In M&A transactions, the typical time gap of several weeks or even months between signing a transaction agreement and closing on the transaction creates a dual challenge: preserving the value and independence of the target company until closing and achieving "Day One Readiness" by planning for integration of the target into the acquirer's activities as soon as possible after closing.
When addressing these challenges, the parties need to respect the boundaries set by antitrust laws. Where the transaction is subject to pre-closing merger review in the EU and/or the US, the parties are subject to a standstill obligation imposed by the EU Merger Regulation (EUMR) and the Hart-Scott-Rodino Antitrust Improvement (HSR) Act—the parties may not implement the transaction before clearance is obtained1 and need to continue acting as independent companies.2 Not observing the standstill obligation amounts to "gun-jumping."
The parties also must be careful not to exchange competitively sensitive information improperly prior to closing, particularly when they are actual or potential competitors. Information exchange is a potential concern during due diligence as well as integration planning and can be sanctioned under general competition rules prohibiting anti-competitive agreements, such as Article 101 TFEU in Europe and Section 1 of the Sherman Act in the United States.3 This is true even where a transaction is not reportable. Further, in reportable transactions, improper information exchange also can support a finding that the standstill obligation was not observed.
Infringing these rules exposes the parties to various risks, including significant monetary penalties: a fine up to ten percent of the infringing party's worldwide revenues at the EU level, and civil penalties of $41,484 per day (adjusted annually) in the US for the duration of the violation as well as possible disgorgement of any ill-gotten profits.
This update summarizes the risks and mitigating measures in light of two landmark rulings on gun-jumping rendered by the European Court of Justice (Ernst & Young) and the European Commission (EC) (Altice/PT Portugal) earlier this year and in light of current US practice.
1 In the US, "clearance" typically occurs in the form of expiry or termination of the waiting period.
2 Similar obligations apply under the merger control laws of most other jurisdictions worldwide.
3 Again, similar rules apply in many other jurisdictions worldwide.
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