On 24 September 2020, the oral hearing in case Altice v European Commission (T-425/18) took place before the General Court ('the hearing').
Altice is appealing a 2018 European Commission (EC) decision ('the Altice decision') which imposed a fine of €124.5m on the company for implementing its 2015 acquisition of PT Portugal prior to notification and approval from the EC in breach of the EU Merger Regulation (EUMR) (see our earlier posts here and here).
The EC had based the so-called 'gun-jumping' infringement on three components:
- certain provisions in the transaction agreement resulted in Altice acquiring the legal right to exercise decisive influence over PT Portugal;
- Altice actually exercised decisive influence over aspects of the PT Portugal business; and
- PT Portugal and Altice systematically and extensively exchanged commercially sensitive information.
The General Court judgment in the Altice case is highly anticipated. The outcome will have important implications for all companies involved in M&A transactions as it will likely provide guidance on the extent to which a buyer may exert pre-closing influence on the target and the information that can be shared between buyer and seller post-signing but pre-closing.
We set out below four interesting points discussed at the hearing and provide an overview of a few practical implications.
1. EC maintains broad interpretation of standstill obligation despite the ECJ’s EY judgment
The hearing focused on the application of the Court of Justice’s judgment in Ernst & Young P/S v Konkurrencerådet (C-633/16) (EY), which was published after the Altice decision.
While the EY judgment leaves room for interpretation, the widely shared view at the time of publication was that the Court had defined the standstill obligation more restrictively than had previously been assumed by the EC in its administrative practice, stating that 'a concentration is implemented only by a transaction which, in whole or in part, in fact or in law, contributes to the change in control of the target undertaking' (see our earlier post here).
The Court in EY thus held that ancillary and preparatory steps in a merger context only breach the standstill obligation if they contribute, as such, to the change of control of the target undertaking. Pre-merger co-ordination that does not contribute to the change in control may still be prohibition under Article 101 TFEU.
At the hearing, the EC maintained a broad interpretation of the standstill obligation and argued that each of the three components of the Altice infringement constituted a separate gun-jumping infringement. For example, the EC reiterated the position it expressed in the Altice decision that the exchange of commercially sensitive information can constitute a gun-jumping infringement (rather than an Article 101 TFEU infringement) where:
- competitors are involved;
- no appropriate safeguards are adopted (clean teams); and
- the exchange is not justified by/necessary for the valuation of the target business.
This may come as a surprise to many, given that it seems difficult to explain why sensitive information exchange for due diligence or integration planning purposes, even if excessive, could 'contribute to the change in control of the target undertaking'.
2. Exchange of sensitive information easier to justify pre-signing than post-signing
In the Altice decision and at the hearing, the EC took the position that there is a stronger justification for information exchange pre-signing than between signing and closing, given the need to engage in due diligence as a means of evaluating the target business.
Conversely, the EC appears more cautious with respect to information exchange between signing and closing, including – potentially – for the purposes of integration planning.
3. Granting of SPA rights: can be justifiable but scope should be considered carefully
In the Altice decision, the EC examined (based on the ancillary restraints notice) whether certain pre-merger measures were directly related and necessary to the implementation of a concentration.
At the hearing, the EC maintained that sales and purchase agreement (SPA) rights between the seller and the buyer determining the conduct of a target can be justified if strictly limited to that which is necessary to preserve the value of the target (ie no influence on ordinary course business). The EC reiterated its position that Altice’s rights in the SPA were not proportionate, noting – for example – that a veto for the buyer over target contracts valued at €1m could not be considered material in the context of a transaction value exceeding €2.5bn.
Other criteria to assess proportionality were referenced in the Altice decision (including the breadth of commercial actions covered by the veto rights and the possibility to protect the value of the target through other provisions in the SPA) but were less of a focus in the hearing than the materiality threshold.
4. Prior consultation with the EC: an option where difficult questions arise
At the hearing, when discussing the proportionality of its fine, the EC highlighted that it is possible for merging parties to obtain informal guidance from the EC in relation to the standstill obligation. We note that this is a point that has been made by Commission officials at various conferences as well.
5. Practical implications
The hearing provided some interesting insights into the position of the EC and the questions the General Court will need to answer. A few practical implications include:
- First: the EC appears to take the view that EY should be interpreted narrowly and its previous practice of construing the scope of the gun-jumping prohibition remains valid. Specifically, the Commission does not seem to consider that the EY judgment has limited the scope of gun-jumping infringements to actions directly leading to the transfer of control in a narrow sense. As long as the General Court has not pronounced on the scope of the standstill obligation, companies may therefore prefer to remain cautious in applying the EY judgment as the (only) benchmark for determining the permissible scope of their pre-closing conduct.
- Second: accordingly, the EC’s approach of bringing information under the gun-jumping provisions implies that if pre-merger information exchange is captured by Article 7 EUMR, it cannot at the same time be captured by Article 101 TFEU (see EY at paragraph 58: extending the scope of Article 7 EUMR reduces the scope of Article 101 TFEU). If that is the case, this arguably reduces risk on the seller, as only the purchaser and the target can be fined for violations of the EUMR suspension obligation; fines for a violation of Article 101 TFEU can also be imposed on the seller.
- Third: the EC’s view that pre-signing information exchange is more likely justifiable than the exchange of information between signing and closing is important because, in practice, it is sometimes observed that parties feel more confident exchanging information after signing than pre-signing, based on the view that the scope of permissible information exchange should increase the closer one gets to clearance. While integration planning should still be recognised in principle as a legitimate justification (provided appropriate safeguards are in place), it seems more important than ever to document that a given information exchange was indispensable for those purposes and could not wait until after closing.
- Fourth: the EC’s view that the mere act of signing an SPA (absent actual exercise of SPA rights in practice) can be sufficient to constitute a gun-jumping infringement means that it remains critical to assess, at the time of negotiating a deal, whether the scope of SPA rights can be justified in the context of the overall transaction. It is therefore not sufficient for the parties to ensure that the acquirer does not in practice exercise undue influence over the target between signing and closing. Even absent any exercise of influence in practice, the Commission believes that it can impose a fine on the acquirer if the wording of the SPA gives it a (theoretical) 'right' to influence the target.
The authors thank their colleague Christian Weinmann for attending the hearing and contributing to this post.