Many jurisdictions across the world have mandatory notification regimes. When the relevant filing thresholds are met, the merger review process has a suspensive effect on the transaction, meaning that the parties must continue to operate as competitors and cannot integrate until they receive merger approval.
‘Gun-jumping’ refers to unlawful conduct of the merging parties before such approval is granted, including early implementation of the merger, the coordination of competitive conduct or the unrestricted exchange of competitively sensitive information.
The EU and U.S. competition authorities have been and remain active in enforcing gun-jumping cases, while in recent years other competition authorities across the world, including in China, have also become increasingly active. This is a trend we expect to continue.
At the time of writing, the European Commission (EC) is investigating two potential gun-jumping cases– Altice/PT Portugal and Canon/Toshiba Medical Systems (TMS).
These cases are significant because, while the EC has made clear that in each case its approval in respect of the merger will not be affected, they demonstrate that not only is gun-jumping a live risk, but the EC is prepared to pursue potential procedural infringements even if the risk of serious harm is low.
Canon/TMS involves allegations that Canon implemented the merger before both notifying and obtaining approval from the EC. This case involved a two-step acquisition procedure known as ‘warehousing.’ On signing, Canon acquired a single non-voting share in TMS, for which it paid effectively the full value of TMS. At the same time, an interim buyer acquired voting shares in TMS for a nominal amount. Canon also took options over these shares. Canon intended to have control of TMS only when it exercised the options following notification and merger approval. The EC cleared the merger in September 2016 but has subsequently opened an investigation into whether these arrangements let Canon effectively acquire TMS before it notified the deal.
The Canon case is particularly significant as the EC has taken issue with the very design of the transaction. Warehousing structures are not uncommon. They can, for example, be used in auctions to enable potential ‘strategic’ purchasers, whose business may overlap with a target’s, to compete on a level playing field with potential private equity purchasers, which are less likely to have competition issues. In the Canon case, the structure was designed to enable the purchase price to change hands as quickly as possible on signing, as Toshiba was in urgent need of cash to balance its books following an accounting scandal. The Canon case highlights the need for businesses to be aware of the risks certain transaction structures may bring, particularly as the reason for breach is irrelevant, whether deliberate, negligent or innocent.
However, it is not just the EC that has taken issue with the arrangements in Canon/TMS. The opening of its investigation followed a public warning by the Japanese competition authority, the Japan Fair Trade Commission (JFTC), in 2016 that the arrangements may be in violation of antitrust law. The JFTC did not impose a fine on Canon, but the public announcement serves as a warning to others contemplating similar structures. The Chinese competition authority, the Ministry of Commerce (MOFCOM), went a step further and, in January 2017, fined Canon RMB300,000 (approx. US$45,166) for failure to notify the transaction at the first step.
In this regard, the Canon case highlights a significant discrepancy in the severity of risk posed by breaching gun-jumping rules across the different regimes, particularly between China and other merger control jurisdictions, such as the EU and the United States.
In the EU, the financial consequences of running afoul of the rules can be severe. The EC can impose a fine of up to 10% of worldwide turnover, should it decide that Canon has broken the rules. The EC has previously fined companies up to €20 million for gun-jumping. Similarly, in the United States, the Department of Justice (DOJ) can impose fines of up to US$41,4841 per day, per company that is out of compliance, for gun-jumping offenses. The DOJ has obtained civil penalties as high as $5.67 million for gun-jumping violations, when it reached a settlement in 2003 with Gemstar-TV Guide, reflecting the then-maximum penalties of $11,000 per day that each company was out of compliance.
In fact, the DOJ continues to monitor potential gun-jumping violations closely. On January 18, 2017, the DOJ obtained a US$600,000 civil penalty from Duke Energy, a seller of wholesale electricity, for gun-jumping violations relating to Duke’s acquisition of Osprey, an electricity generating plant in Florida. Duke agreed to purchase Osprey in August 2014. At the same time, the parties entered into a tolling agreement whereby Duke assumed control of operational responsibilities at Osprey and also retained any profit (or loss) from the operation of the plant. While similar tolling arrangements standing alone are not uncommon in the electric power generation industry, and the DOJ did not allege that the tolling agreement standing alone was a violation of the antitrust laws, the DOJ did allege that the use of the tolling agreement in conjunction with the purchase agreement was a gun-jumping violation, because it transferred beneficial control prior to HSR clearance. The DOJ obtained penalties from Duke for the 150-day period that the parties were out compliance: from the effective time of the tolling agreement in October 2014, through the date that Duke received early termination of the HSR waiting period for the acquisition in February 2015.2
By contrast, in China, the maximum financial penalty for gun-jumping is a fine of RMB500,000 (approx. US$75,277). It is certainly true that in recent years China has increased its focus on enforcing gun-jumping rules. As of the end of 2017, the Ministry of Commerce (MOFCOM) of the Government of China has publicly announced 17 gun-jumping cases. However, the average amount of the fine imposed per penalized company is RMB190,000 (approx. US$29,000). This has led to criticism that the fines are too low to act as a sufficient deterrent to prevent companies from taking calculated risk with regard to jumping the gun.
For large-scale transactions, the financial cost for each day of delaying the closing can easily exceed the average fine for gun-jumping. However, gun-jumping may lead to additional and substantive delay of clearance. MOFCOM can request the parties to suspend the implementation during the gun-jumping investigation, and did so in seven out of the 17 cases. On average, the investigation period takes approximately 230 calendar days. So even if the fine is insignificant, gun-jumping may lead to severe loss considering the possible additional delay of the transaction.
For companies with multi-jurisdictional operations engaging in complex M&A transactions, evaluating the risks posed by gun-jumping rules across jurisdictions can be particularly challenging; not only do the rules frequently lack clarity, but the assessment by the regulators takes place on a case-by-case basis and there are often differences in approach between regimes. However, the competition authorities have recently shown that they are likely to enforce the rules rigorously as a deterrent to others. Given the increased enforcement activity in this area from competition authorities across the world, businesses must be aware of the risks and take measures to mitigate these based on the individual circumstances of their case.