CASE COMMENTS: MERGERS - EUROPEAN UNION - PROCEDURAL INFRINGEMENTS - GUN-JUMPING - FINES

Gun-jumping: The European Commission imposes two fines totalling EUR 28 million upon one of the world major suppliers of optical products for having infringed the Merger Regulation prior notification and standstill obligations (Canon / Toshiba Medical Systems)

Warehousing – or portage – transactions, which consist in parking the target with an interim buyer in view of its onward sale to the ultimate acquirer, are no exceptions to the prohibition of gun jumping: this is, in a nutshell, the conclusion drawn by the European Commission in its decision of 27 June 2019, in which it imposed a sanction of EUR 28 million on Canon for having infringed both Articles 4(1) and 7(1) of the Merger Regulation (relating respectively to the obligation of prior notification and to the standstill obligation) in the context of its acquisition of Toshiba Medical Systems Corporation (’TMSC’).

In this case, the warehousing scheme was required by the financial difficulties faced by the Toshiba group, which forced it to divest – before the end of the 2015 fiscal year – its subsidiary specialized in the manufacturing of medical imaging equipment. Pursuant to the two-step structure chosen by the parties, Toshiba first sold 95% of TMSC’s capital to a special-purpose vehicle named MS Holding, while the remaining 5% were sold to Canon, which, in parallel, acquired share options over MS Holding’s stake. This first step, which was implemented on 17 March 2016, enabled Toshiba to relinquish control over TMSC within the required time frame, without having to wait for Canon to obtain the required merger control clearances. On 19 December 2016, after its acquisition of control over TMSC was cleared by the European Commission and the Chinese Ministry of Commerce, Canon exercised its shares options over MS Holding’s stake and therefore took control over TMSC. This ultimate transaction constituted the second step of Canon’s acquisition of control over TMSC.

Yet, according to the European Commission, the transaction was, as from MS Holding’s interim acquisition of 95% of TMSC’s share capital, subject to merger control clearance. Considering that the two phases of the transaction constituted together a single concentration, the European Commission found that the interim phase amounted to a partial implementation of the transaction in the sense of the Court of justice’s preliminary ruling in the Ernst & Young case (Court of justice, judgment of 31 May 2018, case C-633/16 - Ernst & Young) and should therefore have been notified and cleared beforehand. In line with the wording of paragraph 35 of the Commission’s Consolidated Jurisdictional Notice on the control of concentrations between undertakings, this decision rules that Articles 4(1) and 7(1) of the Merger Regulation apply to the interim transaction in a warehousing scheme, even where the interim transaction in question does not, as such, confer upon the ultimate buyer the possibility to exercise decisive influence over the target.

Characterization of the single concentration

While acknowledging that MS Holding’s acquisition of 95% of TMSC’s share capital did not, as such, result in transferring control to Canon, the Commission nevertheless points out that such an acquisition was part of the overall transaction consisting in the lasting acquisition of control over TMSC by Canon. In other words, MS Holding’s interim acquisition and Canon’s ultimate acquisition constituted together a single concentration in the sense of paragraph 35 of the Consolidated Jurisdictional Notice relating to warehousing schemes.

Since the adoption of the Consolidated Jurisdictional Notice, the Commission draws a distinction between, warehousing or portage schemes, on the one hand, and temporary holdings of shares by financial institutions, on the other hand. While the second type of transaction is expressly exempted from the notification obligation by Article 3(5) of the Merger Regulation, warehousing transactions must be notified to the Commission as from the stage of the first – interim – transaction. More precisely, the transaction by which an interim buyer acquires control over a target should be considered as the first step of a single concentration comprising the lasting acquisition of control by the ultimate buyer where: (i) the first transaction is only undertaken to facilitate the second transaction; (ii) the first buyer is directly linked to the ultimate acquirer; and (iii) the ultimate acquirer bears the major part of the economic risks and may also be granted specific rights. This position contrasts with the former approach followed by the Commission, notably in the Lagardère/Natexis/Vivendi case, in which the Commission found that Natexis’ interim acquisition of Vivendi publishing assets benefited from the financial institutions exemption to the notification obligation and therefore only reviewed the second step of the transaction, i.e., the acquisition of Vivendi publishing business by Lagardère (Eur. Comm., 7 January 2004, case COMP/M. 2978 – Lagardère/Natexis/VUP, followed by a Court of First Instance’s ruling, which made clear that, even if the Commission erred in law in applying the financial institutions exemption, such finding had no impact on the clearance delivered by the Commission on 7 January 2004 : CFI, 13 September 2010, T-279/04 – Editions Odile Jacob v. European Commission, para. 162).

In the Canon/TMSC case, it appears that MS Holding’s acquisition was only undertaken to enable Canon to ultimately take control over TMSC. The Commission points out in that respect that Canon is the one which participated in, and won, the bid launched by Toshiba, while MS Holding did not even exist at the time of the bidding process. MS Holding was indeed set up afterwards, in order to enable Toshiba to relinquish control over TMSC and therefore to address its financial difficulties in time, while giving Canon sufficient time to obtain the merger control clearances. There indeed seems to be no doubt that MS Holding’s role was purely temporary and did not entail any economic incentive. First, the price payed by MS Holding for the acquisition of 95% of the target’s share capital amounted to approximately 800 Euros only, whereas Canon had to pay 5.3 billion Euros for the acquisition of the share options. Second, MS Holding shareholders committed ex ante to sell their shares to Canon upon exercise of the share options by Canon at a fixed price irrespective of TMSC’s economic performances. Third, it appears that MS Holding never intended to get involved in TMSC’s business conduct: it had indeed been agreed from the very beginning that MS Holding shareholders would never exercise their voting rights and, as a matter of fact, none of MS Holding shareholders ever met with TMSC managers.

It also seems difficult to challenge the existence of a direct link between Canon and MS Holding: Canon itself proposed to set up an interim buyer, in order to allow Toshiba to receive the full acquisition price of TMSC before the end of the 2015 fiscal year, without having to wait for Canon to obtain the merger control clearances. Even though, as Canon put it, the transaction structure did not provide any advantage to it and only aimed at addressing Toshiba’s financial difficulties, the Commission points out that, precisely because it brought a solution to Toshiba’s needs, this two-step structure enabled Canon to win the bid.

Finally, Canon, by paying the full price of TMSC acquisition at the stage of the interim acquisition, bore the economic risk of the whole transaction well before the implementation of the ultimate acquisition. The Commission points out in that respect that the payment of the EUR 5.3 billion price was irreversible, since, pursuant to the agreements, in case Canon would not obtain the required merger control clearances, it could not claim back the purchase price. By paying the EUR 5.3 billion at the first step of the transaction, Canon therefore acquired the right to become TMSC’s sole shareholder or, as the case may be, the right to sell its share options to a third party of its choice for a price reflecting TMSC’s value. According to the Commission, the share options acquired by Canon cannot be regarded as genuine options: while genuine share options may or may not be exercised by their holder, Canon was, from the very beginning, committed to exercise the share options, given that it had already paid the full price for the acquisition of TMSC. As a result, Canon was the only one able to determine the identity of TMSC’s ultimate acquirer, i.e., either Canon or a third party of its choice. As regards this second scenario, the Commission made clear that the sale to a third party was highly unlikely: since the transaction did not raise any competition concern, there was no doubt that the merger control clearances would be obtained and therefore that Canon would take control over TMSC.

Application of the concept of ’contribution to the change in control’ derived from the Court of justice’s preliminary ruling in the Ernst & Young case

The Commission did not examine whether MS Holding acquisition of TMSC contributed, as such, to TMSC’s change of control; it considered, however, that such acquisition, as part of the overall concentration, amounted to a partial implementation of Canon’s acquisition of control over TMSC. Given that such an interim acquisition had been neither notified nor cleared before its implementation, MS Holding’s acquisition of TMSC infringes Articles 4(1) and 7(1) of the Merger Regulation.

The Commission’s reasoning in that respect seems to illustrate the recent shift in the EU case law from the notion of ’possibility to exercise of decisive influence’ enshrined in Article 3(2) of the Merger Regulation to the concept of ’contribution to the change in control’ recently developed by the Court of justice. In its 2018 preliminary ruling in the Ernst & Young / KPMG case, the Court of justice had indeed stated that the standstill obligation did apply to ’a transaction which, in whole or in part, in fact or in law, contributes to the change in control of the target undertaking’ (CJEU, judgment of 31 May 2018, C-633/16 – Ernst & Young, para. 59). Building on this, the Commission found that the implementation of the interim transaction infringed EU merger control rules because it contributed – at least in part – to the change of control over TMSC.

In the aforementioned Ernst & Young / KPMG case, the Court of justice had found that the termination by KPMG Denmark of its cooperation agreement with KPMG International in view of its acquisition by Ernst & Young did not contribute to KPMG Denmark’s change of control and could not therefore be regarded as bringing about the implementation of the concentration. To come to such a conclusion, the Court pointed out that (i) the termination agreement was a transaction concerning only one of the merging parties and a third party; (ii) Ernst & Young did not acquire the possibility of exercising any influence on KPMG Denmark as a result of this termination agreement; and (iii) KPMG Denmark was independent both before and after the termination from a competition law standpoint. The Commission found that the situation in the Canon/TMSC case differed from the Ernst & Young / KPMG circumstances with respect to each of these three criteria.

On the first one, the Commission found that, even though the interim transaction took place between MS Holding and TMSC, it nevertheless also involved Canon (which, as explained above, was the one proposing to set up an interim buyer). That said, in our view, the fact that Toshiba’s control over TMSC was removed as a result of the interim transaction does not in any way establish that Canon took control over TMSC before the ultimate transaction; quite the contrary, the Commission acknowledges that Canon did not control TMSC until the ultimate transaction: ’Canon did not control TMSC between the Interim Transaction and the Ultimate Transaction’ (Eur. Comm. decision, para. 157).

The Commission stated, as regards the possibility of exercising influence over the target (second criterion), that Canon ’was the only party that could ultimately dispose of TMSC controlling shares, by either (i) exercising the Share Options or (ii) in the (unlikely) event of no antitrust approvals, by selling the Share Options to the acquirer of its choice’ (Eur. Comm. decision, para. 157). The Commission concluded therefrom that Canon inevitably acquired the possibility of exercising influence over TMSC’s future’. As regards the issue of the independence (third criterion), the Commission pointed out that, as opposed to KPMG Denmark, TMSC was initially controlled by Toshiba and that this control was removed as a result of the interim transaction. Based on such considerations, the Commission drew the conclusion that the interim transaction had a direct functional link with the change of control over TMSC and therefore contributed to the implementation of Canon’s acquisition over TMSC.

While such a conclusion is consistent with paragraph 35 of the Consolidated Jurisdictional Notice, it seems to us that the Commission’s reasoning results, in practice, in depriving warehousing transaction structures of any interest: in the Canon/TMSC case, in which time was of the essence, this type of acquisition structure was needed, precisely because the seller could not afford to wait for the merger control clearances. Should MS Holding’s interim acquisition have to be notified to, and cleared by, the Commission before its implementation, Toshiba would not have been able to transfer the control of TMSC before the end of the 2015 fiscal year and, therefore, Canon would certainly not have been able to win the bid. The problem is that, in this specific case, it seems that no other potential acquirer would have been able to acquire TMSC in time to address Toshiba’s financial needs. The Commission indeed specifies in its decision that ’Only the Canon proposal for a two-step transaction did not require antitrust clearance before Toshiba could relinquish control over TMSC. Put differently, among the proposals that Toshiba proposed and received, Canon’s two-step transaction structure was the only one that allowed the change in control over TMSC in a way that would address the financial needs of Toshiba’ (Eur. Comm. decision, para. 149). As opposed for instance to the Lagardère/Natexis/Vivendi case, in which Lagardère’s acquisition of Vivendi publishing assets required a phase II merger control review, which resulted in postponing the transfer of the price by several months, Canon’s acquisition of TMSC was examined under a phase I review, which lasted a bit more than one month. In other words, in order to avoid the delay required by the merger control review, Toshiba should have found an acquirer, whose turnover did not meet the EU merger control thresholds, which, considering the purchase price of TMSC, would have certainly proven very difficult. The argument raised by the Commission that Canon could have asked the Commission for a derogation from the standstill obligation under Article 7(3) of the Merger Regulation does not actually solve the issue: the outcome of such a derogation request is necessarily uncertain, which is not compatible with the constraints of a bidding process such as the one concerning TMSC, where bidders must position themselves as fast as possible and provide a robust and reliable offer leaving as little uncertainty as possible.

Furthermore, in its assessment, the Commission seems to depart from the cornerstone of the characterization of a concentration under EU merger control law, i.e., the acquisition of the ’possibility to exercise a decisive influence’. It is surprising in that respect that the Commission chooses to refer to the ’possibility of exercising influence over TMSC’s future’ – a concept that does not exist under EU merger control rules – without ever assessing whether the interim transaction could give Canon the possibility to interfere with the strategic decisions on TMSC’s business policy. By applying Articles 4(1) and 7(1) to transactions, which do not, in themselves, confer upon the ultimate buyer the possibility to exercise decisive influence, this decision may pave the way to a further extension of the application scope of the notion of gun jumping.

Double punishment of Canon: a potential ground for a partial annulment of the Commission’s decision

Consistently with its precedents in the field of gun jumping, the Commission imposed upon Canon two fines of Euros 14 million each for the infringements of Article 4(1) and 7(1) of the Merger Regulation.

The Commission’s decisional practice on this point is currently being called into question before the Court of justice. In particular, Advocate General Evgeni Tanchev recently advocated for the annulment of the fine imposed upon Marine Harvest for infringement of Article 4(1) (September 26, 2019, C-10/18P, Marine Harvest v. Commission). The Advocate General indeed considered that imposing two fines for gun jumping practices constituted a breach of the principles governing concurrent offences which can be found in the legal orders of several EU Member States. According to such principles, where the same conduct is caught by more than one statutory provision, it may be sanctioned only once. As regards the two provisions prohibiting gun jumping practices, Advocate General Tanchev considered that the infringement of Article 7(1) should be regarded as subsuming the infringement of Article 4(1). He relied in particular on the fact that (i) Article 7(1) refers to both the obligation of prior notification and the standstill obligation, so that Article 4(1) cannot be regarded as providing for any additional obligation; and (ii) ’any damage to competition arises not from the failure to notify in breach of Article 4(1) of Regulation No 139/2004, but from the implementation of a concentration that has not been declared compatible, in breach of Article 7(1) of that regulation’. As a result, a company implementing a transaction without/before having obtained the European Commission’s clearance and therefore infringing both Articles 4(1) and 7(1) could, according to Advocate General Evgeni Tanchev, be sanctioned only for the infringement of Article 7(1), which encompasses the infringement of Article 4(1). In its request for annulment of the Commission’s gun jumping decision of 24 April 2018 (case M. 7993 – Altice/PT Portugal (Article 14(2) procedure), Altice also refers to the prohibition of double punishment rooted in the general principles common to the legal systems of the Member States (Case T-425/18).

Should the Court of justice endorse the Advocate General’s opinion on this point, this might subsequently result in a reduction by 50% of the amount of the fine imposed upon Canon.

Note Chronicles

Authors

  • Hogan Lovells (Paris)
  • Hogan Lovells (Paris)

Quotation

Eric Paroche, Céline Verney, Gun-jumping: The European Commission imposes two fines totalling EUR 28 million upon one of the world major suppliers of optical products for having infringed the Merger Regulation prior notification and standstill obligations (Canon / Toshiba Medical Systems), 27 June 2019, Concurrences N° 1-2020, Art. N° 92988, pp. 113-116

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