The Commission’s decision on 27 June 2019 to impose a €28 million fine on Canon for breaching EU notification and standstill obligations is the latest in a series of cases showing the Commission’s determination to take action against procedural infringements of EU merger control. It follows a 3 year investigation by the Commission, and a 2017 fine by the Chinese authority for breach of Chinese merger control rules.
The case concerns Canon’s 2016 acquisition of Toshiba Medical Systems Corporation (TMSC) by way of a so-called “warehousing” two step transaction:
- in step one, Canon paid €5.28 billion for 5% of the share capital of TMSC (with limited voted rights), and options to acquire all of TMSC’s shares (exercisable on receipt of antitrust clearances). At the same time, a special-purpose vehicle paid €800 for 95% of TMSC’s share capital (with voting rights);
- in step two, once regulatory approvals were obtained, Canon acquired 100% of TMSC by exercising the options and converting them into voting shares. TMSC bought back and cancelled the remaining shares.
While the full version of the decision is not yet public, the Commission has stated that it views steps one and two together as a single notifiable transaction and that, by carrying out step one, Canon partially implemented its acquisition of control of TMSC before notifying the Commission and gaining approval. The disparity in the consideration paid was likely a key fact in the Commission’s decision to “look through” the two steps and treat them as a single transaction.
Prior to 2008, the Commission had on occasion accepted warehousing structures. Its policy changed, however, with new guidance that made it clear that implementing structures where an interim buyer acquires shares on behalf of the ultimate buyer without prior approval would normally be considered “gun-jumping” under EU law. As such, the Commission’s opposition to warehousing structures is nothing new.
However, it is questionable whether an outright rejection of any kind of warehousing structure is in line with recent decisions taken by the European Court of Justice (ECJ), particularly in EY/KPMG. It may be argued that, under ECJ jurisprudence, it should be possible to design a deal structure in such a way that achieves some of the benefits of warehousing without violating the standstill obligation, provided it is guaranteed (based on the deal documentation and other factors) that the ultimate acquirer cannot exercise any kind of control rights over the target. The full decision, when published, should provide helpful guidance on whether and how the Commission dealt with these arguments.
Canon has announced that it will appeal the decision, which it claims was based on a “novel concept of ‘preparatory acts’ or ‘partial implementation’'” and is out of line with the approach taken by the EU courts.
For now, investors and companies buying targets in series of transactions involving interim buyers should continue to exercise particular caution over:
- the terms of any contractual arrangements governing the multiple steps which may make the transactions “interdependent”, either because they are linked by condition or it can be shown that each transaction would not have been carried out without the other;
- rights attached to options which will be exercised to acquire control at a certain time (e.g. once all conditions have been satisfied); and
- when financial and economic risk is in fact assumed by the ultimate acquirer at step one, either by early payment of full consideration or other obligations assumed during the warehousing period.