Falling foul of merger control rules can be expensive
“Enforcement against companies for gun jumping is not a new phenomenon. However, the landscape is continuously changing and developing. Now more than ever, dealmakers need to seek advice from the early stages of developing the deal structure through to liaising with the counterparty and integration planning.”
- Nicole Kar
We recently reported on competition authorities around the world clamping down on procedural breaches of merger control rules (see our Predictions for 2018). These breaches range from early implementation of transactions prior to merger control clearance (a breach of the standstill obligation or “gun jumping”), to the provision of incorrect or misleading information to competition authorities.
This trend continues apace. And as the frequency and severity of fines increase, dealmakers need to pay particularly close attention to the rules. Below are some tips for staying clear of the risks.
Seek timely advice when considering using two-step deal structures
In competitive auctions, strategic buyers often use two-step deal structures. This is because the standstill obligation can place strategic bidders at a disadvantage if they face more protracted merger approval processes compared to non-strategic bidders. These structures have received scrutiny by competition authorities in the past and so care is required when using them. For example, the EC is currently investigating Canon for an alleged gun jumping infringement concerning a two-step transaction structure used in relation to its acquisition of Toshiba Medical (see our alert here). The EC’s decision in this case is due later in the year and we expect it will shed light on the manner in which two-step structures will be assessed in the future, at least in the EU.
Carefully assess all interactions throughout the merger review process
Companies contemplating a transaction are entitled to start planning in advance in order to facilitate future integration. But if the interactions go too far, the behaviour can amount to early implementation and give rise to gun jumping. Although a recent judgment by the Court of Justice of the EU (see our alert here) appears to give more leeway for merging companies to agree and implement preparatory measures that do not confer control or directly contribute to the eventual acquisition of control, parties should remain cautious. The EC’s €124.5m fine imposed on Altice in April of this year is a cautionary tale of how things can go wrong.
The EC found that Altice had begun implementing its acquisition of PT Portugal prior to notification and prior to clearance through:
(i) pre-closing covenants: veto rights over the employment of any officer or director of the Target; over changes to the Target’s pricing policies; and over a broad range of contracts;
(ii) actual interference in the Target’s ordinary business conduct, such as instructions on how to carry out a marketing campaign; and
(iii) unlawful exchange of commercially sensitive information (CSI), covering granular, non-historic and individualised financial data.
The decision highlights the importance of carrying out an upfront antitrust review of the relationship between merging parties during due diligence before closing. Pre-closing covenants must not enable the buyer to exert control over the Target’s commercial policy or influence its ordinary course of business pre-closing. And while competition authorities acknowledge that merging parties need to exchange certain CSI in the context of a transaction, the appropriate safeguards must be put in place, through properly structured NDAs and/or clean team arrangements. It is worth noting that although the parties were competitors in this case, the rules on gun jumping apply to all buyers - whether trade or financial sponsors.
Don't forget the importance of general antitrust rules
Moreover, interactions between merging parties can also infringe the general rules on anticompetitive practices which apply in transaction settings. The Australian Competition and Consumer Commission is currently investigating two companies concerning an asset sale agreement signed before the acquisition was completed (see Allens client alert here).
In the U.S., the FTC recently issued guidelines on exchange of information during pre-merger negotiations and due diligence. The FTC stressed that the later the stage of the transaction, the more information might have to be shared, which in turn requires that stronger safeguards be implemented.
Missed filings still happen and can be costly in more ways than one
Despite the prevalence of merger control laws, parties still fail on occasion to notify transactions for one reason or another. For example, in December 2012, the EC fined Marine Harvest €20 million for gun jumping and this was upheld by the General Court in 2017 (see our alert here). The U.S. DOJ also recently stated that it has at least two ongoing investigations for failure to notify, while China’s SAMR continues to intensify its enforcement in this area.
And it is not just the risk of fines which is important. Failure to notify can lead to the transaction being unwound, as was the case when the Philippine Competition Commission recently voided a merger in the shipping sector and fined the parties for failure to notify.
Consider the full range of procedural merger control rules
There are a range of merger control rules which can trip companies up, not just standstill obligations. Following the headline €110m fine imposed by the EC on Facebook in 2017 for the provision of incorrect/misleading information, the EC’s decisions in two cases raising similar issues are expected later this year, and other authorities are also active on this front.
"Competition authorities in South-East Asian jurisdictions have recently demonstrated that they are now a voice to be reckoned with, through their robust challenge of the Uber-Grab transaction which the parties did not notify, including in Singapore, Vietnam and the Philippines."
- Clara Ingen-Housz