The court’s reasoning in Canon Inc v Commission contains some important lessons for parties (and their advisors) contemplating creative approaches to the structuring of mergers and acquisitions.
EU and Irish merger-control rules apply in the State. The former regime is contained in the EU Merger Regulation (EUMR), whereas the latter regime is found in the Competition Act 2002 (as amended). Both regimes apply to changes in control, provided the relevant jurisdictional thresholds are met.
The EUMR tends to apply to transactions involving large companies with a potential impact across several EU member states, whereas the 2002 act typically catches deals whose likely effects are national rather than international.
Under both the EUMR and the 2002 act, ‘control’ is defined as the capability of exercising decisive influence over the strategic business affairs of the relevant target entity or business. Control may be either de jure (for example, by contract) or de facto (for example, through voting patterns at shareholder meetings).
The EUMR operates an ex ante suspensory regime. In other words, if a particular transaction triggers a mandatory notification to the commission, article 4(1) of the EUMR provides that it must be notified prior to completion.
Article 4(1) is also known as the ‘obligation to notify’ provision. Separately, article 7(1) of the EUMR stipulates that any transaction that is mandatorily notifiable to the commission must not be implemented until it is cleared (or deemed) cleared.
Article 7(1) is often referred to as the ‘standstill obligation’. Although perhaps more accurately referring to an infringement of the latter provision, a breach of either or both provisions is usually referred to as ‘gun-jumping’.
The 2002 act, like many other national merger-control laws, also requires the mandatory notification of certain transactions, while also prohibiting the closing of a notifiable transaction until the clearance or deemed clearance is granted.
In early 2016, Toshiba Corporation was in significant financial difficulty. It thus initiated an accelerated bidding process for the sale of TMSC. Canon won this award process because it was the only bidder that had not made the payment of the purchase price conditional on the receipt of any relevant merger-control clearances, including under the EUMR.
The acquisition of TMSC by Canon was carried out in two steps – a ‘warehousing’ sale to an immediate buyer, followed by the final acquisition by the ultimate purchaser after any required merger-control clearances were granted.
The purpose of this approach was to allow the sale of TMSC to be recognised in Toshiba’s accounts by 31 March 2016, even though the sale was not completed – that is, Canon would not actually acquire control until after it received the necessary merger approvals.
Firstly, in March 2016, MS Holding, a special purpose vehicle (SPV) solely controlled by Canon, acquired 95% of TMSC’s shares. At the same time, Canon acquired the remaining 5% of TMSC’s shares from Toshiba, while also purchasing a call option on the TMSC equity held by the SPV.
This first step was the ‘interim transaction’ and was implemented that month. Secondly, in December 2016, after obtaining merger clearance from both the commission (and the other relevant merger-control authorities), Canon exercised its option to acquire the remaining shares in TMSC. This step is referred to as the ‘ultimate transaction’.
Around the same time as the interim transaction occurred, Canon began pre-notification engagement with the commission, and a formal notification was submitted under the EUMR in August 2016. The acquisition received unconditional clearance from the commission the following month.
However, in parallel with its substantive review of the transaction, the commission was also examining whether Canon had breached either the failure to notify and/or the standstill obligations under the EUMR. This investigation was triggered by an anonymous complaint submitted in March 2016. (One might speculate that this complainant was one of the disappointed under-bidders for TMSC.)
Arising from its investigation, the commission found that:
- The interim transaction and the ultimate transaction constituted a single concentration within the meaning of the EUMR,
- The interim transaction was a direct functional link to the acquisition of control of TMSC by Canon and, as such, contributed to the change in control of TMSC, and
- Because it partially implemented the acquisition prior to both notification to, and clearance from the commission, Canon violated both the standstill obligation and the obligation to notify.
Therefore, the commission concluded that by proceeding with the interim transaction, Canon had violated both article 4(1) and article 7(1) of the EUMR. A fine of €14 million was imposed on the company for each infringement.
In its appeal to the General Court, Canon claimed that the interim transaction did not infringe either article 4(1) or article 7(1) of the EUMR. This company’s core argument was that the interim transaction could not constitute early implementation, as it did not result in an acquisition of control over TMSC.
Canon sought to rely on the EU’s Court of Justice’s May 2018 decision in Case C-633/16 Ernst & Young, where the court held that only transactions contributing to a lasting change of control of the target undertaking fall within the scope of article 7(1).
In addition, that court found that actions/operations do not contribute to a lasting change of control when they do not have a direct functional link with the implementation of the transaction.
Indeed, the court ultimately determined that the transaction in question, namely the termination of a cooperation agreement, that was a prerequisite to the merger, did not constitute partial implementation of the concentration, given that it had no direct functional link with the relevant change of control.
The commission accepted that Canon did not acquire control of TMSC as a result of the interim transaction, so the issue to be determined was whether this first step could constitute partial implementation.
The General Court noted that a transaction is implemented as soon as the parties to the transaction carry out operations that contribute to a lasting change in control of the target undertaking.
Therefore, partial implementation does fall within the scope of the standstill obligation, and the test for determining whether Canon breached its obligations under the EUMR is not whether there was an acquisition of control of TMSC prior to the clearance of the transaction, but whether the contested actions contributed, in whole or in part, in fact or in law, to the change of control of the undertaking before it was notified and/or before it was cleared.
The court concluded that the mere fact that the voting share options gave Canon the possibility to exercise influence on the target’s business infringed the standstill and notification obligations (albeit that influence was insufficient to confer control upon Canon).
Ultimately, the court upheld the commission’s conclusion that the interim transaction and the ultimate transaction together constituted a single transaction for three reasons:
- The interim transaction was only carried out in view of the ultimate transaction,
- The sole purpose of MS Holding was to facilitate the acquisition of control of TMSC by Canon, and
- Canon was the only party able to determine the identity of the ultimate purchaser of TMSC and, therefore, assumed the economic risk of the entire transaction.
As mentioned above, under section 18(1) of the 2002 act, parties are obliged to notify any merger or acquisition satisfying the relevant jurisdictional thresholds to the Competition and Consumer Protection Commission (CCPC).
If the merging parties implement a notifiable merger/acquisition prior to clearance or deemed clearance from CCPC, the merger or acquisition is deemed void. In addition, failure to notify the CCPC constitutes a criminal offence under Irish law that can result in fines up to €250,000.
In December 2015, Armalou Holdings Limited (Armalou) acquired Lillis-O’Donnell Motor Company Limited through its wholly owned subsidiary, Spirit Ford Limited. After the CCPC was informed about the acquisition by a third party in August 2017, it commenced an investigation into the suspected breach of section 18(1) of the 2002 act the following October.
Ultimately, the CCPC referred the matter to the Director of Public Prosecutions, who brought proceedings. In April 2019, Armalou pleaded guilty to six charges in connection with the failure to notify the CCPC of the transaction.
The Dublin District Court found that Armalou was not aware of its duty to notify the CCPC and, since the failure to notify therefore did not constitute a wilful breach of the 2002 act, the court applied the Probation Act 1907 and ordered Armalou to make a charitable donation of €2,000. (Separately, the acquisition was notified to the CCPC in February 2018 – over two years after being implemented, and only after the CCPC had required the merging parties to notify the transaction.)
Together, Canon andArmalou show that both the commission and the CCPC will adopt a strict approach to structuring transactions that may give rise to ‘gun-jumping’.
In competitive bid situations, a purchaser whose offer will require mergers clearance is often at a disadvantage where a rival bidder does not have any such obligations, particularly in situations where the vendor would favour a quick sale.
In such scenarios, the purchaser’s advisors are often asked to suggest potential ways of accelerating the payment of consideration to the vendor.
Warehousing is often cited as a potential option. In theory, this could mean that the ultimate purchaser could instruct its investment bank to buy the target for the purpose of selling same to the former subject to any merger clearances.
Potentially, the first/initial transaction does not require approval because, under both the EUMR and the 2002 act, where control is acquired by a financial or other institution (whose normal activity includes dealing with securities, for the purposes of selling such securities with one year), a notifiable transaction will not occur.
However, the 2002 act, in response to a CCPC recommended revision, explicitly states that this ‘warehousing exemption’ is not available where the ultimate buyer bears a major part of the economic risk of the initial acquisition. Indeed, the General Court’s decision in Canon is further proof of the perils of such structures. Accordingly, the warehousing approach is likely to be oft-mentioned, but little used.
More broadly, the Canon judgment shows that parties need to craft any transaction documentation carefully, so that there is no ground for the commission, the CCPC, or a disgruntled third party to argue that steps contributing to a lasting change of control were taken in advance of any necessary merger clearance.
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