Competition law and M&A: navigating through a minefield
The (European) supervision of concentrations is in full development. Most notably, the European Commission (“Commission”) has been cracking down on violations of the Merger Regulation in recent years.
If concentrations meet certain turnover thresholds, the companies involved have a notification obligation (Article 4 Merger Regulation). The companies involved may then not implement the concentration until the competent authority has approved the concentration. This is the standstill obligation (Article 7 Merger Regulation).
There is strict enforcement of violations of the notification and standstill obligation – so-called ‘gun-jumping’. It is therefore important to know what is and what is not permitted under competition law in the case of (the preparation of) a concentration. This blog provides an overview of recent legal developments and clarifies what merging parties can do prior to the approval of a transaction to avoid gun-jumping.
Unexpected decisive control?
If a company intends to acquire decisive control of another company, the acquiring party must notify this, provided that the turnover thresholds are met. However, it is not always clear when decisive control exists. For example, in 2012, Norwegian fish farmer Marine Harvest (now Mowi) acquired 48.5% of the shares in its competitor Morpol. This was notified to the Commission with a notice that the voting rights would not be exercised by Marine Harvest until approval was granted by the Commission. Prior to the notification, Marine Harvest made a public offer for the remaining shares in Morpol. This transaction was notified to the Commission, which subsequently found that the notification and standstill obligations had been violated because Marine Harvest had already acquired de facto decisive control in the acquisition of 48.5% of the shares in Morpol. The Commission reached this conclusion by checking the usual attendance of shareholders at previous shareholder meetings. On that basis, the Commission found that Marine Harvest, with 48.5%, constituted a majority among shareholders and could therefore exercise decisive control.
Marine Harvest was subsequently fined €10 million for violating the notification obligation and another €10 million for violating the standstill obligation. Although these appear to be two sides of the same coin, they are two distinguishable obligations for which the Commission can impose separate fines. Thus, there is no violation of the ne bis in idem principle. The Court of Justice of the European Union (“CJEU”) upheld the fines, ruling that in this case it did not matter that Marine Harvest had not exercised the voting rights because de facto sole decisive control had already been acquired prior to the public offer.
Decisive control or customary protection rights?
In February 2015, the telecom company Altice notified a proposed acquisition of PT Portugal, which received conditional approval from the Commission in April 2015. However, it later turned out that Altice could already exercise decisive influence before the acquisition was approved. In fact, the acquisition agreement already gave the telecom company veto rights over the appointment of senior management, pricing policy and several important contracts.
While the acquiring company may protect the value of the (shares in the) target company, it may not exercise decisive control beyond the ordinary course of business before the concentration approval is granted. Factors that are relevant in assessing whether there is a normal course of business are (i) the degree of involvement of the acquiring party in the day-to-day operation of the business, (ii) the nature of the measures in the agreement in favour of the acquiring company, and (iii) the monetary thresholds for exercising a veto with respect to the value of the target or purchase price. When these thresholds are very low, the exercise of decisive control is more likely to occur.
In this case, Altice already exercised decisive control prior to the notification through its involvement in PT Portugal’s negotiation strategy and choice of suppliers and certain TV channels. On that basis, in April 2018 the Commission imposed a fine of €124.5 million on Altice for gun-jumping, whereof €62.25 million for violating the notification obligation of Article 4 Merger Regulation and €62.25 million for violating the standstill obligation of Article 7 Merger Regulation.
On 8 November 2016, Altice was again fined €80 million for gun-jumping, this time by the French competition authority. In 2014, Altice notified the proposed acquisition of two telecom companies, SFR and OTL, by its subsidiary Numericable. The French competition authority had launched an investigation into gun-jumping, which revealed that Altice already had access to strategic information from and could exercise decisive influence over both companies before the concentration was approved. Altice had thus already acquired decisive control prior to any approval of the concentration, thereby engaging in gun-jumping.
Inseparable step for transaction does not necessarily lead to decisive control
An example of a situation where no decisive control was acquired by the purchasing company concerned the proposed concentration of KPMG Denmark and EY. The consultancy firms entered into a merger agreement on 18 November 2013. Since the Danish branch of KMPG still had a cooperation agreement with the KPMG group, this agreement was terminated on the very same day. The Danish competition authority approved the concentration at the end of May 2014, but stated (in December 2014) that unconditionally and irrevocably terminating the cooperation agreement with the KPMG Group before the concentration was approved could be regarded as an act in breach of the standstill obligation. The CJEU disagreed, concluding that the termination of the cooperation agreement does not lead to a change in decisive control of KPMG Denmark, even if this termination is inextricably linked to the concentration and may constitute a preparatory or side transaction of this concentration. According to the CJEU, transactions that do not lead to a change in decisive control do not fall within Article 7 Merger Regulation.
Transactions consisting of multiple steps
The Commission decision on Canon‘s acquisition of Toshiba Medical Systems Corporation (“TMSC”) shows that the notification and standstill obligation also applies to so-called ‘special purpose vehicles’. Canon intended to acquire TMSC by means of a ‘warehouse construction’. A special purpose vehicle was established which acquired 95% of the shares in TMSC for €800. Canon then acquired 5% of the shares for €5.28 billion and obtained a stock option on the remaining shares. The proposed acquisition was then notified to the Commission on 12 August 2016. After the Commission’s approval, the remaining 95% of the shares were acquired. The Commission launched an investigation into this construction in July 2017. It concluded that a transaction in which an interim buyer – the special purpose vehicle – acquires decisive control until the company will be sold to the ultimate seller, can be seen as the first step of the (final) transaction. After all, the preparatory step as such contributed to Canon’s acquisition of decisive control over TMSC, so that prior to this first step, notification was already required. As this was not done, the Commission imposed a fine of €28 million on Canon.
Another type of two-stage rocket was used by the French company Veolia. Veolia, active in the water, waste treatment and energy sectors, wanted to acquire decisive control of Suez through two steps. First, it obtained 29.9% of the shares in Suez from energy company ENGIE on 6 October 2020. The second step involved making a public offer for the remaining shares in Suez. Suez believed that these two steps should be considered as one transaction and that therefore Veolia should have notified the transaction before acquiring the shares. The Commission agreed that this was one transaction and that the two steps were interdependent; the public offer would never have happened without the previous acquisition of ENGIE shares. However, the Commission argued that both steps fell within the exception Article 7(2) Merger Regulation.
Article 7(2) Merger Regulation provides an exception to this standstill obligation for two types of transactions: a public bid and a series of share transactions where decisive control is acquired from multiple selling parties. However, the concentration must then be notified directly to the Commission and the acquirer may not exercise the voting rights. The Commission considered that the exception of Article 7(2) Merger Regulation regarding the public bid was also applicable to the first step of the concentration – the acquisition of 29.9% of the shares in Suez.
The Commission’s decision is in line with the General Court’s judgment in Marine Harvest. Indeed, the General Court concluded that it is possible for the acquisition of a minority stake, not yet acquiring decisive control of the target company, followed by a public takeover bid, to form part of one concentration falling within the scope of Article 7(2) Merger Regulation.
The difference between Marine Harvest and Veolia/Suez is that in the first situation, de facto decisive control was already obtained at the first step, namely through the acquisition of 48.5% of the shares in Morpol. This was not the case with Veolia with a 29.9% stake. Therefore, the standstill obligation is only violated if the first step already leads to an acquisition of decisive control. Although Suez has filed an appeal against the Commission’s decision, it does not appear to be going forward now that Veolia and Suez have reached a merger agreement on 12 April.
Lessons for the future
The aforementioned case law shows that the following points are important in the preparation of mergers:
- De facto acquisition of decisive control also triggers a notification and standstill obligation.
- This also applies to special purpose vehicles that acquire (temporary) decisive control.
- Always notify preparatory steps to a concentration if they as such contribute to the change of decisive control.
- Do not exercise decisive control prior to the approval of a concentration, insofar it is not necessary to protect the value of the target company.
- Decisive control may not relate to the day-to-day operations.
- In the case of a pre-closing veto right, the monetary threshold for exercising it must not be too low with respect to the transaction values.
In addition to the notification and standstill obligation for concentrations, the cartel prohibition also still applies in full. In particular, the exchange of competitively sensitive information plays a role in the preparation of mergers. In that context, it is advisable under certain circumstances to set up Clean Teams in order to limit the risk of violating the cartel prohibition. Clean Teams are particularly advisable in transactions between two competitors.
- The exchange of information should not lead to the situation where the commercial market behaviour of parties could be influenced.
- Assemble the Clean Team, if possible, from a closed group of individuals who are not (as of that moment) involved (anymore) in the day-to-day operations of the parties.
- For example, independent consultants or specially appointed employees.
- Treat information within the Clean Team as strictly confidential.
- Establish (internal) protocols regarding what information is accessible and to whom.
- Seek legal advice when in doubt.
- Have individuals on the Clean Team sign a confidentiality agreement and monitor its compliance.
Finally, it is worth noting that the Commission has introduced a new policy expanding its supervisory role with respect to concentrations. In this regard, please read our blog on Article 22 Merger Regulation.
For all your questions regarding merger control, bureau Brandeis is happy to help. You can reach us through the links below.