News Update Competition

7 October 2021

In its judgment on 22 September 2021, the General Court ("GC") confirmed the European Commission's ("EC") decision to impose double fines on Altice totalling EUR 124.5 million for "gun jumping" in the acquisition process of PT Portugal. The GC's judgment clarified how to interpret and apply the notification obligation and the standstill obligation for transactions that are subject to the EC's approval.

Background

In December 2014, Altice concluded a share purchase agreement ("SPA") for acquiring sole control of PT Portugal – the incumbent telecommunications operator in Portugal. Altice notified the acquisition to the EC in February 2015. A few months later, the EC cleared the acquisition.

In 2016, after further details about the acquisition process were published in press reports, the EC opened an investigation into a possible breach of the notification and standstill obligations. The EC's investigation found that:

• The SPA provided certain veto rights allowing Altice to exercise decisive influence over PT Portugal as of its signing;
• Altice had actually exercised decisive influence over PT Portugal; and
• At the request of Altice, PT Portugal had shared commercially sensitive information with Altice before closing the deal.

Based on these findings, the EC's decision on 24 April 2018 found that Altice had not respected the two main obligations under the European Merger Regulation. In particular, the EC found that Altice had:

• Breached the obligation to notify the acquisition to the EC before implementing (notification obligation); and
• Infringed the prohibition to implement the acquisition before it was notified and cleared (standstill obligation).

Altice brought an appeal before the GC, seeking to annul the EC's decision.

GC's judgment

The GC's judgment confirms existing case law and provides important clarifications on:

• Whether infringing the notification and standstill obligations can be fined separately without breaching the principle of ne bis in idem;
• When pre-closing agreements amount to a transaction's early implementation (notification obligation); and
• When communication between undertakings before clearance results in the acquirer's ability to exercise decisive influence (standstill obligation).

Double fining v. ne bis in idem and proportionality
In line with earlier Court of Justice of the EU ("CJEU") case law (see our 17 March 2020 News Update), the GC rules that the notification and standstill obligations each pursue autonomous objectives. It underlines the distinct nature of both obligations by pointing out that the notification obligation consists of a positive obligation and when violated, results in instantaneous infringement; while the standstill obligation lays down a negative obligation and when violated, results in a continuous infringement. Due to this, the GC dismissed Altice's argument that double fining for a parallel violation of the notification and standstill obligations breaches the principle of ne bis in idem and proportionality.

Pre-closing agreements violating the standstill obligation
A few years back, the CJEU rendered its landmark Ernst & Young judgment in which it emphasised that the standstill obligation should in principle be confined to the actual change of control or measures that contribute to the change of control. Thus, the decisive element for applying the standstill obligation is if there is a change of control (an acquisition which results in a change of control on a lasting basis).

On the question whether the pre-closing clauses in the SPA between Altice and PT Portugal resulted in such decisive control, the GC fully backs the EC's findings. While confirming that the standstill obligation does not prohibit pre-closing agreements which are necessary to ensure that the target's value is preserved or avoid compromising the target's commercial integrity, the EC upholds a strict standard for the standstill obligation. This strict standard also implies that for establishing a violation, the EC does not need to prove that agreements in breach with the standstill obligation have actually been implemented.

Essentially, the GC confirms that the SPA violated the gun jumping prohibition in three areas.

• Control on management: The SPA allowed Altice to appoint and dismiss members of the management of PT Portugal and to change the terms of employment of members of the management. With reference to the EC's Jurisdictional Consolidated Notice, it rules that this circumstance conferred control to Altice over PT Portugal.
• Control on contracts: The SPA provided Altice veto rights over any material contract and contracts and commitments exceeding a certain value (varying from EUR 1-5 million during the pre-closing period). Considering the broad material scope of application versus the low monetary thresholds of the veto right, the GC rules that the veto right goes beyond what is necessary to preserve PT Portugal' value.
• Control on pricing policies and terms and conditions: The SPA included Altice's veto rights over decisions modifying PT Portugal's pricing policies, standard offer prices and standard terms and conditions. Due to the wide scope of application of the veto right which de facto covers any changes to prices because of the lack of definitions of "pricing policies" and "standard offer prices", the GC rules that the EC was right on establishing the existence of decisive influence.

Communication before EC clearance
Communication between the acquirer and the target – also called information exchange – during the acquisition but prior to EC clearance is allowed insofar as it is necessary and does not result in the exercise of decisive influence by the acquirer. If communication goes beyond of what is necessary to ensure that the value of the target is preserved or to avoid compromising its commercial integrity, it will qualify as an illicit early implementation of the transaction in breach of the standstill obligation. In other words, the communication must not influence the target's ordinary business.

The GC confirmed the EC's view that the provision of information by PT led to Altice's involvement in management decisions and resulted in its ability to exercise decisive control as it was not limited to the ordinary course of business of PT Portugal.

• Participating in a conference call concerning a new product promotion campaign by PT Telecom and writing instructions to PT Portugal.
• Intervening in PT Portugal's contract negotiations with important business partners and also when it concerned very low contract values.
• Involvement in choice of technical suppliers of PT Portugal.
• Involvement in various M&A activities, including a request to PT Portugal to contact a third party to acquire as many shares as possible. The GC rules that this had overstepped the boundaries of what could be considered necessary to preserve PT Portugal's value.
• Approval of an investment decision of PT Portugal, in particular the communication about additional information, including the payback period for the investment which concerned an existing contract's renewal and a level of revenue comparable to that of the pre-existing contract.

Takeaways

• As determined in previous case law, the trigger for gun jumping remains a change of control prior to EC's clearance – whether actually implemented or not.
• In cases involving gun jumping, undertakings are exposed to double infringements and thus double fines.
• Pre-closing agreements in transactions should be carefully reviewed against clauses that violate the notification and standstill obligations. This always requires a case-by-case analysis. The standard for gun jumping is strict: actually implementing clauses that are contrary to the notification and standstill obligations is not required for finding an infringement.
• Special attention must be given to veto rights and the involvement in the management of the target company. As with pre-closing agreements, vetoes and management involvement require a case-by-case analysis. They will only be acceptable under strict conditions, namely when it is necessary to preserve the target's value or its commercial integrity.
• If circumstances exist that require the acquisition to be partially implemented before clearance by the EC, parties must request a derogation from the EC to that effect instead of implementing while relying on those circumstances.
• The EC does not offer guidance on its fining policy for infringements of Articles 4(1) and 7(1), but the GC points out that the EC has fined Altice as well as Marine Harvest in an earlier case, a fine of around 1% of the undertaking concerned. This may well provide an indication of future EC fining policy.