In the M&A world, speed is of essence. However, while the parties involved may hope for a rapid close of their transaction, merger control rules can impose limits on how quickly they can proceed.
Most countries that subject deals to merger review also apply hold separate requirements for the period in which the transaction is under review by the antitrust authority. These rules essentially outlaw any steps that could be considered an 'implementation' of the transaction before clearance is obtained. “Gun jumping” in the antitrust world occurs when merging parties violate such rules by in effect closing a transaction before receiving merger control clearance.
Gun jumping can be costly: It sours relations with the regulator, creates procedural disadvantages, and may lead to significant financial penalties. For example, in Germany fines may be up to 10 percent of the world-wide turnover, and fining guidelines state that a penalty of up to 30 percent of the affected turnover is appropriate for significant breaches of the law – which may include violations of the hold separate rules.
'Gun jumping' in the antitrust world occurs when merging parties violate such rules by in effect closing a transaction before receiving merger control clearance
Private equity investors should be aware of possible pitfalls: Neither foreign deals nor foreign companies are immune from sanctions. International confectionery and pet food producer Mars discovered this when it was recently fined €4.5 million for implementing a US acquisition before the German authority, the Bundeskartellamt, had given its approval. The Bundeskartellamt continues to pursue such cases vigorously, the most recent decision dating from May 2011. For investors, numerous lessons can be gleaned from these decisions.
Avoid formal or de facto transfer of control …
Hold separate rules usually capture both the legal consummation as well as the factual implementation of the deal. Thus, it may not be sufficient to make formal closing – such as the transfer of the shares – subject to prior approval by the competition authority. The parties must also ensure that factual control over the business (or distinct parts of it) is not transferred before clearance is obtained.
It would, however, be wrong to assume that the seller is allowed to do as it pleases as the transaction is being reviewed. Hold separate rules aim to preserve the status quo in order to let the authority effectively block transactions that raise competition issues. At the same time, these rules acknowledge a legitimate interest of the acquirer to get what it is paying for. Thus, interim management clauses which prohibit actions that would change the structure of the business are acceptable. Such actions may be banned altogether or, as a less restrictive alternative, be subject to prior approval of the purchaser. At the same time, actions taken in the in the ordinary course of business must not be made subject to prior approval. Irreversible investments into new product lines that would fundamentally change the shape of the business may thus be subject to the acquirer’s approval; price rises for existing products in line with changes to raw material costs may not.
… but feel free to pay the purchase price
Provisions relating to the purchase price are usually not caught by hold separate rules. For example clauses that stipulate an effective date prior to the date of consummation as such do not raise issues. Merger control rules are generally neutral on who enjoys the economic benefit deriving from a business, but are focused on who can influence its competitive strategy. Usually, the two elements are interrelated – those carrying the risk and enjoying the benefits of pursuing a business are usually also able to determine its competitive behaviour. However, the parties are free to find another arrangement: reallocating the risks and benefits associated with a business does not raise issues if the power to direct it remains with the seller.
The same rationale applies to clauses that require payment of the purchase price before clearance is obtained. As such, they are acceptable, provided that payment does not give the purchaser the power to – directly or indirectly, formally or informally – determine the commercial behaviour of the target. Both the agreement and the actual behaviour must be in line with this requirement. This also applies where the purchase agreement requires payment of the purchase price even if the competition authority does not clear the transaction. Again, the seller (or a trustee) must continue to independently run the business while it is sold to a third party without giving the (frustrated) purchaser control over its competitive actions.
Integration planning is acceptable …
In general, while waiting for clearance, the parties can plan for the time after closing, define the structure and operational principles of the combined entity and even communicate those plans to employees. It is the implementation of those plans that is not acceptable. Parties should not, for example start to restructure the target while the merger review is still ongoing. Even informal influence over the target – e.g. using employees of the acquirer who are seconded to the target to fill management positions or making “suggestions” about the way the business should be run prior to closing – can lead to serious problems with the authorities.
The same applies to contacts with third parties. While it is possible to visit customers together to explain the rationale of the transaction and the plans the parties have post-closing, gun jumping rules provide that the parties must not create the impression of already acting as a combined entity. Such visits must, thus, be limited to “selling” the transaction. They must not be used to (jointly) sell products or services.
… but be wary if you already own a competing business
Special requirements exist when planning the integration of bolt on acquisitions. The parties must be careful not to coordinate their business activities before they combine their business. In addition, they must avoid exchanging confidential competitively significant information. Generally, teams dealing with technical issues (such as IT or HR integration) are not prone to come into contact with such information. Issues may arise where integration teams are planning future commercial policy. Creating a “Clean Team” – a group that is firewalled from others who are involved in the competitive process – is a straightforward way of keeping sensitive information from those responsible for the competitive decisions within the parties.
It is also the most intrusive – and least practical – way as those involved in the decision making process within the company are usually those who will plan the strategy of the combined entity. Thus, unless the PE-backed company has a separate strategy department detached from the operating business, alternative solutions must be sought. These may be sophisticated – such as the use of black boxes which neutralize data before it is shared – or straightforward – such as the careful review of whether sensitive information really needs to be shared to plan future strategies. Also, the assessment is not necessarily static: Generally, the sharing of information may become less of an issue as the investigation progresses towards clearance. Thus, the assessment of what is still permissible may not only depend on the circumstances of the individual case but also on the scheduling of the planning exercise.
Overall, take care of what you write down
Those involved in private equity understand that success often depends on how a case is presented. This is also true when it comes to substantive merger review or gun jumping investigations. A parties’ written record may matter just as much as its actions. Overly aggressive language can be as damaging as unrestrained salesmanship. Formal reports to the management board pose as much risk as a short email to a colleague. Generally, it is advisable to keep communication to a minimum. When writing is necessary, remember to draft in a matter-of-fact style and before you hit “send” think about how the document might be understood if read by an antitrust official.
Getting it right may not be easy – in particular when many people involved in the process are enthusiastic about the transaction. However, given the cost of getting it wrong, it will be worth the effort.
Dr. Marc Reysen is an Antitrust and Competition partner at international law firm O’Melveny & Myers.