As the time taken to secure merger control clearances for global transactions lengthens, the parties and their advisers may be tempted to explore alternative deal structures that might allow a transaction to close sooner than otherwise expected. In a stark reminder to industry that it will not tolerate schemes that have, in its view, been devised to circumvent or undermine the efficacy of merger review, the European Commission (EC) announced on June 27, 2019 that it was fining the Japanese conglomerate, Canon, EUR 28 million (almost $32 million) for closing its acquisition of Toshiba Medical Systems (TMSC) in 2016 before notification to the EC and other competent agencies.¹

Warehousing Structure

The acquisition of stock by firms whose normal activity includes transactions or trading in securities on a temporary basis with a view to re-sale is excluded from the scope of mandatory merger review in Europe (so-called banking privilege). In early 2016, and with an eye to a possible transaction, TMSC (with the consent of its parent Toshiba) modified its shareholding structure, creating new classes of shares: 20 Class A shares, 1 Class B share, and 100 Share Options. In March 2016, a special purpose vehicle with three 33 percent shareholders (presumably qualifying financial investors) bought all of the A Shares in TMSC, representing approximately 95 percent of TMSC's stock, for (just) $900. Canon acquired the B Share and the 100 Share Options for $6 billion. The parties' agreement provided that Canon could only exercise its share options once all merger control approvals had been secured, and that at closing the Class A shares "warehoused" with the financial investors would be bought back by TMSC.

Canon notified its intention to acquire sole control of TMSC to the EC in August 2016, and secured unconditional approval from the European watchdog in September 2016.

EC Investigation

In July 2017, the EC sent a formal complaint to Canon, alleging that, through this legal construct, Canon had implemented the acquisition prior to notification and approval. A supplementary statement of objections was adopted in November 2018.

Announcing its decision on June 27, 2019, the EC stated that, in its view, the two-step warehousing scheme devised by the parties was part of a single transaction; that the transaction was subject to notification; and Canon had infringed the standstill obligation by carrying out the first step prior to notification. In a careful choice of words, in its press release, the EC characterized the breach as "partial implementation," presumably to distinguish this transaction from cases such as Altice/PT Portugal (2018, fine of $140 million) where the purchaser in fact exercised decisive influence over strategic decisions taken by the target prior to notification and/or clearance.

The EC stressed that it considers breaches of the notification requirement and the standstill obligation as distinct and "serious" offenses. It characterized Canon's conduct as "at least negligent."

Takeaways

The EC has adopted a more aggressive enforcement policy in respect of procedural breaches of the EU's merger rules under Commissioner Margrethe Vestager's watch. Facebook was fined $125 million in 2017 for providing incorrect or misleading information to the EC during its WhatsApp investigation and, in April 2019, GE was fined almost $60 million for a similar breach. Other cases are pending. The unambiguous message from the EC is that businesses flout the procedural rules that regulate the assessment of mergers at their financial peril, and that this is so whether the transaction is problematic or not.

Gun-Jumping Fines Imposed by Other European Agencies

Enforcement of procedural rules is not the preserve of the EC. For instance, in 2016, France levied a fine of $90 million (at today's rates) on telecoms operator Altice for taking control of SFR and Virgin Mobile prior to notification. Also, earlier this week the Danish agency imposed a more modest fine of $900,000 on a Danish firm for failing to notify its 2016 acquisition of 72 Shell-branded service stations. And in Ireland, where the failure to notify a merger is a criminal offense, in May 2019, the prosecutor accepted guilty pleas from the seller and the buyer to an un-notified transaction and required them to contribute to the costs of the prosecution and make personal charitable donations.