Gun-jumping: the growing firepower of EU and UK merger authorities
August 2019 | SPECIAL REPORT: COMPETITION & ANTITRUST
Financier Worldwide Magazine
August 2019 Issue
On 11 February 2019, the Competition Appeal Tribunal (CAT) upheld the first ever ‘gun-jumping’ fine imposed by the UK Competition and Markets Authority (CMA). The £100,000 fine was found by the CAT to be “appropriate” in light of the “utmost importance that interim orders be scrupulously complied with”. Perhaps buoyed by the CAT’s endorsement, on 12 February 2019 the CMA imposed a second fine – double the amount of the first – on the same party for a separate breach of the same interim order.
The CMA’s toughening stance is consistent with a broader trend of UK and EU regulators stepping up enforcement of procedural breaches, and in particular gun-jumping violations. Violations are attracting increasingly significant fines and, in some cases, the unwinding of transactions altogether. The added vigour with which regulators are policing procedural compliance in the UK and EU places renewed pressure on companies to “scrupulously” comply – or face a growing barrage of enforcement action.
Gun-jumping refers to circumstances in which parties close, or take relevant steps toward closing, a transaction prior to having received clearance from a relevant competition authority. In a mandatory regime (i.e., where all mergers subject to that agency’s jurisdiction must be notified), taking steps toward closing without prior approval may constitute a breach of a ‘standstill obligation’. Penalties for breaching a standstill obligation can be significant. The European Commission (EC) may impose a fine of up to 10 percent of aggregate turnover on companies that intentionally or negligently breach their standstill obligations.
The EC had, until recently, adopted a relatively soft approach to enforcing these powers and had not imposed substantial fines. The EC’s approach appears to be shifting. In a recent enforcement action, the EC fined Altice €124.5m for breaching its standstill obligation following notification of its plans to acquire PT Portugal. Despite clearing the acquisition, EU competition commissioner Margrethe Vestager explained that the EC found “some pre-closing covenants gave Altice the possibility to exercise decisive influence over the target”. In particular, conditions imposed in the transaction agreement “granted Altice the right to veto decisions concerning staff, contracts above a certain value, and any pricing policy of the target”. She noted that Altice “had actually exercised decisive influence in a number of instances”. While it is common for a buyer to include provisions concerning the conduct of the target business prior to closing, the EC’s enforcement action serves as a cautionary reminder to take care not to go further than necessary to preserve the value of the target business.
More recently, on 27 June 2019, the EC fined Canon €28m for breaching its standstill obligation in relation to its acquisition of Toshiba Medical Systems (TMS). The acquisition involved a ‘warehousing’ structure, whereby prior to closing: (i) an interim buyer purchased a majority of the shares in TSM; and (ii) Canon was granted purchase options giving it a right to acquire those shares from the interim buyer. Even though the EC ultimately cleared the transaction unconditionally, it found that the transaction structure effectively amounted to a “partial implementation” of Canon’s acquisition of TSM before it had obtained requisite clearance. In the EC’s view, it would appear that certain ownership rights – even if not exercised – obtained through the initial phases of a multi-stage transaction may still raise concerns.
In a recent interview, Ms Vestager counselled observers not to “read too much into the number of recent procedural infringement cases”, insisting that the EC simply “deal[s] with procedural infringements if and when they arise”. Nonetheless, the growing emphasis on procedural violations – and in particular gun-jumping violations – suggests the EC is stepping up its enforcement activity. Until Altice, for example, the EC had only previously dealt with a breach of standstill obligation (in the context of partial implementation) in one other case going back two decades. And in that case no fine was imposed.
In contrast to the EU regime, UK merger control operates as a voluntary regime. In practice, this means that while parties are not obliged to notify a pending transaction, the CMA retains the power to ‘call in’ qualifying transactions that have not been voluntarily notified for review. It may do so before or after closing. In addition, the CMA has a general power to prevent transacting parties from taking actions that may prejudice the outcome of a merger investigation. This includes the ability to require the parties to refrain from taking any further steps to integrate their businesses pending completion of a CMA investigation. As with the EU regime, the penalties for failing to comply are potentially significant – fines can be set at up to 5 percent of the party’s worldwide turnover.
A number of recent cases indicate that, like the EC, the CMA is beginning to enforce its powers more strictly. As part of its investigation into Electro Rent’s acquisition of Microlease, the CMA stated that it was considering “the transfer of Electro Rent’s lease over its registered place of business in the UK” as one way to potentially address the competition concerns it had identified. Despite being aware of the CMA’s intentions, Electro Rent proceeded to terminate its lease before the CMA had reached a final conclusion. The CMA found that this constituted a breach of an interim order it had imposed requiring the parties to, among other things, refrain from taking any action that could impair the ability of either party from being able to compete independently.
On appeal before the CAT, Electro Rent argued that it had a reasonable excuse for breaching the interim order because it had communicated its intentions to the monitoring trustee prior to terminating the lease. The CAT rejected Eletro Rent’s argument, finding that “[i]n view of the importance of adherence to the interim order”, no reasonable person would have terminated the lease “without first having consulted the CMA”. In upholding the fine, the CAT emphasised the “public importance” of ensuring that “the merger control process, and the duties that it creates, are strictly, and conscientiously, observed”. It added that the fine was justified in “furthering a policy objective of deterring non-compliance, or of incentivizing compliance”.
The day after the CAT’s ruling, the CMA wasted little time in imposing an additional £200,000 fine on Electro Rent for failing to seek its consent before appointing its CFO as a director of Microlease prior to closing. The CMA found that the appointment “carried a material risk for potential integration and exchange of confidential information” and it “was therefore foreseeable that the consent of the CMA would be required”. The CMA placed emphasis on the “potential” for pre-closing information exchange, concluding that Electro Rent was at fault even though the CMA did not find any actual harm to competition.
These cases suggest that the CMA is taking a tougher line than the EC. The EU Court of Justice (ECJ) has recently held that steps taken to close a transaction prior to obtaining requisite approval will only amount to a gun-jumping violation under the EU merger regime where the actions can be seen as “contributing to a lasting change of control of the target”. Steps taken that are “ancillary and preparatory” will not suffice. It is doubtful that Electro Rent’s termination of its lease or appointment of a director would have met this threshold.
On 10 January 2019, the CMA imposed another gun-jumping fine. The CMA fined Ausurus £300,000 for failing “to take adequate steps to procure that the [target’s] business was carried on separately”. Among other things, Ausurus had begun to take over aspects of the target’s operations by accepting payments from the target’s customers and making payments to its suppliers on its behalf. This, according to the CMA, “clearly constituted a step towards integration” and “prejudiced the ability of the [target] business to compete independently”.
This succession of gun-jumping fines was quickly followed by a further example of the CMA’s emboldened approach. On 28 February 2019, the CMA issued its first unwinding order, effectively requiring parties to a completed merger to unwind certain steps they had taken to integrate their businesses prior to the conclusion of the CMA’s merger review. The CMA had opened an investigation into the merger of tech companies Tobii and Smartbox, which had not been notified to the CMA for review. As part of its unwinding order, the CMA concluded that certain aspects of the merger should be unwound, including: (i) a product resale agreement; (ii) an agreement to discontinue certain R&D projects; and (iii) an agreement to discontinue the supply of certain products. The CMA concluded that it had “reasonable grounds for suspecting that” these steps to integrate the businesses “might prejudice” the CMA’s investigation or subsequent remedial action, notwithstanding the relatively small size of the transaction in question.
While the CMA has yet to reach a final decision in Tobii, and Canon is appealing its EC’s fine to the ECJ, these recent cases indicate the regulators’ hardening approach to procedural violations. As Ms Vestager remarked following the Altice fine, the EC “has always taken compliance with procedural rules in competition proceedings very seriously”. Merging parties will need to do the same.
Paul Stuart is an associate and Andrew Boyce is a trainee solicitor at Cleary Gottlieb Steen & Hamilton LLP. Mr Stuart can be contacted on +44 (0)20 7614 2207 or by email: firstname.lastname@example.org. Mr Boyce can be contacted on +44 (0)20 7614 2217 or by email: email@example.com.
© Financier Worldwide
Paul Stuart and Andrew Boyce
Cleary Gottlieb Steen & Hamilton LLP