Gun-jumping refers to the practice of implementing a merger/acquisition prior to obtaining a necessary antitrust clearance(s). Such practices are prohibited in many countries and may result in substantial fines. Such practices often (but not necessarily) involve the separate infraction of failing to notify the deal to the relevant authority prior to the deal's implementation. This is because the failure to notify and gun-jumping share the common objective of cheating an antitrust agency of its mandated authority to review the transaction.

Under the EU Merger Regulation 139/2004, the failure to notify and gun-jumping are dealt with in Articles 4(1) and 7(1), respectively. Pursuant to Article 14(1), each practice, if committed intentionally or negligently, is punishable by a fine of up to 10% of the parties' aggregate turnover in their last financial year. The relevant turnover on the acquirer's side includes the turnover of its parent and subsidiary companies, which is then aggregated with that of the target. Chinese SOEs should beware that, as a result of the European Commission's merger decision in EDF/CGN/NNB of March 2016, their relevant turnover would include all companies in the SASAC of the acquiring firm (national or regional) involved in the same industrial sector.

The most recent EU-level decision involving gun-jumping took place in the 26 October 2017 judgment of Marine Harvest USA v. European Commission [Case T-704/14], in which the General Court affirmed a Commission decision fining Marine Harvest the sum of €20 million for having violated both Articles 4(1) and 7(1) [i.e. €10 million for each infringement]. In the case in question, Marine Harvest, under a share purchase agreement, obtained 48.5% of the shares in Morpol, thereby obtaining sole de facto control of Morpol. Almost a year later, Marine Harvest, very belatedly, notified the transaction to the Commission. The General Court, however, upheld the Commission's conclusion that the late notification and gun-jumping constituted negligent violations of Articles 4(1) and 7(1).

There is a gun-jumping case currently pending in the Court of Justice, i.e. Ernst & Young P/S Koncurrenceradet [Case C-633/16], involving the merger of KPMG DK, KPMG's Danish operation, and E&Y. The deal was notified to the Danish Competition Council, as required under Danish law. However, the Council found that KPMG DK and E&Y had committed an act of gun-jumping in that prior to the merger clearance, KPMG DK had severed its cooperation agreement with KPMG, which in the view of the Council amounted to partial implementation of the merger with E&Y. This decision was appealed to the relevant Danish court, which then referred the issue of gun-jumping directly to the EU Court of Justice, since the Danish merger provisions on gun-jumping mirror EU law.

Prior to ECJ judgments being rendered, the Advocate General of the Court (who is not a sitting judge) issues his advisory opinion on the matters before the Court, which the latter almost always adheres to. On 18 January 2018, Advocate General Wahl issued his Opinion in Ernst & Young, in which he concluded that the parties had not committed an act of gun-jumping. In his view, the termination of the cooperation agreement between KMPG DK and KMPG was nothing more than a preparatory step or prerequisite to the implementation of the merger, but did not contribute, in any way, to a change in control between the merging parties.

As of yet, the European Commission has not pursued a gun-jumping case against any Chinese companies. However, given the risk of such severe fines, it is imperative for large Chinese companies to consider the potential for an EU merger filing when carrying out a big M&A transaction when both parties have significant EU sales. The same care should be given to all other jurisdictions with "mandatory" merger filing legislation (now found in most countries), given that these jurisdictions consider gun-jumping penalties as a necessary deterrent to merger filing avoidance. Such countries include the US, Brazil, Mexico, Germany and France.

Once the Chinese company knows that it has a merger filing requirement, it should seek the detailed advice of antitrust counsel as to any potential penalties for failure to notify or suspend the transaction pending clearance as part of its overall risk assessment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.