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.
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.