Gun-jumping: Do's & Don'ts
Gun-jumping practices are at the center of competition law news in this autumn 2018. After the record fines imposed on Altice by the French Competition Authority in November 2016 and by the European Commission in April 2018 (respectively €80 and €125 million), the President of the French Competition Authority thought that it would be useful to highlight in an article the practices that companies should avoid when implementing their mergers1. More than exhaustive guidelines which would apply to all situations, this article provides an analysis guide and thus sends a warning to companies whose practices, guided by economic imperatives, tend to go beyond what is acceptable under competition law in the phase prior to the authorization of their operation. Companies are now forewarned that they have sufficient material in French and European decision-making practice to be aware of this issue and take the appropriate measures to comply with competition law before the authorization is obtained.
Reminders concerning the notion of gun-jumping
Gun-jumping covers two main categories of behavior which might lead to sanctions: the absence of notification of a notifiable operation and non-compliance with the suspensive effective of the competition authorities' decisions through the early, even partial, implementation of the operation before its authorization.
For the record, when a merger exceeds the thresholds set by the European Commission, or otherwise by a national competition authority, it must be notified to the Commission - or to this authority as the case may be - so that the latter may review it in order to authorize it, subject to conditions or not, or prohibit it (except in the very rare countries that do not have an ex-ante merger control mechanism). Before the Commission or relevant authority's decision, companies cannot carry out the operation and are required to wait for the authorization, except in exceptional cases of derogation from the suspensive effect (in case of duly substantiated special need) or in the countries where the notification does not have a suspensive effect.
The purpose of the suspensive effect of the decisions on mergers is to guarantee that the market remains competitive and no irreparable damage is caused to competition by the parties as a result of the early implementation of the operation. This is even more justified as the outcome of the Commission or competent authority's review cannot be known in advance. Although refusals are quite rare, the authorization of the operation can very well be subject to conditions. Lastly, the companies may decide not to pursue the operation for various reasons.
Non-compliance with the suspensive effect of the decisions relating to mergers exposes all the parties to the merger to a fine, which can be up to, under French law, 5 percent of the turnover realized in France for the parties and under European law, 10 percent of the parties' global turnover. Companies' deviant practices are generally more exposed to the competition authorities' attention when the operation is notifiable. If the competition authorities uncover indications of gun-jumping, they will not hesitate to conduct unannounced raids to verify their doubts, even in case of a favorable decision on the merger.
Finally, gun-jumping practices present an obvious commercial risk for the target in particular when the prospective acquirer is a competitor since, if the negotiations fail, the latter will have had access to commercial information allowing it to adapt its strategy on the market and compete unfairly with the target.
Identification of gun-jumping behaviors
Aside from the absence of notification when it is required, which is an easily identifiable faulty behavior, the parties to the merger are likely to commit a range of prohibited practices leading in concreto to the early completion of the operation. Precedents regarding gun-jumping (and in particular the Altice decisions) bring to light several broad categories of risky or faulty behaviors, without this list being exhaustive. Although, in the Altice decisions, a set of faulty behaviors resulted in sanctions, a single isolated behavior may also result in a sanction being imposed, as the President of the French Competition Authority recalled in her article.
The acquirer's decisive influence on the target's day-to-day management
During the interim period between the signing and the closing of an operation, it is legitimate for the acquirer to want to ensure the preservation of the target asset's economic value. Thus, it is customary for the parties to enter into a memorandum of understanding containing a certain number of provisions protecting the acquirer's interests. This is notably the case of clauses containing an obligation to manage the target "in the ordinary course of business" but without right of review for the acquirer or the prohibition to make investments above a certain threshold exceeding the target's day-to-day management or, more generally, the prohibition of any significant change affecting the target's value until the closing. These memorandums of understanding also generally include sale price adjustment clauses on the closing date depending on certain criteria and/or warranty and indemnification mechanisms in case of litigation.
Although the very principle of these protective provisions is totally accepted by competition authorities, care must be taken to ensure that these clauses do not exceed what is strictly necessary for the legitimate preservation of the acquirer's interests. Furthermore, as the competition authorities carry out an in concreto review of the notifying parties' practices, care must be taken to ensure that the implementation of these clauses is also limited to this strict imperative.
In particular, the following clauses are often prohibited: clauses offering the acquirer a right of review or veto right on the target's day-to-day management acts, taking common business decisions and any other provision allowing the acquirer to take control of the target de jure or de facto by exercising a decisive influence over it. For instance, in the Altice/PT Portugal decision, the acquirer had a veto right on issues concerning the target's ordinary activity, with review thresholds too low to be considered as aimed at preserving the target's value. The same applies to veto rights on the removal from office of managers that are too broadly defined and on the modification by PT Portugal of its pricing policies and offers. As the Commission recalled, it does not matter whether such veto rights or rights of prior consents were exercised in practice, the possibility to exercise them alone is sufficient.
As the French Competition Authority's President summarized, any interference in the target's day-to-day management or any intervention in decisions which are easily reversible and which will not impact the target's valuation should be avoided. This kind of interference can only cover exceptional situations.
The exchange of unlawful information
During the negotiation phase, it is also legitimate for the acquirer to need to have access to a certain amount of information on the target to assess its activity and negotiate the purchase agreement with full knowledge of the facts. However, until the authorization, the notifying parties remain independent companies and must act as such so as not to damage the market irreparably. If the exchanges of information go beyond what is necessary and become systematic, an unsupervised and excessive access by the acquirer to the target's sensitive business information can constitute an indication that even before the antitrust authorization, the acquirer exercises a decisive influence over the target. Therefore, it must be ensured that only the exchanges of information which are strictly justified by the needs of the operation are authorized.
This is even more true and sensitive when the acquirer is one of the target's competitors.
As rightly recalled by the French Competition Authority's President in her article and in the Federal Trade Commission's paper2, mergers between competitors are operations which present the greatest risk of gun-jumping. In particular, in the phase preceding the authorization, competitors are exposed to significant risks of exchanges of unlawful information.
It must not be forgotten that, even when the operation does not need to be authorized by a competition authority, an exchange of sensitive business information between competing operators - which does not present a risk of gun-jumping - could still fall under the prohibition of concerted practices, until the closing of the operation.
Accordingly, the notifying parties should be careful not to exchange sensitive information during their negotiations or to do so only via a "clean team" procedure where only those not involved in the acquirer's strategy or business policy may have access to sensitive information.
The appointment of the target's managers
It is consistently held in the competition authorities' analysis that the appointment of managers is an element which might lead to the conclusion that a target company has been taken over. Therefore, the effective assumption of office of the managers appointed by the acquirer, alone or jointly, is formally prohibited before any authorization. On the other hand, it is quite possible to provide that a manager will be appointed subject to the authorization. However, this manager cannot start exercising his duties before the authorization.
Determining the target's strategy
Before the authorization, the target must continue to act as an
autonomous company independent from the acquirer. It must not in
any event anticipate an authorization and act by putting itself
under the prism of the future merged entity. Any behavior to the
contrary, which might guide the target's strategy other than in
its sole interest, would be reprehensible from a competition law
point of view.
For example, in the Altice/SFR case, the parties prepared the commercialization of a common project whereas they had not yet received the authorization. Moreover, they coordinated their conduct on the market by operationally implementing this project during the suspensive period.
Practical recommendations to avoid risks of gun jumping
In general, it should be ensured that the acquirer does not obtain at any time a decisive influence over the target before the authorization. Care must be taken that there is no de facto change of control before its authorization by the Commission or the competent authority. To do so, the notifying parties must notably respect a body of essential rules of conduct while keeping in mind that each operation has its specificities and requires the implementation of an adapted action plan.
Body of essential rules of conduct (non-exhaustive list):
- Ensure that any intervention is guided by the legitimate protection of the target's value and not by the commercial interest of the future merged entity;
- Ensure that the notifying parties act as autonomous and independent companies until the competition authority's green light. There must be no coordinated action on the market before the authorization;
- Control the lawfulness of the terms of the share purchase agreement and ensure that they are strictly necessary for the protection of the target's value without ever giving the acquirer a decisive influence over the target;
- Prevent exchanges of
sensitive information, in particular if the prospective
acquirer is a competitor. A specific action plan must be
implemented according to the operation at hand. This action plan
must include gradual measures depending on the progress of the
negotiations. For instance, access to the target's information
may be broadened depending on the progress of the negotiations and
the capacity of the short-listed acquirer. However, it is
imperative to ensure that no sensitive information is exchanged
between competitors until closing.
- Firstly, access to the Data Room must be limited and the information to which the prospective acquirer(s) may have access must be confidentialized if they are competitors. The target may use the analysis grid proposed by the guidelines on horizontal cooperation agreements to determine the information that may be considered commercially sensitive. The communication of sufficiently aggregate information that does not allow a client or client category to be identified is not generally considered as sensitive. In any event, access should be given only to information having strictly a legitimate interest for the operation.
- Then, it is recommended to provide the actual use of a clean team and confidentiality agreements adapted to the specific circumstances of the operation. Clean teams ideally can be composed of independent third parties and otherwise, they must not in any event involve employees in charge of the notifying parties' operational policy. Specific measures may also be implemented in this respect to avoid the communication of the target's sensitive information: no printing or downloading of sensitive documents, consultation of sensitive documents in situ, obligation to destroy or return sensitive documents after their analysis, limited distribution of the Due Diligence reports or distribution of a non-confidential version, sanctions and penalties attached to breaches of the confidentiality of the sensitive information, etc.
- Finally, the effective implementation of the action plan chosen must be ensured as well as its respect by the persons involved. The competition authorities will not limit themselves to analyzing the measures implemented on the face of it by the notifying parties if, concretely, they have not been respected. Therefore, the notifying parties are invited to set up control mechanisms, ideally by an independent third party.
- Make sure not to anticipate the authorization through the premature implementation of the operation and integration actions.
1. Isabelle de Silva, Gun jumping: What practices are to be avoided? Insights on the early implementation of mergers, Concurrrences No. 3-2018.
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