation by the Competition Authority if it constitutes a merger within the meaning of competition law. However, the provisions of the settlement do not preclude another arrangement for the sale, for example, a direct sale to foreign parties that could strengthen competition in the relevant market. If FSÍ chooses another sales arrangement, the fund must be prepared to provide an explanation for it.
- The annual and half-yearly accounts of acquired companies must be published. The publication of accounts promotes greater accountability and transparency, which ensures better compliance with the conditions. However, a reduction in disclosure may be considered if it appears likely to cause an undue distortion of competition in the relevant market.
- Continuous and thorough monitoring of the conditions by the FSÍ and the NBI shall be ensured, along with regular reporting to and supervision by the Competition Authority.
The above-mentioned conditions and their underlying assumptions are discussed in more detail in the decision of the Competition Authority. No. 1/2011.
