On 23 July 2014, the European Commission fined Marine Harvest € 20 million for taking a 48.5% stake in its competitor Morpol without filing the acquisition to the European Commission and obtaining competition clearance in advance.
This fine serves as an important reminder to business that competition authorities around the world apply a zero tolerance policy to companies who fail to comply with obligations to notify to the authorities transactions which require prior merger control clearance and/or fail to observe mandatory waiting periods prior to implementing the transaction.
What are the rules?
Under the EU Merger Regulation, transactions must be notified to the European Commission where a party obtains control of another party and certain turnover thresholds are met. If a transaction is notifiable, a standstill obligation arises which prevents the parties completing their transaction prior to competition approval from the European Commission. The test for control is whether a party has the possibility of exercising "decisive influence" over another party. In assessing decisive influence, the European Commission looks beyond the level of shareholdings, and also examines whether control has been acquired on a de jure and/or de facto basis. For its de facto assessment, the European Commission will consider whether the shareholder is likely to achieve a majority at the shareholders' meetings, given the level of its shareholdings and the evidence resulting from the presence of shareholders in the shareholders' meetings in previous years. It will assess whether the remaining shares are widely dispersed, whether other important shareholders have structural, economic or family links with the large minority shareholder or whether other shareholders have a strategic or purely financial interest in the target company. Other factors such as the level of board representation will also be relevant to the assessment.
What happened in this case?
On 14 December 2012, Marine Harvest entered into a share purchase agreement with Friendmall Ltd and Bazmonta Holding Ltd by which it acquired a 48.5% shareholding in Morpol. The closing of this transaction took place on 18 December 2012. On 15 January 2013, Marine Harvest submitted a mandatory public offer for the remaining 51.5% shares in Morpol pursuant to the Norwegian Securities Act. Following the settlement and completion of the mandatory offer on 12 March 2013, Marine Harvest acquired 87.1% of the shares in Morpol. The acquisition of the remaining shares in Morpol was completed on 12 November 2013.
Marine Harvest notified its acquisition of Morpol to the European Commission on 9 August 2013. On 30 September 2013, the European Commission approved the transaction, subject to an undertaking by Marine Harvest to divest the majority of Morpol's salmon farming activities in Scotland.
However, the European Commission also decided that, by acquiring the initial 48.5% stake in Morpol on 18 December 2012, Marine Harvest had acquired de facto sole control over Morpol at that point. Its investigation found that following this transaction Marine Harvest in practice enjoyed a stable majority at the shareholders' meetings, because of the wide dispersion of the remaining shares and previous attendance rates at these meetings.
The European Commission therefore considered that Marine Harvest had "jumped the gun" in breach of the EU Merger Regulation by implementing an acquisition of control eight months before the formal notification to the European Commission took place, and over nine months before the European Commission authorised it.
The European Commission decided to fine Marine Harvest € 20 million. In setting the amount of the fine, the European Commission took into account as aggravating circumstances the fact that Marine Harvest was a large European company with wide previous experience of the EU Merger Regulation, and the fact that the transaction was only eventually cleared subject to significant remedies (ie it was a deal raising real competition issues, and so precisely the type of case the authorities want to ensure they have the opportunity to review before it proceeds). As mitigating circumstances, the European Commission took into account the fact that Marine Harvest had not exercised its voting rights in Morpol after having acquired control over it, and that it had informed the European Commission of its initial stake shortly after the acquisition of that shareholding through pre-notification contacts in relation to the notification of its intended subsequent acquisition of the majority interest.
It should be noted that Article 7(2) of the EU Merger Regulation contains an exemption allowing for the acquisition of shares on a stock exchange prior to obtaining clearance, provided that the voting rights are not exercised. However, this only applies where there is a public bid or a series of stock exchange transactions, not in the case of a private sale (as was the case here).
Not the only EC gun jumping case
In a separate development, the Court of Justice of the European Union this month upheld a fine of € 20 million fine imposed by the European Commission on Electrabel for acquiring control over Compagnie Nationale du Rhône (CNR) without prior approval under the EU Merger Regulation. This case has similarities to the Marine Harvest one, in that the shareholding in question was less than 50%, and the European Commission imposed a significant fine despite the fact that Electrabel had approached the Commission of its own volition.
Need for caution
These cases illustrate how important it is for companies to check very carefully whether merger control rules apply to a transaction such that prior notification for approval is required and to observe carefully any standstill obligations. Notifications may even be required for certain acquisitions of minority holdings, and standstill obligations may apply in the case of acquisitions where voting rights will not be exercised until clearance.
The cases referred to above concerned confusion around whether a minority shareholding gave rise to de facto control for merger control purposes, but there are other scenarios in which a failure to notify may come to light subsequently, such as in relation to a different prior transaction – where the information required to be provided to the competition authorities as part of a notification reveals that the notifying party made an acquisition of another business previously and the authorities raise questions as to why it was never notified.
Caution is required not just for notifications to the European Commission. Many national merger control regimes around the world require the prior notification of transactions for competition clearance, including transactions involving the acquisition of minority interests and joint ventures, and impose standstill obligations - with serious consequences for breach of these rules, which are routinely enforced. For example, the U.S. Department of Justice and Federal Trade Commission have enforced breaches of the U.S. merger control waiting period obligations and failures to notify by imposing substantial fines on over 50 transactions. See here for our ealert on the Barry Diller case. In China, the Ministry of Commerce (MOFCOM) has developed a specific procedure for investigating companies that fail to notify reportable transactions, and has reportedly sanctioned a few businesses for failure to notify, though it has not publicly released the failure-to-file decisions. In a recent move, however, MOFCOM decided that, from May 2014 onwards, it will make public failure-to-file decisions and hence it may be only a matter of time before the first decisions are released. See here for our ealert on this recent Chinese development.