The ECJ’s judgment is the latest reminder to companies that non-compliance with procedural rules of EU merger control, in particular trying to exercise control over an acquisition target before the EC gives its approval for the acquisition, can result in hefty fines. It underscores why it is critical to have robust procedures in place, not just on paper but in practice, to manage contact between the buyer and the target, both before signing and between signing and completion.
EU merger control rules place strict obligations on merging parties
Where an M&A transaction falls within the EC’s jurisdiction under the EU Merger Regulation (EUMR), there are two main obligations on the parties. First, they need to notify the transaction to the EC (the notification obligation). Second, they must wait until the EC has approved the transaction before they can implement the transaction (the standstill obligation).
Failure to comply with these obligations is punishable by significant fines – up to 10% of the global turnover of the undertakings concerned. But, until recently, there were few cases in which the EC had tested how far these obligations go in practice, or indeed fined parties actually found to have breached them.
The fine on Altice and the GC ruling upholding it
In 2018, the Commission fined Altice a total of EUR124.5m for “jumping the gun” on its acquisition of PT Portugal. This consisted of EUR62.25m for failure to notify and EUR62.25m for violating the standstill obligation.
According to the EC, Altice could (and in some instances did) exercise “decisive influence” over PT Portugal prior to the EC’s clearance and on certain occasions even prior to the formal notification of the transaction. Decisive influence means the possibility to determine the strategic commercial behavior of the target undertaking. Altice also received sensitive information about PT Portugal.
The General Court (GC) largely dismissed Altice’s appeal against the EC’s decision:
- It agreed with the EC that certain veto rights granted to Altice for the period between signing and closing went beyond what was necessary to prevent material changes to PT Portugal’s business and to preserve the value of Altice’s investment, and that they gave Altice the possibility to exercise decisive influence over PT Portugal. This was in particular the case for Altice’s veto rights over the appointment, dismissal or changes to the contracts of any officer and director, any modification of PT Portugal’s pricing policies other than as reflected in the budget, and the conclusion, termination or modification of contracts covering a wide range of commercially relevant matters with a low monetary threshold. The court said that Altice had failed to show that these veto rights were necessary to preserve the commercial integrity of the target in the interim.
- It confirmed the EC’s finding that Altice, by intervening in the day-to-day business decisions of PT Portugal and either approving or rejecting them, had actually exercised decisive influence over PT Portugal prior to notifying the transaction and in between notification and receiving clearance.
- It agreed that this finding was corroborated by the exchange between the parties shortly after the signing of the SPA of competitively sensitive information concerning, among others, cost-related strategies, profit margins, network expansion plans and future pricing strategies.
The GC also ruled that the EC was entitled to impose two separate fines for the conduct. However, the GC reduced the fine for breaching the notification obligation by 10% on the basis that, before signing the SPA, Altice had informed the EC about the deal and submitted a case team allocation request.
Further confirmation from the ECJ…
The ECJ rejected Altice’s argument that, by imposing two fines – one for the failure to notify and one for the breach of the standstill obligation – the EC had acted disproportionately and essentially punished Altice twice for the same underlying conduct.
In line with its Marine Harvest case law, the ECJ held that the two fines were for different infringements of different provisions with different objectives: the notification obligation is a positive obligation to notify a concentration, while the standstill obligation is a negative obligation not to proceed without clearance. According to the ECJ, the possibility for the EC to issue separate fines for infringements of the notification and standstill obligations by the same conduct is necessary and appropriate for the effectiveness of EU merger control.
The ECJ also rejected Altice’s argument that the GC was wrong to find that the pre-closing covenants questioned by the EC allowed Altice to exercise decisive influence over PT Portugal even prior to the notification of the transaction.
The court held (referring to its previous judgment in Ernst & Young) that implementation of a concentration arises as soon as the parties implement measures that contribute to a lasting change of control over the target. It is the change of control that must be “lasting” and not each individual measure. As a result, any measure, even ancillary or preparatory and short-lived (for example, exercising occasional vetoes over certain decisions, to apply prior to closing), may partially implement a concentration if it contributes to a lasting change of control over the target, and can therefore violate the notification and standstill obligations. In particular, a measure need not be “necessary” for the lasting change of control in order for a partial implementation to arise.
Against this background the ECJ also dismissed Altice’s argument that the exchange of competitively sensitive information did not contribute to a premature exercise of decisive influence.
…but with a slight reduction in fine
The ECJ sided with Altice on one issue – that the EC had failed to provide reasons why the infringement of the notification and the standstill obligations called for fines of the same amount, although their duration differed (the failure to file infringement was “instantaneous” whereas the breach of the standstill obligation was “continuing”).
The ECJ emphasised that the duty for the EC to state reasons for the calculation of fines is particularly important in the area of EU merger control, which lacks relevant guidelines. The court reiterated that the amount of the fines imposed for breaches of EUMR procedural rules must be assessed in view of the circumstances of each case, considering the gravity, nature and duration of the infringements.
The ECJ went on to reduce the fine for the failure to notify to EUR 52.9m, a 15% reduction from the EC’s fine and around a 5% reduction from the GC fine. In setting the amount, the ECJ said it had considered the nature, gravity and duration of the breach and found the new amount to be proportionate and dissuasive. However, the court did not further explain how it arrived at the fine amount. The ECJ did not reduce the fine for breach of the standstill obligation.
Takeaways for businesses carrying out M&A
The ECJ’s judgment reinforces the importance of the following aspects of good practice in M&A transactions:
- Carefully consider pre-completion covenants in SPAs. They should go far enough to give the purchaser reasonable protection in terms of preserving the value of the target business between signing and completion. But they should not give vetoes over matters going beyond this that could in substance give the purchaser early control of the target. Importantly, the mere existence of the veto rights could suffice for the finding of early acquisition of decisive influence – it is not necessary to exercise those rights.
- Gun jumping/integration planning guidelines can help the relevant teams at the purchaser and seller navigate what interactions are permissible at different stages of the transaction. A clear clean team protocol (or agreement) can also ensure that any information that does need to be shared between merging parties is restricted to individuals within the receiving party who are not involved directly in areas of their respective business that compete with the party to whom the information relates.
- Remember that even where notification and standstill obligations do not apply – for example after clearance has been obtained but before closing or in non-suspensory merger control regimes like the UK (assuming no ‘hold separate’ order is in place) – antitrust issues can still arise where the purchaser and target are competitors. This is because, as long as they are still separate entities, the purchaser and target will be seen as independent undertakings in the eyes of antitrust laws that prohibit anti-competitive agreements, so great care should be taken in the design and operation of any pre-completion joint commercial initiatives or communication campaigns.
Strict procedural enforcement looks set to continue
The ECJ’s ruling fully supports the EC’s tough stance on failure to file and gun jumping in EU merger control. It confirms that, in the case of gun jumping that takes place before a transaction has been notified to the EC, the EC is likely to sanction severely both the failure to notify and the breach of the standstill obligation.
Any action by merging parties to deliberately breach the standstill obligation will be treated even more harshly. In July 2023 the EC imposed a record EUR432m fine on Illumina for completing its acquisition of GRAIL while the EC’s in-depth review was pending (see our alert on that decision). In October, in an unprecedented move following the EC’s earlier decision to block the transaction, the EC ordered Illumina to divest GRAIL within 12 months and to keep funding it until then. This shows that, notwithstanding the particular circumstances of the Illumina/GRAIL case, violations of those procedural rules securing the effectiveness of EU merger control remain a top enforcement priority for the EC.
The EC is not an outlier in its strict enforcement of procedural merger control rules. Most merger control regimes globally operate mandatory notification and standstill rules that are similar to those of the EU. Antitrust authorities in a growing number of these jurisdictions are stepping up their procedural enforcement.
For example, during 2023 the Indian CCI has imposed numerous fines for gun jumping, the Brazilian CADE continued to open and settle gun jumping probes and fines have been imposed in many other jurisdictions across the globe. Even in the UK, which operates a predominantly non-suspensory merger control regime, the Competition and Markets Authority has shown itself to be more than willing to aggressively enforce ‘hold separate orders’ which it now routinely imposes on mergers that it has identified and called-in for review following completion.
At the same time, several merger control regimes are considering (eg Australia) or have made (eg Egypt) a move from a voluntary and/or non-suspensory system to the predominant model of a duty to notify with standstill obligation. And with notification and/or standstill rules proliferating in foreign investment control regimes worldwide (including the UK since January 2022), gun jumping issues are likely to arise in an increasing range of transactions.
