Hamilton Perspectives Newsletter

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.