Telecoms M&A: Enforcers take aim at gun-jumping

Telecoms.com periodically invites third parties to share their views on the industry’s most pressing issues. In this piece Jean-Julien Lemonnier, Counsel at international law firm White & Case, takes a look at the issue of ‘gun-jumping, which has recently landed Altice in hot water.

Telecoms multinational Altice recently found itself under fire for conduct around its acquisition of Portugal Telecom, receiving a record breaking €125 million euro fine in April 2018 from the EU commission for ‘gun-jumping’. This is not the first fine imposed on Altice for gun-jumping. In November 2016, the company was fined (€80 Million) by the French Competition authority on the same grounds (acquisition of SFR and another company).

Gun-jumping, or a breach of the standstill obligation, is a violation which occurs when parties take steps to implement a transaction prior to having received clearance from the competition authorities. Parties involved can be fined and ordered to unwind any steps they have taken.

With regulators across the globe increasingly monitoring and taking action against gun-jumping, and an apparent surge in M&A activity across the Telecoms sector, companies involved in these deals need to be aware of the issue and how to avoid falling foul of the rules.

What does gun-jumping entail?

Most practitioners classify gun-jumping as a scenario in which the parties to a transaction appropriately send formal notification of the transaction to the relevant competition agency, but then coordinate their activities during the mandatory pre-closing suspensive period. This conduct is referred to as ‘substantive gun-jumping’, and it usually leads to an intricate approach by competition authorities involving several theories of harm. Competition enforcers also often look into what is called ‘procedural gun-jumping’, which is a separate infringement for a complete absence of any filing before the respective authority (see for instance the recent decision of the Danish Competition and Consumer Authority, that saw companies fined approximately €540.000 for not notifying a merger).

Why is gun-jumping a trending topic in 2018?

Gun-jumping has been in the spotlight for the past several years and telecoms companies need to be keenly aware of the increasing activism of local and global antitrust enforcers. Recently, both procedural and substantive gun-jumping have been widely sanctioned, with several fines ranging in the millions of euros.

A clear trend can be discerned in cases spanning all continents and sectors. In 2016, in North America, the US Department of Justice fined Flakeboard and SierraPine a combined total of close to US$5 million dollars for pre-closing coordination conduct in violation of the Hart-Scott-Rodino and Sherman antitrust acts. The same year in South America, CADE, the Brazilian competition agency, sanctioned Cisco and Technicolor approximately €8 million after having issued gun-jumping guidelines in 2015.

In Asia, MOFCOM, the Chinese competition enforcer, has recently put in place a gun-jumping whistleblower notice and has sanctioned a foreign undertaking (Canon, for its acquisition of Toshiba Medical) ¥300,000 (€38,000 approximately).

In Europe, in 2014 the Commission fined the Norway-based Marine Harvest €20 million (the case was upheld by the General Court and is now pending in the Court of Justice). In April 2018, the Commission imposed a €125 million fine upon Altice for implementing its acquisition of Portugal Telecom (Altice lodged an appeal against this decision). Member States including Poland, Romania, Spain, Austria and several others have imposed fines ranging in the hundreds of thousands on local operations.

In the UK (in the context of an ex-post control in May 2018), the Competition and Markets Authority imposed a £100,000 penalty upon a company for a failure to comply, without reasonable excuse, with the requirements imposed by the interim order issued by the CMA (which required the company to seek the CMA’s consent before taking any action which might prejudice a reference of the merger or impede the taking of any action under the Enterprise Act 2002 by the CMA).

Multiplication of these cases helps to have a better understanding of behaviours that may or may not constitute gun-jumping practices.

As such, in the context of the acquisition of KPMG Denmark by EY, the Danish Competition Authority ruled that the companies, by announcing the early termination of KPMG Denmark cooperation agreement with KPMG International, had jumped the gun. On appeal, the Danish Maritime and Commercial Court referred the case to the European Court of Justice for a preliminary ruling on the interpretation of the standstill obligation.  The ECJ stated on May 2018 that the termination of the cooperation between KPMG Denmark and KPMG International before the merger approval by the Danish Competition Authority does not violate the gun-jumping prohibition because the termination did not contribute to a change of control over KPMG Denmark. This decision leave room for a treatment of conducts which do not contribute to a change of control, based on antitrust laws.

On this ground, other jurisdictions, like in the US, sanctioned parties to a merger because of a coordination of their competitive conduct prior to the closing. Very recently, the Australian Competition and Consumer Commission (ACCC) has taken its first proceedings in relation to gun-jumping against a company specialising in biological storage and management, for alleged cartel conduct in the context of the acquisition by a company of its assets in cord blood and tissue banking business.

In France, up until the Altice decision, gun-jumping sanctions had only been imposed where there was a complete lack of notification with the national enforcer. However, Altice—which is a full-on substantive gun-jumping case—has been in the spotlight for over a year, raising several questions for future operations.

Is the Altice case in France indicative of a shift towards a more restrictive stance on pre-clearance conduct? 

The French Competition Authority’s (FCA) analysis in the Altice case of November 2016 has been widely discussed by practitioners as it was the first time, at least at the European level, that a gun-jumping decision provided an almost ‘catalogue-like’ and in-depth assessment of several types of pre-closing practices.  With Altice, the FCA appears to have taken a bold step, imposing, at the time it was rendered, the highest worldwide fine for gun-jumping conduct: €80 million.

There is spirited debate among practitioners as to how to interpret the somewhat restrictive approach of the decision in several key areas, notably information exchange. In particular, as far as information exchange is concerned, the FCA has held that ‘whatever the reasons for which the undertakings would need to exchange information, it is incumbent on them to establish a framework which would eliminate all communication of strategic information between independent undertakings in light of the Guidelines on the applicability of Article 101 TFEU [Treaty on the Functioning of the European Union] to horizontal cooperation agreements’ (paragraph 260). Furthermore, the wording of the decision (here quoted from an English translation of the decision) appears to make it difficult for in-house legal advisers to be included in the deal process. Moreover, it seems that they ‘cannot be considered as making possible the avoidance of the dissemination of strategic information between the two undertakings’.

The decision continues: ‘As a matter of fact, the two individuals who were the recipients of the commercially sensitive information were the in-house counsels, who are not subject to the same rules of confidentiality applicable to external attorney. They are subject to the hierarchic authority of the company and cannot be considered as independent of the company’s management.  For this reason, it should be considered that their access to commercially sensitive information is equivalent to the entire company obtaining access to the said information (paragraph 318).

During a March 2017 conference, the FCA attempted to limit the decision’s reach by stating that it consists of more of a sui generis decision than a landmark one. As regards the involvement of in-house legal divisions in deal process, the FCA explained that its intention was to prevent it, but to remind that in such a case, precautionary appropriate measures have to be put in place. However, the decision could have broader implications because this rigid approach taken by the Authority forms part of the body of precedents of its administrative practice and therefore could lead to similar cases in the future.

What advice should be given to dealmakers in the current regulatory climate?

Facing questions arising from recent gun-jumping cases, several authorities have published guidelines in order to inform companies considering an M&A transaction.

As an example, the Brazilian Administrative Council for Economic Defence (CADE) issued its “Guidelines for the analysis of previous consummation of merger transactions”.

Likewise, the U.S. Federal Trade Commission (FTC) published on March 20 2018 updated guidance to sensitize undertakings of the risks of sharing information with a competitor before and during negotiations.

In France, following the Altice case, Isabelle De Silva, President of the FCA, published an article in May 2018 to shed light on the competitive issues of this decision.

Several lessons can be drawn from these documents and cases.

In general, caution should be taken towards potential issues related to sale or purchase agreements (SPAs). In particular, the wording of the SPA should not be over-restrictive, granting veto rights over certain types of conduct of the target, which would result in de facto control. On the other hand, the acquirer and the target should not over-interpret the SPA clauses. In the French Altice case, SFR asked for Altice’s approval of certain actions without the SPA expressly requiring it, giving the FCA the impression of control.

Information exchange also appears to be a more and more controversial area in merger control (and also from an antitrust perspective), meaning that the composition and internal functioning of ‘clean teams’ may fall under the scrutiny of competition authorities in order to ensure that adequate safeguards are applied.

Joint commercial dealings are another type of conduct that should be handled with caution. The joint conception of future projects during the suspensive period could be flagged by competition agencies. As seen in the French Altice case, the FCA sanctioned a joint project of the acquirer and the target that was conceived during the suspensory period and was launched just days after clearance was granted.

What can we expect from the road ahead?

At the time of writing, the Commission has just released on its website the public version of its Altice decision. At first glance, the facts appear to be comparable if not sometimes identical to the French Altice case (especially the exchange of commercially sensitive information, the intervention in marketing campaigns, and the contents of the SPA). We can expect that the debates that will take place in the coming months will provide additional guidance on how to interpret the wording of this (125 page) decision. Likewise, additional criteria may be provided by the Commission (Canon/Toshiba case), and in national competition authorities’ decisions, which should be rendered in the coming months.