On 18 May 2022, the General Court of the EU dismissed Canon’s appeal against the Commission’s 2019 decision that fined Canon €28m for breaching EU notification and standstill obligations by partially implementing a transaction through a warehousing structure.
The Court considered that Canon was wrong to argue (and interpret the European Court of Justice (ECJ) judgment in EY/KPMG to mean) that only changes which confer an element of control on the buyer were relevant for gun-jumping purposes. Rather, transaction steps that do not, on their own, confer to the buyer early control over the target can constitute partial implementation if they contribute to a change of control.
Notwithstanding some open questions around how to assess whether an act contributes to a change of control, the judgment affirms the Commission’s negative position on warehousing arrangements. Investors should be prudent about warehousing structures and other pre-closing agreements (e.g., early purchase price payments or certain variations of a hell-or-high-water obligation). These should, however, remain possible if carefully structured.
The case concerns Canon’s 2016 acquisition of Toshiba Medical Systems Corporation (TMSC) by way of a two-step “warehousing” transaction:
- Step 1: Canon paid €5.28bn for 5 per cent of TMSC’s share capital (with limited voted rights), and options to acquire all TMSC’s shares (exercisable on receipt of antitrust clearances). At the same time, a special-purpose vehicle controlled by Canon (and set up with its involvement) paid €800 for 95 per cent of TMSC’s share capital (with voting rights);
- Step 2: once regulatory approvals were obtained, Canon acquired 100 per cent of TMSC by exercising the options and converting them into voting shares.
The Commission cleared the transaction in 2016. However, it viewed the two steps as a single notifiable transaction and held that Step 1 was “necessary to achieve a change of control in TMSC, in the sense that it presented a direct functional link with the implementation of the concentration” and therefore “contributed (at least in part) to the change in control of the target” (para. 143). By carrying out Step 1, Canon partially implemented the acquisition of control before notifying the Commission and gaining approval. This was the first time the Commission has found a breach of the notification and standstill obligations in the context of a single concentration involving a warehousing structure (and not a more straightforward early acquisition of control, as was the case e.g. in Altice).
The Court confirmed the Commission’s findings. It distinguished between the existence of a “concentration”, which requires a change of control under the EU Merger Regulations (EUMR), and an “implementation of a concentration” which can partially happen without acquisition of control. It underscored that, to be effective, the Commission’s merger control investigation must happen not only before acquisition of control, but also before (even partial) implementation of the concentration.
On this basis, the Court reaffirmed that gun-jumping was not limited to situations in which the buyer acquires control of the target, but more broadly covered any transaction step that contributes, in whole or in part, in fact or in law, to the change of control over the target. The Court did not further clarify how direct and material an act must be to “contribute” in a meaningful way to the acquisition of control. This remains an open point for interpretation.
The Court stated that this position was in line with the 2018 judgment of the ECJ in EY/KPMG. That judgment should not be read to mean, as Canon argued, that gun jumping can occur only if the implemented transaction step itself results in change of control over the target. This is unsurprising considering that the EY/KPMG judgment itself included the “contributing to” test, stating that “any partial implementation of a concentration” was covered by the standstill obligation (see our previous blog post on EY/KPMG).
The Court confirmed that the Commission correctly concluded that Step 1 “contributed to the change of control over the target”, including based on the following facts:
- Step 1 was necessary for Toshiba to relinquish control over TMSC and irreversibly collect payment from Canon before the end of its financial year.
- The objective of the two-step structure was for Step 1 to allow an interim buyer to purchase TMSC’s share capital and Canon to irreversibly pay the purchase price while obtaining the greatest certainty that it would ultimately acquire control of TMSC, all this without meeting the merger notification requirements.
- The interim buyer paid a token purchase price of €800 for shares worth approximately €5.28bn, further highlighting the interconnectedness of the two steps.
- The interim buyer’s control over TMSC was only temporary, as shown by the ex-ante agreement to sell the shares to Canon once merger approvals were received and by the interim buyer’s limited voting rights.
- The interim buyer was not economically interested in the target beyond its role as an interim buyer for which it was paid a fixed price.
- The tripartite and interdependent dimension of the contracts between Toshiba, the interim buyer, and Canon. The Court held that Step 1 was “not viable in isolation” because it was clear that Toshiba would not have relinquished its control over TMSC in return for €800 without Canon’s involvement.
- After Step 1 was implemented, Canon had “sole power to determine the identity of the ultimate acquirer of TMSC” (this would be either Canon itself if merger approvals were obtained or, conversely, a third party of Canon’s choice). The Court compared this to the facts in EY/KPMG, where Ernst & Young did not have the power to determine the target’s future owner if the transaction was not approved.
The judgment includes a paragraph rejecting Canon’s argument that Step 1 gave it “no influence” over the target, meaning that it could not have jumped the gun. Rather than referring to its position repeated throughout the judgment that no element of (even partial) control is required for an interim step to constitute early implementation, the Court rejected the argument by explaining that Canon “had some influence in the present case” as it had the power to determine the ultimate buyer if the original transaction was prohibited. This could cause confusion as to whether early implementation steps must give the buyer “some influence” over the target to constitute gun jumping – a notion that is not supported elsewhere in the judgment.
Implications for dealmaking
Canon has signalled that it will appeal this decision to the ECJ, presumably on the basis that Step 1 was merely a preparatory act, which did not contribute to Canon acquiring control. The ECJ’s judgment might clarify how to assess whether an act contributes to an acquisition of control, as well as the relevance of the buyer obtaining “some influence” over the target. It might also provide further guidance on types of warehousing structures that might remain acceptable. While the interim buyer in this case was established by the parties and controlled by Canon, warehousing arrangements involving independent banks or third-party vehicles and giving the ultimate buyer no say over the target and what happens to it if the competition authorities prohibit the transaction, should not raise justifiable gun jumping concerns.
Pending the outcome of that appeal, investors buying targets in series of transactions involving interim buyers should continue to exercise significant caution before implementing any form of warehousing, and also in relation to:
- the terms of contractual arrangements governing any multiple step transactions which may make those transactions “interdependent” (either because they are linked by condition, or it can be shown that each transaction would not have been carried out without the other) and the timing of implementing those arrangements;
- rights attached to options which will be eventually exercised to acquire control (e.g., once all conditions have been satisfied) to ensure that any initial arrangements in relation to those options do not “contribute to the change of control”; and
- financial and economic risk being in fact assumed early by the ultimate buyer.
Other pre-closing arrangements that parties sometimes negotiate as part of the investor’s hell-or-high-water obligation, such as an early purchaser price payment or a backstop structure that requires an independent trustee to sell the target to an alternative buyer if the original transaction is prohibited, should remain possible if carefully structured to avoid being seen as contributing to the investor’s eventual acquisition of control over the target.
The Court reiterated that parties should consult the Commission if they have slightest doubts about interim transactions leading to partial implementation.
For further details, please contact us or your usual contact in our Antitrust, Competition and Trade team if you would like to discuss this update further. To read more about these and other antitrust developments, refer also to our Global antitrust in 2022: 10 Key Themes report.
The General Court reconfirms that transaction steps that do not confer to the buyer early control over the target can constitute partial implementation if they contribute to a change of control.