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Gun Jumping – MODRALL – November 2018 OECD discussion


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This presentation by Jay MODRALL, Partner, Norton Rose Fulbright, was made during the discussion “The Suspensory Effects of Merger Notifications and Gun Jumping” held at the 130th meeting of the OECD Competition Committee on 27 November 2018. More papers and presentations on the topic can be found out at

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Gun Jumping – MODRALL – November 2018 OECD discussion

  1. 1. Gun-Jumping: Drawing the Line(s) Jay Modrall Partner Norton Rose Fulbright LLP November 27, 2018
  2. 2. Topics Discussed 2 What is gun-jumping: procedural vs substantive gun-jumping Types of procedural gun-jumping Causes of procedural gun-jumping Gray areas between procedural and substantive gun-jumping What can companies do to avoid gun-jumping? What can authorities do to help reduce gun-jumping?
  3. 3. “Procedural” vs. “Substantive” Gun-Jumping “Gun-jumping” refers to the illegal implementation of a transaction under applicable merger review laws Avoiding gun-jumping is increasingly problematic for companies • 150+ merger regimes • Global transactions commonly trigger 10-15 filings • Longer merger review periods A distinction is commonly made between • Procedural gun-jumping – Defined as implementing a notifiable transaction without observing mandatory waiting periods or clearance requirements  Sanctioned under merger control statutes • Substantive gun-jumping – Defined as co-ordination of competitive conduct by merging parties, for example by sharing competitively sensitive information  Sanctioned under general antitrust statutes 3
  4. 4. Procedural Gun-Jumping 4 My focus today is on procedural gun-jumping, but in practice the distinction can be unclear The legal status of procedural gun-jumping depends on the merger control statute’s characteristics: • Statutory suspensory requirement prohibiting implementation of a notifiable transaction without notification, approval, or expiration of a waiting period (e.g., EU, U.S., etc.). For example, – EUMR Article 4.1: “Concentrations with a Community dimension . . . shall be notified to the Commission prior to their implementation . . ..” – EUMR Article 7.1: “A concentration. . . shall not be implemented either before its notification or until it has been declared compatible with the common market . . ..”  The key concept is “implementation” of a notifiable concentration • Order issued by an antitrust authority in – A mandatory notification regime without a statutory suspensory provision (e.g., Italy; Mexico), or – A voluntary notification regime (e.g., Australia; New Zealand; UK) • Statutory deadline for notifying
  5. 5. Procedural Gun-Jumping, cont’d 5 Procedural gun-jumping violations can be distinguished based on the notification status and the conduct in question • Notification status: procedural gun-jumping cases may arise where the parties – Do not file any notification, – Do file a notification but implement the transaction before approval is granted, or – Failure to successfully “carve out” jurisdictions where approval has not been obtained to allow closing to occur in jurisdictions where approval is pending • The conduct in question may range from – Closing/completion of the transaction (transfer of consideration against title to assets/shares), – Exercise of “control” or other conduct considered to constitute implementation, or – Transfer of risk without closing/completion or other implementation (e.g., ARCO (U.S., 1991))
  6. 6. Reasons for Procedural Gun-Jumping 6 The “purest” form of procedural gun-jumping involves closing/completing without making required notifications at all Why do parties commit “pure” procedural gun-jumping violations? • Misunderstanding of trigger events (e.g., in the EU, acquisition of “control” of an “undertaking”) – Minority investments (e.g., Panasonic Europe – 49% (Mexico; 2017); Marine Harvest -- 48.5% (EU; 2014); Electrabel – 47.92% (EU; 2009); Samsung – 45.4% (EU; 1998)) – Joint ventures (application of thresholds often complex, and JVs commonly evolve over time) – Contracts/assets/liabilities (short of going concern); e.g.: – South Africa: MultiChoice – exclusive distribution agreement (2018 (pending)) – Poland: Bac-Pol – contracts, employees, inventory, trade secrets (2017); Fermy Drobiu Woźniak -- lease of assets (2017); Lukoil -- petrol stations (2013) – Brazil: GasLocal – LNG supply (2015); Aurizôna Petroléo and Potiólio – oil & gas leases ( 2014); OGX Petroleos – oil & gas lease (2013); – Lithuania: UAB AMIC Lieteva – petrol stations (2014); Lukoil – petrol station JV (2013)) – India: Combination of shares and assets (e.g., Etihad – 24% of shares plus slots (2013)) – Prepayment of purchase price (e.g., Hindustan Colas (India; 2016); ARCO (US; 1991))
  7. 7. Reasons for Procedural Gun-Jumping, cont’d 7 • Misunderstanding of thresholds – Geographic allocation of turnover (different from accounting/tax principles or difficult to determine) – Definition of “group” for turnover purposes (e.g., A.P. Møller (EU; 1999)) (significant differences in the definition of “group”; attribution of turnover of joint ventures/jointly held entities; inconsistencies between antitrust and accounting rules) – Market share thresholds (e.g., GRIFOLS (Spain; 2015); Essilor (Spain; 2014); Bergé (Spain; 2010))  Surprisingly few cases in spite of difficulty in applying market share thresholds – Transaction-value based thresholds • Mistaken reliance on exemption (e.g., “investment only”) – E.g., Canon (Japan, China, EU (SO); 2017); ValueAct (US; 2016); Zuari Fertilizers and SCM Solifert (India; 2014 and 2015); Verifone (Spain; 2012) • Mistaken reliance on local “carveout” – E.g., Minerva (Chile; 2018); Baxalta (2016; India); Eli Lilly (2016; India); Cisco (2016; Brazil); Mars (Germany; 2008)
  8. 8. Procedural vs Substantive: Drawing Lines 8 “Non-pure” procedural gun-jumping can involve a range of conduct: • Excessive control by acquirer over target business decisions; joint activities; management changes; information sharing, etc. Whether pre-approval conduct should be assessed as procedural gun-jumping depends on the precise scope of the relevant statute • Articles 4.1 and 7.1 EUMR prohibit premature “implementation,” but definition of “concentration” requires change of “control” – In E&Y (May 2018), the ECJ found that the EUMR prohibits the “implementation . . . of any transaction which contributes to lasting change of control” (regardless of any market effects); while – “transactions not contributing to the implementation of a concentration” must be assessed under general antitrust rules (requiring assessment of market effects) • But cf. Germany: Standstill applies “to all measures and behaviours, that . . .stand in a connection with the intended concentration and would be suitable to at least partly implement the effects of the concentration.” (Federal Court of Justice, 14 November 2017, KVR 57/16) – Query what is the status of KVR post-E&Y?
  9. 9. Procedural vs Substantive: Drawing Lines, cont’d 9 • Section 7A Clayton Act (HSR) prohibits “acqui[sition], directly or indirectly, [of] any voting securities or assets of any other person, unless . . . the waiting period . . . has expired” – Although the statute prohibits only acquisitions of securities and assets, U.S. authorities apply it to a broad range of conduct Infringement decisions may not distinguish clearly whether illegal conduct is procedural or substantive • EU: In Altice (April 2018), based only on EUMR, the EU Commission sanctioned (i) Altice’s veto rights over PT Portugal decisions, (ii) Altice’s role in PT Portugal decisions not subject to veto, and (iii) sharing of competitively sensitive information Altice adopted one month before the ECJ’s E&Y judgment; arguably only vetoes of PT Portugal decisions would qualify as exercise of “control” • U.S.: In Flakeboard -- Coordination of mill closing and customer transfer (2014), separate fines for HSR and Sherman Act violations, but see Gemstar (2003; no distinction between HSR and Sherman Act violations)
  10. 10. Procedural vs Substantive: Drawing Lines, cont’d 10 The distinction between procedural and substantive gun-jumping is not semantic. Differences include • Conduct covered – Antitrust counsel must often advise on what an acquirer and target can do between signing and closing of a transaction; – In the EU, E&Y could significantly change that advice – E.g., E&Y could allow target to take or refrain from a wider range of actions in anticipation of closing, so long as actions are not directed by the acquirer • Substantive standard for infringement – E.g., whether or not a showing of a market effect is required • Applicable procedure • Potential fines
  11. 11. Procedural Gun-Jumping Takeaways 11 Gun-jumping enforcement seem to be increasing, in number of actions and the range of conduct covered • Proliferation of regimes and their application to non-structural transactions likely to further increase caseloads and lead to inconsistencies What can parties do to reduce gun-jumping? • Collect data required to assess filing requirements and understand filing thresholds • Identify required filings early to avoid timing issues and oversights • Implement NDAs, clean teams and similar procedures before and after signing • Limit consent rights to decisions that are material to the target’s business • Exercise special caution in relying on exemptions (e.g., “investment only”) or employing “deferred closings”
  12. 12. Procedural Gun-Jumping Takeaways, cont’d 12 What can OECD members/authorities do to reduce gun-jumping? • Use clear definitions of trigger events (cf., ICN I.B (2017)) – Harmonize interpretations of common concepts such as “control” – Apply merger control only to transactions resulting in a structural market change • Use clear, understandable and objectively quantifiable notification thresholds (cf., ICN II.D and II.E (2017)) – Harmonize interpretations of common concepts such as “group” and geographic allocation of turnover and align with accounting and tax concepts – Provide guidance on the application of thresholds that may give rise to confusion • Align interpretations of thresholds with accounting/tax concepts • Clarify exemptions • Clarify local nexus requirements, including carveout rules OECD members/authorities should distinguish substantive tests and procedures for procedural and substantive gun-jumping
  13. 13. Gun-Jumping Enforcement Levels 13 Fines imposed for gun-jumping vary significantly across jurisdictions and even within jurisdictions • EU Commission imposed – Until 2009: No or de minimis fines (A.P. Møller ECU 219,000 (1999); Samsung ECU 32,000 (1998); no fines in Ineos (2007), Yara (2007), or Kirch (1997)) – 2009-2018: €20 million for “pure” procedural gun-jumping cases (Marine Harvest (2014) and Electrabel (2009)); no fines for “non-pure”/substantive gun-jumping – 2018: €125 million (Altice; 2018), for a “non-pure”/substantive infringement  Query whether Altice is an outlier based on extreme conduct, or an indication of dramatically increased fines in future? • U.S. agencies have imposed significant fines for many years – $11 M (ValueAct; 2016); $3.8 M (Flakeboard; 2014); $5.7 M (Gemstar; 2003); $5.6 M (Mahle;1997)  ValueAct represented a significant increase, but still far below recent EU/France fines
  14. 14. Gun-Jumping Enforcement Levels, cont’d 14 • Compare high-end fines from other jurisdictions: – Austria: Top fine of €750 K (2016), but others at €185 K or less – Brazil: Top fine of €7.0 M (2016), but mainly below €700 K – Chile: €3.2 M (2018) – France: Top fine of €80 M (2017), but may be an outlier; one fine of €4 M (2013); others about €400 K – Germany: Two high fines (€4.1 M (2009) and €4.5 M (2008)) in cases of intentional gun-jumping, in other cases no fines – India: Fines from €125 K (2013) to €536 K (2016) – Indonesia: €600 K (2016) – Lithuania: Top fine of €3.3 M (2014); others of €948 K (2017) and €340 K (2013) – Mexico: €2.7 M (2017) – Poland: Top fine of €124 K (2017); others less than €100 K – Ukraine €50 K (2017)
  15. 15. Takeaways on Gun-Jumping Enforcement Levels 15 Gun-jumping enforcement has increased significantly • More cases: at least 13 in 2017, compared to 3 in 2010 • New jurisdictions: several imposed first fines in 2015-2018 – But many jurisdictions with mandatory/suspensory regimes have apparently not imposed fines • Higher fines – Highest fines traditionally in the U.S. and Europe, with dramatic increases in 2016-2018, but – Certain emerging market jurisdictions also impose large fines (e.g., Chile; Mexico) – Some jurisdictions in Europe have active enforcement but modest fines (e.g., Austria; Ireland) No correlation between fine size and gun-jumping type (“pure” vs “non-pure” procedural/substantive) Why are gun-jumping fines so different? • Statutory framework/limitations • Different legal traditions • Different enforcement theories: Are higher fines really needed?
  16. 16. How Should Gun-Jumping Sanctions Evolve? 16 Doubtful that a harmonized approach to gun-jumping fines is needed, but as enforcement levels and fines increase authorities will be considering aggravating or mitigating factors • Should intent/culpability be taken into account? – E.g., should gun-jumping fines be lower in cases where trigger events and/or thresholds are unclear or subjective? • Should “pure” procedural gun-jumping (i.e., no filing) attract higher fines than “non-pure” procedural/substantive gun-jumping (i.e., filing but impermissible pre-closing conduct)? – In “non-pure”/substantive cases, how should degree of culpability be measured? • Should fines be lower if a merger raises no substantive issues? – Lower risk of adverse effects on competition • Should self-reporting/cooperation lead to immunity/reductions? – Leniency programs for gun-jumping? • What about other factors taken into account in fining hard-core infringements (e.g., local affected turnover, recidivism)?
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