Antitrust law in M&A practice reloaded: EGC confirms record fine for gun-jumping

The European General Court (“EGC”) has confirmed the highest ever fine decision for “gun-jumping” within the EEA (judgment in Case T-425/18 – Altice Europe NV v Commission). In 2018, the European Commission (“Commission”) had imposed a record fine of € 124.5 million on the multinational telecommunications company Altice Europe NV (“Altice”) for infringing both the obligation to file a notification of the concentration and the prohibition of putting it into effect. The EGC dismissed Altice’s action for annulment, confirmed the Commission’s findings and only corrected the value of the fine by 10%. According to the EGC, the prohibition of double jeopardy (ne bis in idem) does not prevent this either.

Background

The Merger Control Regulation (“MCR”) requires that concentrations must be reported to the Commission if they have an EU-wide dimension and the given thresholds have been met (“notification obligation” within the meaning of Article 4(1) of the MCR). In addition, the undertakings may not implement the concentration until the Commission has taken a clearance decision (“implementation prohibition” within the meaning of Article 7(1) of the MCR). In its decision, the EGC made clear that both provisions are to be applied in parallel and that it can make a difference for the fine whether a company complies with the notification obligation but infringes the standstill obligation or even both obligations (as in the present case by Altice).

Like when athletes start running a race too early, gun-jumping refers to the premature implementation of concentrations that are subject to notification, i.e. figuratively speaking before the starting shot has been fired by the competent competition authority (clearance after notification). Traditionally, gun-jumping relates to situations where the implementation as such is anticipated, such as the transfer of company shares or the acquisition of control. In its decision supporting the Commission, the EGC makes it emphatically clear that, under certain circumstances, the inadmissible exchange of information and mere preparatory acts, such as the possibility of exercising decisive influence over the target company, can also be considered an infringement of the implementation prohibition. This broad interpretation entails risks for transactions.

The Commission’s Altice decision

Through a share purchase agreement (“SPA”) entered into in December 2014, Altice was to acquire sole control of PT Portugal. The SPA provided Altice with certain influence and veto rights over a number of operational decisions at PT Portugal, pending approval by the competition authority.

In February 2015, Altice notified the Commission of its acquisition of sole control over PT Portugal. By decision of 20 April 2015, the Commission declared the acquisition compatible with the internal market (subject to compliance with certain commitments). On the basis of information obtained from the press, the Commission opened an investigation in March 2016 due to a possible infringement of the provisions of the MCR and also identified this.

The Commission imposed a penalty on Altice primarily because of the covenants in dispute (also ordinary conduct of business clauses) and because of an inadmissible exchange of information.

Gun-jumping through covenants

The decision deserves special attention with regard to covenants. Against the backdrop of the investment risk on the part of the purchaser coupled with the time lag between signing and closing, there is a high level of interest in hedging during this phase. For this reason, clauses in the form of consultation rights, veto rights or also reservations of consent with regard to certain business transactions at the target company have become established in company sale and purchase agreements for the phase prior to implementation.

The Commission also basically recognises the need for regulations in takeover agreements that are intended to ensure the preservation of the company and the purpose of the transaction. However, what is actually still permitted or already prohibited with the limitation to the extent necessary to avoid endangering the value of the company, as required by decision-making practice, remains a legal grey area. This applies not least because the most diverse processes can have an influence on the (sustainable) value of a company.

By confirming the Altice decision, the EGC has further defined the dividing line between permitted value preservation clauses and impermissible controlling influence – at least in a negative sense. The Court objected to three categories of influence and veto rights, which it considered to be too broad and not necessary to safeguard Altice’s interests:

• appointing and recalling directors;
  
  
• modifying pricing policies and standard terms and conditions; and
  
  
• the possibility of entering into, terminating or modifying various contracts with relatively low level of monetary thresholds.

In particular, the EGC sees the possibility of jointly determining the structure of the management as an opportunity to exercise decisive influence on the business policy of a company. The possibility of reserving consent to the appointment of managing directors or exercising influence on groups of staff frequently encountered in practice is at least likely to be put to an end as a result. Instead, it should be assessed on a case-by-case basis which employee really appears to be indispensable for preserving the company’s value.

It remains unclear, however, what practical consequences the decision will have for any possibilities of exercising influence on contracts in other situations. The ruling also does not provide a reliable basis for purchasers as to how threshold values for contracts can be formed in a legally watertight manner, so that they may in any case be subject to a requirement of consent.

Gun-jumping by exchanging information

A look at the EGC’s decision is also worthwhile for future advisory practice with regard to the handling of the aspect of information exchange between the time the company sale and purchase agreement is concluded (signing) and the time it is implemented (closing).

It becomes clear that – contrary to what was indicated after the decision of the Court of Justice of the European Union (“CJEU”) in Ernst & Young (CJEU, judgment of 31 May 2018, Case C-633/16 – Ernst & Young) – exchanges of sensitive information must also be examined under merger control law aspects in the context of an implementation prohibition.

Both the Commission and the EGC acknowledge that the exchange of information of a commercial nature between a potential purchaser and a seller may, if properly conducted, be considered part of the normal acquisition process if the nature and purpose of that exchange is directly related to the potential purchaser’s need to assess the value of the company. This provides legal certainty for the exchange of information in the context of a pre-signing due diligence based on these criteria.

However, caution is required in the time period after the signing, which is viewed particularly critically by the Commission and also by the EGC. In the opinion of the EGC, the limit of what is permissible is exceeded if the exchange of information continues after the signing of the SPA and very sensitive information is exchanged from a competition point of view. In the case in question, this involved exchanging information on future pricing strategies and weekly information on key performance indicators. The EGC saw this as the exercise of decisive influence by Altice over PT Portugal, i.e. prior to implementation, which should not have taken place prior to clearance.

Since the exchange of information in the Altice case was only a further contribution to the infringement of the implementation prohibition, it remains open whether gun-jumping can also be justified by an exchange of information alone. In any case, this no longer seems to be ruled out for the phase after signing.

Practical consequences

The EGC’s decision has brought antitrust law further into the focus of M&A transactions. Particularly in view of the clearly recognisable trend of the Commission to pursue and suspect gun-jumping infringements more intensively and systematically, careful and early antitrust law support of M&A processes is necessary.

It is becoming apparent that the significance of merger control provisions goes far beyond the need for notification obligations. The prohibition of implementation already applies if the sale and purchase agreement gives the purchaser the possibility to exercise a decisive influence on the target company – i.e. where applicable, already from the signing. Exchanging information is also fraught with risks in this context, as it can now also be part of gun-jumping in view of European case law. The boundaries of what is permissible or not are sometimes fluid. In any case, in the light of Altice, particular caution is always called for as soon as the covenants lead to access to the management, pricing policy and contracting of the target company.

In any case, in view of the understanding of the scope of the implementation prohibition and the comments in the judgment, care must be taken that narrow wording is used in SPAs so as not to run the risk of going beyond what is required to preserve the value of a target company. The mere possibility of exercising influence in sensitive areas can be sufficient to constitute a gun-jumping infringement. This means that decisions will have to be deliberated on a case-by-case basis in the future as well and should be documented accordingly. Although the ruling is formally limited to EU merger control, it also seems quite likely that the national competition authorities will follow this lead.