Athletes will be familiar with the repercussions of ‘jumping the gun’ but two decisions this year have highlighted the risk for merging businesses.
Under the EU Merger Regulation and the Irish Competition Act, a notifiable merger or acquisition should not be implemented unless it has been notified and cleared by the European Commission (Commission) or the Irish Competition and Consumer Protection Commission (CCPC). Premature integration of businesses prior to a merger notification or its approval by the relevant competition authority is commonly referred to as ‘gun-jumping’. Gun jumping is prohibited by EU and Irish competition laws to ensure that competitors remain independent of each other and do not share commercially sensitive information until the transaction has been approved by the relevant competition authority.
What are the consequences of gun jumping?
The Commission can impose fines of up to 10% of annual world-wide turnover of companies which breach the notification and/or the standstill obligation. In Ireland, gun-jumping is a criminal offence with fines of up to €250,000.
In April of this year, Altice was fined €125 million, the highest fine ever imposed by the Commission for gun-jumping. Altice entered into an agreement to acquire PT Portugal but only notified the transaction to the Commission in the following year. The Commission approved the acquisition in April 2015 but subsequently (in April 2018) concluded that Altice had infringed the gun-jumping prohibition by acquiring veto rights over decisions concerning PT Portugal, by instructing PT Portugal on how to conduct a marketing campaign and by receiving commercially sensitive information from PT Portugal.
The decision follows on from severe fines imposed on other companies for procedural breaches of the EU Merger Regulation, including a €110 million fine on Facebook for providing incorrect or misleading information during the Commission’s investigation of its acquisition of WhatsApp. While the completion of the merger control review itself was not affected in either case, the high fines are intended as a deterrent to protect the integrity of the merger control process.
In Ireland, the CCPC commenced its first formal investigation into gun-jumping in October 2017 in relation to the acquisition of Lillis O’Donnell Motor Company by Armalou Holdings Limited. It will be interesting to see how this investigation will play out but, unfortunately, no update on the investigation is available at this time.
What conduct amounts to gun jumping?
It can be difficult to draw the line between permitted pre-merger planning and prohibited gun-jumping behaviour. Some planning is permitted, as long as no commercially sensitive information is exchanged and the purchaser does not exert decisive influence over the target company.
A recent judgment from the Court of Justice of the European Union (CJEU) relating to the merger between KPMG Denmark, a member of the international KPMG network, and Ernst & Young (EY) has shed some light on this area. After KPMG Denmark signed a merger agreement with EY, it terminated its cooperation agreement with KPMG International, which meant that formal cooperation would end within 10 months. The Danish competition authority believed that the termination of the cooperation agreement amounted to gun jumping because the termination was merger-specific, irreversible and had the potential to affect markets. Conversely, the CJEU found that the termination of the co-operation agreement did not breach the standstill obligation as it did not contribute to a shift in control between the merging entities.
The above-mentioned cases show that merging companies and those wishing to acquire all or part of another business must be careful not to integrate the merging businesses prior to any necessary clearance from the relevant competition authority.
While some preparation planning is allowed, the purchaser should not exert any decisive influence over the target business. This could, for example, include the exercise of important veto rights over the budget or business plan. In addition, merging businesses must be careful not to exchange any competitively sensitive information prior to competition clearance. In order to safeguard the confidentiality of competitively sensitive information, it may be necessary to set up a confidentiality ring and/or a confidential section of the data room. In addition, given the potentially severe consequences associated with gun jumping, it would be prudent to have any integration plans or meetings reviewed or observed by a competition lawyer.