Gun jumping: recent developments and practices to be avoided

A few recent decisions of the French and European competition authorities serve as an important reminder to companies: disregarding the obligation to notify and obtain prior approval for mergers that fall under the purview of merger authorities comes with financial and reputational risks.

We would like to remind that failing to comply with the notification and suspension obligations can result in the company being found guilty of gun jumping. In France, this can result in penalties of up to 5 percent of the company’s France-generated turnover, excluding taxes, for the last fiscal year. If deemed appropriate by the competition authority, this can be increased by as much as 5 percent of the France-generated turnover of the target during the same period. Moreover, under European Union law, the penalty can reach 10 percent of the total turnover of the parties to the transaction.

While in some cases the breach was clearly flagrant, there was room for doubt in other cases. This, however, did not prompt leniency on the part of the supervisory authorities, who severely sanctioned the companies involved.

In recent months, the French and European competition authorities have issued sanctions or opened investigations for gun jumping in three very different cases: i) Cofepp, ii) Toshiba/Canon and iii) Illumina/Grail. In the Sigma-Aldrich case, the Commission has fined the company for having provided inaccurate or misleading information.

The Cofepp case

This case involves the spirits sector. On April 12, 2022, the French Competition Authority (Authority) fined Compagnie Financière Européenne de Prises de Participation (Cofepp) €7 million for having taken control of Marie Brizard Wine & Spirits (MBWS) before notifying the operation and obtaining approval from the Authority. Cofepp had notified the Authority in 2019 of its intention to acquire the sole control of MBWS by increasing its stake from 29.47 percent to 47.08 percent, it being specified that Cofepp was already the main minority shareholder of MBWS. The Authority cleared the transaction, subject to conditions. Shortly after this, the Authority opened a gun jumping investigation and conducted dawn raids at both parties’ headquarters. It found that Cofepp had been exercising decisive influence over the target and thus, de facto control over MBWS well before the capital increase was notified and cleared. The Authority thus considered that the directors representing Cofepp on the MBWS board of directors had access to sensitive information that fell under MBWS business secrets (budget, commercial and marketing prospects, sales volume, commercial policy, etc.), even though MBWS was a direct competitor of Cofepp. In addition, the seized documents revealed that Cofepp had been involved in MBWS’s strategic and operational decisions as early as 2017, well before it notified the Authority of the transaction.

The takeaway from this case is that even if the terms of the shareholders’ agreements and majority rules for the governing bodies contained therein do not formally allow a minority shareholding to exercise control over a company’s strategic decisions, it is still essential to ensure that actual practice does not go against those provisions. Thus, the moment a minority shareholder intervenes in the strategic decisions of the company, it can already be considered as exercising control over the company. Furthermore, a company taking a minority stake in a competitor must, even if it does not exercise decisive influence, take all necessary measures to prevent it from having access to that competitor’s strategic commercial information. If it fails to do so, the company could be fined not only for gun jumping, but also for anti-competitive agreements involving the exchange of sensitive commercial information.

The Toshiba/Canon case

In this gun jumping case, the General Court of the European Union upheld Canon Inc.’s €28 million fine for prematurely implementing a merger in unprecedented circumstances in 2016.

Canon Inc. acquired Toshiba Medical Systems Corporation (TMSC), a subsidiary of the Toshiba Corporation, in 2016. This acquisition was completed in a two-stage “warehousing” structure so that Toshiba could have the sale of its subsidiary recognized in its accounts within the expected timeframe to improve its balance sheet. Thus, in the first stage of the transaction the acquisition was taken over by a securitization vehicle—MS Holding—which was created specifically for this purpose (provisional transaction). In the second stage, once antitrust approval was obtained, Canon would exercise its call option on MS Holding (final transaction). Having understood the need to obtain antitrust clearance before it took control of MS Holding, Canon notified the European Commission of the transaction only after it had completed the first step.

However, the Commission regarded the provisional and final transactions as part of one single transaction that should have been notified before completing the first step. The Commission considered that even if Canon was not in a position to take decisions within MS Holding at the end of the first step, the first step constituted partial completion of the overall transaction since Toshiba was able to irrevocably exit this subsidiary from its accounts and obtain the price for the sale.

This case shows that even if Canon clearly intended to first obtain the necessary antitrust clearances before acquiring the target, the Commission’s view of the complex legal arrangements put in place to accelerate divestitures may differ from that of the companies. It is therefore always preferable, if there is any doubt about a transaction’s structure, to consult informally with the competition authority before implementing the deal.

The Illumina/Grail case

In this case, on July 19, 2022, the Commission sent Illumina and Grail a formal statement of objections for gun jumping. Illumina is a US company specializing in genomic sequencing. It develops, manufactures and markets integrated systems for genetic analysis, in particular next generation genomic sequencers (NGS) which are used, among other things, in the development of cancer screening tests. Grail is a US biotechnology company which relies on genomic sequencing to develop such cancer screening tests.

The novelty of this case stems from the fact that this operation did not pass the turnover thresholds of any competition authority. Following a complaint from a third party, the French competition authority, subsequently joined by five other European competition authorities, used the referral procedure of Article 22 of EU Regulation No. 139/2004, which allows the Commission to examine a transaction that does not have a European dimension or falls below the turnover thresholds if it affects trade between member states and significantly threatens to affect competition in the EU. The Commission accepted the referral request and opened an in-depth investigation of the transaction. The Commission reproached these two companies for having announced the completion of the transaction while the Commission’s in-depth investigation of the transaction was still ongoing.

On July 13, 2022, the General Court of the European Union confirmed the validity of the Commission’s decision accepting the referral request.

The Commission announced, on September 6, 2022, its decision to prohibit the completion of the acquisition. Illumina is indeed the only credible supplier of the NGS systems, which is an essential input to develop and process cancer detection tests. The Commission considered that Illumina would have had the ability and the incentive to engage in foreclosure strategies against Grail’s rivals attempting to develop cancer detection tests, by preventing them from accessing this technology (e.g., by increasing prices, degrade quality etc.). Also, the Commission announced that the remedies offered by Illumina and consisting in i) granting licenses to NGS suppliers, ii) stopping the on-going patents lawsuits in the US and in Europe against a NGS supplier (BGI Genomics China) and iii) entering into agreements with Grail’s competitors based on standard contract would not solve all the identified competition concerns. The Commission thus considered that this transaction would have hampered innovation and reduced choice in the emerging market for blood-based early cancer detection tests.

The parties face not only significant penalties because they chose to disregard their obligation to suspend the proceedings when the Commission examines the transaction, but also might have to undo their transaction as a result of this prohibition.

The Sigma-Aldrich case

Although companies are exposed to fines if they do not notify in time or carry out their transaction without waiting for authorization, they also risk fines for providing incomplete or inaccurate information at the time of notification. This is evident in the Commission’s decision of May 3, 2021, published in May 2022, where it fined Sigma-Aldrich €7.5 million for having provided inaccurate or misleading information during the Commission’s 2015 review of Merck’s acquisition of the company. The Commission conditionally approved Merck’s acquisition of Sigma-Aldrich, subject to both companies agreeing to divest certain Sigma-Aldrich assets to Honeywell, a third-party buyer. It was in fact the trustee appointed in this case who informed the Commission about the existence of a key innovation project, “iCap,” which was closely linked to the divested business but excluded from the scope of the divesture. Sigma-Aldrich deliberately concealed this project in its replies to the Commission’s requests for information in order not to have to transfer this project to Honeywell. Sigma-Aldrich thus prevented the Commission from making an informed assessment of the scope of the transaction in question in the light of all the facts.

Vigilance is therefore required for companies wishing to circumvent the merger control rules. It is essential to remember that it’s not just the competition authorities to watch out for: customers or suppliers can also file complaints to the competition authorities.