On 27 June 2019, the European Commission (Commission) imposed a fine of €28 million on Canon for implementing a transaction prematurely in breach of the EU merger control rules (so-called gun-jumping).
The decision is the latest in a line of recent decisions at EU and Irish level for procedural infringements of the merger control rules, which we have previously reported on.
EU Merger Control
The EU merger control rules are equivalent to the Irish rules in that they require merging companies to notify qualifying mergers prior to their implementation (the notification requirement) and not to implement them until cleared by the Commission (the standstill obligation).
Canon acquired Toshiba Medical Systems Corporation (Toshiba) through a so-called 'warehousing' two-step transaction involving an interim buyer:
- Step 1: The interim buyer (a special purpose vehicle created by Canon and Toshiba through a law firm) acquired 95% in the share capital of Toshiba for €800. Canon paid €5.28 billion for the remaining 5% of the shares and options over the interim buyer's shares. Step 1 was carried out prior to notification to, and approval by, the Commission
- Step 2: Following approval of the merger by the Commission, Canon exercised its options to acquire 100% of Toshiba
While the transaction was cleared by the Commission in 2016, the Commission investigation into the gun jumping allegation took 3 years.
The Commission took the view that the two steps formed a single notifiable transaction, with the first step contributing to, and being necessary for, the acquisition of final control over Toshiba, which occurred with the second step. Therefore, by carrying out the first step, Canon had partially implemented the transaction prior to notifying the Commission and gaining approval. This was in breach of the notification requirement and the standstill obligation.
Two issues appear to have been significant in the Commission's assessment of the deal structure:
- the fact that the interim buyer was not an independent third party intermediary
- the fact that the option structure involved payment of the full purchase price by Canon which meant that Canon effectively bore all of the commercial risk after Step 1, even though it did not enable Canon to exercise actual control
The decision is consistent with guidance issued by the Commission in 2008. This guidance states that, where an interim buyer acquires shares on behalf of the ultimate buyer, who bears the major part of the economic risk, the "Commission will consider the transaction by which the interim buyer acquires control in such circumstances as the first step of a single concentration comprising the lasting acquisition of control by the ultimate buyer".
It is also consistent with the Section 16(8A) of the Irish Competition Act, 2002, as amended, which states that the notification requirement applies in a warehousing transaction where the "ultimate buyer bears the major part of the economic risks".
The decision comes against the background of an increasing amount of procedural infringement decisions at Irish and EU level over the recent past (see below links to previous articles on this topic). Investors and buyers should exercise caution when using warehousing or option structures. A key consideration in the merger control process is when financial and economic risk is assumed by the ultimate buyer, for example through payment of consideration or other obligations.
Canon has announced that it will appeal the Commission's decision. It will be interesting to see how the General Court of the EU will evaluate the transaction, especially in light of the recent judgment of the European Court of Justice (ECJ) in the EY/KPMG transaction. In that case, the ECJ noted that the scope of the standstill obligation applies to partial implementation of concentrations where the measures are “necessary to achieve a change of control”. The ECJ contrasted this with purely ancillary or preparatory measures, which do not constitute gun-jumping if they do not confer control or influence over the target.