On May 18, 2017, the European Commission (the Commission) sent a “statement of objections”[1] to Altice – a Netherlands-based multinational company operating in the telecommunications (TLC) sector – alleging that it breached the EU Merger Regulation (Regulation N. 139/04, or EUMR) by implementing the acquisition of PT Portugal prior to the Commission’s clearance of the concentration or even prior to the notification of the transaction (so called gun jumping). The same day, the Commission issued a landmark decision fining Facebook €110 million for allegedly providing incorrect information in the course of the merger control proceedings for the acquisition of WhatsApp in 2014.
Shortly after (on July 6), the Commission announced it sent formal accusations to: General Electric and, separately, to Merck and Sigma Aldrich alleging that they failed to provide the Commission with information which was essential for a thorough and correct assessment of the effects of the notified concentrations on competition; and also to Canon over suspected gun jumping.
These companies risk steep fines for breach of procedural merger control rules (up to 1% of their global turnover for gun jumping; or up to 10% for providing incorrect/misleading information), even though the infringements may not have had any distortive impact on competition.
Such unprecedented activism of the Commission in pursuing this type of infringement marks a significant step towards a stricter enforcement of EU merger control rules. It is therefore advisable to take a closer look at the specific objections raised by the Commission in these infringement proceedings and on the underlying facts which have been made available to the public.
1. Background on the relevant rules in the EUMR
Pursuant to the EUMR, concentrations between undertakings which exceed certain turnover thresholds (known as concentrations with a EU dimension) must be recorded with the Commission prior to closing (referred to as prior notification obligation) and cannot be completed until the Commission has taken a clearance decision (known as a standstill obligation). Failure to comply with these obligations (or gun jumping) triggers fines up to 10% of the worldwide turnover of the undertaking(s) responsible for notification (Article 14, para. 2, letters a and b of the EUMR).
Further, providing misleading or incorrect information in the notification form or in response to a separate request for information also triggers fines up to 1% of the global turnovers of the undertakings concerned (Article 14, para. 1).
So far, fines levied by the Commission for gun jumping have been in the range of €20 million, such as those imposed in 2009 on Electrabel for acquiring control of Compagnie Nationale du Rhone; and in 2014 on Marine Harvest in relation to the acquisition of control of Morpol. Notably, the €110 million fine against Facebook/WhatsApp is the first and only imposed for providing misleading/incorrect information since the EUMR came into force; and the proceedings against General Electric, Merck and Sigma Aldrich prove that it was not intended to remain an isolated, exceptional case.
2. Gun jumping: The cases against Altice and Canon
In the previous infringement cases against Electrabel and Marine Harvest, the companies have been condemned for an outright breach of the prior notification obligation as they only notified the Commission of the concentration after months or years had passed after the formal completion of the transactions.
Altice did notify the Commission of the transaction before completing the acquisition of PT Portugal from Oi (the Brazilian TLC operator), but the Commission alleges that certain provisions of the share purchase agreement put Altice in a position to control (or exercise decisive influence over) the target company prior to the notification and clearance of the transaction.
In particular, according to the Commission’s objections, the share purchase agreement has granted Altice the right to: (i) obtain sensitive information which is usually only available to controlling companies, without restrictions aimed at preventing the early use of such information, and (ii) give instructions to the target on how to handle commercial relationships and negotiations. Because the share purchase agreement did not provide for sufficient safeguards and precautionary measures to avoid the early use of sensitive information and to preclude the exercise of typical control powers by Altice, the parties acted negligently or intentionally in contrast with the standstill obligation.
Specifically, Commissioner Margrethe Vestager, in charge of the competition policy at the Commission, in a speech before the Romanian Competition Council said that “we found that Altice’s agreement to buy PT Portugal seems to have allowed it to control its rival even before we approved the merger. It appears that Altice had already been acting as if it owned PT Portugal”, and added that “It seems that it gave instructions on how to handle commercial issues, such as contract negotiations. And it also seems to have been given sensitive information. Information that only PT Portugal’s owner should have had and without any safeguards to stop it misusing that information”. Interestingly, Commissioner Vestager also pointed out that initial suspicions were raised by press reports indicating that Altice’s executives had been visiting PT Portugal[2].
With regards to the investigation against Canon, the Commission’s official press release says that the Japan-based company is accused of using a “warehousing”, a two-step transaction structure involving an interim buyer to effectively implement the acquisition of Toshiba Medical System before both notifying, and obtaining approval from, the Commission (the parties filed the transaction on August 12, 2016, and the Commission cleared it on September 19, without raising concerns at the time).
More specifically, the Commission points out that Canon paid the full price of the merger (approximately €5.28 billion) before notifying the Commission: first, it paid for non-voting shares in the company; second, it paid for stock options for 95% voting shares that were provisionally held by an interim buyer (who had paid €800 to acquire such shares). Once merger clearance was obtained, Canon exercised these options, formally acquiring the entire voting share capital of Toshiba Medical System. The preliminary view of the Commission is that this warehousing arrangement was aimed at circumventing merger control rules and letting Canon effectively acquire Toshiba Medical System before notifying it.
When two apparently separate transactions are interdependent the Commission may indeed treat them as two steps of a single notifiable concentration; and there is nothing novel in this principle. However, what makes the Canon case peculiar is that the Commission deems that, as a matter of fact, the transaction was effectively completed after the first step (i.e. acquisition of stock options for 95% voting shares and payment of the full price) rather than after the second (i.e. exercise of the stock options and formal purchase of the voting shares).
Notably, the (scant) description of accusations in the press release seems to imply that the Commission took the early payment (i.e. prior to closing) of the full price of the takeover as presumptive evidence of the infringement of the prior notification and standstill obligations – though other circumstances may have played a role, such as the fact that the interim buyer could not sell the 95% stake without Canon’s approval.
3. Misleading information: The cases against General Electric, and Merck and Sigma Aldrich
According to the official press release, in the statement of objections sent to General Electric the Commission alleges that the company failed to disclose information about the development of a specific product when it reported the acquisition of LM Wind – a company which makes blades for wind turbines.
Reportedly, General Electric first reported the transaction in January, 2017, without the information on the contested product under development. A month later, it withdrew the notification and re-sent it 11 days later with complete information about that product. The Commission then cleared the transaction unconditionally in March, 2017, but nonetheless decided to open an investigation into misleading information.
The Commission maintains that research and development (R&D) plans can affect the perspective competitive structure of the relevant market (i.e. on-shore and off-shore wind turbines) because of the essential role played by innovation and technology therein. Hence, to ensure a thorough and sound assessment of post-merger effects on competition, information was due not only on current products but also on those in the R&D pipeline. This stance is in line with the recent trend of the Commission requiring the parties of a merger to provide detailed information on R&D projects, even if at an early stage and far from becoming marketable products, particularly in the pharmaceutical and chemicals sectors.
Notably, at the same time of the first notification of the acquisition of LM Wind by General Electric, the Commission was reviewing another important transaction in the same field – the acquisition of wind turbine maker Gamesa by Siemens – the competitive assessment of which could have been impacted by the information provided by General Electric in the other deal. The Siemens/Gamesa deal was also cleared unconditionally in March, 2017, but the risk of an incorrect assessment of the competitive impact of both mergers on the relevant markets (including on future competition) must have moved the Commission to open the infringement proceeding against General Electric with a view to affirm – as a matter of principle – the importance of always filing complete and correct notifications in the first place, including on R&D projects.
The third case concerns the information provided to the Commission by the life sciences companies Merck and Sigma Aldrich in the context of the notification of their merger back in 2015. The Commission reports that the parties failed to inform the Commission about the development of a new, important technology which was relevant for the delimitation of a business, that had to be divested to a competitor as a condition for the clearance of the transaction. In particular, the Commission was concerned that the merger would have had an adverse impact on competition in the chemical labs business and the missing information on the innovation product was closely linked to that business, which was at the core of the Commission’s analysis. Indeed, the Commission maintains that the technology would have been included in the remedy package if it had been reported during the notification process, and by not including it, the viability and competitiveness of the divested business was impaired.
The technology in question was then licensed by Merck to Honeywell, which was the buyer of the divested business, and therefore the possible harm to competition was removed. However, this occurred almost a year later and only because the Commission was subsequently made aware of the issue by a third party. Hence, it opened the investigation and has taken the preliminary view that the parties have intentionally or negligently supplied incorrect or misleading information.
4. Conclusions and recommendations
The lesson to be learned by undertakings and competition lawyers from the described developments is not completely new. Antitrust lawyers across the world are familiar with safeguards that need to be included in share purchase agreements in the context of notifiable mergers with a view to avoid:
- unnecessary exchanges of sensitive information between the merging parties (in a stage where they are still independent competitors); or
- early management of the target business, which could be construed as either a breach of Article 101 TFEU (The Treaty on the Functioning of the European Union which prohibits anticompetitive agreements), or of the prior notification and standstill obligations under the EUMR.
Antitrust lawyers are also often concerned with requesting that the parties of a merger provide a large amount of data and information to avoid misunderstandings or missing relevant information that is required by the Commission. However, such safeguards and extensive requests for information have often been criticized or opposed by business people managing the transaction as overkill or a formalistic complication with no real grounds for concern, thus pushing lawyers to overlook or underestimate them. These proceedings prove that, most likely, this is a mistake.
Hence, undertakings involved in a merger must bear in mind that exchange of information between the parties of a transaction prior to notification and clearance should be strictly limited to the objectively indispensable information required by the parties during the due diligence phase to evaluate the viability of the deal and the fairness of the purchase price, or to ensure compliance with the interim management obligations. In addition, even the disclosure of such information should be restricted to a “confidentiality ring” made up of counsels and/or rigidly selected employees of the parties, who must also sign specific non-disclosure agreements, agreeing to not reveal any of the information outside of the ring or use it for purposes other than those mentioned above. Further, the clauses in the purchase agreement concerning the interim management of the target business between the signing and the closing of the transaction – i.e. pending the clearance of the concentration by the Commission – should be designed with a view to prevent any unnecessary, extraordinary decisions that could affect or endanger the financial standing and valuation of the target business or jeopardize the value of the buyer’s investment; whilst at the same time cannot go beyond this objective and allow the purchasing undertaking(s) to divert the ordinary course of business in their own interest, as if they were already controlling the target.
With regards to the information to be supplied to the Commission during merger control proceedings, it is worth noting that R&D projects cannot be hidden under the carpet, particularly in markets characterized by a high rate of technology and where competition is driven by large investments in innovation.
The Commission said the current investigations are limited to the assessment of breaches of the merger procedural rules and that the three mergers will remain valid and effective. Nonetheless, the Commission does not rule out the possibility of withdrawing merger clearances, should it find that the parties committed extreme violations of procedural rules. The day the described proceedings were announced, the Commission’s chief Margrethe Vestager told reporters: “It is an extreme step to undo a merger approval but I don’t think that one can completely say that it will never happen … It will have to be a very, very, very severe infringement of our procedural rules that has real effects in the market concerned, if we were ever to take the step of withdrawing a merger clearance”.
This article has been published also on Concurrences.com on April 24, 2018.
