On 18 May 2022, the EU General Court ("General Court") upheld the European Commission's ("Commission") €28 million fine which was imposed on Canon Inc ("Canon") for gun-jumping in the context of a warehousing structure put in place to assist in its acquisition of Toshiba Medical Systems Corporation ("TMSC"). The General Court confirmed that Canon's two-step takeover of TMSC, via a warehousing structure, had led to a partial implementation of the transaction prior to Commission clearance and as such, Canon was in breach of its EU notification and standstill obligations.
The key takeaway in respect of the ruling is that 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 lasting change of control of the target'. In light of the widely anticipated Competition (Amendment) Bill 2022 (the "Bill"), and its implementation of a wider, more extensive prohibition on gun-jumping – it is advised that Irish companies involved in M&A transactions proceed with caution, particularly if the transaction involves warehousing structures, or multiple steps prior to completion.
Engagement with the Commission
Canon commenced the pre-notification process of its proposed acquisition of sole control over TMSC to the Commission in March 2016, but did not formally notify the deal until August of the same year. Unconditional clearance in respect of the transaction was provided by the Commission in September 2016. However, prior to clearance being given and pursuant to an anonymous complaint being issued, the Commission initiated an investigation (in July 2016) for possible violations of the standstill obligations and notification requirement.
Background to Transaction
Canon's acquisition of TMSC in 2016 involved a two-step process:
Step 1 – March 2016: For approximately €5.28 billion, Canon purchased 5% of TMSC's share capital (with limited share voting rights) and call options to acquire the entirety of TMSC's shares. It is noted that the call options were exercisable following receipt of the requisite competition clearances. At the same time, MS Holding (an SPV owned and controlled by Canon) paid €800.00 for 95% of TMSC's share capital (with voting rights). Both transactions were implemented instantly.
Step 2 – December 2016: Following receipt of antitrust clearances, Canon, in exercising its call options and converting them into voting shares, acquired 100% of TMSC.
On 27 June 2019, the Commission found that Canon had infringed the requisite standstill obligations and notification requirement and as a result of this, imposed two fines on Canon totalling €28 million. In its assessment, the Commission considered that both steps constituted a single notifiable transaction and that 'Step 1' was a necessary step in achieving a change of control between the parties. Thus, by completing 'Step 1', Canon had partially implemented a single notifiable transaction.
General Court Ruling
In rejecting Canon's argument that the implementation of intermediary steps not leading to a change of control over the target could not constitute a breach of the standstill obligation, the General Court (in relying on Ernst & Young C-633/16) held that "a concentration is implemented as soon as the parties to the concentration carry out operations which contribute to a lasting change of control over the target undertaking".
In distinguishing between a "concentration" which requires a change of control under the relevant EU Merger Regulations, and the "implementation of a concentration" which can partially happen without acquisition of control, the General Court concluded that the test for determining whether the standstill obligation and obligation to notify were infringed by Canon is not whether there was an acquisition of control of TMSC prior to the clearance of the transaction, but whether Canon's actions "contributed, in whole or in part, in fact or in law, to the change of control of that undertaking before that date".
In light of the above, the General Court reaffirmed that Canon had partially implemented the transaction and thus, was in breach of EU law.
It is not usually possible to carve out local completion of a merger to avoid breaching the prohibition on implementation of a merger not cleared by the CCPC. The Competition Act prohibits the use of “warehousing” provisions to avoid the requirement to notify a merger or acquisition where the acquisition of control is constituted by the undertaking holding on a temporary basis securities in another undertaking for the purpose of arranging for onward sale. Thus, where the entity which acquired control has only done do so on the basis of the future onward sale of the business to an ultimate buyer who bears the major part of the economic risks, a requirement to notify the transaction will arise.
In our February 2022 article, we outline the inclusion (in the CCPC's arsenal) of a new ‘gun-jumping’ offence of breach of the ‘stand-still’ obligation under section 19 of the Competition Act (ie, making it a criminal offence, as well as a breach of statutory duty, to complete a transaction prior to CCPC clearance). This supplements the current Irish ‘gun-jumping’ offence of failure to notify prior to completion (which may now be prosecuted by the CCPC (rather than the DPP) pursuant to summary proceedings). Any transaction completed in breach of the ‘stand-still’ obligation is void until the CCPC approves the transaction.
The General Court's ruling reinforces (and actively discourages) the Commission's negative view on warehousing arrangements which are intentionally designed to avoid suspension and notification obligations. This and other recent EU court rulings reinforcing the breadth of gun-jumping rules, combined with the additional powers being afforded to the CCPC in respect of gun-jumping offences, means that the effects of Irish merger control filing obligations can rarely be avoided through structuring.
However, investors can hugely benefit from seeking to avail of simplified, accelerated Irish merger control procedures. These are currently working very well in many cases, with the average waiting/review periods of two to three weeks being among the shortest and most efficient in Europe.