The European Commission (“the Commission”) last month levied a fine of EUR 20 million on Marine Harvest ASA (“Marine Harvest”), a Norwegian seafood company, for acquiring a 48.5% stake in its competitor Morpol ASA (“Morpol”) prior to notifying the transaction to the Commission and receiving its approval.1 Earlier that month the European Court of Justice (“ECJ”) upheld a Commission fine of EUR 20 million on Belgian energy company Electrabel for failure to notify the increase of its stake in the French electricity company Compagnie Nationale du Rhône (“CNR”) from 17.86% to 49.95%.2 In both cases, acquisitions of below 50% shareholdings were deemed to be reportable under the EU Merger Regulation (“EUMR”) on grounds that they conferred on the acquirers de facto sole control over the respective target companies.
The Marine Harvest case is a stark reminder that the Commission is prepared to impose significant penalties on companies that breach their obligations (i) to notify transactions that fall within the scope of the EUMR (notification requirement), and (ii) to refrain from closing such transactions before merger control clearance is granted (standstill obligation). Following Electrabel, it is clear that it has the European Courts’ blessing to do so. Under the EUMR, fines for “gun jumping” can reach 10% of the annual worldwide turnover of the corporate group to which a company belongs.
Companies should therefore assess the merger control implications of envisaged transactions already at an early stage in the process and make sure that procedural and substantive risks are adequately addressed. This is particularly true when a notification requirement cannot be determined on the basis of a bright line test, but rather as in the case of de facto sole control, careful consideration of a number of transaction-specific factors is warranted.
The Marine Harvest Case
Background. On December 14, 2012, Marine Harvest entered into a share purchase agreement to acquire 48.5% of Morpol’s shares from Morpol’s two largest shareholders, both of which belonged to the same corporate group. Morpol was, at the time, listed on the Oslo stock exchange. The closing of this transaction took place on December 18, 2012. Marine Harvest subsequently submitted on January 15, 2013 a mandatory public offer for the remaining shares in Morpol pursuant to the Norwegian Securities Trading Act. Following the settlement and completion of this offer on March 12, 2013, Marine Harvest held 87.1% of the shares in Morpol.
Merger Control Proceedings. On August 9, 2013, Marine Harvest notified the Commission of the transaction. In the course of its review, the Commission raised concerns that the transaction, as originally notified, would significantly reduce competition in the market for farming and primary processing of Scottish salmon. It cleared the transaction only after the parties agreed to significant divestments.3
In its clearance decision, the Commission took the view that the acquisition of the initial 48.5% stake had already conferred upon Marine Harvest de facto sole control over Morpol. While there is no precise threshold above which a minority shareholding may be presumed to confer de facto control, the Commission pointed out that a share of 48.5% would give Marine Harvest a stable majority at Morpol’s shareholders’ meetings in view of the wide dispersion of the remaining shares and previous attendance rates at these meetings. Given that Marine Harvest had completed its acquisition of the initial 48.5% stake prior to notification and clearance, the Commission indicated that an infringement of the notification requirement (set out in Article 4(1) EUMR) and the standstill obligation (provided in Article 7(1) EUMR) could “not be excluded”.
“Gun Jumping” Investigation. The Commission consequently launched a separate investigation into the matter and issued a statement of objections in which it set out its “gun jumping” allegations against Marine Harvest. In the course of the proceedings, Marine Harvest invoked Article 7(2) EUMR, which provides for an exemption to the standstill obligation in the case of public bids. According to this provision, closing may occur prior to the clearance of the transaction in the case of public bids, provided that the acquirer (i) notifies the transaction to the Commission immediately following the publication of the bid, and (ii) does not exercise voting rights attached to the securities prior to the Commission’s clearance, or does so only to maintain the full value of the investment based on a derogation granted by the Commission. During the merger notification process Marine Harvest submitted that it would not exercise any voting rights or other forms of de jure or de facto control over Morpol pending the Commission’s merger control review.
The Commission found that the conditions of the Article 7(2) EUMR exemption were not met. It concluded its investigation with an infringement decision on July 23, 2014, finding that Marine Harvest had breached its notification and standstill obligations and imposed a EUR 20 million fine on the company. While its decision has not yet been made public, and its press release does not expressly address the topic, it had already in its merger clearance decision pointed out that Article 7(2) EUMR applies to acquisitions of control by means of acquisitions of packages of shares from “various” sellers in the context of public bids or so called “creeping bids”.4 It therefore considered that the exemption of Article 7(2) EUMR is not applicable in a case where a controlling stake is acquired by the purchaser of a single package of shares from one seller.
The Commission’s reasoning appears to be in line with a previous decision in which it found that the Article 7(2) EUMR exemption is not available where a controlling minority shareholding is acquired through a single acquisition of shares from one seller, with the expectation that a majority shareholding will in due course be acquired through a public bid.5 Marine Harvest nonetheless indicated in a statement that it remains convinced that it acted in accordance with the requirements of the Article 7(2) EUMR exemption for public bids. The Commission’s decision is subject to appeal.
The Electrabel Case
The Commission rendered its decision to fine Marine Harvest only a few weeks after the ECJ upheld in its entirety a EUR 20 million “gun jumping” fine on Electrabel that the Commission had imposed in 2009. This fine thus far constituted the only major penalty imposed by the Commission on a company for premature closing of a reportable transaction.6
Background and Merger Control Proceedings. Between June and December 2003, Electrabel, through a series of transactions, acquired 49.95% of the capital and 47.92% of the voting rights in CNR, a French public company active in the electricity sector. Several years later, in August 2007, Electrabel entered into discussions with the Commission to assess whether it had acquired de facto sole control over CNR and needed, therefore, to file a notification under the EUMR. The Commission concluded that it had. Electrabel subsequently filed a merger notification based on the assumption that it had acquired de factosole control in the course of 2007. The transaction, which did not raise substantive competition law concerns, was cleared by the Commission in April 2008.7 In its clearance decision the Commission, however, left open the question of the date on which de facto sole control had, in fact, been attained.
“Gun Jumping” Investigation. The Commission subsequently launched an investigation and concluded in its infringement decision that Electrabel had already acquired de facto sole control over CNR in December 2003.8 In its reasoning it stated that, although Electrabel’s shareholding remained below 50%, Electrabel would in practice enjoy a stable majority at CNR’s future shareholder’s meetings in light of the participation and shareholder voting patterns in the previous three years and the wide dispersion of the remaining shares. This was reinforced by other factors, including the fact that Electrabel was the sole industrial shareholder of CNR, held an absolute majority on CNR’s management board as well as the ability to maintain that majority, and had taken over a central role in CNR’s operational management.
Appeal to General Court. Electrabel’s subsequent appeal of the Commission’s infringement decision was dismissed by the EU’s General Court in its entirety.9 In particular, the Court rejected Electrabel’s argument that it could only have detected the acquisition of de facto sole control in 2007 when it was in a position to confirm that it had in fact achieved a consistent majority of the voting rights at CNR’s shareholders’ meetings over a time period of three years. The Court clarified that, also taking into account the specific circumstances of the case, the relevant period for the analysis of the attendance at shareholders’ meetings were the years preceding the acquisition of the shareholding in question. The acquirer thus has a duty to assess the likelihood that it may acquire de facto control before a transaction takes place (prospective method).
Another argument raised by Electrabel in its appeal related to the limitation period applicable to “gun jumping” infringements. Electrabel maintained that the Commission’s power to impose a penalty was time-barred on grounds that the infringement was of a procedural nature and that therefore a three-year limitation period applied. The Court, however, took the view that a gun jumping offense does not concern simply an absence of a notification but a conduct that gives rise to a structural change in the conditions of competition and therefore cannot be characterized as purely formal or procedural in nature. It thus considered that a five-year limitation period was applicable. In relation to the starting point of the limitation period, Electrabel submitted that the breach in question constituted an instantaneous infringement and that the limitation period should therefore have been calculated from the day on which the transaction was implemented. The Court rejected this position, holding that the infringement was continuous until the date on which the Commission granted its clearance.
Appeal to ECJ. Electrabel’s subsequent appeal of the General Court’s judgment to the ECJ was dismissed, mainly on procedural grounds. As regards the limitation question, the ECJ did not expressly endorse or reject the General Court’s approach as it found the distinction between instantaneous and continuous infringements to be irrelevant to the case in question. The five-year limitation period would in any event have been interrupted by a procedural measure taken by the Commission in 2008 and would therefore not have elapsed, even if it had already started running on the day Electrabel acquired de factosole control over CNR.
The Marine Harvest and Electrabel cases show the Commission’s resolve to impose high fines on companies that breach their notification and standstill obligations under the EUMR, even when such breaches are committed negligently and the assessment of the relevant conditions that trigger a notification requirement is not straightforward. Both Electrabel and Marine Harvest were in disagreement with the Commission as to when the conditions for a filing were met. They acted on the assumption that their conduct was in compliance with the EUMR and made the Commission aware of their respective transactions on their own accord at a point in time they deemed to appropriate.
Moreover, companies should not go on the assumption that the Commission will impose severe penalties only where parties fail to notify transactions that can be expected to raise substantive competition concerns in the EU. The Commission considers any infringement of the notification and standstill obligations as serious, since it “undermines the very essence of EU merger control”. While the Marine Harvest transaction gave rise to significant overlaps and required divestitures, the Electrabel transaction was not problematic from a substantive merger control perspective. Notwithstanding, the Commission noted in its infringement decision in the Electrabel case that it would have imposed an even higher fine if the transaction had led to substantive issues.
In light of the General Court’s reasoning in the Electrabel case, the risk of a Commission investigation into a potential “gun jumping“ infringement will remain for many years after the closing of a transaction occurs. The General Court’s current approach suggests that the five-year limitation period will only start to run once merger control clearance is granted or the acquiring company gives up its controlling stake in the target. While such an approach may seem questionable from a legal certainty perspective, some time will likely pass until the ECJ takes a view on the matter (if ever). As long as it doesn’t, companies will have to come to terms with the views expressed by the General Court.
The stakes for not notifying a reportable transaction in the EU are therefore as high as they have ever been. This is true not only in respect of filings to the Commission, but also at a Member State level. The German Federal Cartel Office (“FCO”) has taken a particularly tough stance on “gun jumping” and issued several fines for breach of the standstill obligation in recent years. The most notable penalty imposed by the FCO was a EUR 4.5 million fine on US company Mars Inc. for implementing its acquisition of another US company, Nutro Products, Inc., without having received prior clearance.