Increased scrutiny of pre-closing conduct
As antitrust authorities around the world step up enforcement of rules requiring full business separation pending clearance (see further 10 Key Themes - deal risk) a key risk area is the level of influence buyers exercise over a target’s business, with heavy penalties being imposed on buyers who cross the line and exercise control (or have the right to exercise control) too early (‘gun jumping’).
While most authorities allow buyers to take reasonable and necessary steps to protect the value of their investment, deciding what is appropriate in practice can be difficult, particularly when parties face extended periods of regulatory review.
Recent cases have shown that the cost of getting it wrong can be staggeringly high. Managing these risks requires a thorough understanding of the rules in each jurisdiction and robust procedures that safeguard against possible infringements.
Key antitrust principles
Most antitrust authorities operate ‘suspensory’ merger control regimes, which impose strict prohibitions on parties taking any steps which could be construed as early integration. Authorities want to ensure that pre-merger conditions of competition are fully maintained until they have decided whether the deal should go ahead.
Pending clearance, merging parties must act as independent competitors. This means no integration, exercise of management control, joint marketing, coordination of commercial behaviour or uncontrolled sharing of commercially sensitive information.
To allow buyers to protect the value of their investment, they are generally allowed to limit a target to its ordinary course of business and impose financial penalties for any reduction in value from non-ordinary course decisions
Buyer consent rights for non-ordinary course decisions are also generally acceptable, but caution must be exercised:
- thresholds must be set at the right level to avoid any influence in practice over ordinary course activities;
- consent rights must be strictly limited to actions which are necessary to protect the value of the target; and
- commercially sensitive information must be limited to appropriately structured and constituted ring-fenced clean teams.
Recent developments globally: areas of risk
Recent cases have highlighted the key risk areas for buyers in structuring and implementing ‘gap controls’.
In Europe, the European Commission (in 2018) and French competition authority (in 2016) imposed record fines of €125 million and €80 million respectively on cable and telecoms company Altice for 'gun jumping' on three separate deals. Three types of infringing behaviour were viewed together as allowing Altice to exercise control over target businesses before the deals were cleared:
- Rights granted in purchase agreements allowed Altice to veto decisions and intervene in the target's business beyond what was necessary to preserve value.
- Altice exercised control in practice over operational decisions that did not impact target value, including marketing campaigns, commercial contracts and future investments.
- Significant and regular exchanges of commercially sensitive information took place without proper safeguards being in place which contributed to Altice's exercise of control over 'day-to-day' operations.
In May 2018, the EU’s Court of Justice held that the suspension obligation is only breached by actions which contribute to a change in control, although behaviour falling outside scope may still be caught by the prohibitions on restrictive practices (see further EY/KPMG)