Minimising the costs and risks of merger control processes on M&A transactions
November 2019 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
Over 130 countries have merger control laws, allowing regulators to consider the impact of transactions on competition. In most jurisdictions it is mandatory to notify transactions to the regulator and obtain clearance before completion. Transactions that are implemented before clearance is obtained may be declared invalid, and fines may be imposed on the parties. Consequently, there will typically be a gap between signing and completion while merger clearances are obtained.
Parties are exposed to numerous risks in this interim period. These include changes in market conditions and a deterioration of the target business and its relationship with customers and suppliers. The purchaser may also incur costs in maintaining financing for the transaction until completion, and parties will be unable to integrate their businesses and exploit synergies.
It is therefore essential for parties to obtain advice at an early stage on the implications of merger control requirements on the transaction timetable and on their ability to undertake actions ahead of completion. This will enable them to take steps to mitigate any adverse impacts of merger control processes.
When does merger control apply?
Merger control can apply to a wide variety of transactions including mergers, acquisitions, transfers of assets and joint ventures. It is usually applicable where one or more parties obtain control over the target’s business or assets. In many jurisdictions, including the EU, control includes having over 50 percent of voting rights, having under 50 percent of voting rights where this is likely to provide a stable majority of votes actually exercised at shareholder meetings, and a minority shareholding with veto rights in relation to key strategic matters, such as the business plan, approval of the budget or the appointment of senior management.
However, in some jurisdictions, including Japan, South Korea and Brazil, merger control can also apply to the acquisition of minority shareholdings without veto rights. In the UK, merger control covers the acquisition of material influence over the target, which can exist at shareholdings of around 15 percent.
In most jurisdictions, identifying whether a merger notification is required for a particular transaction involves an assessment of the turnover of the target and the purchaser’s group in the jurisdiction or worldwide. However, some jurisdictions have thresholds based on market shares, such as Australia, Spain and the UK, assets, including the US and India, or the turnover of the seller, such as Ukraine.
Revenue and asset-based filing requirements can be triggered even if there is no overlap in the parties’ business activities. Similarly, filings can be required even if the target has no presence in a particular jurisdiction. This is a particular risk when two or more parties acquire joint control of a target, as the revenues of the parties obtaining joint control may be sufficient by themselves to meet filing thresholds, such as those in the EU and China.
Finally, some jurisdictions have filing deadlines that start to run from the signing of the merger agreement, such as Greece and Slovenia, or from closing, such as Argentina, Indonesia and South Korea. Fines may be imposed for failing to file in time.
The purchaser should seek to identify where merger filings are required sufficiently in advance of signing to engage legal advisers in the relevant jurisdictions and develop an overall filing strategy. It is advisable for one law firm to coordinate all filings and ensure consistency. This is vital as regulators will often consult each other about a deal and exchange information.
What are the restrictions during the merger review process?
In most jurisdictions, parties to a transaction are subject to a standstill obligation, requiring them to continue to act independently of each other until they receive merger clearance. This prevents parties from completing or ‘implementing’ the transaction until clearance is received.
Measures which are usually prohibited include the transfer of shares or assets, reappointment of management bodies, organisational merger of business units and relocation of employees. Actions to withdraw the target business from certain business segments, coordination or adjustment of products and joint marketing and distribution are also prohibited. The exchange of sensitive business information between the parties is generally prohibited. If the parties are competitors, such information exchanges also risk being treated as cartel behaviour. However, the disclosure of information for due diligence and integration planning purposes is acceptable provided suitable safeguards are in place, such as the use of clean teams.
Regulators are increasingly investigating non-compliance with standstill obligations (known as ‘gun jumping’). The European Commission (EC) can fine companies up to 10 percent of their worldwide turnover for gun jumping and has recently imposed large fines. In April 2018, the EC fined Altice €124.5m for gaining control over the target by obtaining veto rights and access to sensitive business data before it obtained merger clearance. In addition, in June 2019, the EC fined Canon €28m for gun jumping in its acquisition of Toshiba Medical Systems.
Restrictions can also apply in jurisdictions which permit completion before merger clearance is obtained. In the UK, making a merger filing is voluntary, but the Competition and Markets Authority (CMA) can choose to investigate completed transactions and can impose an order requiring the parties to operate separately and to unwind any integration that has taken place.
Parties should also consider whether it is possible to complete a global deal while carving out jurisdictions in which merger clearance is pending. Some jurisdictions permit this, although the nature of the transaction and the structure of the target business will determine if this is practically possible.
Minimising the length of merger reviews
There is considerable disparity between jurisdictions in the duration of merger reviews. In some jurisdictions, such as the US, a transaction is deemed to be cleared unless the regulator acts within a specified time limit. In other jurisdictions there are no binding time limits or no time limits at all.
It is important to assess whether the transaction is likely to have an impact on competition in the relevant jurisdiction, for example if the merging parties are close competitors. This will impact on the length and complexity of the process. Regulators apply greater scrutiny to such transactions, requesting more information and documents from the merging parties and obtaining views from their customers, competitors and suppliers. Many jurisdictions also allow the regulator additional time to conduct an in-depth review of transactions which raise competition concerns.
For example, the EU has a short form notification procedure for transactions which do not raise competition concerns. It has a formal Phase 1 period of 25 working days to clear non-problematic deals. A further 90 working days are available for a detailed Phase 2 investigation of complex deals.
The purchaser is usually responsible for making merger filings. However, in some jurisdictions, such as the US, the seller is also responsible. In any event, the filing will typically require information from the purchaser (or joint purchasers) and the target. Where such information is confidential it is usually provided only to the lawyers preparing the filing.
It is advisable to start to prepare filings in advance of signing. Some jurisdictions require the parties to include extensive internal documentation and data, which may not be readily available. The provision of notarised documents and certified translations can also take time.
Regulators can reject a filing which contains incomplete information, which will restart the review period. In order to avoid this, best practice in certain jurisdictions (such as the EU and UK) is to engage in pre-notification discussions. This involves submitting a draft filing and agreeing with the regulator what further information is required before the filing is deemed complete. This pre-notification process can take several weeks, or months in complex cases.
Regulators have powers to request further information during the review process and can usually ‘stop the clock’ while awaiting the parties’ response. Parties should be ready to respond to such requests promptly, while ensuring that they provide complete and accurate information. The sanctions for providing false or misleading information can be severe, such as the €110m fine imposed by the EC on Facebook for providing misleading information in relation to its acquisition of Whatsapp.
If a deal is likely to raise competition issues, parties should consider in advance whether they can offer remedies, such as the divestment of an overlapping business to reduce market share. This may satisfy the regulator to clear the transaction without a lengthy in-depth review.
Receipt of merger clearances is often the last condition to be satisfied before a transaction can complete. While the timing of clearances is to a significant extent in the hands of relevant regulators, purchasers can take proactive steps to reduce the duration of merger control processes. Although purchasers will primarily be focused on agreeing and signing the deal, engagement with merger control issues at an early stage will be beneficial in most cases.
Steven Vaz is a partner and Natasha Gromof is an associate at Ashurst LLP. Mr Vaz can be contacted on +44 (0)20 7859 2350 or by email: firstname.lastname@example.org. Ms Gromof can be contacted on +44 (0)20 7859 2191 or by email: email@example.com.
Steven Vaz and Natasha Gromof