Summary: Over the last year, we have noted increasing enforcement of merger control rules globally. In this blog, we outline some recent European decisions, a reminder issued by the United States Federal Trade Commission (“FTC”) and moves by China to punish gun-jumping going back almost a decade.
Throughout 2017 and early 2018, we noted in several blogs (see our previous blogs from January 2018, July 2017 and May 2017) that competition authorities globally had been cracking down on the enforcement of merger control procedural rules, and particularly on so-called “gun jumping” – that is, the implementation of a merger before mandatory merger clearance is received.
Recent decisions in Europe and China, and reminders from the United States, demonstrate that competition agencies are continuing the global push to enforce merger control notification rules with increasing intensity.
Europe Continues its Crack Down
In our May 2017 blog, we noted that the European Commission had launched an investigation into whether Altice had “jumped the gun” by exercising “decisive influence” over PT Portugal, before the Commission cleared that acquisition in April 2015.
On 24 April 2018, the Commission concluded its investigation and found that Altice had failed to comply with the so-called “standstill obligation” under EU merger control, and fined Altice EUR125 million. This represents the highest ever fine in Europe for gun jumping, and comes less than two years after the French Competition Authority issued the then-highest fine of EUR80 million, also against Altice in relation to its takeover of SFR.
In deciding that Altice had failed to comply with the standstill obligation, the Commission found that:
- certain provisions of the purchase agreement resulted in Altice acquiring the legal right to exercise decisive influence over PT Portugal, for example by granting Altice veto rights over decisions concerning PT Portugal's ordinary business; and
- in certain cases, Altice actually exercised decisive influence over aspects of PT Portugal's business, for example by giving PT Portugal instructions on how to carry out a marketing campaign and by seeking and receiving detailed commercially sensitive information about PT Portugal outside the framework of any confidentiality agreement.
This shows that simply making completion of a deal conditional on merger clearance is not necessarily enough to avoid jumping the gun. If the terms of the transaction agreement allow the purchaser to influence the target business prior to closing (beyond, for example, ensuring the value of the business is maintained during the pre-closing period), they could risk breaching the standstill obligation.
In July 2017, we noted that the Commission had also launched a gun jumping investigation into Canon, as well as investigations into Merck and GE for other potential procedural breaches. These cases remain ongoing, and it is possible that we could see the Commission issuing further significant fines in the coming months.
This continued European crackdown comes as the Commission continues to consider potentially expanding European merger control by adding new thresholds based on deal value, with a view to capturing potentially problematic deals that might not meet the current turnover thresholds.
It is not just the European Commission that is continuing to pursue these procedural breaches. Competition agencies in Member States also remain active in this area, with Austria the latest example after Comparex was fined EUR30,000 on 25 April 2018 for notifying in 2017 a transaction that it had actually completed in 2014 and Luxembourg Holdings 70 was fined EUR40,000 for acquiring 50% of Texbond without prior merger approval.
A Reminder in the United States
Companies must also be mindful of gun jumping under US law. In particular, for transactions subject to filing obligations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), a transfer of beneficial ownership prior to expiration or termination of the relevant waiting period is a violation of the HSR Act and can result in penalties of up to $41,484 per day (the current maximum daily penalty, which is adjusted annually). Moreover, where the parties to a transaction are competitors, premerger conduct that amounts to a transfer of beneficial ownership could potentially violate §1 of the Sherman Act and/or §5 of the FTC Act (which prohibit anticompetitive conduct between competitors), regardless of whether the HSR Act applies and/or the waiting period has expired or been terminated.
The US antitrust agencies will challenge premerger conduct that they believe amounts to a transfer of beneficial ownership in violation of the HSR Act. For example, in 2017 the U.S. Department of Justice reached a settlement with Duke Energy Corporation (“Duke”) for a gun jumping violation arising from Duke’s alleged acquisition of beneficial ownership of Osprey Energy Center (“Osprey”), a Florida electrical generating facility, prior to complying with its obligations under the HSR Act. The transfer of beneficial ownership occurred as a result of a “tolling agreement” entered into as part of the acquisition, which allowed Duke to exercise control over Osprey during the premerger period (eg, Duke took over control of purchasing fuel for the plant, made arrangements for delivery of the fuel and transmission of the generated energy, and retained the resulting profits or losses). The settlement required Duke to pay a civil penalty of $600,000.
As in other jurisdictions, a transfer of beneficial ownership may arise from various types of premerger conduct. As the FTC recently reminded readers of its blog, even premerger information exchange (eg, in the course of due diligence or integration planning activities) may contribute to a gun jumping violation to the extent it leads to a transfer of beneficial ownership before the transaction has closed.
The Chinese authorities have also increased their focus in this area recently, with failures to notify going back as far as 2009 being fined.
In April 2018, the Ministry of Commerce (“Mofcom”) issued fines of approximately US$30,000 each against Chinese companies involved in two joint ventures that were completed in 2009 and 2010 but not notified.
These penalties mean that Mofcom has issued 22 gun jumping penalties since 2014, and follows an announcement from earlier this year that 39 such cases have been investigated in the last two years. It is not just Chinese companies that have been in the firing line – the largest fine so far was imposed on Bombardier Sweden in 2016, and in February of this year a subsidiary of South Korea’s CJ Corporation was fined in relation to non-notification of a joint venture in 2011.
The continued global crackdown shows the ever-increasing importance of compliance with merger control obligations worldwide. Considering merger control obligations early on in the M&A process is key to ensuring compliance and keeping a deal on track.