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Be Careful! Procedural Issues Matter in Merger Control
The analysis of where to file mergers, acquisitions, investments and joint ventures worldwide is more complex than ever. Countries have widely varying jurisdictional regimes and catch a surprising range of transactions. At the same time, regulators worldwide are keen to take enforcement action against companies when a transaction is not filed, is filed late, or there is an attempt to avoid the rules or incorrect information is provided.
The European Commission has imposed numerous fines for various procedural infringements of the EU merger control rules, with the latest example announced 27 June 2019. In that case, Canon was fined €28 million for using a “warehousing” structure to allow it effectively to complete an acquisition before merger control clearance was obtained.
On 12 August 2016, Canon notified the Commission of its plan to acquire Toshiba Medical Systems Corporation (TMSC) from Toshiba. The Commission unconditionally cleared the transaction on 19 September 2016.
For the acquisition, Canon used a two-step transaction structure involving an interim buyer. As a first step, the interim buyer acquired 95 percent of the share capital of TMSC for €800, whereas Canon paid €5.28 billion for the remaining 5 percent of the shares and share options over the interim buyer's stake. This first step was carried out prior to notification to or approval by the Commission.
As a second step, following approval of the merger by the Commission, Canon exercised its share options, acquiring 100 percent of the shares of TMSC.
The Commission took the view that this was a sham and that the first and second steps in the transaction structure formed together a single notifiable merger. The first step contributed to the acquisition of final control over TMSC, which occurred with the second step. In fact, as the Commission noted, within the structure chosen by the companies, the first step was necessary for Canon to gain control over TMSC.
By carrying out the first step, Canon had therefore partially implemented its acquisition of TMSC before both the notification and the Commission's approval. This breached the requirements under EU merger control law to notify the Commission for approval of the merger and not to complete before approval (the “standstill obligation”).
Warehousing structures are often considered, particularly in competitive bidding scenarios, but this case shows that they are difficult to implement and regulators worldwide will be on the lookout for purely artificial structures.
Commission to Investigate Alleged Exclusivity Arrangements; Seeks Interim Measures for First Time in 18 Years
On 26 June 2019, the European Commission opened an investigation into alleged abuse of dominance through the use of exclusive arrangements. For the first time in 18 years, the Commission also seeks to impose interim measures during its investigation of the alleged practices.
The new case concerns alleged exclusivity practices put in place by Broadcom, the world's largest designer, developer and provider of integrated circuits for wired communication devices. It is a global leader in a number of markets, including systems on a chip, front-end chips, WiFi chipsets and components for so-called central office/head end equipment to provide high-speed data connections.
The Commission alleges that Broadcom implemented a range of exclusionary practices in relation to these products. These practices may include (i) setting exclusive purchasing obligations, (ii) granting rebates or other advantages conditioned on exclusivity or minimum purchase requirements, (iii) product bundling, (iv) abusive IP-related strategies and (v) deliberately degrading interoperability between Broadcom products and other products.
The Commission is apparently so concerned by the potential foreclosure impact of these alleged practices that it has taken the extremely unusual step of seeking to stop the alleged practices while it carries out its investigation. The interim measures the Commission wants to impose are similar to an injunction imposed by a court.
Interim measures can be granted only if a company's behaviour constitutes at first sight an infringement of the competition rules and if there is a risk of serious and irreparable harm to competition. The Commission claims these conditions are satisfied here, in particular due to the alleged “elimination or marginalisation of competitors before the end of proceedings.”
The Commission has therefore sent a statement of objections to Broadcom setting out why the Commission contends interim measures are needed, to which the company has the opportunity to respond within a short timeframe.
Competitors Should Not Share Supplies to a Customer or Exchange Sensitive Information
On 18 June 2019, the UK Competition and Markets Authority (CMA) sent a statement of objections (SO) to four pharmaceutical companies alleging that they shared supplies to a wholesaler and exchanged commercially sensitive information.
If ultimately confirmed, these infringements of EU and UK competition law are likely to give rise to significant fines. In addition, affected customers will inevitably bring claims for damages.
The CMA alleges that competitors King and Auden Mckenzie agreed that one would supply only 10mg nortriptyline tablets to a large pharmaceutical wholesaler and the other would supply only 5mg nortriptyline tablets to that wholesaler. In addition, the two suppliers allegedly agreed to fix the quantities and the prices of supply.
The CMA also alleges that King, Alissa and Lexon exchanged commercially sensitive information — including information about prices, volumes and entry plans — to try to keep nortriptyline prices high.
The range of addressees of the SO shows that competition law risk can extend to companies that take over an infringing business and to consultants acting for them. The addressees include Accord-UK Limited (formerly named Actavis UK Limited) because the CMA provisionally considers it the economic successor of Auden Mckenzie (Pharma Division) Limited and that it should therefore be held liable for that company’s direct involvement in the alleged infringement.
The addressees also include Praze Consultants Limited, a consultancy which conducted King’s corporate and commercial services. This is because the CMA provisionally considers that Praze directly participated in both the infringements of competition law alleged against King.
Small Local Markets Not Immune From Competition Law Enforcement
Just because a business is small does not mean it is immune from competition law enforcement action. National regulators across the EU, including in the UK, regularly investigate and fine small businesses, which then also leaves them open to follow-on private damages claims from customers and other third parties.
The CMA provided an example of this on 13 June 2019 when it announced that it had sent an SO to four estate agents active in the Berkshire area of the UK.
The CMA alleges that the companies broke UK competition law by taking part in a price-fixing cartel with several aspects:
- Agreeing that they would all apply minimum commission rates for residential property sales
- Exchanging confidential pricing information
- Holding meetings and colluding to make sure they were all enforcing and maintaining the agreed minimum commission rates
This is the third CMA case brought against estate agents in recent years. It’s not clear how the case came to the attention of the CMA, but there does not appear to have been a whistleblower. Estate agents, and indeed all businesses, need to have suitable competition law compliance programmes, including training and monitoring measures, in place.
Additional European competition law news coverage can be found in our news section.
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