In November 2016, the French Competition Authority (FCA) imposed an unprecedented € 80 million fine in the telecom sector for merger control “gun jumping” in the takeover of SFR by Altice1 (the Decision). This widely-commented case has thrown the French M&A and legal world into a frenzy, essentially for two reasons:
- firstly, it concerned a “softer” form of gun jumping: the parties had indeed filed a merger control application, and did wait for the authorisation before closing the transaction. However, according to the FCA, they cooperated too closely between the signing and the closing, among others by exchanging strategic information. Such a high fine for this type of “grey zone” behaviour is unsettling, since the rules on how to manage the pre-closing period are not always entirely clear (1);
- secondly, although the Decision appears to be based on an exceptional set of facts (2), it also contains a number of “principle paragraphs”, drafted in a general manner, as if the FCA had taken this opportunity to issue informal guidelines in this area. This could have been a good approach, were it not for the choice of words in these paragraphs: a strict interpretation could indeed challenge the whole way in which M&A transactions are conducted in practice, and particularly the management of “clean teams” (3).
Companies and practitioners hope that the FCA will provide further guidance and restore some balance. Eyes are also turned to the European Commission, which has recently opened a probe on Altice’s purchase of Portugal Telecom; depending on the facts at stake, the Commission’s decision may shed some light on the way forward. However, in the meantime, the question remains of how to deal with the Decision in practice (4).
1 | Context of the decision: gun jumping in Europe
The term “gun jumping” refers to a breach of merger control regulations, and may cover different types of behaviour, the most obvious being what could be called “hard” gun jumping, i.e. implementing a notifiable transaction without making the compulsory filings to the competition authorities. But even when parties have ticked in the merger filing box, they could still be jumping the gun if they decide to implement the transaction prematurely. A clear example is when the closing occurs before the merger control authorisation is obtained, which constitutes a direct breach of the suspensive effect of most merger control procedures.
There are however more subtle forms of gun jumping, such as exchanging strategic information between the signing and the closing, or requesting the buyer’s consent before the seller adopts a strategic decision. This is where gun jumping gets difficult to manage: to any M&A operative, asking for the buyer’s go-ahead before getting involved in a project that may have significant consequences on future business seems only reasonable and is, as a matter of fact, quite common in practice. In many cases, that kind of cooperation may be necessary to attain the goals of the transaction, or simply to preserve the value of the target and its future activity. In most cases, the success of the transaction depends on the synergies that the buyer will be able to implement, and this is only possible if the integration is prepared beforehand.
From the competition law point of view, this early cooperation may nevertheless constitute an infringement. In theory, as long as the parties have not closed the transaction, they remain competitors, who are not supposed to exchange sensitive information, and even less adopt strategic decisions in a joint manner. Defining what constitutes “sensitive” information in this context may not always be easy though, which is all the more problematic considering the level of applicable sanctions: at EU level, fines can be up to 10% of global turnover of all parties involved for any form of premature implementation of the transaction.
It is true that, for a long time, these “softer” forms of gun jumping have been seen in Europe as a “low-risk area”. Contrary to other jurisdictions like the US, the few existing decisions mostly concerned transactions that had simply not been notified, or had been notified late. This was the case in the Electrabel / Compagnie Nationale du Rhône takeover, which was notified in 2008, whereas the Commission considered that Electrabel had already acquired de facto control over the target back in 2003. The Commission imposed a 20 million euros fine for implementing a transaction without notifying it2.
The European Commission has been recently taking a tougher stance on gun jumping, but very few cases concern the premature implementation of a notified concentration, and even fewer have led to a fine (see separate article in this edition, The EU gets tough on gun jumping). One of the rare illustrations was the fine imposed by the Norwegian Competition Authority on the grocery group Norgesgruppen in early 2014. But this decision seemed an exception when compared to the number of transactions that went on undisturbed.
This age of “insouciance” has abruptly come to an end in France, and that may also soon be the case at the Commission level in the new Altice case.
2 | The exceptional set of facts under review
The Decision concerned not only one but two acquisitions carried out by Altice, within the frame of the concentration trend in the telecom sector: the first target was SFR (one of the main French mobile operators), and, the second, was Omer Telecom (OTL), operating, among others, under the Virgin Mobile brand. The management of this second transaction has been considered as another element of gun jumping, since the FCA found that Altice “replaced” SFR as buyer of OTL.
Concerning the implementation of both transactions, it is interesting to note that the FCA took a pragmatic and “non-formalistic” approach: it did not exclusively focus on the provisions of the share purchase agreement (SPA), but it analysed in detail the way in which the parties had interpreted and applied those provisions, and how they acted in practice.
Some of the measures adopted by the parties certainly appear to have gone beyond what is acceptable during the pre-closing period. For example:
- Altice actively intervened in the definition of SFR’s commercial policy, and in particular in its pricing policy, such as in the definition of tariffs for a high-speed offer;
- the parties globally reinforced their commercial relations and, among other things, co-managed an important project concerning very high speed wholesale offers (the “marque blanche” project);
- in the OTL transaction, key managers were prematurely appointed and started acting in their new position before the closing;
- globally, the parties frequently exchanged sensitive information, among others during regularly organised pre-integration meetings.
Other infringements, on the other hand, seem less obvious and raise questions as to how the parties should have behaved:
- Altice blocked investments in IT equipment planned by SFR: on the face of it, this measure may appear reasonable, considering that IT systems would have to be integrated and probably reviewed right after the integration, thus probably rendering any investment useless;
- Altice intervened in SFR’s response to a tender: this was probably going beyond what is admissible, but the response to certain important tenders may have a determining impact on the conduct of business after the integration, and it is not entirely surprising that the buyer wants to have its say on these decisions.
However, representatives of the FCA have insisted on the fact that these infringements cannot be taken as a “checklist”. According to them, the key element in this case, which accounts for the very high fine, was the fact that the parties showed an overall and complete unawareness of gun jumping rules, and behaved, in every aspect, as if they already were a single company.
3 | The controversial principles that seem to result from the Decision
Besides the very specific set of facts that caught the FCA’s attention, the buzz created by the Decision essentially stems from a few paragraphs, drafted in such general terms that they seem to go beyond the factual situation at stake. The wording of these paragraphs is somehow mysterious and, if interpreted in a strict manner, could render the management of M&A transactions considerably more complex. This is the case, for example:
- for certain paragraphs of the Decision concerning convenants3. In the OTL transaction, the parties had agreed on a general prohibition for the target to adopt certain decisions; as well as an exception for a number of decisions, which could be adopted, subject to the buyer’s consent. The FCA indicates that this arrangement amounts to a premature acquisition of control over the target.
A strict interpretation of this paragraph may be taken as a refusal of the traditional distinction, followed among others by US authorities, between decisions taken “in the ordinary course of business”, and extraordinary decisions. It is obvious that the target would be penalised by a no-exception prohibition to adopt certain decisions, and that, in certain cases, requesting the consent of the buyer appears to be reasonable, for example concerning non-reversible decisions that may have a determining impact on post-integration business.
- for paragraphs concerning exchanges of information and “clean teams”. Among others, paragraph 260 could be interpreted as imposing a general ban on the exchange of any strategic information between the parties, which would in practice block the acquisition process.
Also, and this has probably been the most commented line of the Decision, paragraph 262 seems to ban all employees from “clean teams”; these should then be exclusively formed by external advisers, which is unfeasible in practice.
It seems reasonable to assume that the FCA did not intend these paragraphs to be interpreted in a strict manner, but their wording is nevertheless unsettling, and the publication by the FCA of guidance in this respect would be very welcome by companies and practitioners.
4 | What to do in practice ?
The Decision essentially underlines the importance of raising the awareness among the management team, and having an initial strategic reflection about the best way to deal with gun jumping risks at the different stages of the transaction. The simple fact of carrying out this exercise should prevent the “general unawareness” condemned by the FCA.
As to the principles that should frame this strategic reflection, and as long as no further official guidance is available, it seems safe to assume that traditional principles may be followed. In essence, these are:
- timing: adapt the level of information exchanges and common decision-making to the needs of the parties at each stage of the acquisition process;
- need-to-know basis: limit interactions to what is strictly necessary; and
- people: to the extent possible, limit the number of people in contact with sensitive information, and choose people who are as far from operational positions as possible.