The need for notification

Under most merger control laws - including those which apply in the EU and now in over 100 countries worldwide - a transaction (a merger, takeover or joint venture) which meets the required thresholds must be notified to the relevant competition (antitrust) authorities. It is therefore essential that at the outset of any transaction a detailed analysis of potential notification obligations is undertaken, as in some jurisdictions it may not be immediately obvious that the transaction meets the relevant thresholds. Failure to account for all relevant group turnover of the acquiring entity (including that of shareholders in joint ventures), or to allocate turnover to the correct countries are common examples of factors which can complicate that analysis.

In common with most merger control regimes (although interestingly not the UK, which we consider separately below), the EC Merger Regulation requires mandatory prenotification of mergers under its jurisdiction. That is, the parties to a transaction which creates a concentration with a “Community dimension” (i.e. when the worldwide and EU turnover of the companies concerned exceed certain thresholds), must notify the European Commission before the implementation of the transaction, so that the European Commission can examine whether the deal would significantly impede effective competition in the EU or any substantial part of it. This is known as the “standstill obligation”.

A failure to notify and obtain competition approval can put the legal validity of the transaction in question. This can lead to a wide range of problems for the companies involved moving forward, even if this is not detected by the competition authorities.

In addition, where an authority becomes aware of the failure to notify, there can be serious penalties: In jurisdictions (including the EC) where notification is mandatory, the authority can impose significant fines on parties who fail to notify, while an examination of a deal after the event risks an authority finding a negative impact on competition, and then imposing conditions, requiring divestments or even prohibiting the deal. The burden and cost in this case is highly likely to fall on the buyer who has already completed the transaction.

Back to top

The Electrabel fine

On 10 June 2009 the European Commission imposed a fine of €20 million on Electrabel, an electricity producer and retailer belonging to the Suez Group (now GDF Suez) for acquiring control of Compagnie Nationale du Rhône (CNR), another electricity producer, without having received prior approval under the EC  Merger Regulation¹. The European Commission concluded that the infringement lasted for a significant period and that Electrabel should have been aware of its obligation to obtain Commission approval before proceeding with the acquisition.

Despite the fact that Electrabel notified the acquisition to the Commission and subsequently received clearance, Electrabel still received a substantial fine. In this case the Commission had not considered the precise date at which Electrabel had acquired control of CNR within the meaning of the EC Merger Regulation in its substantive assessment of the concentration. However, when the Commission completed its investigation on this issue it concluded that Electrabel already acquired de facto sole control of CNR more than four years before the notification.

This case signals that the European Commission will not tolerate breaches of the merger regulation and emphasises the paramount importance of the standstill obligation; the transaction may only be implemented after competition clearance has been given.

Footnote:

1. See press release: Mergers: Commission fines Electrabel 20 million euros for acquiring control of Compagnie Nationale du Rhône without prior Commission approval

Back to top

Other recent cases of “gun-jumping”

Germany

Two recent decisions by the German competition authority (the Bundeskartellamt or BKA) also illustrate a willingness to take a tough stance on “gun jumping”, when parties have notified a transaction to the authority and then either implemented the transaction or are involved in improper co-ordination before the authority has made a clearance decision.

In December 2008, the BKA imposed a fine of €4.5 million against the U.S. company Mars, Inc. for implementing its acquisition of US -based Nutro Products, Inc. without clearance from the BKA². Mars had acquired the majority of the shares in Nutro after having obtained clearance from the US antitrust authorities, but while the German merger control review was still pending. This decision is notable for two reasons: (1) it is the first such fine applied to a transaction between two non-German companies; and (2) the BKA found that Mars had violated the “gun-jumping” prohibition by closing the transaction even though it carved out the distribution rights for Nutro’s products in Germany. Although an appeal has been lodged against the decision of the BKA, if the decision stands it casts doubt on the possibility of carving out certain national elements of a business from completion - a tactic that has been regularly employed in order to allow a completion timetable to proceed in spite of regulatory clearances not having been received in certain jurisdictions.

In February 2009, the BKA imposed a fine of €4.13 million on a German printing and publishing house for “gun-jumping” in connection with an acquisition that had been completed since January 2001³. The BKA discovered the violation when examining another merger which concerned a subsequent sale of the acquired company. This decision of the BKA is also the subject of an appeal, but highlights the fact that risk associated with failing to notify does not disappear once the deal is completed, or potentially for many years thereafter.

UK

By contrast with mandatory notification regimes, notification of transactions in the UK  is voluntary but the OFT (Office of Fair Trading) has the right to examine completed transactions and, if it identifies serious concerns, refers the matter to the Competition Commission which could, in a worst case scenario, prohibit the merger and require the acquirer to dispose of the target. It follows that other than in clear-cut cases, parties are well advised to prenotify to the OFT, where the parties also gain the advantage of putting their version of events to the OFT prior to competitor or customer comments.

However, despite the risks, it is notable that recently a number of deals appear to have been completed without clearance being sought in advance from the OFT. In the first six months of 2009, of the five deals where the OFT has identified serious concerns and referred them to the Competition Commission for in-depth review, three are transactions which have already been completed. In these cases, there is a significant risk that the Competition Commission will impose some form of remedies, such as requiring divestments of certain parts of the business, and it is possible it could prohibit the deals completely, giving the acquirer the burden of having to find a new buyer for the target within a publicly-specified timetable, which is likely to involve a “fire-sale” price.

Footnotes:

2. View Fine imposed against Mars for violating the prohibition to put a merger into effect
3. View Bußgeld gegen Druck- und Verlagshaus Frankfurt am Main GmbH wegen Verstoßes gegen das Vollzugsverbot

Back to top

The risk of illegal coordinated behaviour between the parties

In addition to the risk of fines for completing a transaction prior to receiving clearance, there is also risk of findings of illegal coordinated behaviour - infringing competition law prohibitions and anti-competitive agreements - where parties share commercial information during due diligence, or take other steps to implement a transaction prior to completion. While it is inevitable that parties to a transaction will want to discuss and exchange information, for example during the due diligence process and in order to negotiate the terms of the deal, it is also clear that by sharing detailed or sensitive information such as prices, costs, volumes, markets and customers there is a risk of violating competition law in the process. Disclosure of current and future business strategy, such as product development plans or investment proposals, may also infringe these prohibitions. Where the parties are competitors or potential competitors, there is a risk of future co-ordination or perceived co-ordination of strategies through disclosure of sensitive information.

This issue arose in a recent case in the US. In January 2009, the Omnicare judgment⁴ dismissed a claim that two merging parties (Pacificare and UnitedHealth) had illegally shared information in relation to contracts they were independently negotiating with Omnicare prior to having completed their merger. It was alleged that this information sharing had led to UnitedHealth abandoning contract discussions with Omnicare in anticipation of being able to take advantage of the more favourable deal which Pacificare had already agreed with Omnicare.

A significant aspect of this decision is that it recognised the value of the pre-merger precautions put in place by the merging parties to stop any flow of competitively sensitive information between them prior to completion of the merger. It made clear that the exchange of commercially-sensitive information ahead of a merger can fall foul of the cartel rules, and lead to potentially substantial fines or even criminal penalties in some jurisdictions.

The following measures can significantly lower the competition law risks of improper pre-clearance co-ordination.

• Sign a confidentiality agreement governing the sharing of confidential information and stipulating legitimate reasons of disclosure of sensitive commercial information;
• Take corrective action if information is leaked beyond the terms of the confidentiality agreement in order to minimise risk of any finding of coordinated action;
• Consider setting up information barriers within company teams (e.g. the transaction team and the commercial team responsible for the products or services in question) and between the parties;
• Consider restricting access to information to senior company executives;
• If it is not possible to restrict information to a designated group, a wider group of individuals should only have access to the information that is appropriate for their role e.g. only information necessary to conduct due diligence and the valuation process;
• Avoid sharing key competitor information and, where possible, provide redacted, aggregated and historical data;
• Stipulate that agreements on prices, sales and customers are not exchanged before closing;
• Avoid disclosing information that would provide the merging parties with the ability to align their competitive conduct, in the event that the transaction does not proceed;
• Consider appointing an independent third party, such as an accountancy firm to review the information and produce a report;
• Consider including covenants in the merger agreement e.g. not to enter into any agreements prior to closing, or prohibiting acquisitions or disposals without consent.

Footnote:

4. Supreme Court judgment, 16 January 2009, Omnicare, Inc. v. UnitedHealth Group, Inc., -- F.Supp.2d --, 2009 WL 112423 (N.D. III.2009)

Back to top