4. Deal risk

Managing multiple merger reviews as authorities step up enforcement and the risk of third-party challenge grows

As authorities worldwide step up enforcement of their merger control rules, companies planning deals in 2018 must pay even closer attention to their obligations and conduct throughout the period from early planning up to final merger control clearance.

We are seeing more authorities impose heavy fines for an increasingly wide range of pre-clearance conduct, with accompanying strong signals that authorities will take tough action against any parties that infringe the rules this year.

Wider risks in 2018 include the trend in all regions for more intervention in merger review processes by third parties – whether they are competitors, activists or government agencies (see further in theme 2) – and, for deals affecting the EU and UK, legal uncertainty caused by the UK’s impending exit from the EU’s ‘one-stop-shop’ for merger review.

Managing these risks on multiple merger reviews affecting a single deal requires a thorough understanding of often complex rules in each jurisdiction and robust procedures that safeguard against breach of increasingly burdensome obligations.

Gun-jumping – tough enforcement against parties that fail to notify on time or integrate their businesses pre-clearance

Most companies are aware that failing to notify a deal on time or integrating businesses pre-clearance exposes them to risk of fines and other penalties. However, difficulties arise in practice when parties experience lengthy periods between signing and closing, or they pursue more novel deal structures where filing obligations may be less clear. Recent cases have shown that the price for getting it wrong can be very high:

  • Early integration: following a record €80m fine in France in late 2016 and recent enforcement action by several other authorities in the US and Europe, parties’ conduct between signing and closing has come into sharp focus globally. Pending clearance, merging parties must act as independent competitors. This means:

no integration - exercise of management control, joint marketing, co-ordination of commercial behaviour or uncontrolled sharing of sensitive information;

pre-closing obligations should be strictly limited to non-ordinary course action and legitimate value protection; and

robust structures should limit the exchange of commercially sensitive information to information that is strictly necessary for deal planning and to ring-fenced clean teams. Parties should also have appropriate documentation in place to demonstrate the existence and operation of such structures if challenged.

Concerns have arisen in practice that authorities may apply different criteria when drawing the fine line between legitimate planning on the one hand and premature integration on the other, with (some) European authorities being more restrictive than their US counterparts. Current uncertainties, compounded by a marked increase in third-party complaints about alleged gun-jumping, are driving some companies engaged in global deals to change traditional approaches. Ongoing cases may provide more guidance on the scope of legitimate planning in 2018, but pending that, companies should exercise particular caution over conduct between signing and closing.

As the spotlight in France and elsewhere remains firmly on parties’ conduct between signing and closing, a clear understanding of the fine line between legitimate planning and integration is more important than ever in 2018.

Jérôme Philippe, Antitrust Partner, Paris

  • Novel deal structures: recent action in China, Japan and Europe has confirmed a tightening approach to deal structures that enable a seller to dispose of a business quickly and transfer regulatory risk to the buyer. In two-step transactions, for example, where an interim buyer acquires the target before the final deal is approved, the initial step will trigger a notification requirement in most major regimes if the two steps are interlinked and the ultimate buyer bears economic risk from step one. In these cases, implementing step one before notifying the relevant authorities and obtaining approval will amount to gun-jumping. Given the increased focus globally, early engagement with the authorities is a pre-requisite for parties pursuing similar structures in 2018.
False and misleading information – the importance of verifying your facts and evidence

Recent cases have confirmed that merging parties face heavy penalties if they fail to disclose sufficient and correct information during reviews, or if they provide misleading responses to requests for information. This proves particularly challenging when authorities demand voluminous data and internal documents within tight time frames, which then form core parts of their evidence.

Parties involved in complex deals should ensure their document review tools and procedures for preparing and verifying submissions are watertight. Disclosure of facts and evidence must be full and accurate, which includes future plans on product development or innovation. Authorities are often now requiring parties to file, for example, detailed methodology notes alongside substantive submissions to ensure transparency in relation to the way in which the parties collected the information.

Authorities are particularly sensitive to any allegations that the merging parties may have tried to influence the way in which customers respond to market testing. It is customary and legitimate for companies to engage with their customers following the announcement of a transaction, but this process must be managed to ensure that such contacts are not used to influence customers’ feedback to the regulators.

Recent European Commission investigations emphasise the need for even greater care to be taken when submitting evidence to the authorities. This continues to be challenging as regulators demand ever-increasing volumes of data and internal documents within tight timelines.

Sascha Schubert, Antitrust Partner, Brussels

Safeguarding legal privilege in multijurisdictional reviews

As parties face demands for substantial document production by more authorities, it is becoming increasingly challenging to protect legally privileged materials. The scope of legal privilege differs significantly across jurisdictions, with the EU position generally narrower than other jurisdictions (including the US and UK) but going beyond what some EU member states accept (including Germany). In Asia, legal privilege is less established: the concept does not even exist in mainland China, Japan or South Korea.

These differences present challenges in cross-border deals where disclosure in one jurisdiction may amount to waiver and lead to subsequent disclosure to other authorities and courts. Parties are advised to maintain detailed records of privileged materials in each jurisdiction, and be ready to justify such claims to avoid forced disclosure.

Post-closing interventions – by authorities or competitors

Companies should also take account of the growing trend of authorities or competitors challenging completed deals. The US agencies, for example, can challenge completed deals, even when the mandatory Hart-Scott-Rodino Act (HSR) waiting period has expired without agency intervention or when the deal did not trigger an HSR notification. Recent use of these powers reinforces the fact that the US agencies will not hesitate to pursue consummated transactions when deemed necessary.

Even when authorities do not have such broad powers, where concerns are raised they will challenge parties’ assessments of whether a deal required notification, as demonstrated recently in China by Mofcom’s investigation into Didi Chuxing’s acquisition of Uber China.

Mofcom’s 300,000 yuan ($43,000) fine on Canon for its two-step acquisition of Toshiba’s medical unit, its investigation of Didi Chuxing’s acquisition of Uber China and the possibility of future increases in fines for failure to notify send strong signals to companies that fail to take proper account of China’s strict merger control rules.

Alastair Mordaunt, Antitrust Partner, Hong Kong

In Europe, an increasing number of Commission decisions are subsequently challenged in court, not only by the addressees of a prohibition decision but also by disgruntled competitors unhappy with merger clearances. 2017 saw rare examples of the EU’s General Court annulling a Commission clearance decision (Liberty Global/Ziggo) and overturning a prohibition decision (UPS/TNT). Both cases confirm the importance of procedural safeguards for parties and third parties throughout the investigation, and of well-reasoned Commission decisions.

Brexit uncertainty – implications for merger control risk

Through 2018, companies planning deals that affect EU and UK markets will need to take account of the impact Brexit may have on how and where their deal is reviewed. Post-Brexit (or any transitional period), the EU’s ‘one-stop-shop’ for merger reviews will no longer apply to the UK, meaning that deals will be subject to parallel EU and UK reviews if relevant thresholds are met.

This will mean:

  • the review of more deals in the UK: the CMA estimates up to 50 additional cases per year (almost doubling current numbers), with about six more phase 2 investigations (again doubling the current caseload) – even with additional funding, such increases are likely to present challenges for the authority and merging parties; and
  • the review of fewer deals by the European Commission: if current thresholds remain the same, informal estimates suggest that around 100 fewer cases per year will be subject to EU review (notified deals currently number around 360 each year).

To mitigate any impact of parallel reviews on deal timing or outcome, parties will need to ensure that they manage the process effectively across the EU and UK and that all likely concerns (and potential areas of divergence) are understood from the outset.

For deals crossing the Brexit period, parties will need to stay close to developments in both the EU and UK on the transitional arrangements that are needed to resolve current uncertainties, such as which authority gains or cedes jurisdiction at different points. For complex deals likely to face protracted pre-notification and in-depth investigation, parties must factor in these risks from early 2018.

Increased regulatory risk, particularly in cross-border deals where several merger control authorities will be involved, is driving parties to focus heavily on antitrust risk allocation when negotiating transaction agreements. We are helping more clients find increasingly sophisticated solutions, making sure their deals accurately reflect their business goals and legal needs in the current risk environment.

Matthew F Herman, Global Transactions Partner, New York, and Co-head of Global M&A

Looking ahead in 2018

  • Plan early – make sure you have a thorough understanding from the outset of all the rules and your obligations in each jurisdiction, taking full account of any increased risk of regulatory or third-party intervention in deal timelines.
  • Robust procedures – implement strict procedures and processes that ensure complete and accurate submissions of evidence, while maintaining full business separation between signing and closing and controlling the flow of sensitive information through ring-fenced clean teams.
  • Contractual terms – pay close attention to any arrangements governing the conduct of the target between signing and closing, making sure that any purchaser rights are tightly confined to non-ordinary course decisions that directly affect target value.