A question that frequently presents itself in M&A transactions is what rights the buyer may exercise in the phase between the signing of the Share Purchase Agreement ("SPA") and the closing of the transaction. The buyer will usually want to exercise certain veto rights as soon as possible in order to (i) safeguard the value of its acquisition and/or (ii) prepare the implementation of the transaction.
As we previously wrote, both the European Merger Regulation and the Dutch Competition Act prohibit the implementation of notifiable concentrations if the prior approval of the European Commission or the Netherlands Authority for Consumers & Markets (“ACM”) has not been obtained. The obligation to notify concentrations that meet certain turnover and other thresholds is also known as the “standstill obligation”. Until the closing of the transaction, the parties are furthermore bound by the prohibition on making anticompetitive agreements, set out in Article 101 of the TFEU and Section 6 of the Dutch Competition Act (the “cartel prohibition”). That prohibition also provides that competitors may not exchange confidential information.
“Gun jumping” is violation of the standstill obligation and/or the cartel prohibition. Gun jumping in any event includes the following situations:
- failure to notify a notifiable concentration;
- late notification of a notifiable concentration;
- the exercising of certain rights without the transaction having been closed;
- the exchange of confidential information between competitors without the transaction having been closed.
Both the European Commission and the ACM can impose high fines on gun jumping, which may have drastic and unforeseen consequences, particularly in situations in which the moment of implementation of the concentration is not entirely clear.
A case in point is Electrabel, a Belgian power company, on which a fine in the amount of €20 million was imposed for implementing a transaction without notifying it to the European Commission in a timely manner and awaiting its approval. The case in question involved the purchase by Electrabel of shares in Compagnie Nationale du Rhone (“CNR”), a French electricity company. Between June and December 2003 Electrabel increased its shareholding in CNR from 17.86% to 49.95% of the shares, as a result of which it held 47.92% of the voting rights. That transaction was not notified to the European Commission. It later became apparent that Electrabel thereby took the position that there had been no change of control because it had obtained less than half the voting rights and therefore could not exercise decisive control over CNR’s commercial and strategic policy. The European Commission did not subscribe to that analysis, however. After investigating the case it found that Electrabel had indeed acquired de facto control over CNR. The European Commission argued in that regard that part of the remaining shares (16.82%) were dispersed over almost 200 different local authorities. Those authorities usually did not attend the shareholders’ meetings. Moreover, Electrabel had a majority on CNR’s management board, which allowed it to control the business operations. Both the Court of First Instance and the Court of Justice shared the European Commission’s view that Electrabel had thereby gained control.
Marine Harvest, a Norwegian salmon farmer, also experienced the consequences of a difference of opinion with the European Commission as to when the concentration had been implemented. That case involved the acquisition by Marine Harvest of Morpol, a Polish salmon processor. At the end of September 2013 the European Commission conditionally approved the concentration of the two companies. In March 2014, however, it found that Marine Harvest had acquired 48.5% of the shares in Morpol at the end of 2012 already. In the European Commission’s opinion, Marine Harvest had thereby already acquired de facto control (or in any event the possibility of such control). In light of the dispersal of the other shares and the earlier attendance figures at shareholders’ meetings, Marine Harvest had a stable majority at those meetings. In the European Commission’s opinion Marine Harvest should therefore have notified the transaction in 2012 already, even though it was an established fact that Marine Harvest had not yet factually exercised its controlling rights. The European Commission imposed a fine of €20 million. Marine Harvest appealed that decision.
A well-known example of a Dutch gun jumping case is the acquisition of part of the activities of Canal+ by Chellomedia of Airfield. The Netherlands Competition Authority, ACM’s predecessor, imposed fines on both Chellomedia and Airfield for their failure to give timely notification of the acquisition at the end of 2004. The parties signed the acquisition agreement before the acquisition had been notified, whereby Chellomedia immediately gained control. Chellomedia acquired a veto, for instance, with regard to (i) the appointment and removal from office of senior managers; (ii) the budget or the business plan; and (iii) expenditure in excess of €50,000, as well as important agreements. Also in that case the Dutch court agreed with the Netherlands Competition Authority that Chellomedia had thereby acquired control.
In sum, acquiring control (or the possibility of control) without first notifying the transaction and awaiting approval definitely entails significant risks. In situations in which it is unclear at what point control is acquired it is therefore advisable to first obtain advice (possibly informally) from the competition authorities.
Between approval and closing
Also after a transaction has been approved, the parties are bound by the cartel prohibition until the moment of closing. Particularly if the buyer and the seller are competitors, they must continue to compete and, in principle, may not exchange any confidential information until the moment of closing. If the buyer and seller are not competitors, however, the cartel prohibition usually offers more room for cooperation and exchange of information during the period until closing.
So what are buyers allowed to do?
Fortunately, competition law does not bind buyers hand and foot. Very few transactions would be concluded if the buyers did not have access to certain (confidential) information. Buyers need to know where they stand before they can commit to certain acquisitions. And buyers can indeed stipulate certain requirements regarding the target in order to safeguard their (proposed) acquisition. A list is presented below of practices and agreements that, in principle, are permitted under competition law. Buyers should always proceed with care, however. Throughout the transaction they should therefore beware of potential competition law issues, particularly with regard to the exchange of sensitive business information.
- During the initial phases of the transaction the exchange of information required to perform a due diligence investigation can give rise to competition law objections, particularly if a concentration between competitors is involved. That can be avoided by drawing up a confidentiality agreement.
- In the case of a concentration between competitors it may be advisable to use “Clean Teams”: teams consisting of employees of the parties involved who are not directly involved in the day-to-day management and are given access to confidential information of the other party on a strictly confidential basis.
- In certain circumstances it is possible by means of conditions subsequent or a MAC (material adverse change) clause to make agreements aimed at safeguarding the value of the target. Any unforeseen circumstances that impact the value of the target between the moment of signing and the moment of closing (such as the issue of new shares, a liquidation petition and the performance of activities outside the sector) can thereby be provided for.
- Finally, a buyer may require of the target that it continue to act between signing and closing in the ordinary course of business consistent with past practices, so that the buyer is not confronted with any unpleasant surprises at the time of the transfer.