Editor's note: Marcos Battisti, head of Western Europe and Israel at Intel Capital, outlines in a guest article why he is concerned on behalf of the corporate venturing and VC industries about proposed reforms of the European Union merger control Regulation.
These proposed reforms, which were under public consultation until October 3, would mean that acquisitions of more than a 20% stake in a company active in the same sector - or of above 5% under certain conditions – might need to be notified. This could have a significant negative impact on the VC industry in Europe, Battisti argues.
Mr. Battisti's guest post originally appeared on Global Corporate Venturing, the trade magazine for the corporate VC industry. Emphasis is ours.
We welcome and support the European Commission’s initiative to review and improve the European merger regime. However, we are concerned that the proposed new system regarding non-controlling minority shareholdings could lead to a potential, unintended, backlash against venture capital investments in Europe and thus adversely affect many innovative small and medium European (“SME”) companies which benefit from those investments.
Corporate venture capital investors play a critical role in providing financing to innovative SME companies. Corporate investors tend to invest within their own sectors and on a longer term basis. This means that they continue to fund the investee company in future investment rounds when other investors, such as venture funds, might have walked away at an earlier stage. Venture capital investments may well involve two or more investors which each satisfy the European Commission’s jurisdictional thresholds.
Therefore, the proposal, if implemented without amendment, will likely mean that an important number of corporate venturing deals will require a public filing before closing.
The consequences of such a filing requirement are both to delay the availability of funding to SME companies that are in need of capital and will cause disclosure of information - such as the size and terms of deals as well as the description of the transaction project itself - which may damage the competitiveness of the venture-backed companies, particularly those innovative companies which are operating in “stealth mode” and relying therefore on confidentiality to protect their competitive advantage.
These issues will affect the entire corporate venturing community and I understand that both the BVCA and the EVCA are seriously concerned about the current proposals.
If the proposals are implemented without amendment, there is little doubt that corporate investors will think twice before engaging in an investment which may require a notification, even if only of an “information notice”.
The time and costs required to analyse whether a filing is required; the preparation of the actual filing; the fact that the deal will be publicly disclosed; the delay arising out of the waiting period and the legal uncertainty as to whether the investment may be investigated by the European Commission even after the waiting period has expired are all negative factors which could well lead to a decrease in investment in the region.
Given that corporate investors have an in-depth knowledge of the industries where they invest, they tend to lead the venture capital investments which they make. If lead corporate investors are discouraged, it could also be expected that other investors, such as financial funds, will follow suit.
We therefore may lose an important part of venture capital activity.
It is important to note that this proposed new legislation would be coming at a time when every government in the European Union is attempting to stimulate corporate venturing activity.
I have difficulties in understanding how an investment in an SME company, which is by its nature in an early stage of development and thus with no real presence in the market, could give rise to antitrust concerns such that a filing would be required. Clearly, the proposal may capture situations that are in no way related to monopolistic power. Normal venture-backed SME companies are simply not big enough to cause concerns in relation to competition.
The aim of the European Commission is to ensure that markets are functioning well and in accordance with the rules on competition.
We understand that large transactions between strong competitors can raise competitive issues. Large deals like Ryanair’s investment in Aer Lingus can understandably catch the European Commission’s attention. However, these deals are much more competitively sensitive and thus of a completely different scale than venture capital deals.
I would strongly encourage the Commission to carefully review all of the responses to their proposal and to consider all of the potential consequences that the proposed new system may have on the VC industry.
Proper safeguards as well as clear and objective thresholds should be put in place in order to avoid that the new rules stifle investments in Europe and therefore hinder economic growth.
As an industry, we do not cause financial crises; what we do bring to the table is positive.
We provide a mechanism to fund what are generally SME companies, with the aim of helping them to grow and create more jobs. We are concerned that the proposal is looking at something that is not currently a problem and, if implemented, can create significant, surely unintended, collateral damage to Europe’s venture industry.
To see further context of Battisti's concerns, and wider venture capital industry worries, read this article on Global Corporate Venturing as well.
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