As authorities worldwide step up enforcement of their merger control rules, companies planning deals in 2018 must pay even closer attention to their obligations and conduct throughout the period from early planning up to final merger control clearance.
We are seeing more authorities impose heavy fines for an increasingly wide range of pre-clearance conduct, with accompanying strong signals that authorities will take tough action against any parties that infringe procedural rules this year.
Wider risks in 2018 include the trend in all regions for more intervention in merger review processes by third parties and, for deals affecting the EU and UK, legal uncertainty caused by the UK's impending exit from the EU's "one-stop-shop" for merger review.
The below focuses on three antitrust deal risks in particular:
- Gun jumping
- Provision of false or misleading information
- Safeguarding legal privilege in multijurisdictional reviews
Gun-jumping – tough enforcement against parties that fail to notify on time or integrate their businesses pre-clearance
Most companies are aware that failing to notify a deal on time or integrating businesses pre-clearance ("gun jumping") exposes them to risk of fines and other penalties. However, difficulties arise in practice when parties experience lengthy periods between signing and closing. In theory the distinction between permitted integration planning and illegal premature implementation of the deal is clear - many times in practice it is (currently) not.
Recent cases have shown that the price for getting it wrong can be very high. In late 2016, French competition authority imposed a record €80m fine for early integration and illegal information exchange on Altice. Several gun-jumping cases are pending before the EU Commission and the EU courts. Interestingly, Advocate General Wahl recently took a much narrower position than the EU Commission and the Danish competition authority on the scope of gun-jumping in the EY / KPMG case pending before the EU Court of Justice. But it remains to be seen whether the court will follow AG Wahl's views in its judgment. (For details on EY / KPMG see my blog post: http://risk.freshfields.com/post/102eocc/ag-wahl-in-ey-kpmg-the-latest-on-gun-jumping.)
Concerns have arisen in practice that authorities may apply different criteria when drawing the fine line between legitimate planning on the one hand and premature integration on the other, with (some) European authorities being more restrictive than their US counterparts. Current uncertainties, compounded by a marked increase in third-party complaints about alleged gun-jumping, are driving some companies engaged in global deals to change traditional approaches.
False and misleading information – the importance of verifying your facts and evidence
Recent cases have confirmed that merging parties face heavy penalties if they fail to disclose sufficient and correct information during reviews, or if they provide misleading responses to requests for information. For instance, at EU level Facebook was recently fined €110 million for providing false / misleading information during its the Commission's investigation of the WhatsApp takeover. For companies it proves particularly challenging to fully comply in all instances when authorities demand voluminous data and internal documents within very tight time frames, which then form core parts of their evidence.
Parties involved in complex deals should ensure their document review tools and procedures for preparing and verifying submissions are watertight. Disclosure of facts and evidence must be full and accurate, which includes future plans on product development or innovation. Authorities are often now requiring parties to file, for example, detailed methodology notes alongside substantive submissions to ensure transparency in relation to the way in which the parties collected the information.
Authorities are particularly sensitive to any allegations that the merging parties may have tried to influence the way in which customers respond to market testing. It is customary and legitimate for companies to engage with their customers following the announcement of a transaction, but this process must be managed to ensure that such contacts are not used to influence customers’ feedback to the regulators.
Safeguarding legal privilege in multijurisdictional reviews
As parties face demands for substantial document production by more authorities, it is becoming increasingly challenging to protect legally privileged materials. The scope of legal privilege differs significantly across jurisdictions, with the EU position generally narrower than other jurisdictions (including the US and UK) but going beyond what some EU member states accept (including Germany). In Asia, legal privilege is less established: the concept does not even exist in mainland China, Japan or South Korea.
These differences present challenges in cross-border deals where disclosure in one jurisdiction may amount to waiver and lead to subsequent disclosure to other authorities and courts. Parties are advised to maintain detailed records of privileged materials in each jurisdiction, and be ready to justify such claims to avoid forced disclosure.
Post-closing interventions – by authorities or competitors
Companies should also take account of the growing trend of authorities or competitors challenging completed deals. The US agencies, for example, can challenge completed deals, even when the mandatory Hart-Scott-Rodino Act (HSR) waiting period has expired without agency intervention or when the deal did not trigger an HSR notification. Recent use of these powers reinforces the fact that the US agencies will not hesitate to pursue consummated transactions when deemed necessary.
Even when authorities do not have such broad powers, where concerns are raised they will challenge parties’ assessments of whether a deal required notification, as demonstrated recently in China by Mofcom’s investigation into Didi Chuxing’sacquisition of Uber China.
In Europe, an increasing number of Commission decisions are subsequently challenged in court, not only by the addressees of a prohibition decision but also by disgruntled competitors unhappy with merger clearances. 2017 saw rare examples of the EU’s General Court annulling a Commission clearance decision (Liberty Global/Ziggo) and overturning a prohibition decision (UPS/TNT). Both cases confirm the importance of procedural safeguards for parties and third parties throughout the investigation, and of well-reasoned Commission decisions.
Brexit uncertainty – implications for merger control risk
Through 2018, companies planning deals that affect EU and UK markets will need to take account of the impact Brexit may have on how and where their deal is reviewed. Post-Brexit (or any transitional period), the EU’s ‘one-stop-shop’ for merger reviews will no longer apply to the UK, meaning that deals will be subject to parallel EU and UK reviews if relevant thresholds are met.
This will mean:
- the review of more deals in the UK: the CMA estimates up to 50 additional cases per year (almost doubling current numbers), with about six more phase 2 investigations (again doubling the current caseload) – even with additional funding, such increases are likely to present challenges for the authority and merging parties; and
- the review of fewer deals by the European Commission: if current thresholds remain the same, informal estimates suggest that around 100 fewer cases per year will be subject to EU review (notified deals currently number around 360 each year).
To mitigate any impact of parallel reviews on deal timing or outcome, parties will need to ensure that they manage the process effectively across the EU and UK and that all likely concerns (and potential areas of divergence) are understood from the outset.
For deals crossing the Brexit period, parties will need to stay close to developments in both the EU and UK on the transitional arrangements that are needed to resolve current uncertainties, such as which authority gains or cedes jurisdiction at different points. For complex deals likely to face protracted pre-notification and in-depth investigation, parties must factor in these risks from early 2018.
Looking ahead in 2018
- Plan early – make sure you have a thorough understanding from the outset of all the rules and your obligations in each jurisdiction, taking full account of any increased risk of regulatory or third-party intervention in deal timelines.
- Robust procedures – implement strict procedures and processes that ensure complete and accurate submissions of evidence, while maintaining full business separation between signing and closing and controlling the flow of sensitive information through ring-fenced clean teams.
- Contractual terms – pay close attention to any arrangements governing the conduct of the target between signing and closing, making sure that any purchaser rights are tightly confined to non-ordinary course decisions that directly affect target value.