“Gun-jumping” – antitrust pre-closing risks and how to avoid them

by Dentons
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Competition authorities around the world – and in particular in Europe – have re-focused their attention on pre-closing behavior and transaction structures. These may conflict with antitrust rules in two ways: First, transactions may be subject to prior merger control notification and clearance of competition authorities. In many jurisdictions, such proceedings are mandatory, i.e. transactions must not be implemented before clearance (so-called “standstill obligation”). Second, and independently of merger control requirements, until closing transaction parties principally remain independent and are subject to general antitrust rules (e.g. regarding the exchange of competitively sensitive information). The latter must be taken into account when preparing and negotiating a deal (e.g. by setting up clean teams), however, is – as such – rarely subject of public enforcement. In contrast, the first aspect – also referred to as “gun jumping” – regularly leads to investigations and fines.

“Gun jumping” can have various forms as the following recent enforcement examples evidence:

Step-by-step implementation of transactions

  • In October 2017, the General Court of the European Union upheld a decision of the European Commission fining Norwegian seafood company Marine Harvest EUR 20 million for taking control of Morpol without prior EU merger clearance. Marine Harvest had first acquired – without notification – a 48.5% stake in Morpol. The Commission held that Marine Harvest, despite the minority stake, already had de facto sole control, enjoying a stable majority at the shareholders' meetings because of the wide dispersion of the remaining shares and relatively low attendance at these meetings. Marine Harvest had only notified the subsequent second step, a public offer for the remaining shares – which according to the Commission and the General Court was too late.
  • In July 2017, the European Commission announced its preliminary conclusion that Canon’s acquisition of Toshiba Medical Systems breached EU merger control rules. As a first step, Canon had set up a special-purpose holding company that acted as an interim buyer. The holding company acquired 95% in the share capital of Toshiba Medical Systems. Canon acquired the remaining 5%, as well as stock options for all of the shares held by the holding company. As a second step, Canon exercised the stock options. Canon notified the proposed acquisition to the Commission only after having implemented the first step. Authorities in China and Japan found this structure to infringe antitrust rules as well.
  • In May 2017, the European Commission announced its preliminary finding that Altice jumped the gun in its acquisition of PT Portugal. Altice had – without notification – concluded an option agreement with PT Portugal’s majority owner to acquire sole control over PT Portugal.

“Carve-out” structures

  • International mergers are typically subject to several notifications, some of which may be more complex and time-consuming. In such cases, parties sometimes consider to close the deal, but exclude certain geographical parts of the respective business until the clearance is received in that jurisdiction. While this may work in some jurisdictions and in particular circumstances, many authorities are very critical of such an approach. In 2016, Cisco Systems and Technicolor settled a case involving a ‘carve-out’ in Brazil for a fine of approx. EUR 7.5 million.

Early integration

  • For the economic success of a transaction, it is necessary to integrate the businesses as soon as possible. However, the slope towards “gun jumping” is slippery. In 2014, the Norwegian Competition Authority fined grocery wholesaler NorgesGruppen for taking over the leases of its target’s premises prior to clearance. Similarly, the German Federal Cartel Office prohibited supermarket chains Edeka and Kaiser’s Tengelmann to imple-ment joint purchasing prior to clearance.
  • Regarding staff, while HR integration planning is permissible, transaction parties may generally not transfer executives or key employees before clearance. In 2016, the French Competition Authority imposed a record fine of EUR 80 million on telecommunications company Altice for jumping the gun in its acquisition of SFR and Virgin Mobile France. The fine was inter alia based on the allegation that Altice had prematurely transferred the general manager of Virgin to the board of SFR. 
  • Reversing integration can also raise concerns. In 2018, the European Court of Justice will rule on this question that came up with regard to the merger between Ernst & Young and KMPG in Denmark (case C-633/16). KMPG in Denmark had already terminated its coop-eration with the international KPMG network in anticipation of the merger before it was approved.

Exchange of information

  • Parties to a transaction have legitimate interests to exchange information, e.g. for due diligence purposes, to identify possible synergies or to prepare for integration. However, in principle competitors must not have access to competitively sensitive information (such as prices, costs, R&D projects or other strategic plans) before closing. In the Altice case, the French authority did not deem it sufficient that the exchange of certain sensitive in-formation had been restricted to in-house counsel. Consequently, depending on how sensitive the information is, parties may have to consider to form ‘super clean teams’ consisting of external counsel only.

Pre-closing covenants and ordinary course of business clauses

  • It can take several weeks (or even longer) before the competition authorities take their decision. To preserve the target’s value post-signing, the seller usually undertakes to ab-stain from actions outside the ordinary course of business, e.g. in relation to capital measures. This is generally accepted by competition authorities. However, such clauses must not give the acquirer decisive influence over the target before clearance. Therefore, the parties need to take care to set thresholds at an appropriate level to ensure that ordi-nary course of business activities are not affected. In the Altice case, while the French Competition Authority did not object to a price adjustment clause, it did take issue with a clause that made the conclusion of certain contracts and investments subject to the buy-er’s approval.

These recent examples show that care should be taken when structuring, preparing and implementing transactions. Signing does not provide for a “carte blanche” but instead antitrust restrictions remain in force until closing. Commercial interests to close the transaction as soon as possible and to preserve the value of the target must be aligned with the prohibition of “gun jumping”. Authorities acknowledge that there is no black or white list of permissible actions and that, instead, a case-by-case self-assessment is required. Infringements can lead to significant fines, interim measures and unwinding orders as well as civil law ineffectiveness of implementing acts.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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