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Record fine for merger control gun jumping

 

14 November 2016

Competition authorities worldwide are cracking down on parties found to have implemented notifiable transactions prior to clearance (including where such transactions have been notified but not yet cleared - so-called 'gun jumping'). Most recently, the French competition authority (FCA) has imposed a record EUR 80 million fine on the telecoms company SFR and its parent Altice for implementing two transactions before receiving competition clearance. It is the highest fine ever imposed for gun jumping. 

Introduction

On 8 November 2016, the FCA published a press release announcing its decision to impose a fine of EUR 80 million on the SFR Group and Altice Luxembourg. The fine relates to two separate acquisitions by Altice in the French telecommunications sector that were both notified and cleared by the FCA in 2014:

  • the acquisition of SFR by Altice subsidiary Numericable (cleared on 30 October 2014); and
  • the acquisition of OTL (operating the brand Virgin Mobile in France) by Altice subsidiary Numericable (cleared on 27 November 2014).

The FCA found that Altice violated French competition law by implementing these transactions prior to clearance, in particular by exercising decisive influence over the targets and accessing commercially sensitive information from the targets.

The FCA was tipped off about this behaviour by competitors and conducted dawn raids at the premises of Numericable, SFR and OTL on 2 April 2015. During the course of the subsequent investigation, Altice and SFR agreed to settle the case.

Notwithstanding the settlement, this is the highest fine imposed so far by any competition authority for gun jumping violations. The fine could have been much higher.

The FCA has not yet published the full decision. To fully understand the facts and the FCA’s legal reasoning, we will have to await the FCA’s decision. Nonetheless, we can already draw several important conclusions from the FCA’s announcement.

Legal context

Under French law the parties to a transaction that meets the French merger control jurisdictional thresholds must notify that transaction to the FCA and are prohibited from completing before the FCA has given its clearance (the ‘standstill obligation’). Most jurisdictions with some form of merger control similarly combine an obligation to file a transaction with a standstill obligation.

Importantly, the standstill obligation means that the parties to the transaction must continue to act as independent businesses until receiving clearance. During this time, a purchaser is not allowed to determine the strategic and commercial behaviour of the target company. Where the parties are active in the same market, they must therefore continue to compete as independent entities and, in particular, are not allowed to coordinate their market behaviour or exchange commercially sensitive information.

Under the French Commercial Code, gun jumping violations can be penalised for an amount of up to 5% of the turnover generated by the parties in France during the preceding financial year. (Under EU competition law, gun jumping or failing to notify a transaction can result in a fine of up to 10% of the relevant companies’ aggregate annual turnover.)

Gun jumping violations found by the FCA

The FCA found that Altice and SFR violated the standstill obligation by allowing Altice to influence the strategic conduct of SFR and OTL and by giving Altice access to strategic information concerning both target companies. In particular, the FCA identified the following behaviour as infringing the standstill obligation:

1. Intervention by Altice in the operational management of the target

The FCA found that Altice was involved in the operational management of SFR, in particular by the submission of the following commercial decisions to Altice for its prior validation:

  • the terms of the participation by SFR in a tender for the development of a local fibre network;
  • the renegotiation of a mobile network sharing agreement between SFR and Bouygues Telecom; and
  • SFR’s pricing policy for high-speed broadband offers (an intervention by Altice’s President resulted in the suspension of a promotional offer prior to the end of the scheduled promotional period).

With regard to OTL, the FCA found that Altice had taken certain strategic decisions on behalf of OTL in accordance with the terms of a memorandum of understanding between the parties.

2. Strategic coordination

The FCA found that Altice and SFR had already started the implementation of a coordinated strategy during the suspensory period, highlighting two particular instances of such conduct:

  • the negotiation and "intensive preparation" of the joint launch under the SFR brand of a new range of high-speed broadband offers using the Numericable cable network rather than SFR’s own infrastructure, which occurred 19 days after obtaining competition clearance; and
  • the close coordination between the two parties in respect of the acquisition of control over OTL. Following the submission of an offer by SFR for the acquisition of OTL, the SFR CEO disclosed the offer amount to Altice’s President and Altice subsequently stepped into SFR’s shoes in the acquisition of OTL.

3. Exchange of strategic information

In both transactions, Altice received large amounts of strategic and commercially sensitive information from the respective target business. In particular, the FCA's press release states that:

  • before obtaining approval for the acquisition of SFR, the most senior executives of SFR and Altice, in the context of integration planning, exchanged a large amount of strategic information and un-aggregated data on SFR’s recent business performance and forecasts for the coming months; and
  • before obtaining approval for the acquisition of OTL, Altice put in place a system of weekly reporting of commercially sensitive information allowing Altice to closely monitor OTL’s economic performance.

Given the importance for an acquirer to be in a position to integrate acquired businesses as quickly as possible after completion – and therefore to prepare for that integration as far as possible within the bounds of merger control laws – it will be interesting to see from the FCA's final decision exactly what information it deemed to be in violation of the standstill obligations in these transactions.

4. Managerial integration

The FCA has further found that during the suspensory period, the managing director of OTL started to perform management duties within SFR-Numericable, in particular by being involved in new commercial projects concerning SFR and receiving commercially sensitive information relating to SFR.

Level of the fine

The EUR 80m fine imposed on Altice and SFR constitutes by far the largest gun jumping fine imposed by any competition authority worldwide. It is also the first fine imposed by the FCA for gun jumping, although the authority has previously imposed fines for a failure to notify (e.g. the EUR 4m fine imposed on Castel in 2013, later reduced to EUR 3m) or for breach of commitments (e.g. the EUR 15m fine imposed on Altice in April this year).

The fine is four times as high as the previous highest fine, the EUR 20 million gun jumping fine imposed by the European Commission on Electrabel in 2009. Equally, the Altice / SFR fine is four times higher than the highest fine imposed so far for any failure to notify in Europe, namely the EUR 20 million fine imposed on Marine Harvest in 2014.

In a press release issued on 8 November, Altice indicated that it “chose to settle the matter in order to limit its financial exposure, given the level of penalties imposed for this type of procedural violation under the French Commercial Code”. The announcement of the FCA confirms that the fine amount reflects the fact that the parties did not contest the alleged conduct nor their legal treatment.

The FCA took into account various other factors in determining the level of the fine. These include:

  • the size of the transactions and their impact on the telecommunications industry;
  • the scale and accumulation of the various types of gun jumping behaviour, with certain practices being directly related to concerns the FCA had identified during the merger assessment;
  • the extent of the target activities directly affected by the behaviour;
  • the duration of the gun jumping conduct, which began even before notification and extended throughout the merger control procedure; and
  • the deliberate nature of the gun jumping, with similar conduct occurring in respect of the two separate transactions.

Once the full decision is published, it will be particularly interesting to read in more detail how the FCA weighed these various factors and how this was reflected in the fining decision.

Global trend of increased enforcement of the filing and standstill obligations

The decision of the FCA confirms a wider trend of increased enforcement in the context of M&A transactions. In Europe, the US, China, Brazil and elsewhere we are witnessing authorities targeting gun jumping and failure to notify violations more actively and more aggressively. This development was highlighted earlier this year in our report Global trends in merger control enforcement.

In Europe, we have seen enforcement action for failure to notify being taken in the last two years by authorities in Austria, Croatia, Czech Republic, Denmark, France, Hungary, Italy, Latvia, Lithuania, Norway, Portugal, Romania and Spain.

The US authorities have also been very strict enforcers in this regard in the past, and have shown an appetite to enforce the rules even more actively in 2015 and 2016. Compared to the two enforcement actions in 2013 and one action in 2014, the DOJ has brought six enforcement actions for failures to file under the Hart-Scott-Rodino Act in the past two years. One of these cases concerns the USD 11m fine settlement reached with investment firm ValueAct for a failure to notify its acquisitions of shares in Baker Hughes and Halliburton, purchased with the intention to influence the firms’ business decisions including decisions related to the Baker Hughes/Halliburton merger. The most recent gun jumping case in the US dates from 2014, concerning the USD 3.8m fine and additional USD 1.15m disgorgement of illegally obtained profits agreed to in a settlement by Flakeboard and SierraPine. The DOJ brought the action because of an agreement between the parties to close one of SierraPine’s mills and transfer its customers to Flakeboard before the expiration of the HSR waiting period.

China has also been very active in its enforcement of the merger filing obligation. We reported on this with a separate publication in May this year. MOFCOM announced two years ago that it would step up its efforts to target companies that failed to notify reportable transactions. Since then, it has followed a policy of ‘naming and shaming’ in an attempt to both increase awareness and the reputational stigma on non-filers. In 2015, MOFCOM reportedly imposed fines for failures to notify in nine cases. This year, MOFCOM has so far imposed three fines, with at least eight cases reportedly still being investigated. The level of fines in China is relatively modest due to the limited fining cap, with reported fines totalling EUR 189,000 in 2015 and EUR 153,500 so far in 2016. However, increasing deterrence by strengthening MOFCOM’s powers through higher statutory fines is on the agenda.

In Brazil, the competition authority (CADE) has been particularly focused on preventing gun jumping violations. Last year, CADE published gun jumping guidelines to provide companies with more detailed guidance in respect of the conduct of merging parties pending merger approval. In January this year, CADE fined Cisco Systems and Technicolor EUR 6.7m for completing their global transaction before obtaining merger clearance in Brazil. The authority did not accept the parties’ argument that a carve-out of the Brazilian businesses effectively prevented coordination in Brazil. CADE is currently investigating at least one other gun jumping case. In addition to its gun jumping enforcement, CADE has also imposed several fines on companies in the last two years for failures to notify their transactions.

The trend of increased enforcement of the filing and standstill obligations by authorities around the world shows that for multi-jurisdictional transactions, the risks of non-compliance are further increased by the possibility of parallel enforcement action and fines being imposed by competition authorities for gun jumping or failures to notify across multiple jurisdictions in which the transaction meets the relevant notification thresholds.

Impact for businesses

The FCA itself notes in its announcement that the decision to impose a EUR 80 million fine for gun jumping behaviour sends a strong message to companies, namely that they must be very careful not to implement a notifiable transaction before obtaining competition clearance; any failure to comply with this standstill obligation may result in severe penalties.

In its own press release, Altice notes that its practices were “aimed to make the new entity operational as soon as possible after obtaining clearance of the transaction, were performed in good faith, in the midst of legal uncertainty”. The tension between compliance with merger control stand-still obligations and the – legitimate – desire for parties to prepare for integration as early and as effectively as possible so as to maximise the benefits of merger synergies is an increasingly common theme in strategic M&A transactions. In that context, it will be particularly interesting, once the full decision is published, to see how the FCA has assessed the exchanges of information in this case and to what extent the fine rests on these exchanges as opposed to other types of gun jumping violations such as the apparent strategic and commercial coordination on practices directly related to concerns identified by the FCA during its merger assessment.

 

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