Introduction
Implementing a merger prior to competition authority clearance can be a costly mistake: parties to a merger can find themselves liable for a hefty fine. A couple of firms have made this mistake in the past and have paid the price - six figures in certain instances.
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Heavy fines
The Competition Tribunal was, historically, relatively lenient on parties found to have implemented a merger prior to approval. But in the last few years, it has taken the view that the Act has been in force for a long enough period for parties to know better. Parties who jump the gun can therefore expect harsher fines in future.
It is important for firms engaged in merger negotiations to remember that before competition authority approval:
- It is prohibited for a firm to implement the transaction in any way and prior implementation can render both firms liable for a fine of up to 10 per cent of their annual turnover;
- In horizontal mergers (where one firm acquires control over a competitor or potential competitor), the parties to the transaction will continue to viewed as competitors until the transaction is approved and must ensure that they interact at arm’s length
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Implementation of merger
Prior implementation can take a number of different forms. It is not necessarily limited to the actual sale of shares, sale of the business, or changing a business’s name. It can be subtler forms of implementation that are problematic, such as the acquirer becoming involved in strategic planning of the target firm, indentifying target markets, developing new products or services, taking charge of ordering raw materials, amending procurement policies or becoming involved in customer relations. This could be viewed by the competition authorities as prior implementation of the merger and must be avoided. A good general rule is to ensure that all aspects of the merging parties’ businesses are run independently with no input or influence into decisions or strategy from the other party to the transaction. In particular, there should also be no change in management of the target firm in the transaction.
Parties to a proposed merger can, however, make statements to customers and employees that give an overview of what is envisaged once regulatory approval is obtained.
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Beware of information exchange
Especially if a merger involves competitors, it is critical to bear in mind that until the Commission approves the merger, the parties will be viewed as competitors and will therefore be subject to the restrictions set out in section 4 of the Act, in particular the prohibition on price fixing, market allocation and bid-rigging. Information exchange between competitors is viewed as particularly problematic by the competition authorities. An exchange of information relating to purchase or selling prices or various other forms of commercially sensitive information can in some case be viewed as indirect price fixing even if the exchange arises as an inadvertent consequence of pre-merger negotiations or preparations. As is the case with prior implementation, a section 4 contravention could expose a firm to an administrative penalty of up to 10% of its annual turnover.
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What can be disclosed?
A useful guideline on how to determine what information is commercially sensitive, and therefore problematic to exchange prior to clearance from a competition law perspective, is to ask whether a firm would ordinarily be permitted to share that sort of information with a competitor in the absence of a potential merger. Examples of commercially sensitive information include information relating to purchase or selling pricing, marketing or expansion strategies, manufacturing or output capacity, and fixed or variable costs, if that information is not available publically. Due diligence procedures are common prior to any potential transaction and in that case it is advisable to employ the services of independent third parties or to ring-fence the group of people who will have access to and review the commercially sensitive information. This group of people should consist of business developers, internal legal advisors or accountants, who are not involved in the marketing, production or sales aspects of the business.
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Get advice
As with most things, prevention is better than cure. In this case it is always safer to consult with a reputable competition law attorney in respect of conduct envisaged to occur prior to the approval of a transaction by the competition authorities.
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