In M&A transactions that constitute concentrations under the competition rules and exceed the notification thresholds, the parties involved must wait after signing before putting them into effect until the competent competition authorities grant approval. This so-called standstill obligation also prevents the buyer from acquiring rights already between signing and approval that would enable it to exercise control over the target company.
If the standstill obligation is breached – commonly referred to as ‘gun jumping’ – the parties involved risk a high fine. The Court of Justice of the European Union (“ECJ”) confirmed in late 2023 that the European Commission (the “Commission”) rightly imposed a €125 million fine on cable company Altice for gun jumping on its acquisition of PT Portugal. In the Netherlands, the Netherlands Authority for Consumers and Markets (“ACM”) imposed a fine of over €1.8 million on the Modulaire company a year earlier.
Gun jumping: what is and is not permitted
The term ‘gun jumping’ is used in competition law for two different scenarios: (i) cases in which the transaction has not been notified (and has therefore not been approved) at all before its implementation; and (ii) cases in which the transaction has been notified but is then implemented before approval is given.
Competition authorities can detect gun jumping in several ways. First, it is mandatory in many countries to provide the authorities with the transaction documentation at the time of the notification, which can reveal any problematic pre-closing covenants. Second, market participants (such as buyers or competitors) may report suspected gun jumping to the authorities.
The Commission and ACM may impose a fine for gun jumping, which may also amount to 10% of the annual turnover of the companies involved. Practice shows that parties still slip up in this regard and that ACM does not shy away from imposing high fines for gun jumping, even if the parties confess their mistake of their own accord after the fact. Examples include a €16,000 fine for HAL Investments in 2008, a €500,000 fine for Motorhuis in 2013, and a €1.85 million fine for Modulaire in 2022.
The prohibition on gun jumping does not prevent parties from agreeing on certain pre-closing covenants between signing and approval, in order to preserve the value of the target company but without giving the buyer influence over the commercial policy. On the basis of such covenants, the target company may, for instance, be prohibited – without the buyer’s prior consent – from dismissing specialist or other staff members, changing the structure of the company, issuing shares, filing for bankruptcy, or making investments that are not in keeping with the day-to-day operations.
It is important in this regard that the rights granted to the buyer do not go beyond what is strictly necessary to preserve the value of the target company and do not already give the buyer the ability to influence the target company’s day-to-day operations. The fact that pre-closing covenants relate to a limited period between signing and approval (sometimes only a few weeks) does not alter this. Such cases may also constitute a premature lasting change of control.
It is furthermore possible to make integration preparations prior to approval, provided that they do not result in the exercise of control, such as preparations for the integration of IT systems and agreements on the key personnel to be appointed at the merged entity. This is subject, however, to approval and to the closing of the transaction. But if the parties to the merger are each other’s actual or potential competitors, they must ensure that no sensitive commercial information is exchanged, or must work with so-called clean teams before closing: until closing, the cartel prohibition remains fully applicable and the parties must determine their market. behaviour entirely independently. In that regard, the exchange of sensitive commercial information may have the effect of influencing the market behaviour of an actual or potential competitor, removing uncertainty about each other’s market behaviour, or facilitating collusive conduct.
Examples of gun jumping in practice
Altice/PT Portugal
A recent ruling in the field of gun jumping relates to the acquisition of PT Portugal by telecoms company Altice. The acquisition had been notified to the Commission prior to closing, but it was suspected that Altice already had decisive influence over PT Portugal – and was exercising that influence in practice.
The transaction documentation required the seller between signing and closing to seek Altice’s written approval of “numerous decisions” regarding PT Portugal’s operations and commercial strategies. These included whether or not to enter into certain agreements with buyers, the composition of the management board, and the pricing policies.
Among other things, PT Portugal had to seek approval to compete for an outsourcing contract, but according to the Commission that contract was likely to have little impact on PT Portugal’s value because it formed part of its day-to-day operations and was similar to earlier contracts. Altice also wrongly interfered in a marketing campaign of PT Portugal and the negotiations on a television distribution contract. These interventions were deemed unnecessary because they did not significantly affect the value or integrity of PT Portugal’s operations.
EY/KPMG
This case revolved around the merger between the Danish branch of KPMG and EY. Before the merger, KPMG Denmark was a party to a collaboration agreement with KPMG’s international network. On the same day on which the merger agreement with EY was signed (18 November 2013), KPMG Denmark terminated the collaboration agreement with KPMG’s international network effective 30 September 2014. The merger with EY was subsequently notified on 7 February 2014.
The Danish competition authority classified the termination by KPMG Denmark as gun jumping because it allegedly amounted to the implementation (or the start of the implementation) of the transaction before it had even been notified. To this end, the Danish competition authority argued that the termination was specific to the transaction, was irreversible, and caused potential market effects in the period between notification and approval of the concentration.
The ECJ was asked to provide a further clarification of the meaning of the standstill obligation and specifically whether the termination of the collaboration agreement was in breach of that obligation and whether the alleged market effects of the termination were relevant in that regard. The ECJ found that effective implementation of a concentration required that measures had to be taken that contributed to a lasting change of control. According to the ECJ, the termination of the collaboration agreement by KPMG Denmark did take place as part of the transaction, but did not in itself contribute to the change of control over KPMG Denmark.
Practical tips for pre-closing covenants
When formulating pre-closing covenants, the parties involved should bear in mind that exclusively granting certain powers of veto may result in gun jumping, regardless of whether the buyer actually exercises those rights. Care should be taken to avoid giving the buyer the ability to determine the strategic commercial behaviour of the target company prior to closing. The main points of attention here can be summarised as follows:
- Always check before the signing whether a transaction is notifiable anywhere. Beware that notification thresholds vary from country to country and are subject to change.
- Report a notifiable transaction to all the competent authorities in good time and await their approval before closing the transaction.
- Avoid provisions in the transaction documentation that give the buyer control in a competition law sense between signing and approval. However, it is possible to grant powers of veto if they are necessary to preserve the value of the target company.
- Ensure that, prior to approval, the buyer does not and cannot interfere with decisions of the target company that are part of its day-to-day business.
- Limit the sharing of sensitive competitive information prior to closing to what is strictly necessary to effect the transaction.
- Bear in mind that an increasing number of countries have a foreign direct investment regime in addition to the competition law framework – such as the Wet Vifo (Investments, Mergers and Acquisitions (Security Screening) Act) in the Netherlands – that may also include a notification obligation and standstill obligation.
A longer version of this blog was previously published as an article in the Tijdschrift voor de Ondernemingsrechtpraktijk (TOP 2024/5).
Follow Maverick Advocaten on LinkedIn.
