Pending a potential appeal to the European Court of Justice, caution is required in M&A transactions that include warehousing structures or involve multiple steps. Competition authorities may prove trigger-happy.
The EU Merger Regulation'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.
In 2016, Canon used a two-step 'warehousing' structure for the purchase of TMSC. As a first step, an interim buyer acquired 95% of TMSC five months before Canon notified the Commission of the deal. Following the Commission’s unconditional clearance, Canon proceeded with the second step, acquired the remaining 5%, and exercised the share option to acquire 100% of TMSC (see our July 2019 newsletter). According to the Commission, both steps combined constituted a single concentration. Consequently, the implementation of the first step of the 'warehousing' structure had led to the partial implementation of the concentration, thereby triggering the gun jumping rules.
Preparatory measures and implementation of a concentration
On appeal, Canon argued that the interim transaction in itself could not trigger the gun jumping rules, because a concentration can be considered implemented only if control is acquired. Canon did not acquire control over TMSC by implementing the first step of the warehousing structure.
The General Court rejected Canon’s arguments and referred to the European Court of Justice’s ruling in the Ernst & Young case to explain that purely auxiliary or preparatory measures that have 'no direct functional link with the implementation of the concentration' are not caught by the gun jumping rules (see our June 2018 newsletter). However, implementation of preparatory steps contributing to a lasting change of control over the target undertaking do constitute gun jumping, irrespective of whether those steps themselves lead to a change of control over the target undertaking. Closely related transactions are treated as a single concentration if they are necessary to achieve a change of control over the target and, consequently, have a direct functional link with the implementation of the concentration. The General Court therefore agreed with the Commission’s reasoning that the warehousing structure used by Canon contributed to a change of control over the target company as part of a single concentration that had to be notified and cleared prior to implementation.
The European Court of Justice may have the final say on this gun jumping issue, now that Canon is considering an appeal. Until then, however, caution is required in transactions that involve multiple steps or include 'warehousing' structures.
Caution is commendable for gun jumping in all forms, for that matter, as it is likely to remain a hot topic for both the Commission and national competition authorities. The ACM has jumped on the gun jumping bandwagon (see our April 2022 newsletter) and recently imposed another gun jumping fine. The Commission’s investigation for breach of the standstill obligation in the Illumina-Grail merger is ongoing (see our December 2021 newsletter) and the European Court of Justice is expected to shed more light on the gun jumping fine imposed on Altice soon (see our October 2021 newsletter).
This article was published in the Competition Newsletter of June 2022. Other articles in this newsletter: