M&A – Five Key Antitrust Tips
Awareness of the need to comply with merger control and foreign investment regimes to ensure successful M&A execution is rising across Asia as new regimes come on line and existing regimes become more active. Parties should start planning for merger control and foreign investment filings early in order to manage execution risks effectively and avoid undue delay.
In this Antitrust Legal Quick Tip, we set out five key tips you should consider to manage your transaction more effectively.
Tip 1: Don’t forget merger control and foreign investment regimes capture a broad range of transactions
It may be tempting to assume that merger control applies only to mergers and majority stake acquisitions, but in reality it can capture a much broader range of transactions, including:
- acquisitions of a minority shareholding: most jurisdictions capture acquisitions of “control” which can cover situations of negative control through vetoes over strategic decisions such as approving the annual budgets, business plans or the appointment / removal of senior management;
- establishment of joint ventures: in many jurisdictions, filings may be triggered because of the JV parents’ turnover in that jurisdiction, notwithstanding that the JV may itself have no local nexus. In addition, while some jurisdictions such as the EU only capture “full function” JVs i.e. JVs with market-facing operations that are independent from their parents, other jurisdictions, such as China, capture all types of JVs; and
- changes in the quality of control: this includes a change in the number of companies exercising control over the target. For example, where a JV partner acquires its partner’s stake, a party sells a controlling stake to a third party or where a new partner acquires control alongside existing JV partners.
In addition, some jurisdictions have separate foreign investment review regimes which can also capture a broad range of transactions and are not always limited to just sensitive industries such as energy, defence, infrastructure, telecommunications and agriculture.
Tip 2: Make sure your transaction timetable caters for merger control and foreign investment filings and approvals
The merger control process can be more time consuming and burdensome than you might imagine. You may need to factor the following into your transaction timetable:
- the time needed to prepare the merger filing: typically three to four weeks, but this may be considerably longer if the transaction involves complex antitrust issues or if the merger parties need a lot of time to gather the necessary information for the filing (see Tip 5 below);
- the pre-notification phase: the period between submission of the filing – or draft filing – and formal acceptance of the filing by the authority. Not all regimes have this phase but in regimes which do its duration varies, from one or two weeks to several months in complex cases. In most jurisdictions, there is no statutory time limit in relation to the pre-notification phase; and
- the formal review phase: this is often divided into a “Phase I” review that is typically four to six weeks and a much longer, in-depth “Phase II” review for more complex transactions which can last three to six months or more.
Foreign investment review processes can also be time consuming and should be factored into your transaction timetable. A combination of factors, such as regulators exercising extensive powers of investigation and lengthy pre-notification phases, has made predicting and managing transaction timetables more challenging. Overly ambitious long-stop dates should be avoided and each party’s respective contractual obligations to ensure merger clearances are obtained should be clearly defined. In addition, potential timetable issues should also be carefully thought through if standby debt or equity financing is contemplated – unexpected delays may increase financing costs.
Tip 3: Be mindful of “gun jumping” issues: don’t implement the transaction until it is cleared and closed
While merger rules allow merger parties to engage in some planning of their merger, they must operate their own businesses as independent companies until the transaction is cleared and closed. In order to avoid significant fines (e.g. the European Commission fined a company €20 million in 2014 for taking steps to integrate the acquired business prior to closing – commonly referred to as "gun jumping"), reputational damage, souring relationships with the regulators and potential unwinding of the transaction, parties should:
- avoid any activity that may be viewed as implementation of the transaction: for example, there should be no prior integration of the parties’ businesses and no joint marketing or coordination of competitive behaviour; and
- exercise caution in exchanging information: as independent companies, parties must not exchange competitively sensitive information (for example, in the context of due diligence or integration planning) without appropriate safeguards being in place. Safeguards include the use of clean teams (i.e. a group of employees and outside advisers who (i) have a defined role in the due diligence, valuation and integration planning or related matters in connection with the transaction; and (ii) are not involved in any competitively sensitive decisions of either party) or aggregating / redacting / anonymising the relevant information.
Tip 4: Be careful of the documents you create to avoid inadvertent antitrust risks
Many antitrust authorities have the power to require the disclosure of a wide range of documents by merger parties. Their powers can apply not just to documents created for the contemplated transaction, but also to documents created in the ordinary course of business and prepared by advisers such as investment bankers and other consultants.
To avoid producing any documents that may be misinterpreted and prove problematic when the transaction is reviewed by the authorities, parties should wherever possible ensure sensitive documents are produced in a manner that confers legal privilege and thereby helps to avoid disclosure obligations (and in the EU, only outside counsel who are EU qualified can confer privilege). In addition, you should not, when creating documents:
- characterise the parties as “dominant” as “dominance” has a special meaning in antitrust law;
- make other statements that exaggerate or make unnecessary or unsubstantiated conclusions about the parties’ market position or market shares;
- make statements that might be interpreted as an expression of intent to suppress competition, or drive competitors out of business as a result of the transaction; or
- make statements or produce data that might inadvertently and incorrectly suggest that prices / profit margins may be increased or maintained (including, e.g., references to revenue synergies), or service reduced, as a result of the transaction.
Tip 5: How to better prepare yourself for future regulatory filings
To better prepare for future merger control and foreign investment filings and to avoid undue delay in the preparation phase, you can start taking a number of practical steps now, including creating and maintaining:
- a database of your group’s global and country by country turnover in the latest financial year;
- a list of all group entities and their business activities; and
- a database and copies of all previous merger control and foreign investment filings.