Hamilton Perspectives Nyhetsbrev

Integration and influence over target companies pre-closing – cause for caution in the light of recent cases

A key con­cern of buy­ers in pri­va­te M&A trans­ac­tions is en­su­ring that un­til clo­sing of the trans­ac­tion the tar­get bu­si­ness is run in a man­ner which pro­tects the va­lue of the tar­get bu­si­ness and gi­ves the buy­er a cer­tain de­gree of com­fort that its plans for the tar­get bu­si­ness are not im­pai­red. This is ty­pi­cal­ly ac­hi­e­ved by way of cer­tain un­der­ta­kings by the sel­ler in re­spect of the con­duct of the tar­get bu­si­ness for the pe­ri­od between sig­ning of the trans­ac­tion docu­ments and clo­sing. Such un­der­ta­kings in­clu­de at le­ast an ob­li­ga­tion to con­duct the tar­get bu­si­ness in the or­di­na­ry cour­se. The buy­er will nor­mal­ly al­so requi­re that its con­sent be ob­tai­ned for cer­tain ma­te­ri­al bu­si­ness de­ci­sions and to re­cei­ve in­for­ma­tion on the tar­get bu­si­ness in or­der to pre­pa­re its in­teg­ra­tion and ot­her post-clo­sing ac­tions du­ring the in­te­rim pe­ri­od. When drafting and ne­go­ti­a­ting such un­der­ta­kings, it is cri­ti­cal to ta­ke in­to ac­count com­pe­ti­tion law aspects, in par­ticu­lar mer­ger con­trol, to avo­id po­ten­ti­al ex­po­su­re to sig­ni­fi­cant san­c­tions.

Merger con­trol fram­ework

Over the last couple of deca­des mer­ger con­trol has go­ne from be­ing the con­cern of a few countri­es to a si­tu­a­tion whe­re mer­ger con­trol re­gi­mes ex­ist in a ve­ry lar­ge num­ber of ju­ris­dic­tions ac­ross the world. Many of tho­se re­gi­mes pro­vi­de for a sus­pen­sion ob­li­ga­tion whe­re­by the par­ti­es may not im­ple­ment a trans­ac­tion fal­ling wit­hin mer­ger con­trol un­til such ti­me as the com­pe­tent aut­ho­ri­ty has is­su­ed a de­ci­sion to clear the trans­ac­tion. This pe­ri­od is re­fer­red to as standstill. Depending on the ju­ris­dic­tion con­cer­ned, fai­lu­re to re­spect standstill (com­mon­ly re­fer­red to as “gun jum­ping”) may re­sult in sig­ni­fi­cant fi­nan­ci­al pe­nal­ti­es (and ul­ti­ma­tely the risk that the aut­ho­ri­ty will pro­hi­bit the de­al, ne­ces­si­ta­ting its bre­a­kup). Whilst for ma­ny ye­ars ca­ses whe­re san­c­tions we­re im­po­sed we­re few and far between, in re­cent ye­ars com­pe­ti­tion aut­ho­ri­ti­es ha­ve be­come mar­ked­ly mo­re ag­gres­si­ve in their ap­pli­ca­tion of the­se ru­les.

Recent de­ve­lop­ments

Two re­cent ca­ses ha­ve high­lighted aut­ho­ri­ti­es’ vi­ews on the sco­pe of the­se ru­les.

In the Ernst & Young ca­se, the Danish com­pe­ti­tion aut­ho­ri­ty had ta­ken is­sue with cer­tain ac­tion ta­ken in the con­text of EY’s ac­qui­si­tion of KPMG’s Danish ac­ti­vi­ti­es. In fact, KPMG Denmark had ter­mi­na­ted its coo­pe­ra­tion agre­e­ment with the um­brel­la or­ga­ni­sa­tion KPMG International be­fo­re the Danish com­pe­ti­tion aut­ho­ri­ty’s clea­ran­ce de­ci­sion. The aut­ho­ri­ty vi­ewed this as gun jum­ping and took a de­ci­sion against the par­ti­es, which was ap­pe­a­led. The Danish court in the mat­ter asked the European Court of Justice (“ECJ”) for a pre­li­mi­na­ry ru­ling.

The ECJ took a nar­row vi­ew of what could con­sti­tu­te gun jum­ping, li­mi­ting it to ac­tions which “in who­le or in part, in fact or in law, con­tri­bu­te to the change in con­trol of the tar­get un­der­ta­king”. Even though cer­tain ac­tions may be an­ci­l­la­ry or pre­pa­ra­to­ry to the trans­ac­tion, and may even pro­du­ce ef­fects in the mar­ket, it do­es not con­sti­tu­te gun jum­ping if it “do­es not con­tri­bu­te, as such, to the change of con­trol of the tar­get un­der­ta­king”, i.e. if the par­ti­es by that ac­tion “ha­ve not ac­qui­red the pos­si­bi­li­ty of ex­er­ci­sing any in­flu­ence on’” the tar­get. Accordingly, the ECJ ta­kes a rat­her nar­row vi­ew of the sco­pe of the gun jum­ping con­cept.

This can be con­tras­ted with the European Commission’s re­cent de­ci­sion to im­po­se fi­nes of EUR 124.5 mil­li­on on Altice for im­ple­men­ting its ac­qui­si­tion of Portugal Telecom be­fo­re it had be­en clea­red by the Commission. According to the Commission’s press re­le­a­se, the con­duct com­plai­ned of in­clu­ded gran­ting Altice ve­to rights over de­ci­sions con­cer­ning Portugal Telecom’s or­di­na­ry bu­si­ness, ac­tu­al ex­er­ci­se of in­flu­ence by Altice over Portugal Telecom in­clu­ding in­struc­tions on how to car­ry out mar­ke­ting cam­paigns and Altice re­ceiving com­mer­ci­al­ly sen­si­ti­ve in­for­ma­tion. Regarding sha­ring of such in­for­ma­tion, the Commission ap­pe­ars to vi­ew such in­for­ma­tion ex­change as a me­ans of ex­er­ci­sing in­flu­ence, and hence po­ten­ti­al­ly gun jum­ping al­so in the sen­se of the ECJ.

The Commission’s de­ci­sion follows the French Competition Authority’s 2016 de­ci­sion to im­po­se a EUR 80 mil­li­on fi­ne on Altice for si­mi­lar con­duct in the con­text of its ac­qui­si­tion of SFR, in­clu­ding i.a. in­ter­ven­tion in SFR’s ope­ra­tio­nal ma­na­ge­ment, de­ve­lop­ment of jo­int stra­te­gi­es and re­le­a­se of com­mer­ci­al­ly sen­si­ti­ve in­for­ma­tion.

Having re­gard to the abo­ve, and the incre­a­se in en­for­ce­ment of the­se ru­les, buy­ers and sel­lers drafting and ne­go­ti­a­ting trans­ac­tion docu­ments in pri­va­te M&A trans­ac­tions should con­ti­nue to ex­er­ci­se cau­tion and tho­roughly con­si­der their ob­li­ga­tions un­der mer­ger con­trol standstill as well as the fact that un­til clo­sing the par­ti­es re­main sub­ject to the “nor­mal” com­pe­ti­tion ru­les aspects of pre-clo­sing ar­range­ments. In par­ticu­lar, a buy­er’s right to in­flu­ence ope­ra­tio­nal de­ci­sions of the tar­get com­pa­ny or to re­cei­ve com­mer­ci­al­ly sen­si­ti­ve in­for­ma­tion pri­or to clo­sing should be ca­re­ful­ly as­ses­sed. As re­gards sha­ring of com­mer­ci­al­ly sen­si­ti­ve in­for­ma­tion, the­re are ar­range­ments which can be put in pla­ce to en­su­re com­pli­an­ce, in­clu­ding set­ting up so cal­led “clean teams” with the buy­er’s ad­vi­sors which can un­der­ta­ke in­teg­ra­tion pre­pa­ra­tion. The Commission’s de­ci­sion in the Altice ca­se has be­en ap­pe­a­led to the Tribunal and it re­mains to be seen what po­si­tion the court will ta­ke in this mat­ter.