The €124.5 million fine imposed on Altice for gun jumping has been upheld. The ECJ ruled on 9 November 2023 that the European Commission had rightly fined Altice for late notification of the acquisition of PT Portugal and breach of the standstill obligation. This ruling by the highest EU court is relevant to the M&A practice because it confirms that:
- gun jumping may be involved when veto rights in pre-closing covenants alone allow the buyer to exercise decisive influence over the target before the transaction has been approved by the competition authority;
- interference in the management of the target is likely to constitute gun jumping and is not easily deemed to be necessary to preserve the value of the target during the period between signing and closing; and
- exchanging certain information alone may contribute to bringing about the acquisition and may therefore constitute gun jumping.
Background
The case concerns the acquisition of PT Portugal by telecoms company Altice. The Commission suspected that Altice was able to exert decisive influence over PT Portugal even before the Commission had approved the acquisition, and did so in practice. The Commission imposed two separate fines on Altice on that ground, of €62.5 million each. The two fines were for the premature exercising of decisive influence: (i) both before notification; and (ii) before the Commission’s approval of the acquisition. Altice filed an appeal with the General Court, without much success. It also did not achieve any great success before the Court of Justice. However, like the General Court, the Court of Justice did reduce the fine to a limited extent with regard to gun jumping in relation to the notification obligation.
Beware of vetoes relating to the period between signing and closing
The Altice case demonstrates that caution is called for when granting veto rights to the buyer beyond what is necessary to preserve the value of the target.
Obtaining veto rights as such is enough to constitute gun jumping, regardless of whether the buyer actually exercises those rights. What matters is whether the transaction allows the acquirer to exercise decisive influence over the target. This is not altered by the fact that pre-closing covenants refer to a limited period between signing and closing. Also in that case, there can be what the Commission refers to as “a change of control on a lasting basis” – and if that occurs before a notification is filed and approved, that constitutes fineable gun jumping.
The seller was obligated, for instance, to seek Altice’s written consent for “numerous decisions” on PT Portugal’s activities and commercial strategies, such as whether or not to participate in various agreements with suppliers, and decisions on PT Portugal’s pricing policy. The pre-closing covenants also allowed Altice to jointly determine the composition of PT Portugal’s management board.
Buyers should not interfere in a target’s commercial strategic policies, unless that is necessary to preserve the target’s value
The Altice case confirms that interference by the buyer in the target’s strategic commercial decisions is likely to constitute the exercising of control, and therefore gun jumping. Buyer interventions may be necessary to preserve the value of the target during the period between signing and closing, but these must be actions that are not part of the target’s normal operations. The Altice judgment demonstrates that courts are critical on this point and the threshold is therefore high.
Altice gave instructions, for instance, about a PT Portugal marketing campaign. That seems harmless, but gave rise to a gun jumping fine. Altice had also wrongly interfered in the continuation of the negotiations between PT Portugal and a sports channel on a distribution contract. The court considered it relevant that the value of the deal was very low compared with the cost of the acquisition and PT Portugal’s turnover.
Double risk: notification obligation and standstill obligation
A notifiable merger, acquisition or joint venture may not be completed before a competition authority has issued a positive decision on it. During this so-called standstill period, the buyer may not yet exercise control over the target. The (i) notification obligation and (ii) standstill obligation are separate obligations. The Altice judgment demonstrates that violation of (i) and (ii) may lead to separate (double) fines. And that this also applies if both offences are committed simultaneously by bringing about a transaction before it has been notified.
Five practical tips to avoid gun jumping
The Commission and other competition authorities regard the Altice judgment as supportive of taking decisive action against gun jumping. Five tips to avoid problems are set out below:
- Report a notifiable transaction to all the competent authorities in a timely manner and await their approval before closing the transaction.
- Avoid provisions in the transaction documentation that give the buyer competition-law control between signing and closing, e.g. in the form of vetoes. Be aware that competition authorities may request and review transaction documentation as part of a notification process. The buyer may, however, acquire classic minority shareholder rights between signing and closing, so that the target does not take any decisions that significantly reduce the value of the company.
- Ensure that, also in practice – apart from vetoes – the buyer does not interfere with the target’s decisions on day-to-day operations before the closing.
- The parties are expected to continue to operate independently as independent (competing) companies also between signing and closing. Be very careful when sharing sensitive competitive information before the closing. Use clean teams and confidentiality agreements if it is strictly necessary to share information in order to complete the transaction.
- Seek advice beforehand on the extent to which preparatory steps can be taken between signing and closing to integrate the companies after closing.
This blog was also published on M&A Community.
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