Pre-closing covenants protecting the target’s value or commercial integrity pending merger clearance from the European Commission must be drafted carefully. The General Court confirmed the Commission’s record-breaking fines on Altice for violating the EU Merger Regulation’s notification and standstill obligations. According to the General Court, the mere possibility of exercising decisive influence over the target can result in a gun jumping breach.
The Commission’s gun jumping fines
The Commission's gun jumping rules require companies (i) to notify an intended concentration to the Commission before its implementation if the EU Merger Regulation's thresholds are met (the ‘notification obligation’) and (ii) to await the Commission's clearance of the concentration before implementing it (the ‘standstill obligation’).
On 24 April 2018, the European Commission imposed its highest-ever gun jumping fines (totalling EUR 124.5 million) on Altice, a cable and telecommunications company, for acquiring control over PT Portugal before notification and clearance by the Commission (see our May 2018 newsletter). According to the Commission, the purchase agreement contained several pre-closing clauses enabled Altice to (prematurely) control PT Portugal by conferring on it the possibility of “exercising decisive influence” over PT Portugal’s business beyond what was strictly necessary to preserve the value. The clauses gave Altice the power to block decisions relating to, for instance:
- the appointment of PT Portugal’s senior management,
- PT Portugal’s pricing policies,
- the entry into, amendment or termination of any material contracts,
- certain transactions or commitments in excess of EUR 5 million (amended to EUR 1 million one month after signing).
The Commission found that Altice had in fact used these powers on several occasions, thereby intervening in PT Portugal’s day-to-day business dealings. According to the Commission, this finding was corroborated by the exchange of commercial sensitive information about PT Portugal before clearance (and, in part, before notification).
The General Court ruling
On appeal, the General Court confirmed that the gun jumping rules can be triggered by the mere possibility of exercising decisive influence over the target. It considered the relevant pre-closing clauses too broad in wording, and the monetary thresholds too low in value (taking account of the purchase price and PT Portugal’s turnover) to be considered necessary to preserve PT Portugal’s value until the closing of the transaction. As a result, Altice could (and on several occasions actually did) exercise decisive influence as from the date of signing the purchase agreement (i.e., prior to the notification of the transaction).
Furthermore, the General Court acknowledged that the exchange of business information between a potential purchaser and seller can generally be considered part of the acquisition process, but only if the nature and purpose of these exchanges are directly related to the potential purchaser’s need to assess the value of the business. The information exchange between Altice and PT Portugal (i) continued after the signing of the purchase agreement and (ii) related to, commercially and competitively, highly sensitive information. The Commission had therefore been correct to conclude that the information exchanges had contributed to demonstrating that Altice had exercised decisive influence over PT Portugal.
In line with earlier case law (see our March 2020 newsletter), the General Court rejected Altice’s arguments that it should not have been fined twice (for violation of the notification and the standstill obligation respectively). Nevertheless, Altice was granted a 10% reduction of the fine for breach of the notification obligation because it had informed the Commission of the transaction prior to the signing the purchase agreement, and had sent a case team allocation request immediately after signing.
Companies should closely scrutinise their purchase agreement’s pre-closing covenants to ensure they do not extend beyond the preservation of the target’s value or commercial integrity. It is recommended to double-check, for instance, the scope of the wording, the existence of less far-reaching alternatives to attain the same goal, and the level of the (monetary) thresholds involved. Moreover, information exchanges should be curbed by setting up sufficient safeguards (including clean team protocols and confidentiality agreements).
The Commission is likely to continue its tough stance on gun jumping with a promise of adopting interim measures, following Illumina’s premature acquisition of GRAIL. It remains to be seen whether Illumina’s pre-emptive hold-separate agreement will persuade the Commission to tread more lightly on potential gun jumping fines.
This article was published in the Competition Newsletter of October 2021. Other articles in this newsletter:
• Commission reveals first piece of antitrust sustainability puzzle
• ACM walks the walk: first-ever vertical price coordination fine
• Court of Appeal provides guidance for further course of proceedings in pre-stressing steel litigation