On 27 June 2019, the European Commission ("Commission") fined Canon €28 million for the partial implementation of its acquisition of Toshiba Medical Systems ("TMSC") before notification and merger control approval. This was in breach of the EU Merger Regulation's ("EUMR") standstill obligation - the requirement to not implement the merger until notified to and cleared by the Commission.
| what you need to know - key takeaways |
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- Parties to a transaction should be cautious and seek legal advice when structuring a transactions which include interim steps, such as transactions which include: multiple interdependent steps; rights attached to options that give control on obtaining merger clearance; or where effectively all the commercial risk is assumed prior to clearance.
- The case emphasises that a Commission clearance decision does not mean that parties are clear of all gun jumping risks, as the Commission gun jumping investigation commenced after clearance was granted.
- This is the latest in a string of recent EUMR gun jumping cases, all slightly different and all helping to build understanding of gun-jumping dos and don'ts.
- Gun-jumping can result in a fine up to 10% of aggregate worldwide turnover.
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The Transaction
In August 2016, Canon notified the Commission of its potential acquisition of TMSC from Toshiba. The transaction was cleared by the Commission in September 2016. Canon used a "warehouse" structure for its acquisition of TMSC, whereby:
- stage one involved Toshiba transferring 95% of TMSC's shares to a holding corporation, with 5% subsequently purchased by Canon, who had the option to acquire the interim buyer's 95% share; and
- stage two involved Canon exercising its share option to acquire the remaining 95% of the shares, thereby completing the acquisition.
The Commission's view
The Commission viewed stages one and two as part of one single notifiable transaction. Stage one was essential and necessary for Canon to gain control of TMSC. Therefore, stage one constituted a "partial implementation" of a transaction.
In the case of EY, the EU Court of Justice ("ECJ") ruled that there must be a direct functional link between the action and the implementation of the transaction – it cannot be merely ancillary or preparatory. It appears that the Commission considered that the EY test was satisfied in this case, on the basis that stage one had to occur for stage two to occur, which was the completion of the transaction.
Despite the option structure not allowing Canon to exercise actual control prior to stage two, it appears that the payment of the full purchase price meant that Canon effectively assumed all the commercial risk relating to TMSC.
In coming to the €28 million fine, the Commission considered that Canon:
- had breached both the notification requirement and standstill obligation; and
- was aware of its obligations under the EUMR and that its breaches were therefore negligent.
The fact that the transaction was cleared unconditionally was also taken into account in assessing the gravity of the infringements.
Canon has announced it is appealing the decision to the EU General Court.
EUMR gun-jumping enforcement
This is the latest in a string of recent EUMR gun jumping cases, all slightly different and all helping to provide guidance on gun-jumping dos and don'ts. For example:
- in May 2018 the ECJ ruled that EY did not breach the EUMR's standstill obligation regarding its takeover of KPMG's Danish unit as a result of the termination of a cooperation agreement between KPMG DK and KPMG's international network;
- a €125 million fine imposed on a Dutch telecom company, Altice in May 2018;
- in October 2017, the EU General Court rejected an appeal by Marine Harvest against its fine for gun-jumping; and
- in July 2014, the ECJ upheld a €20 million fine on Electrabel for failing to notify to the Commission its acquisition of a minority shareholding and completing the deal without prior clearance from the Commission.
With thanks to Kishen Vora of Ashurst for his contribution.
