No parking! Canon fined EUR 28 million for warehousing transaction structure
The European Commission has landed a third strike against gun-jumping, the prohibition to implement a transaction before notification to and clearance by the Commission.
After the record fine issued to Altice for being able to use its veto rights to prematurely interfere with the target company's ordinary business decisions (see our May 2018 newsletter) and the European Court of Justice ruling in the Ernst & Young case, allowing certain preparatory measures which are not necessary to achieve a change of control (see our June 2018 newsletter), the most recent decision makes clear that Canon's temporary 'parking' of the target company with an interim buyer is not permitted under the gun-jumping rules. Companies should therefore be careful when considering these types of 'parking systems' as the Commission is clearly targeting gun-jumping violations in all forms.
The Commission's gun-jumping rules require companies (i) to notify an intended concentration to the Commission if the EU Merger Regulation's thresholds are met and (ii) to await the Commission's clearance of the concentration before implementing it.
Canon had notified the Commission of its plan to acquire Toshiba Medical Systems Corporation ("TMSC") from Toshiba on 12 August 2016. The Commission cleared the transaction unconditionally on 19 September 2019. Canon had used a 'warehousing' two-step structure involving an interim buyer to acquire TMSC. As a first step, the interim buyer acquired 95% of TMSC for EUR 800 and Canon acquired the remainder 5% for EUR 5.28 billion and share options over the interim buyer's stake. This first step was carried out prior to the notification to the Commission. Following clearance by the Commission, Canon proceeded with the second step of the transaction, exercised its share option and acquired 100% of the shares in TMSC.
In July 2017, the Commission sent a Statement of Objections to Canon, expressing concerns that, through the use of this 'warehousing' structure, Canon had implemented the transaction prior to notification to and clearance from the Commission. In November 2018, the Commission sent a Supplementary Statement of Objections to complement its initial concerns on the basis of recent developments in case law.
Although the details of the Commission's reasoning will only be fully revealed after the publication of its decision, the recent press release confirms that the Commission indeed considers Canon to have violated gun-jumping rules. According to the Commission, the first and second steps of the 'warehousing' transaction structure, taken together, formed a single merger. As a result, by carrying out the first step, which was necessary for Canon to ultimately acquire control of TMSC, Canon partially implemented its acquisition of TMSC before either notifying to or obtaining approval from the Commission.
In the Ernst & Young case, the European Court of Justice clarified that preparatory measures carried out in the context of a concentration but not necessary to achieve a change of control will not be regarded as a partial implementation of a concentration. The Commission's Jurisdictional Notice explains that a temporary 'parking system', according to which a target undertaking is 'parked' with an interim buyer acquiring shares 'on behalf' of the ultimate acquirer (who often bears the major part of the economic risks and may have specific rights) can be regarded as a partial implementation. The interpretation of "partial implementation" therefore seems the decisive factor in determining whether preparatory measures can lead to gun-jumping. Something Canon intends to explore in more detail in its announced appeal of the Commission's decision to the General Court.
Maybe when the full Canon decision is publicly available, it will become clear whether it is possible to conclude 'warehousing' structures which can be considered purely preparatory. For now, companies should be careful when considering measures that may result in the partial implementation of a concentration. As discussed in our May 2019 newsletter, the Commission has its eyes on procedural breaches of its merger control rules. The Canon decision confirms this trend, and clarifies that in order to remain compliant, most two-step 'warehousing' structures will need to be notified to the Commission immediately at the first step, and not afterwards.
This article was published in the Competition Law Newsletter of July 2019. Other articles in this newsletter: