Don’t jump the gun: European Court of Justice confirms strict enforcement of the EU Merger Regulation
The judgment emphasises the importance of complying with the standstill obligation under the EUMR, the risks of certain types of pre-closing covenants and the exposure which can arise from intervening in a target's business prior to Commission approval.
Where mergers, acquisitions and joint ventures meet the turnover thresholds under the EUMR, the parties must:
- notify the Commission prior to implementation of the transaction (Article 4(1) EUMR) (the Notification Obligation); and
- not implement the transaction until it has been notified to, and approved by, the Commission (Article 7(1) EUMR) (the Standstill Obligation).
The EUMR entitles the Commission to impose significant fines – up to 10% of the parties’ global turnover in the preceding financial year – for breaches of these obligations, which are commonly known as gun-jumping.
What went wrong for Altice?
In December 2014, Altice (a multinational telecommunications company) entered into a share purchase agreement (the SPA) with OI SA (a Brazilian telecommunications operator) to acquire sole control of PT Portugal (a telecommunications and multimedia operator in Portugal).
The transaction required approval under the EUMR and Altice submitted a notification to the Commission in February 2015. The Commission adopted a clearance decision approving the transaction on 20 April 2015, subject to commitments that included the divestment of Altice's businesses in Portugal. On 2 June 2015, Altice publicly announced that it had completed the deal.
However, in March 2016, almost a year after adopting its clearance decision, the Commission launched an investigation to determine whether Altice had breached the Notification Obligation and the Standstill Obligation. It subsequently found that Altice had breached those provisions on the basis that, before obtaining the Commission’s clearance (and in some instances, even before its notification):
- Altice had been in a position to exercise decisive influence over PT Portugal, pursuant to certain pre-closing covenants in the SPA, including those that granted Altice veto rights over decisions concerning PT Portugal's ordinary business;
- Altice had actually exercised decisive influence over aspects of PT Portugal's business, including by intervening in its day-to-day business; and
- Altice demonstrated this decisive influence by requesting and receiving commercially sensitive information about PT Portugal outside the framework of any confidentiality agreement.
As a result, in a decision on 24 April 2018, the Commission imposed two fines on Altice totalling €124.5m:
- a fine of €62.25m for infringing the Notification Obligation; and
- a fine of €62.25m for failing to comply with the Standstill Obligation.
How did the courts rule on Altice's appeal?
Altice appealed the Commission’s decision to the General Court (GC) which largely confirmed the Commission's findings and reasoning in a judgment on 22 September 2021. However, the GC did reduce the fine for the infringement of the Notification Obligation by 10% to c. €56m, on the basis that Altice had informed the Commission of the transaction before signing the SPA and had submitted a case-team allocation request and engaged in pre-notification discussions with the Commission.
Altice appealed the GC’s judgment to the CJEU. In an Opinion of April 2023, Advocate General Anthony Michael Collins recommended that the CJEU uphold the GC’s judgment in its entirety, highlighting the importance of deterring companies from gun-jumping.
Consistent with that Opinion, the CJEU largely dismissed Altice’s appeal in a judgment handed down on 9 November 2023. However, the CJEU did further reduce the fine for breach of the Notification Obligation to €52.9m, finding that the Commission had failed to explain why infringements of the Notification Obligation (an instantaneous breach) and the Standstill Obligation (a continuous breach) called for fines of the same amount. The CJEU held that, while there is no obligation to detail how a figure is arrived at, the Commission does have a duty to state the reasons for its fine calculations, which must be assessed in the circumstances of the case considering the gravity, nature, and duration of the infringements.
The CJEU’s key findings are summarised below.
The Commission may impose separate fines for breach of the Notification Obligation and the Standstill Obligation.
Altice argued that separate fines for breaching the Notification and Standstill Obligations were illegal, redundant and disproportionate, as these obligations could not be distinguished or separately infringed. However, the GC and CJEU upheld the Commission's decision to impose two fines, noting that each obligation had a different objective: the Notification Obligation requires parties to notify the Commission of a relevant transaction, while the Standstill Obligation prevents them from implementing the relevant transaction without the Commission’s approval. In doing so, the CJEU followed a recent case covering similar ground (Marine Harvest v Commission), ruling that whilst a breach of the Notification Obligation automatically breached the Standstill Obligation, the reverse was not true. The CJEU also justified the separate fines as necessary and appropriate for the effective enforcement of EU merger control and rejected Altice’s claims of disproportionality and double punishment.
Pre-closing covenants can constitute the implementation of the transaction in breach of the Notification Obligation and the Standstill Obligation.
Altice contended that implementation for the purposes of Articles 4(1) and 7(1) of the EUMR could only occur on the transfer of PT Portugal’s shares to Altice, and not by “short-lived” contractual covenants. The CJEU disagreed, holding that implementation arises as soon as the parties implement measures that contribute to a lasting change of control over the target (in line with the Court’s 2018 judgment in Ernst & Young P/S v Konkurrencerådet). In contrast to Altice’s submissions, the Court held that implementation is not limited to situations that may lead the Commission to order that the underlying transaction be dissolved.
The CJEU therefore confirmed that the signing of an SPA can amount to the implementation of a concentration (i.e. a measure which contributes to the lasting change of control resulting from a merger or acquisition) where it confers on the purchaser the possibility of exercising decisive influence over the target at the point of signing.
The CJEU also held that the veto rights at issue went beyond what was necessary to preserve the value of Altice’s investment, so were not necessary for and ancillary to the underlying transaction.
The exercise of control over a target company can constitute an implementation of the transaction in breach of the Notification Obligation and the Standstill Obligation.
The GC and CJEU confirmed that by intervening in the day-to-day business decisions of PT Portugal, Altice had exercised decisive influence over PT Portugal, and therefore had partially implemented the transaction both prior to notifying the Commission of the transaction and before receiving clearance from the Commission.
Requesting and receiving commercially sensitive information can demonstrate the exercise of control over a target in breach of the Notification Obligation and the Standstill Obligation.
The CJEU followed the GC and AG Collins’ Opinion in relation to the sharing of commercially sensitive information, finding that the Commission was correct to treat this as evidence contributing to the conclusion that Altice had acquired decisive influence over PT Portugal, and that the Commission was entitled to assess this under the EUMR rather than Article 101 TFEU.
This judgment provides important guidance on the interpretation and application of the EUMR, including by confirming that the Commission and the EU courts will:
- impose and uphold substantial fines for gun-jumping, including separate penalties for breaches of the Notification Obligation and the Standstill Obligation;
- consider that the possibility of exercising decisive influence or control over the target may arise not only from the transfer of shares or assets, but also from the details of the transaction agreements and/or any instances of actual intervention in the target's business; and
- scrutinise pre-closing covenants in transaction agreements and may deem them to amount to gun-jumping if they contribute to a lasting change of control over the target and go beyond what is necessary to preserve the value or the commercial integrity of the target.
This judgment demonstrates that the Commission and the EU courts will adopt a strict approach to breaches of the EUMR's procedural rules. Since its decision in Altice, the Commission has continued to impose severe penalties for gun-jumping including fining Illumina €432m for its breach of the Standstill Obligation in its acquisition of GRAIL. It is also currently investigating Vivendi for suspected gun-jumping in its acquisition of Lagardère. Parties involved in mergers that are subject to EUMR approval (or indeed under the EU Foreign Subsidies Regulation) should therefore take particular care to ensure compliance with the relevant procedural rules to avoid any suggestion that such rules have been breached.
This article was also authored by trainee solicitor Robyn Welham.