When an M&A transaction needs to be approved by a competition authority, parties are usually prohibited from implementing it before securing clearance (the so-called "standstill obligation"). For many years, European authorities rarely focused on violations of standstill obligations (a.k.a. gun-jumping). This has changed in recent years, as both the number of cases and the level of fines has increased dramatically. In an M&A context, steering away from gun-jumping must now be high on the agenda.
In June 2009, the Commission imposed a €20 million fine on Electrabel for implementing a deal without the Commission's authorization. The decision came as a surprise as, at the time, the highest fine imposed by the Commission for gun-jumping was €174,000. This was only the beginning of the gun-jumping fever. In 2014, a fine of €20 million was imposed on Marine Harvest for a very similar violation. In April 2018, the Commission fined telecom company Altice €124.5 million for a premature takeover of PT Portugal, and in June 2019, the Commission fined Canon €28 million for using a "warehousing" two-step transaction structure when acquiring Toshiba Medical Systems Corporation.
National authorities are not far behind. In November 2016, the French competition authority fined Altice €80 million for the premature implementation of its acquisition of SFR and Virgin Mobile. In 2018, the German Bundeskartellamt imposed a €4.5 million fine on Mars for partially implementing a transaction. Finally, in September 2019, the UK Competition and Markets Authority imposed a record fine of £250,000 on PayPal in the context of its acquisition of iZettle.
However, apart from clear-cut cases where companies forget to check relevant notification thresholds, avoiding gun-jumping is usually not a walk in the park.
Acquisition by any means
In the past, a common mistake made by companies was to assume that only an acquisition of a majority shareholding would trigger a filing obligation. Nowadays, it is well understood that an acquisition of control over another undertaking can constitute a notifiable concentration regardless of what legal means are used, and sometimes even though it happens only on a de facto basis. This was confirmed in Marine Harvest, where acquiring a 48.5% stake in a company was considered an acquisition of control because of the wide dispersion of the remaining shares and previous attendance rates at the shareholders' meetings. The Commission's reasoning was upheld by the General Court and endorsed by Advocate General Tanchev. What the Advocate General did not endorse, though, was that Marine Harvest received (in line with previous practice) not one, but two fines: one for the violation of the notification obligation, and a second for the violation of the standstill obligation (see: here). The case currently awaits judgment by the EU Court of Justice. Even more difficult to assess from the merger control perspective are transactions involving acquisitions of assets.
Interim period covenants
Much more complicated is the issue of interim period covenants (a.k.a. "conduct of business clauses"). These are contractual clauses, which obligate the seller to refrain from certain actions or to seek the purchaser's consent for them in order to protect the target's value between the signing and closing of a transaction. Not long ago, transactional lawyers acting for purchasers had only one goal when negotiating interim period covenants: to give their client as much control as possible. The problem is that controlling the target's business before merger clearance is the essence of gun-jumping. Before 2018, there was very little case law on interim period covenants at the EU level, but the applicable Commission guidelines suggested that covenants obligating the seller to abstain until completion from material changes in the target's business are permissible . This was consistent with the US courts' approach, which only sanctioned covenants interfering with the target's ordinary course of business .
However, in November 2016, the French competition authority (FCA) issued a decision fining Altice €80 million for the premature implementation of its acquisition of SFR and Virgin Mobile. The decision created a lot of turmoil among antitrust practitioners – not only because of the massive fine for what was then considered a grey zone violation. The decision also contained some very controversial statements that suggested that covenants obligating the seller to seek the buyer's consent before taking certain actions – as opposed to covenants simply obligating the seller to refrain from certain actions – are not permissible (even if these actions concern strategic issues and can materially impact the target's value). It was very difficult to reconcile the FCA's position with longstanding and widespread transactional practice (and also with the fact that, in most cases, the purchaser can simply release the seller from the obligation to refrain from certain actions, which blurs the difference between both types of clauses).
Fortunately, this was straightened up by the Commission's 2018 Altice case (where Altice was sanctioned €124.5 million – this time for the premature implementation of its PT Portugal deal). The Commission confirmed that the purchaser can have pre-closing veto rights as long as they do not go too far. On the other hand, the Commission gave limited guidance on when such rights (and interim period covenants in general) go too far. It provided some criteria for establishing value thresholds above which a veto right may apply (namely the transaction's value, the target's revenues, and the value of the target's contracts). However, they are so vague that it is difficult to apply them in practice. The PT Portugal decision also created some new problems, e.g., by suggesting that a veto right falling outside the ordinary course of business may still be unnecessary to preserve the target's value (and, thus, be illegal). It is certainly difficult to apply the Commission's guidance in practice, but the companies have no choice but to do their best (and to document their efforts well).
Pre-integration preparatory measures
Even less clear is the issue of pre-integration planning. Parties to M&A transactions want to integrate their businesses as soon as possible and they often prepare for this long before merger clearance. However, the line between permissible preparation and illegal gun-jumping is particularly blurred. A recent example is the EY / KPMG Denmark case. In 2014, the Danish competition authority found that EY and KPMG Denmark violated the standstill obligation because, in anticipation of the EY / KPMG Denmark merger and before receiving antitrust clearance, KPMG Denmark terminated its cooperation with the international KPMG network. The Danish authority found that terminating this cooperation before clearance amounted to gun-jumping (as it was "merger-specific, irreversible and likely to have market effects") and the European Commission supported its position.
In May 2018, the EU Court decided, however, that the notice of termination did not violate the standstill obligation, as it did not "contribute" to EY acquiring control of KPMG Denmark. By linking the gun-jumping concept to the notion of a change of control, the judgement significantly restrained the authorities' wide interpretation of the standstill obligation. In particular, it confirmed that purely unilateral measures and joint integration planning should not be considered gun-jumping. It also suggested that joint communication to and even negotiation with future customers and suppliers may also be permissible (although parties must be wary of an anti-competitive exchange of information – see below). On the other hand, finding that a mere "contribution" to a change of control amounts to gun-jumping gave authorities new ammunition (and the Commission immediately used it in its Canon decision, which we discuss below).
Anti-competitive exchange of information
Until closing, parties to a transaction are also subject to general antitrust rules against anti-competitive agreements. This means, i.e., that, to the extent they are actual or potential competitors, they generally cannot share competitively sensitive information (especially on price, cost and volumes). It is widely accepted that in the context of M&A transactions such information may sometimes be shared (e.g., for due diligence and for integration planning) but the scope of the information cannot go beyond what is necessary, and appropriate safeguards must always be in place (and should include at least the setting up of clean teams for the due diligence review of the most sensitive information). Antitrust enforcement against anti-competitive information sharing in the transactional context is currently rather limited (notably, it was one of many misbehaviors listed in the 2016 and 2018 Altice decisions). However, judging by how quickly gun-jumping enforcement develops, this may change at any moment.
M&A transactions often involve very tight schedules and securing antitrust clearance may require a significant amount of time. To speed up the process, parties sometimes use unorthodox transaction structures, which may easily attract antitrust authorities' attention.
A remarkable example of antitrust risk related to such alternative structures is a recent European Commission decision to fine Canon €28 million for partially implementing its acquisition of Toshiba Medical Systems Corporation (TMSC) before merger control approval. Canon used for the acquisition a so-called "warehousing" structure. In the first step, an interim buyer acquired 95% in the share capital of TMSC for €800, while Canon paid €5.28 billion for the remaining 5% of the shares and share options over the interim buyer's stake. Only after this took place did Canon apply for merger clearance. In the second step, following approval of the merger by the Commission, Canon exercised its share options and acquired 100% of the shares of TMSC. Based on the "contribution to a change of control" formula proposed by the EY / KPMG Denmark judgement, the Commission found that already the first step of the transaction "contributed" to the acquisition of control over TMSC, as it was a "necessary" precondition thereof. The Commission's reasoning may create a lot of additional confusion around the gun-jumping concept. In the course of a transaction, there are many steps which are "necessary" for the ultimate change of control but which cannot reasonably be considered gun-jumping (e.g., parties' efforts to fulfill conditions precedent stipulated in the contract). One can only hope that the EU courts will clarify the concept of a "contribution to a change of control". Until that time, companies should be wary of using warehousing structures.
Another tool sometimes used to speed up the M&A process consists in carving out parts of a transaction which still require antitrust clearance, while implementing the transaction in countries where the transaction has already been cleared or does not require clearance. However, most competition authorities generally reject such carve-outs (either because national law does not provide for a relevant exemption from the standstill obligation or because the exemption is interpreted strictly) and are ready to impose significant fines. For example, in 2018 the German competition authority imposed a €4.5 million fine on Mars for carving out the German and Austrian activities of the target and implementing the rest of the acquisition. There are only a few carve-out-friendly jurisdictions (e.g., Israel and Mexico), so the applicability of this tool is very limited (and, in any case, it always requires very careful up-front antitrust planning).
Avoiding gun-jumping risks
It is clear that steering a transaction away from gun-jumping traps is not an easy task. Unfortunately, companies (even those having a dedicated internal antitrust team) often involve antitrust lawyers when the transaction is well underway, and sometimes only at its final stages. Designing a deal without consulting antitrust experts not only increases the gun-jumping risk but often also protracts the process. Engaging them early on, even before initial discussions with the other party, can help save a lot of money and time down the road.
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