Running before starter’s gunshot – unfortunate also when done by companies upon the change of owner
The viewers of athletic competitions know that an athlete who has already taken the final starting position may not start moving until the starter’s gun has been fired. In the case of a permanent change of control over companies (i.e. purchase of majority of shares), a similar function as the starter’s gunshot at an athletic competition is performed by the clearance of the competition protection authority which allows the merger after making sure that it will not impede significantly efficient competition on the market. This applies to the mergers notifiable to the Competition Protection Authority in Slovenia, i.e. the mergers where the undertakings concerned exceed the turnover and/or market share thresholds. (Only) from obtaining the clearance onwards, the transaction may be implemented or completed (so-called closing, for instance the transfer of shares takes place) and from then onwards the new majority owner may exercise its control over the target. Before this, the so-called standstill obligation or suspension of the implementation of the rights from merger applies generally. Thus, until the CPA’s clearance and the closing, the new owner may not exercise its voting rights in the target and e.g. appoint new management in it or decide on its market strategy. Besides, until the closing of the transaction the companies – the target and the new owner’s company – are obliged to operate as independent companies and may not coordinate their businesses on the market.
An infringement of the described (procedural) obligations in the context of mergers and acquisitions (M&A) is in competition law, obviously following the rules of athletics, known as gun jumping. However, the consequences of the so-called gun jumping may be much bitterer for companies than they are in athletics. In Slovenia (similar as in other EU countries) fines up to 10% of the annual turnover of the group may be imposed upon them, while actions contrary to the standstill obligation are also null and void.
It seems that the times when such infringements were treated mildly by the competition protection authorities have passed. In the last two years, the European Commission (as well as some national competition protection authorities in the EU) has introduced several infringement procedures. Last April the European Commission imposed the highest fine for gun jumping so far – EUR 124.5 million – upon the Dutch telecommunication company Altice.
Thus, let us have a look at some less obvious competition-law-related challenges and traps praying on the companies in the context of M&A.
Competition-law-related risks may be associated with the processes of target’s integration into the group of the new owner, e.g. both support functions (accounting, IT) and main activities. The companies usually want to exploit the synergies as soon as possible, however in the case of notifiable mergers the competition law generally allows no integration prior to the clearance from the competition protection authority. Prior to such clearance, the companies may only plan the integration, but may not implement it. The mere planning of integration usually requires the exchange of commercially sensitive or strategic information (e.g. on specific margins, costs, buyers, intended conduct on the market). Therefore, also the planning of integration and the required disclosure of strategic information have to take place only to the minimum extent necessary, taking into account the confidentiality rules, and if the companies are competitors, through a so-called clean team (persons who are not involved in strategic and daily decisions on the markets where the companies compete).
A further trap can be the coordination of competitive conduct of the companies prior to the closing of the transaction. It is not unusual that the management of the target deems the target as a part of the new owner already prior to the closing, and thus reduces competitive activities towards the future owner, e.g. ceases to compete against it at some buyers or some markets, wishes to coordinate price levels, provides it with unlimited access to accounts, coordinates marketing actions and informs it of future investments. All this can constitute a risk of infringing the competition law.
Nevertheless, also the provisions of the agreement on the transfer of stocks/shares that limit the actions of the target during the period from signing the agreement until closing may be dangerous for infringing the competition law. If restrictions require the target to operate as usual until the closing, in accordance with company’s ordinary course of business or that the target shall perform actions outside the ordinary upon the previous consent of the buyer, and such restraints are necessary to maintain the value of buyer’s investment into the target, this is generally admissible. However, in Altice case the European Commission has deemed that the threshold of agreements, for the execution of which PT Portugal (the target) had to obtain Altice’s (buyer’s) consent, was so low that it has comprised a disproportionately large number of commercial contracts of the target. Based on this the European Commission deemed that Altice was able to exert control over target’s daily operation already prior to the closing, which was not admissible.
Given the trends in the EU, the area of gun jumping might soon become the focus of the Slovenian Competition Protection Agency (CPA) as well, especially given the wave of M&A transactions in the recent years in Slovenia and the large number of merger assessments before the CPA. Companies thus have to be careful when buying shares in companies or changing majority owners and have to wait for starter’s gunshot – CPA’s merger clearance and closing of the transaction.