In its May 20 2015 judgment session the Administrative Council for Economic Defence (CADE) approved the Guidelines for Gun Jumping Analysis in Merger Filings. The primary purpose of the guidelines is to prevent the implementation of a transaction (full or partial) before receiving CADE final approval – a practice known as 'gun jumping' in case law.
The guidelines do not bind the antitrust authority in relation to merger filings. They were prepared based on CADE's experience during the first three years of enforcement of the Antitrust Law (Law 12,529/2011). In addition, according to the guidelines, any alleged gun jumping must be analysed on a case-by-case basis; therefore, the guidelines must not be interpreted as a theoretical rule applicable to all cases.
The guidelines have three sections, which address the following:
- the definition and characterisation of 'gun jumping';
- the procedures that can be adopted to mitigate the risk of an infringement being characterised as gun jumping; and
- the penalties applicable to gun jumping.
The activities that may be considered gun jumping are divided into three main categories.
Exchange of information
Through the guidelines, CADE has acknowledged that transactions which are subject to merger control always entail, to a certain extent, an exchange of information – in particular, during due diligence, which is normally carried out before the execution of any binding document between the parties. Notwithstanding the above, abuse during an exchange of information will be characterised as gun jumping. Hence, the parties to a merger must avoid exchanging competitively sensitive information. The guidelines define 'competitively sensitive information' as information that directly addresses the performance of the core activities of the economic agents (eg, information about costs, marketing and product pricing strategies, expansion capacity plans and main customers). To mitigate the risk of an exchange of information being characterised as gun jumping, the guidelines suggest that information be provided in an aggregate manner and with a time delay.
Until CADE analyses a merger filing, the parties must maintain the competitive relationship that existed between them and on the market before the transaction, to the extent that this is possible. Therefore, clauses that result in the early integration of the parties' activities are considered a priori illicit, including:
- previous non-competition agreements;
- pre-payment of consideration (except for typical down-payments for commercial transactions, deposits in escrow accounts or break-up fees);
- direct interference with the strategic aspects of the business of another party; and
- any other activities that cannot be reversed or whose reversal would entail high costs.
Parties' activities before and during implementation of transaction subject to merger control
Any provisions that allow for the effective consummation of a transaction, even partially, before CADE concludes its analysis are considered illicit, including:
- the transfer or use of assets, including voting securities;
- the exercise of voting rights or significant influence on the other party;
- the receipt of profits or payments related to the other party's performance;
- the development of joint sales or marketing strategies;
- the licencing of the other party's exclusive intellectual property;
- the integration of sales forces; and
- the joint development of products or interruption of investments.
The second section of the guidelines sets out example relationships between the parties to a transaction that is subject to merger control which can be adopted to mitigate the risks of prior consummation of a transaction.
Among other measures that can be specifically developed by the parties to a transaction – and depending on the antitrust complexity of the transaction – the guidelines suggest that the following measures be adopted:
- Antitrust protocol – this should set out the procedures to be followed until CADE issues its final decision, primarily with respect to the treatment of competitively sensitive information.
- Clean team and executive committees – the parties should establish bodies specifically created within the scope of the transaction to consolidate the flow of information and control its access, including the processing and treatment of data.
- Data room – a procedure for holding meetings between executive committee members should be established. These meetings must be monitored and can address the future integration process, provided that they do not result in any interference or partnership between companies.
Under the Antitrust Law, the following penalties may be applied in the event of gun jumping:
- fines of between R$60,000 and R$60 million;
- administrative proceedings; and
- the annulment of acts performed before CADE's decision on the merger filing is issued.
The third and last section of the guidelines establishes parameters for the application of the penalties set out in the Antitrust Law.
With regard to the application of fines, the following must be considered:
- the situation when the gun jumping was verified (eg, whether the transaction was notified only after CADE commenced its investigation or was voluntarily presented by the parties);
- the nature of CADE's decision on the merger filing (eg, rejection, approval with restrictions or approval without restrictions), and the existence of horizontal overlapping or vertical integration;
- the time that has elapsed between consummation and notification; and
- the economic size of the infringer.
Administrative proceedings will be commenced where illicit activities have been identified (eg, exchanges of sensitive information, price combinations or interference with the target's decisions): in other words, conduct that – apart from being considered gun jumping – infringes the Antitrust Law (eg, price agreements between competitors).
Finally, before annulling any acts performed before receiving CADE approval, the following must be considered:
- when the conduct took place,
- the proportionality of the acts; and
- the possibility of corroboration of the acts.
The corporate community is always receptive to CADE initiatives – such as the latest guidelines – which are intended to guide economic agents and promote legal security. Apart from reflecting the authority's vision with respect to significant matters, the guidelines enable parties to perform their activities in a legal way, minimising the risk of penalties.
However – and considering the particularities of each case – the parties to a transaction must seek guidance early on when conducting transactions that are subject to merger control. Only once concrete data on each transaction has been analysed will it be possible to structure a transaction in a way that mitigates risks and creates efficiency.
For further information on this topic please contact Fabíola Cammarota de Abreu or Joyce Midori Honda at Souza, Cescon, Barrieu & Flesch Advogados by telephone (+55 11 3089 6500) or email (firstname.lastname@example.org or email@example.com). The Souza, Cescon, Barrieu & Flesch Advogados website can be accessed at www.souzacescon.com.br.
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