More than 100 countries worldwide have merger control regimes, which require parties to reportable transactions to notify antitrust regulators and obtain competition clearance. The majority of these antitrust regimes, including the U.S., EU and most EU Member States, prohibit the parties from implementing their transaction during a waiting period, during which the regulator decides whether the transaction is consistent with relevant competition law. This means that parties to a transaction may not close a deal, or take steps to integrate the businesses during the waiting period – they must, in effect, “stand still” pending clearance or the expiration of the relevant waiting period.
Likewise, in Germany a reportable merger must not be implemented without clearance decision or expiration of the waiting period. Under German law, an infringement of the standstill obligation (so-called "gun-jumping") can lead to fines of up to 10 percent of the group's worldwide turnover. In addition to fines, parties that infringe the standstill obligation risk other consequences, including the possible invalidity of the measures implementing the merger, such as the transfer of shares or assets-- at least insofar as they are governed by German law.
The risks of gun-jumping are generally well understood. But companies should also be aware that the German Federal Cartel Office (FCO) has recently taken a more aggressive approach in its enforcement of gun-jumping, both concerning the treatment of ex-post notifications and the fining policy for gun-jumping.
1. Ex-post notification
In the past, when companies had, either voluntarily or by accident, implemented a transaction reportable under German antitrust laws without reporting it to and obtaining approval from the FCO, they could resort to “ex-post notifications” to legalize the implemented merger. The ex-post notification led to an ex-post clearance within the same deadlines that are applicable for ex ante notifications (one month deadline for a Phase I clearance). The ex-post clearance validated the merger itself, as well as any measures taken to implement it. The risk of fines was relatively low, at least for first-time infringers, and in cases not involving serious competition problems.
This approach has recently changed. The FCO has published new practice guidelines concerning the handling of "ex-post notifications”. It will no longer treat these notifications within the statutory deadlines for notifications but will consider them as pure sources of information leading to the demerger procedure. In other words, instead of considering an “ex post notification” under essentially the same procedural rules as a ex ante notification, the FCO will instead assess whether the implemented transaction created competition problems and should therefore be "unscrambled" or “undone.”
For companies, this is bad news. First, they can no longer be sure to receive a clearance decision within any legally specified deadline after an ex-post notification. Although the FCO is bound by the principle of good administration, it cannot be forced to clear or assess the merger within a specific deadline. Second, as already noted, the measures that the parties to the merger take in implementing the merger can be deemed ineffective under German law without FCO clearance. According to the FCO, a positive outcome of the demerger procedure (i.e. without a decision ordering the demerger), will have the same effect as a clearance decision. But this may leave the parties with uncertainty because the demerger procedure will not in all cases lead to a final decision but may simply be discontinued. In any case, the companies may face the uncomfortable situation of ineffective measures and unenforceable contracts for an undefined period of time, even as first time offenders and even if the merger does not raise any serious competition concerns.
2. Fines for gun-jumping
In the past, the risk of fines was typically small if the merger did not present any serious competition concerns; if it was the group's first infringement of the standstill obligation; and if the company itself notified the FCO ex-post of the implemented merger. Although the FCO has never laid down this practice in writing, the decision practice was largely guided by these principles.
This unwritten policy, however, may be changing. Recently, there have been an increasing number of decisions imposing fines for gun-jumping. In the first five months of 2011 alone, the FCO has imposed fines in two cases. For example, in May 2011, the FCO imposed a substantial fine for the infringement of the standstill obligation against the German company Interseroh. Significantly, Interseroh had notified the FCO of the merger after its implementation (by means of an ex-post notification) and the FCO found that the merger did not give rise to any competition concerns. These facts were only taken into account as mitigating factors for the calculation of the fine. The fine imposed is far below the statutory cap of 10 percent of the group's worldwide turnover, but it is still a risk that needs to be considered in every case.
This increased enforcement activity of the FCO can be seen in its wider context of increased merger control enforcement in Europe. In light of the approach taken by the European Commission and other national competition authorities, gun-jumping is a threat at the European level as well as at the national level. For example, in 2009, the European Commission imposed a fine of EUR 20 million for the infringement of the standstill obligation against the Belgian public utility services group, Electrabel, and appears to be increasing its enforcement activity for gun-jumping.
The filing requirement and the standstill obligation under German law cannot be seen as a pure formality. Gun-jumping leads to a risk of fines and to ineffective implementation measures. The recent change in the FCO's practice makes it more difficult to remedy this situation by means of an ex-post notification.
It is essential to always verify whether and in which jurisdictions a transaction is reportable, and to not close the deal before it has been cleared by the relevant competition authorities. Legal counsel must conduct thorough due diligence to verify whether prior acquisitions by the target have been approved by all relevant competition authorities. If this is not the case, the acquirer must take the appropriate (contractual or other) steps and safeguards against the risk of fines and of ineffective and unenforceable contracts concluded by the target. Particularly in mature competition regimes such as the U.S., the EU or Germany, where the risk is high, competition experts should be involved early on in the transaction to assess the notification requirements and the substantive requirements of merger control.