On 27 June 2019, the European Commission (Commission) announced it had fined Japanese camera and printer manufacturer, Canon, €28m for partially implementing its 2016 acquisition of Toshiba Medical Systems prior to the transaction being notified to the Commission and, as a result, before it had been formally given competition clearance. The focus of concern was the use of a so-called 'warehousing structure' – a two-step process during which the target company is temporarily "parked" with an intermediary buyer with the intention, the Commission claims, of circumventing EU merger control rules (rules requiring merging parties to notify and suspend implementation of their transactions pending approval).
The Commission's actions may come as no great surprise to some in that they confirm the Commission's long-held view that warehousing structures risk violating the EU rules governing mergers. Indeed, this point was made explicit when the Commission issued an updated Consolidated Jurisdictional Notice in 2008 – in particular, confirming that such transactions should be viewed as one single concentration with the intermediary stage merely being the first step towards implementation of the concentration.
This view, however, sits somewhat at odds with the findings of the EU Courts, which have previously confirmed the legality of such arrangements on the basis that the intermediary entity does not necessarily acquire 'control' over the warehoused company or assets. This potential discrepancy in views will no doubt become the focal point of Canon's anticipated challenge before the General Court – the essential questions being:
- to identify circumstances in which a 'concentration' is deemed to be 'implemented' within the meaning of Article 7(1) EU Merger Regulation (EUMR); and (as part of this)
- whether the intermediary warehousing could be viewed as an action which contributes to, and is necessary for (ie is not merely "ancillary or preparatory") the change in control of the target (as per the Court of Justice's ruling last year in Ernst & Young) and, as such, forms the first step in implementing the concentration.
Merger control – procedural gun-jumping
Article 7(1) EUMR requires parties acquiring control of a business in a qualifying transaction (a so-called concentration with an EU dimension) to notify their transaction to the Commission for approval. The provision also prohibits the transaction from being implemented before it has been approved by the Commission – infringing conduct otherwise known as 'gun-jumping'.
Such procedural gun-jumping typically involves conduct falling short of actually taking formal ownership over a target's shares and assets and, instead, often entails more subtle measures that might be construed as prematurely transferring control over the target to the purchaser. The obligation to suspend the closing of a qualifying transaction exists regardless of whether or not the proposed merger creates potential substantive competition concerns – and the fact that a transaction may then receive competition clearance does not protect it from any potential prior violation of the standstill obligation.
Strict enforcement against procedural breaches of merger control rules, in particular failure to observe the standstill obligation, is very topical at the moment – with the Commission and other competition authorities investigating and/or imposing significant fines for gunjumping in a number of high-profile cases. This includes the Commission's Altice/PT Portugal infringement decision, issued on 24 April 2018, which fined the Dutch telecommunications company Altice €124.5m for an alleged infringement of the standstill provisions.
In August 2016, Canon notified its planned acquisition of Toshiba Medical Systems to the Commission – with the Commission clearing the deal unconditionally the following month. However, before notifying the transaction to the Commission, there was an arrangement whereby an interim buyer purchased 95% of the target's shares for the nominal amount of €800. As part of this first step, Canon also paid €5.28 billion for the remaining 5% of the shares and share options over the interim buyer's stake (including a non-voting share providing it veto rights over any decision by the interim buyer to sell Toshiba Medical Systems to a different ultimate buyer). Only after the transaction was cleared by the Commission was the second step executed in which Canon exercised its share options and thus acquired 100% of the shares in Toshiba Medical Systems.
The parties had entered into this arrangement due to financial difficulties suffered by Toshiba Medical Systems' parent company, Toshiba, following its much publicised auditing issues. In short, Toshiba needed to close certain aspects of the transaction quickly to recognise financial benefits in a time-frame that would not accommodate prior receipt of all relevant merger control clearances. The warehouse structure was intended to facilitate an interim transaction so as to allow Toshiba to complete its sale of the medical system business promptly, without the need to wait for the Commission review process to be concluded.
Despite clearing the notified transaction, the Commission soon began looking into the arrangements entered into before the transaction was notified. Following the issuing of two Statement of Objections to Canon, the Commission concluded that the first step of the arrangement amounted to partial implementation of the transaction – insofar as it contributed to (and was necessary for) the ultimate change of control of the target at the second step of the process. In other words, the first and second steps in the transaction structure effectively formed a single concentration – and the first warehousing step was not, as intended, a separate stage at which the concentration with Canon did not arise.
On the basis of the above analysis, the initial measures should have been notified to the Commission for approval before being put into place. Canon therefore, according to the Commission, violated both the notification requirement and the standstill obligation under Article 7(1) EUMR.
End of the story?
Based on public statements, it seems likely that Canon will challenge the Commission's decision before the General Court. The focus there will then be on the main principles that can be distilled out of last year's Ernst & Young ruling handed down by the Court of Justice.
In its Ernst & Young judgment, the Court of Justice clarified that there is no breach of the standstill obligation on account of transactional activity pursued prior to a merger's clearance where such activity does not contribute to (and is not necessary in order to achieve) a change of control on a lasting basis of the target entity – and regardless of whether that activity results in market effects. Such "ancillary or preparatory" acts, whether or not they generate market effects, do not create a "direct functional link" with a proposed merger's implementation.
Accordingly, such arrangements are unlikely to undermine the objective of the EUMR's standstill provisions – namely, to exercise effective oversight over qualifying transactions before they produce lasting changes in market structure.
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