The General Court underlines the importance of standstill obligation before obtaining merger approval
Authors: Špela Remec, Nataša Pipan Nahtigal
In its recent judgement the General Court confirmed the importance of observing the standstill obligation in mergers which are subject to approval by the competent competition authorities. The Court only slightly reduced the record breaking gun-jumping fine imposed by the European Commission.
A. What is gun-jumping and who needs to consider it?
In order to ensure that the most important mergers will bring about welfare for the society or, at minimum, not have a negative effect on the competition on the market, such transactions are subject to review by the competent competition authorities. Until these authorities give the parties their approval to proceed with the completion of the proposed transaction, the EU and the Slovenian competition laws forbid the parties from pursuing any action which could be considered as de facto implementation of the concentration. Early implementation, also called gun-jumping, may be subject to substantial fines in the amount of up to 10 % of the annual turnover of the breaching party’s group.
Gun-jumping may occur in three different situations:
- Failure to notify a transaction to the competent authorities, in violation of the obligation in Article 4(1) of the EU Merger Regulation (“EUMR“)1 or Article 42 of the Slovenian Prevention of Restriction of Competition Act (“Competition Protection Act”)2;
- Early exercise of control over the target by the acquirer, in contravention of Article 7(1) EUMR or Article 44(1) of the Competition Protection Act following the notification, but before a notifiable merger is cleared by the competent authorities; or
- Exchange of competitively sensitive information between competitors in horizontal mergers following the notification, but before a notifiable merger is cleared by the competent authorities.
It should be noted that not all contacts or actions of the acquirer are prohibited. Actions which are necessary to preserve the value of the investment should fall outside of the gun-jumping prohibitions. Additionally, a restriction may be justified by criteria other than the sole and strict preservation of the value of the target undertaking.3 However, the regulators seem to interpret such exemptions quite narrowly.
B. Recent gun-jumping developments in the EU
In the last years, the practice of the European Commission and the EU courts has indicated the regulators’ increased sensitivity and attention to possible gun-jumping violations. Last year, the European Court of Justice finally confirmed a EUR 20 million fine imposed by the Commission upon Mowi for failure to timely notify its acquisition of Morpol, although the transaction met the EU merger control thresholds.
In June 2017, the Commission imposed a fine of EUR 28 million on Canon also for failure to notify its acquisition of Toshiba Medical Systems Corporation.
The record breaking fine in the amount of EUR 124.5 million was imposed by the Commission in 2018 against Altice for premature implementation of its control over PT Portugal. On 22 September 2021 the General Court confirmed the Commission’s decision even though it reduced the total fine by EUR 6.2 million.
C. Altice Judgement of 22 September 2021
The Altice case concerned a premature acquisition and exercise of control over the target company before Altice, as the acquirer, obtained the required merger approvals for the implementation of the merger. In particular, the Share Purchase Agreement (“SPA”) granted Altice certain rights which enabled it to exercise decisive influence over PT Portugal before the completion of the transaction, and, on at least six occasions, Altice actually exercised its influence over the business of PT Portugal prematurely. Such actions were found to have amounted to gun-jumping violations. Furthermore, during such actions, Altice, as the acquirer, and PT Portugal, as the target and at the same time also a competitor of Altice, exchanged certain commercially sensitive information about the business conduct of PT Portugal. Each of these findings is briefly explained in turn below:
a. Provisions of the SPA went beyond what was necessary for Altice to preserve the value of its investment
Among others, the SPA provided that before closing PT Portugal shall require a consent from Altice to:
- Conclude an agreement or take over a commitment in excess of EUR 5 million;
- Enter into, terminate or modify its material contracts;
- Acquire assets in excess of EUR 5 million;
- Recruit new directors or officers or terminate or amend their contracts; or
- Change its pricing policies.
The General Court concluded that the above limitations in the SPA were so broad, and the monetary thresholds compared to the purchase price paid by Altice for its acquisition of PT Portugal were so low, that these limitations went beyond what was necessary to preserve the value of the investment. Additionally, the General Court agreed with the Commission that the acquirer may be justified to be given the right to oversee the key personnel in order to preserve the value of the investment; however, the right to veto the appointment, dismissal or changes to the terms of agreements with officers or directors of the target goes beyond such justified interests.
b. Six instances in which Altice actually exercised its control over PT Portugal
The General Court referred to six particular situations in which the interference of Altice with the business of PT Portugal exceeded what was necessary to protect the value of the investment and which constituted a premature implementation of the concentration:
- Promotional campaign ran by PT Portugal: Altice approved, provided specific instructions about the targets to be achieved and the duration of the campaign. The General Court concluded that such detailed interference with the business conduct of PT Portugal amounted to exercise of control over PT Portugal, especially considering that these types of promotions were common in the mobile telecom sector.
- Renewal of a sport channel distribution agreement: PT Portugal informed Altice about the progress of renewal discussions and provided it with detailed information about the distribution agreement, including its fee structure. On the other hand, Altice informed PT Portugal that its subsidiary, which was a direct competitor of PT Portugal, will no longer distribute the relevant channel and gave PT Portugal instructions on how the negotiations should be conducted. The General Court also concluded that such intervention went beyond what was necessary to preserve the value of PT Portugal, especially since renegotiation of agreements for distribution of television channel forms part of ordinary business of a company such as PT Portugal and the value of the relevant distribution agreement was small compared to the total purchase price paid by Altice to PT Portugal.
- Continuation of selection process for radio access network providers: PT Portugal paused the selection process due to a request by Altice and provided Altice with information about the selection process and strategy. The General Court did not find any explanation which could justify such interference in the selection process by Altice prior to the completion of the merger.
- Conclusion of a video on demand contract: PT Portugal sought Altice’s consent to conclude the agreement and provided Altice with information about the negotiations. Altice disclosed to PT Portugal that it was signing similar agreements on more favorable terms and asked PT Portugal not to enter into the agreement before discussing with Altice. The General Court noted that such interference with PT Portugal’s business was not required to protect the value of the investment and also noted that the conclusion of this agreement was not outside of the ordinary course of business of PT Portugal.
- Purchase and sale of share in a national telecommunications network: Altice was informed that PT Portugal did not intend to buy shares in the network which were offered by another shareholder. Altice requested that such shares be purchased and that efforts be made to even acquire further shares. While the General Court agreed that exchange of opinions regarding the sale and purchase of shares in the target’s investment could be necessary to preserve the value of the target, it nonetheless considered that the request to enquire about possible further purchases went beyond such justified involvement.
- Investments required in respect of a call for tenders for provision of outsourcing services and solutions: PT Portugal sough Altice’s approval for certain investments required in respect of the relevant tender agreement. Altice asked to receive detailed information about the planned investments and, in response, PT Portugal provided information which, among other, included expected customer revenues. The General Court agreed with the European Commission that, considering the value of the agreement, it was unlikely that it would have had a substantial impact on the value of PT Portugal and thus considered that the exchange of such detailed information exceed the required scope necessary to protect the value of the target. Moreover, the court noted that, since the issue concerned the extension of an existing agreement, it formed part of PT Portugal’s day-to-day business.
In the case of inclusion of a new TV channel, PT Portugal asked for Altice’s approval on its inclusion. Since the relevant channel was new compared to the channels previously offered by PT Portugal, the General Court agreed that the approval by Altice could be justified in order to preserve the public image of PT Portugal and thereby the value of its investment. Contrary to situations (i) to (vi) above, such approval was, therefore, not found to have been prohibited.
Based on the above situations (i) to (vi), the General Court concluded that Altice had, in fact, exercised control over PT Portugal before obtaining the required approval from the European Commission to complete the merger. Further, the court noted that Altice could have asked the European Commission to grant an exception from the prohibition of implementation of the concentration, as foreseen under Article 7(3) of the EUMR. A similar option is also available for Slovenian proceedings, under Article 44(4) of the Competition Protection Act. These provisions foresee a possibility of asking the regulator which is reviewing the notified transaction to approve partial implementation of that transaction if it considers such implementation justified in order to preserve the value of the investment.
c. Exchange of commercially sensitive information
Finally, the General Court listed some of the information which was exchanged between Altice and PT Portugal and which the court considered as most problematic in the light of prohibited exchange of information among competitors:
- Key initiative is terms of strategy and commercial objectives of PT Portugal;
- Cost-related strategies;
- Key supplier relationships;
- Recent financial data on revenues, margins, capital expenditure and budget planning;
- Weekly key performance indicators;
- Network expansion plans;
- Detailed information about wholesale business; and
- Future pricing strategy.
Although the above examples of the most sensitive information combined with the list of six types of problematic cases of exercise of control still not do not provide a clear and exhaustive list of all types of information exchanges and behaviors which the European regulators consider problematic before obtaining a merger clearance, they do nonetheless provide valuable guidance to merging parties in planning their activities during the interim period between signing of a purchase and sale agreement and obtaining a merger clearance.
1 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ 2004 L24/1.
2 Zakon o preprečevanju omejevanja konkurence (ZPOmK-1), Official Gazette of the Republic of Slovenia, no. 36/08, as amended.
3 As elaborated upon by the General Court in the Altice Judgment (see Section C of this article), a restriction, under the Commission Notice on restrictions directly related and necessary to concentrations (OJ 2005 C56/03), may be justified by criteria other than the sole and strict preservation of the value of the target undertaking.