EU Antitrust Review of BAE-EADS Deal May Face Legal Limit

European Aeronautic, Defence & Space Co. (EAD)’s planned merger with BAE Systems Plc (BA/) may escape a full review by European Union regulators because governments can exempt defense-industry deals from antitrust scrutiny.

EU law has a military carve-out clause for the defense industry that allows member countries to exempt companies from having to seek approval for a takeover from European Commission overseers, said Alec Burnside, a lawyer at Cadwalader Wickersham & Taft LLP in Brussels.

“It’s traditionally an area of frustration for the commission when it gets locked out of military mergers and it has always tried to discourage member states from blocking” any probe, Burnside said, though any government order would only cover “purely military aspects” of the tie-up.

“Products with dual civilian-military use, and civilian activities, will still have to be notified to the European Commission,” he said.

EADS, the parent of Airbus, is negotiating with Germany, France, Spain, the U.K. and the U.S. on the merger, which would create the largest civil-aviation and defense company, with a combined market value of $45 billion. Management seeking approval of the deal must persuade officials in France, which owns a direct stake in EADS, and the U.K., which can veto any change of ownership in BAE.

BAE-Marconi

The U.K. government cited national security issues to exempt BAE’s 1999 purchase of General Electric Co.’s Marconi defense unit from a commission merger review. The EU’s antitrust agency approved non-defense aspects of the deal in 2000. The French, Spanish and German governments didn’t exempt the companies that formed EADS from a 2000 EU review.

Lindsay Walls, a spokeswoman for BAE, said the completion of any transaction would be subject to a range of governmental and regulatory consents. She declined to comment on any details because discussions are continuing. EADS declined to comment on regulatory approvals of the deal because negotiations are still at an early stage.

The commission also declined to comment on the merger review or a possible review of the government shareholdings.

The exemption can’t be used by governments to avoid any potential antitrust concerns and must only be raised if they see security issues, said Stephen Mavroghenis, a lawyer at Shearman & Sterling LLP in Brussels.

‘Strictly Construed’

“It will be strictly construed and it can be reviewed by the European Court of Justice,” he said. “It would look odd if one state were to say it was in their security interests and the other ones didn’t, but they don’t all have to agree to it.”

EU regulators, usually responsible for approving Europe- wide takeovers and enforcing the right to do business across the bloc, have been careful about any involvement in the defense industry because of the legal exemption, said Clara O’Donnell, an analyst at the London-based Centre for European Reform.

The military opt-out may also affect EU rules that condemn special rights for government shareholders, known as golden shares, “simply because it’s an area where traditionally governments have been allowed to do what they want,” she said.

“In military cases, it can be pretty hard to contest” that such shares are needed to protect government interests, Burnside said.

Government Reviews

German Chancellor Angela Merkel and French President Francois Hollande are reviewing the proposed transaction intensively, Merkel told reporters on Sept. 22. Hollande said jobs, industrial strategy and the interests of both countries were at stake. U.K. Defense Secretary Philip Hammond said the government’s special share in BAE means the company will have to prove the deal defends British interest and jobs, the Guardian reported earlier this month.

Governments would be denied a role in operating decisions in the merged company, and the special shares being offered to states would be limited to 15 percent voting rights, Germany’s economy ministry said in a document obtained by Bloomberg News.

The commission has said such stakes may deter investment in the 27-nation bloc. EU regulators revived legal action last year against Germany’s so-called Volkswagen Law that allows the state of Lower Saxony to veto any takeover of the carmaker.

A bigger regulatory obstacle to the deal may be the U.S., which is “sensitive about who is the owner” of defense- equipment suppliers, said O’Donnell. Any requirement for BAE to sell off U.S. businesses would be a challenge because those units are a significant source of its earnings, she said.

To contact the reporter on this story: Aoife White in Brussels at awhite62@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.