A new European gun-jumping decision, following the European Court of Justice 2022 Marine Harvest judgment, sends a very strong message to companies that initially acquire minority, and gradually acquire controlling, interests in targets.
In April 2022, the Autorité de la concurrence, the French Competition Authority (FCA), fined the Compagnie Financière Européenne de Prises de Participation (Cofepp) up to ?7 million, for having closed its takeover of Marie Brizard Wine & Spirits without first notifying the deal to the FCA and prior to the FCA granting authorisation.
The decision helpfully provides some clarification of the tipping point between absence of control and control, and therefore between no notification and mandatory notification.
Read the full article here, and watch Frédéric Pradelles take us through some key highlights below.
Through a series of transactions that started in 2015, Cofepp, which is active in the wine and spirits sector (Poliakov, Label 5, Porto Cruz, Saint James), gradually acquired interests in its competitor MBWS (Marie Brizard, William Peel, San José). Between 2015 and 2017, Cofepp made six declarations to the Autorité des marchés financiers, the French financial market regulator, that its acquisition of MBWS shares had pushed it over the threshold for acquisition of control. The first threshold of 5% was crossed in June 2015, and the 27.5% threshold in September 2017. Cofepp became the main shareholder of MBWS in 2017, ahead of Diana Holding and DF Holding, which held 21% and 7% respectively.
Over the successive transactions, Cofepp gained increased influence, both in the general shareholder's meeting and on MBWS board of directors. Since June 2017, Cofepp has been able to appoint three of the 11 representatives to the MBWS Board of Directors, and these individuals also held key positions within Cofepp: chairman of the management board, vice-chairman of the board of directors, and managing director/international marketing director.
As a result, according to the FCA's decision, Cofepp could not only directly intervene in MBWS' strategic and operational decisions, but could also obtain information about its competitor's past and future commercial and budgetary policy, which would then be passed on to Cofepp employees. Cofepp and MBWS also strengthened their business and financial relationship, which increased the convergence between the companies.
In December 2018, Cofepp subscribed to a reserved capital increase, at the end of which it would hold more than 47% of the capital and voting rights of MBWS. Cofepp notified the FCA in January 2019, and conditional approval was granted in February 2019. At the same time, however, the FCA carried out inspections and seizures at the premises of Cofepp, MBWS, and Castel, among others, which resulted in a fine decision against Cofepp on 12 April 2022.
The FCA decided that Cofepp violated the obligation to notify under Article L. 430-3 of the French Commercial Code and the obligation to standstill under article L. 430-4 of the same Code. It further noted that Cofepp risked a sanction up to 5% of the acquirer's and the acquired company's combined turnover in France in the last fiscal year under Article L. 430-8.
In line with its previous decisions and its new, 2020 merger control guidelines, when assessing this case, the FCA first recalled the definition of "control" and its application to a de facto controlling situation. A merger is deemed to have taken place when the acquirer obtains decisive influence (i.e., the ability to take strategic decisions on plans, capped investments, budgets, appointments and dismissals of key managers) over all or part of the target's activities, without necessarily holding a majority of the shares.
To assess whether or not there is control based on a de facto situation, the FCA takes into consideration the manner in which strategic decisions are adopted, as well as the involvement of the controlling company in the day-to-day management of the controlled company. The implementation of commercial relationships, or exchanges of information with the purpose or effect of making the transaction a merger, may also constitute circumstantial evidence.
In this case, the FCA considered that Cofepp was, indeed, able to exercise decisive influence over MBWS and thus had de facto control over MBWS prior to the notification of the January 2019 merger. The FCA particularly noted the following circumstantial elements:
- In 2017, Cofepp became the most important shareholder of MBWS in terms of capital and voting rights.
- Being part of MBWS' board of directors, Cofepp had access to its sensitive information, including budgetary and commercial information. Exchanges of information happened during the board meetings and through direct contact with certain key MBWS employees. In addition, monthly board packs containing detailed data on MBWS' business and marketing prospects were sent to the board of directors. These exchanges carried on after July 2018, despite a confidentiality agreement and the constitution of a "clean" team.
- Cofepp and MBWS also strengthened their business and financial relationship through two supply agreements concluded in March 2016 and May 2018. Under these, Cofepp became one of the most important suppliers of whisky and port to MBWS.
- Cofepp was involved in strategic and operational decisions taken by MBWS, such as the appointment of MBWS' managing director, its operational and commercial policy-setting, and in the day-to-day management of the business.
The FCA therefore set the date of Cofepp's de facto acquisition of MBWS as being April 2018, which is the date of the appointment of MBWS' managing director, not the date of formal notification in January 2019, which resulted in its conditional approval in February 2019.
The FCA considers that Cofepp effectively violated its notification obligation in April 2018, in violation of Articles L. 430-3 and L. 430-8, I of the French Commercial Code and, as the de facto merger was completed before the transaction was notified to and cleared by the FCA, the transaction was closed prior clearance, in violation of Article L. 430-8 II of the French Commercial Code.
In addition, according to the FCA, Cofepp carried on having a decisive influence over MBWS between January and February 2019; there were still exchanges between employees of both companies and Cofepp was even more involved in the management of MBWS.
Articles L. 430-4 and L. 430-8, II of the French Commercial Code are intended to ensure that no structural changes or exchange of information can take place in the event that the parties to the transaction abandon the transaction, either as a result of the merger control procedure or for their own reasons. Furthermore, these articles seek to prevent a merger from starting to produce its effects on the market before the FCA has been able to assess them and, if necessary, to issue mandatory remedies, as it was ultimately the case in this instance.
An Instructive Decision
The acquisition of minority interests in competitors is common, but such transactions draw the attention of competition authorities because of their strategic importance. In July 2021, when Orange acquired a 54% interest in TKR, the European Commission required Orange to divest the 30% interest it was going to indirectly acquire from TRMC, on the grounds that it would have given Orange access to commercially sensitive information on one of its strategic competitors.
Specific precautions must be taken in the event of a gradual increase in the capital of a company, whether or not it is a competitor, in order to ensure that the acquirer will not secure de facto control over it, which will be considered as having occurred prior to merger clearance. These precautions are all the more necessary when an acquisition is ultimately notified. As can be seen with Cofepp/MBWS, this is because it exposes the companies to having to eventually justify why they did not notify at an earlier stage, and to the subsequent risk of being sanctioned if the previous transactions were subject to notification to the FCA.
If the infringement is established, it is irrelevant if the gun-jumping infringement is attributable solely to the acquirer.
Finally, the FCA's decision highlights the role of clean teams, which are widely used in M&A transactions and systematically used in the case of mergers between competitors. These teams must fulfil their role effectively, both in the pre-notification and post-notification phases, and protect commercially sensitive information that may be shared internally between the signing and the completion of a merger. In this case, the clean team did not prevent an exchange of sensitive information between target and acquirer, and this was a contributory factor in the FCA's decision.
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