In a period of economic, political and regulatory change, how can companies plot the right course for M&A success?
Merger control in a changing world
Global economic growth is back on the agenda and companies are once again looking to position themselves for success by pursuing mergers and acquisitions. But what are the prerequisites for success in an increasingly disrupted world?
Welcome to the second White & Case merger control publication, the first edition of which was warmly received. Earlier this year, it became apparent that an update was required, not so much driven by regulatory change, but rather to take into account policy shifts.
For example, we have seen the US catch up with Europe in relation to vertical mergers, the AT&T/Time Warner review being the most prominent recent example. At the same time, the European Commission has forged ahead again with a focus on conglomerate mergers and innovation markets. Perhaps the Dow/DuPont merger has attracted the most attention, as authorities now get out their telescopes and look far into the horizon to identify anti-competitive harm. There is a sense among the Commission’s hard-liners that in the past too many mergers wriggled through without proper analysis. Our own view is that it may be legitimate to look ahead to try and identify harm (after all, that is what merger control is all about), but this long lens should not be forgotten when it comes to reviewing the synergies that a merger may create. However, Europe has set the tone, and we expect other authorities to follow.
Europe also seems to be taking the lead (and others will follow due to the prospect of publicity-garnering fines) in relation to procedural infringements. The argument for pursuing companies for inaccurate filings, for example, is that such violations call into question the very system of merger control. Be that as it may, due process needs to be followed in such cases, and this may divert valuable resources to past cases as opposed to dealing with the current case load. In other words, pursuing a few flagrant cases may be necessary to set a precedent, but they should not become regular items on the authorities’ agendas (bringing with them attendant increases in filing times, and costs). Our view is that the authorities should confine their focus to statements that would have yielded a very different outcome, not mere technical infringements.
This leads us to the subject of gun-jumping. Again, viewed from afar, this should not be a problem in no-issues filings, and authorities typically have the tools to unwind a completed merger. The maxim ‘no harm, no foul’ ought to be applied to these cases to ensure that valuable resources are not frittered away on them.
In sum, our assessment is that the global system of merger control continues to limp along. However, the costs associated with a system containing myriad controls are increasingly high. Looking ahead, we wonder whether a fundamental overhaul is needed to ensure that transactions that pose no problems are not saddled with the costs imposed by the global system. (Yes, this will mean some authorities will have to relinquish jurisdiction in certain instances, safe in the knowledge that a transaction will be reviewed elsewhere.)
But more importantly, we continue to believe that the system of mandatory pre-merger review is fundamentally flawed and that instead we should shift to a system of voluntary merger control in which only mergers that present genuine issues need to be notified. Ironically, when commentators question whether the UK system of merger control needs to change in light of Brexit, one of the things that we would not change is the voluntary nature of the system.
The European Commission is increasingly concerned that market consolidation will harm innovation and has changed dramatically the way it examines the impact of mergers on innovation. Merging parties should be prepared for it.
When it comes to mergers within the digital landscape, the greatest challenge for regulation is to strike the right balance as regards enforcement. How are EU authorities taking action and what does this mean for the innovation economy?
The European Commission is paying greater attention to investors who hold stakes in multiple companies in the same industry and considering how this concentration of influence might have an anti-competitive effect.
Gun-jumping has been in the crosshairs of competition-law enforcers for the past decade, and recent developments show authorities across the world are taking an even tougher line
7 min read
Most practitioners classify gun-jumping as a scenario in which the parties to a transaction appropriately send formal notification of the transaction to the relevant competition agency, but then coordinate their activities during the mandatory pre-closing suspensive period. This conduct is referred to as 'substantive gun-jumping', and it usually leads to an intricate approach by competition authorities involving several theories of harm.
Competition enforcers also often look into what is called 'procedural gun-jumping', which is a separate infringement for a complete absence of any filing before the respective authority.
Why is gun-jumping a trending topic in 2018?
Gun-jumping has been in the spotlight for the past several years and transaction-driven industries need to be keenly aware of the increasing activism of local and global antitrust enforcers. Recently, both procedural and substantive gun-jumping have been widely sanctioned, with several fines ranging in the millions of euros.
A clear trend can be discerned in cases spanning four continents. In 2016, in North America, the US Department of Justice fined Flakeboard and SierraPine a combined total of close to US$5 million dollars for pre-closing coordination conduct in violation of the Hart-Scott-Rodino and Sherman antitrust acts. The same year in South America, CADE, the Brazilian competition agency, sanctioned Cisco and Technicolor approximately €8 million after having issued gunjumping guidelines in 2015.
In Asia, MOFCOM, the Chinese competition enforcer, has recently put in place a gun-jumping whistleblower notice and has sanctioned a foreign undertaking (Canon, for its acquisition of Toshiba Medical) ¥300,000 (€38,000 approximately).
In Europe, the Commission recently fined the Norway-based Marine Harvest €20 million (the case was upheld by the General Court and is now pending in the Court of Justice). In April 2018, the Commission imposed a €125 million fine upon Altice for implementing its acquisition of Portugal Telecom (Altice instantaneously announced its intention to lodge an appeal against this decision). Member States including Poland, Romania, Spain, Austria and several others have imposed fines ranging in the hundreds of thousands on local operations.
In addition, the Danish High Court is currently awaiting clarification from the Court of Justice following the referral of a case in relation to the acquisition of KPMG Denmark by EY. In the context of this operation, KPMG Denmark announced the early termination of its cooperation agreement with KPMG. The Danish Competition Authority ruled that by doing so, the companies had jumped the gun. In January 2018, AG Wahl released a (non-binding) opinion in which the standstill obligation does not affect measures that 'precede and are severable from the measures actually leading' to controlling the target undertaking, even if these are taken in connection with the transaction. In a nutshell, AG Wahl considers that ending a cooperation agreement does not violate the gun-jumping prohibition. The judgment of the Court in this case is expected in the coming months.
In France, up until recently, gun-jumping sanctions had only been imposed where there was a complete lack of notification with the national enforcer. However, Altice—which is a full-on substantive gun-jumping case—has been in the spotlight for over a year, raising several questions for future operations.
Is the Altice case in France indicative of a shift towards a more restrictive stance on pre-clearance conduct?
The French Competition Authority's (FCA) analysis in the Altice case of November 2016 has been widely discussed by practitioners as it was the first time, at least at the European level, that a gun-jumping decision provided an almost 'catalogue-like' and in-depth assessment of several types of pre-closing practices. With Altice, the FCA appears to have taken a bold step, imposing, at the time it was rendered, the highest worldwide fine for gun-jumping conduct: €80 million.
There is spirited debate among practitioners as to how to interpret the somewhat restrictive approach of the decision in several key areas, notably information exchange. In particular, as far as information exchange is concerned, the FCA has held that 'whatever the reasons for which the undertakings would need to exchange information, it is incumbent on them to establish a framework which would eliminate all communication of s trategic information between independent undertakings in light of the Guidelines on the applicability of Article 101 TFEU [Treaty on the Functioning of the European Union] to horizontal cooperation agreements'. Furthermore, the wording of the decision (here quoted from an English translation of the decision, paragraphs 260 and 318) appears to make it difficult for in-house legal advisers to be included in the deal process. Moreover, it seems that they 'cannot be considered as making possible the avoidance of the dissemination of strategic information between the two undertakings'.
The decision continues: 'As a matter of fact, the two individuals who were the recipients of the commercially sensitive information were the in-house counsels, who are not subject to the same rules of confidentiality applicable to external attorneys…[T]hey are subject to the hierarchic authority of the company and cannot be considered as independent of the company's management. For this reason, it should be considered that their access to commercially sensitive information is equivalent to the entire company obtaining access to the said information.
During a March 2017 conference, the FCA attempted to limit the decision's reach by stating that it consists of more of a sui generis decision than a landmark one. However, the decision could have broader implications because this rigid approach taken by the Authority forms part of the body of precedents of its administrative practice and therefore could lead to similar cases in the future.
What advice should be given to dealmakers in the current regulatory climate?
In general, caution should be taken towards potential issues related to sale or purchase agreements (SPAs). In particular, the wording of the SPA should not be over-restrictive, granting veto rights over certain types of conduct of the target, which would result in de facto control. On the other hand, the acquirer and the target should not over-interpret the SPA clauses. In Altice, SFR asked for Altice's approval of certain actions without the SPA expressly requiring it, giving the FCA the impression of control.
Information exchange also appears to be a more and more controversial area in merger control, meaning that the composition and internal functioning of 'clean teams' may fall under the scrutiny of competition authorities. Certain confidential information that companies would like to transmit through a 'clean team' is not, in fact, suitable for sharing prior to the merger's closing, and would need to be processed by an independent third party and returned in a non-confidential form.
Joint commercial dealings are another type of conduct that should be handled with caution. The joint conception of future projects during the suspensive period could be flagged by competition agencies. As seen in Altice, the FCA sanctioned a joint project of the acquirer and the target that was conceived during the suspensory period and was launched just days after clearance was granted.
What can we expect from the road ahead?
At the time of writing, the Commission's Altice decision is not publicly available. We can expect that it will provide further clarification, specially since some of the conduct appears to be comparable to the French Altice case, particularly the exchange of commercially sensitive information, the intervention in marketing campaigns, and the contents of the covenants in the SPA (particularly, how they are applied by the parties). Likewise, additional criteria may be provided by the Commission (Canon/Toshiba case), and in national competition authorities' decisions, which should be rendered this year.
Finally, in France, following the Altice case, competition law practitioners have asked for some general guidance as regards gun-jumping. The FCA has taken this into consideration and will publish an article providing additional indications of what it considers to be gun-jumping.
Video: Mitigating the risk of antitrust issues
Partners Axel Schulz and Mark Powell and counsel Sophie Sahlin discuss issues relating to gun-jumping.