On May 18, 2022the EU Court (“Court“) confirmed the European Commission (“Commission“) 28 million euros fine imposed on Canon Inc. (“cannon“) for gun-jumping as part of a storage structure set up to help him acquire Toshiba Medical Systems Corporation (“TMSC“). The Tribunal confirmed that by Cannon the two-step takeover of TMSC, via a warehousing structure, had led to a partial implementation of the operation before the Commission’s clearance and, as such, cannon was in violation of his EU notification and standstill obligations.
The key takeaway from the ruling is that steps in the transaction that, on their own, do not give the buyer early control over the target may constitute partial implementation if they contribute to “a lasting change in control of the target”. In light of the highly anticipated Competition (Amendment) Bill 2022 (the “Invoice“), and its implementation of a wider and more extensive gun-jumping ban – Irish companies involved in M&A transactions are advised to proceed with caution, particularly if the transaction involves storage structures or several stages before construction.
Cooperation with the Commission
cannon began the process of pre-notification of its proposed acquisition of sole control of TMSC to the Commission in March 2016, but did not officially notify the deal until August of that year. The unconditional authorization of the operation was given by the Commission in September 2016. However, before the authorization and following an anonymous complaint, the Commission opened an investigation (in July 2016) for possible breaches of the standstill and notification obligations.
Context of the transaction
by Cannon The acquisition of TMSC in 2016 took place in two stages:
Step 1 – March 2016: For approximately 5.28 billion euros, cannon purchased 5% of the share capital of TMSC (with limited voting rights) and call options to acquire all of the shares of TMSC. It should be noted that the call options could be exercised after receipt of the required competition authorizations. At a time, MS Holding (an SPV owned and controlled by cannon) paid €800.00 for 95% of the share capital of TMSC (with voting rights). Both transactions were implemented instantly.
2nd step – December 2016: Following receipt of antitrust clearances, cannonby exercising its call options and converting them into voting shares, acquired 100% of TMSC.
On June 27, 2019the Commission found that cannon breached the required standstill and notification obligations and, as a result, imposed two fines on cannon totaling 28 million euros. In its assessment, the Commission considered that the two steps constituted a single transaction to be notified and that “step 1” was a necessary step to achieve a change of control between the parties. So, by completing ‘Step 1’, cannon had partially implemented a single notifiable transaction.
General Court decision
By rejecting by Cannon argument that the implementation of interim measures that do not result in a change of control of the target cannot constitute a breach of the standstill obligation, the Court (relying on Ernst & Young C-633/16) held that “a concentration operation is carried out as soon as the parties to the concentration operation carry out operations which contribute to a lasting change of control of the target company”.
By distinguishing a “concentration” which requires a change of control under the EU Merger Regulation, and the “completion of a concentration” which may occur in part without an acquisition of control, the General Court concluded that the test for determining whether the standstill obligation and the notification obligation had been raped by cannon is not whether there was an acquisition of control of TMSC before the authorization of the transaction, but whether by Cannon Shares “contributed, in whole or in part, in fact or in law, to the change of control of this company before this date”.
In view of the foregoing, the Tribunal reaffirmed that cannon had partially implemented the transaction and, therefore, had breached EU right.
It is generally not possible to exclude the local execution of a merger to avoid violating the prohibition against implementing a merger not authorized by the CCPC. The Competition Act prohibits the use of “storage” provisions to avoid the obligation to notify a merger or acquisition where the takeover is made by the company temporarily holding securities of another company for the purpose of organize its resale. Thus, when the entity which has acquired control has done so only on the basis of the future transfer of the activity to an end buyer who bears the major part of the economic risks, an obligation to notify the operation will ask.
In our February 2022 article, we describe the inclusion (in the CCCP’s arsenal) of a new offense of “refusal of firearms” or failure to “immobilize” under section 19 of the Competition Act (i.e. making it a criminal offence, as well as a breach of a legal duty, to enter into a transaction prior to CPCC clearance). This complements the current Irish ‘circumvention of weapons’ offense of failure to notify before completion (which can now be prosecuted by the CCPC (rather than the DPP) in summary proceedings). Any transaction entered into in violation of the “standstill” obligation is void until the CCPC approves the transaction.
The Court’s judgment reinforces (and actively discourages) the Commission’s negative view of storage agreements which are intentionally designed to avoid suspension and notification obligations. This and other recent EU Court rulings strengthening the breadth of the recidivism rules, combined with additional powers granted to the CCPC in relation to recidivism offenses, mean that the effects of Ireland’s merger control filing requirements can rarely be avoided by structuring .
However, investors can reap huge rewards by seeking to benefit from simplified and accelerated Irish merger control procedures. These are currently working very well in many cases, with average waiting/examination periods of two to three weeks being among the shortest and most efficient in Europe.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.