“Gun-jumping” - more serious than a false start. The importance of notifying mergersWednesday, 13 June 2018
A €124.5 million EU fine and a criminal investigation in Ireland have served as useful reminders for companies and transactional lawyers of the importance of having mergers cleared by the relevant competition authority before closing deals, an act which is known as “gun-jumping”.
Gun-jumping is prohibited by competition law in order to preserve the competitive integrity of markets and ensure that competitors remain independent of one another. This includes during the period between signature of a Share Purchase Agreement but prior to the completion of a merger. The increased attention by regulators in this area has also yielded a judgment from the Court of Justice of the European Union (“CJEU”) on 31 May 2018 which shed needed light on the parameters of gun-jumping.
In Ireland, gun-jumping is prohibited by section 19(1) of the Competition Act 2002 (as amended), and where gun-jumping does occur, that merger is void under section 19(2). This means that all parties to a notifiable transaction are under a “standstill obligation” not to implement their transaction before clearance by Ireland’s competition regulator, the Competition and Consumer Protection Commission (“CCPC”). Similar rules exist at EU level for large mergers and the European Commission has been increasingly active in levying fines against companies who engage in gun-jumping.
Enforcement activities at EU and Irish level
Most recently (and significantly) in April 2018, the European Commission fined multinational telecoms company Altice no less than €124.5 million for “serious infringements” of the gun-jumping prohibition and to create a strong deterrent to other potential offenders. It found that Altice implemented its acquisition of telecoms company PT Portugal by exercising control over it prior to clearance, including:
- having veto rights over decisions; and
- giving instructions on how to carry out a marketing campaign (including seeking commercially sensitive information).
The European Commission has previously fined parties €20 million in both the Electrabel (2009) and Marine Harvest (2014) cases.
Traditionally, the CCPC has not pursued “gun-jumping” aggressively. However, given the level of enforcement at EU level and in other EU Member States, it is likely that there will be increased activity in tackling gun-jumping in Ireland. The CCPC recently launched its first formal investigation into suspected gun-jumping in the motor car sales sector through the acquisition of Lillis O'Donnell Motor Company by Armalou Holdings Limited (through Spirit Ford Limited). Although the European Commission can impose civil fines of up to 10% of annual worldwide turnover of "gun-jumpers", in Ireland gun-jumping is a criminal offence. Companies found guilty can be subject to fines of up to €250,000 (on indictment), in addition to daily fines for each subsequent day the transaction is not notified may be applied.
Practical steps to avoid gun-jumping
Clients and their advisors should be aware that gun-jumping may arise in a wide range of circumstances, not limited to the extreme cases where a merger is fully implemented prior to clearance. Some planning is permitted, and this may include (for example) veto rights outside the ordinary course of business, so long as the purchaser cannot exert decisive influence over the entity it is acquiring.
However, the difference between allowable pre-merger planning and prohibited behaviour has traditionally been difficult to draw, as the standstill obligation on merging parties is not defined in Irish or EU legislation. This is particularly problematic as the consequences of getting it wrong for businesses can be very serious.
Some of the uncertainty in this area appears to have been lifted following the judgment of the CJEU on 31 May 2018 in respect of a merger between Ernst & Young / KPMG Denmark (Case C-633/16). In this case, the alleged gun-jumping was the termination by KPMG Denmark of its cooperation agreement with the wider KPMG group, which the Court concluded was conditional on the transaction and likely to be only ancillary and preparatory in nature. Therefore, the CJEU interpreted gun-jumping in a narrow way by deciding that there was no change in control despite the effects it was likely to have on the market. It is likely that this judgment will inform the enforcement activities of competition regulators in gun-jumping cases and the CJEU’s judgment when it assesses Altice's likely appeal.
Ultimately, the lesson for companies involved in notifiable transactions is that they should be vigilant not to fall foul (including unintentionally) of the gun-jumping prohibition by ensuring they:
- carefully assess merger filing obligations and notify the relevant competition regulators;
- abide by appropriate rules of engagement, such as restricting flows of competitively sensitive information (prices, strategy etc.); and
- remain independent of one another and limit cooperation until the transaction is cleared.
For further information, contact our EU, Competition and Regulated Markets team.