Gun jumping is an enforcement priority for EU competition authorities
March 2019 | SPECIAL REPORT: MANAGING RISK
Financier Worldwide Magazine
March 2019 Issue
In April 2018, the European Commission (EC) imposed a record fine of €125m on telecommunications company Altice for the implementation of its acquisition of control over Portugal Telecom before having obtained the required approval by the EC, also known as ‘gun jumping’. Previously, in 2017, the EC imposed €20m fines on each of Electrabel and Marine Harvest.
The high level of the fines imposed by the EC should be understood in the context of an increasing concern of antitrust authorities around the world regarding pre-closing behaviour and transaction structures. These cases are aimed to send a clear message to companies: gun jumping will be considered a very serious infringement and it is now a clear priority on the EC’s agenda.
European Union (EU) merger control rules provide that transactions meeting certain thresholds must be notified to the EC and that they cannot be implemented until clearance is obtained. In this respect, until closing, the merging parties must remain independent and any pre-closing covenants, exchanges of information and integration planning must be carefully assessed.
At EU level, financial penalties resulting from infringements of the standstill obligation can be up to 10 percent of the worldwide turnover of the undertaking concerned. In this respect, the risk associated with this infringement is even more significant given that the concept of undertaking under EU competition law includes not only the corporate entity that actually committed the infringement, but also the corporate group to which that company belongs. Most developed countries have similar provisions to those at EU level, which also foresee significant penalties in case of infringement.
Until recently, the EC had not considered enforcement of this provision as a priority and had paid very little attention to this type of infringement. In fact, no fine was imposed until 2017, despite several cases having been identified in which clear violations of the standstill obligation had taken place. At this moment, the EC decided to change its approach in order to consider gun jumping an enforcement priority.
Antitrust authorities have valid reasons for prosecuting gun jumping infringements since they can undermine the effectiveness of the merger control system. Standstill obligations are aimed at ensuring that mergers do not have an impact on the market until the relevant competition authorities have verified that they will not give rise to any competition concerns. Otherwise, there is a risk that by the time competition authorities reach a decision, the transaction may have already produced a potentially irreparable negative impact on the market.
However, the practical application of the standstill obligation is not always easy. Indeed, with Altice, the EC opened a Pandora’s Box by extending the concept of gun jumping to certain pre-closing acts and integration planning practices common in most M&A transactions. In this respect, the main difficulty is now to identify what specific pre-closing acts and integration planning may be considered as gun jumping. The line that separates those practices that would be permitted and those that would amount to gun jumping is very fine and would require a case-by-case assessment.
Until closing, merging parties should continue to operate independently in the market
It would be advisable to avoid any form of joint communication to clients or coordination of the offers to be made to them during the interim period.
Exchanges of information
The exchange of information between merging parties is essential during the due diligence process and also during the interim period in order to prepare the integration of the businesses. However, until closing, merging parties remain competitors and as such they must not have access to competitively sensitive information from the other party. On the contrary, non-commercially sensitive information may be freely disclosed, for example information regarding IT systems, HR, premises, etc.
As regards commercially sensitive information, such as individualised details of customers, prices, production costs and R&D projects, there are specific measures that could be adopted to mitigate the risk of gun jumping.
The safest option would be the use of an independent third party that has access to the individualised data of the companies. However, this option may not always be satisfactory for parties. As an alternative, the creation of clean teams within the companies would also be possible. Disclosure of confidential information would be limited to members of those clean teams under a strict ‘need to know’ basis. Also, members of clean teams should be carefully selected, ideally not being part of commercial or marketing teams and they must sign a confidentiality and non-disclosure agreement.
It most cross-border transactions, a period of time elapses between signing and closing. To preserve the target’s value during that period, it is common that the seller undertakes to abstain from actions outside the ordinary course of business. In order to monitor compliance with that obligation, sale and purchase agreements usually include provisions requiring the consent of the purchaser in relation to certain actions of the target during that period.
With Altice, the EC considered that the granting of certain veto rights during the interim period had given Altice the possibility of exercising a decisive influence over the target before obtaining clearance. In particular, the EC claimed that those veto rights went beyond what was necessary to preserve the value of the target and gave Altice the possibility of influencing the target business.
The EC’s position with regard to Altice should be construed in light of a landmark ruling adopted on 31 May 2018 by the European Court of Justice of the EU (ECJ) that clarified the limits of the scope of the standstill obligation. In this respect, the ECJ considered that only measures that contribute to the acquisition of control or that actually allow the acquirer to exercise a decisive influence over the target should be considered as gun jumping. On the contrary, other preparatory measures that may be related to the implementation of the transaction but that in themselves do not confer any influence over the target would not constitute an infringement of the standstill obligation.
It can therefore be concluded that veto rights may be aimed at protecting the target value between signing and closing but they cannot refer to activities within the “ordinary course of business of the target”. Particular relevance is given to the monetary value thresholds that are set to determine the acquirer’s consent. In this respect, the lower the value the more likely the veto right is to be considered as within the ordinary course of business conduct of the target. Examples of veto rights that are likely to be considered as leading to gun jumping infringements would be the appointment of senior management, decisions regarding the target’s pricing policies, marketing campaigns, future investments and commercial contracts, unless the monetary value of those contracts and investments have a significant impact on the valuation of the target.
Competition authorities worldwide have intensified their focus on compliance with notification and standstill obligations. The EC is currently leading the way on the definition of the actions between signing a deal and closing that may give rise to an early implementation of transactions. Breaches of standstill obligations may expose companies to hefty financial penalties. Therefore, companies must be particularly careful in designing integration planning and deal structuring in order to avoid the risk of incurring in gun jumping practices.
Ana Raquel Lapresta is a senior associate at Uría Menéndez. She can be contacted on +32 2 639 64 67 or by email: email@example.com.
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Ana Raquel Lapresta