In Print Reprints of articles written by or about Jones Day lawyers. - - PDF document

In Print

Reprints of articles written by or about Jones Day lawyers.

Competition Law Constraints On Pre-Merger Co-Ordination (“Gun-Jumping”)

Greg Olsen, Partner, Jones, Day, Reavis & Pogue The US Department of Justice’s Antitrust Division (“DoJ”) recently announced the settlement of proceed- ings against Computer Associates International Inc (“Computer Associates”) relating to pre-closing co-or- dination activities (“gun jumping”) in its merger with Platinum Technology International Inc. (“Platinum”)1. The case, and the sizeable civil penalty of US $638,000 paid by Computer Associates, serves as a timely reminder

• f competition law constraints on pre-closing activities

between merger participants. The issue is of significance in Europe since US and European competition laws are essentially at one in prohibiting gun-jumping but the matter has to date been given less prominence outside

• f the US.

Business Interests

The business imperatives that motivate pre-closing co-

• rdination include the following:
• Merger participants are understandably keen to

implement integration steps as quickly as possible. Indeed, it is apparent that a significant reason for merger failure is badly managed or executed inte-

• gration2. This is particularly the case where a delay

in the closing of a deal causes customer and work force defections.

• It is also commonplace for an acquiring entity to

seek to restrict the commercial activities of the tar- get company pre-closing. This is often effected by the imposition of an obligation upon the vendor to ensure that the target business does not engage in any activity which is outside of the “ordinary course” during the period from signing until closing.

Competition Law Concerns

In considering pre-closing integration activities and agreeing restrictions on the way in which the business is to be operated, the parties should be aware that com- petition laws are an important factor. There are two complementary competition law concerns:

• If the merger requires notification and clearance

under an applicable competition law, there is often an accompanying requirement that the parties take no steps to implement the merger pending clear-

• ance. Most notably, this is a requirement under the

EC Merger Regulation (“ECMR”) and the US Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”). Generally, these restrictions are im- posed in order to maintain the status quo so as to facilitate any remedial action which may prove necessary.

• Secondly, European, US and other competition laws

require that the parties must continue to operate their businesses as independent competitors pend- ing closing. This follows from the general prohibi- tion on the co-ordination of behaviour between competitors and the exchange of sensitive informa- tion which could facilitate such co-ordination. In contrast to the prohibition on taking steps to imple- ment the merger during the relevant waiting peri-

• ds imposed under the ECMR and HSR, this

“gun-jumping” prohibition continues until the clos- ing actually occurs. The competition laws continue to prohibit co-ordination of competitive behaviour until the parties concerned have, in fact, become a single company. Since there is always a risk that the merger will not proceed to closing it is better for merger participants not to have engaged in such activity at the outset.

Enforcement

Within the EU, it is not evident that the European Com- mission or the national competition authorities have vigorously challenged gun-jumping activities other than to attack overt implementation in instances involving a failure to notify a transaction3. The enforcement climate may however be changing in light of the DoJ’s recent settlement of proceedings against Computer Associates. The case concerned Computer Associates $3.5 bil- lion cash tender offer for Platinum. Prior to the merger announcement, both companies competed in a num- ber of computer software markets. The Merger Agree- ment imposed pre-closing conduct of business restrictions on Platinum including the following:

• Platinum needed Computer Associates’ approval

before entering into contracts with customers that provided for discounts of more than 20% from list price or that amended standard contract terms; and

• Computer Associates installed one of its employees

at Platinum’s headquarters to review and approve customer contracts and undertake other activities related to Platinum’s management. The DoJ claimed that these activities constituted il- legal gun-jumping in contravention of the HSR and Sec- tion 1 of the Sherman Act. Under the settlement, Computer Associates agreed to pay US$638,000 in civil penalties and undertook not to agree on prices, approve

• r reject proposed customer contracts or exchange pro-

spective bid information with any future merger partners. Charles James, Assistant Attorney General in charge

• f the DoJ’s Antitrust Division stated “Merging parties

must comply with their antitrust obligations and con- tinue to operate independently pending consummation

• f their transaction. The Department views gun-jump-

ing as a serious matter and will proceed against parties who fail to respect the law with regard to pre-consum- mation conduct.”

Should gun-jumping be an enforcement priority in Europe?

Whilst the rationale underlying the enforcement of laws against gun-jumping is clear, there are issues to be con- sidered before regulators in Europe embark on a generalised enforcement programme namely:

• As already stated, ineffective integration is often

cited as a reason for merger failure. Given that the period between signing and closing may become protracted, often due to extended regulatory clear- ance timetables, unduly vigorous enforcement of gun-jumping principles may ultimately impact upon transaction success rates across the board.

• Given that only a very small proportion of mergers

give rise to serious competition concern and most agreed deals proceed to completion, it may seem unwarranted to place significant emphasis on the policing of gun-jumping in all cases.

• Some assistance could be drawn from the European

Commission’s approach to ancillary restraints. In es- sence, the European Commission is prepared to sanction restrictions which may be objectionable on a standalone basis if such restrictions are directly related and necessary to the implementation of the

• merger. Building upon this principle, it could be

argued that certain pre-merger co-ordination activ- ity is necessary in order to achieve the deal and should, therefore, be tolerated within reasonable limits.

• The DoJ has expressly recognised the tensions be-

tween gun jumping prohibitions and legitimate due diligence/transition planning activities, and Division representatives have announced that the Division

intends to formally provide additional guidance to the business community on the issue in the com- ing months. At a minimum, it would therefore be prudent for European regulators to await the issu- ance of these guidelines and benefit from the DoJ’s studied examination of the issue before embarking

• n a parallel enforcement programme.

Practical Guidance

It must be recognised that competition law enforcement initiatives arising in the US often directly inform and influence subsequent European regulatory actions. With this in mind, it would be prudent for the parties to a merger or acquisition in Europe to observe the follow- ing practical steps:

• Transition planning (as opposed to implementation)

is permissible pre-closing. However, it should always be done with appropriate legal guidance.

• The parties may share information to the extent

necessary to complete the transaction, to prepare for operation post-closing and to engage in essen- tial transition planning. However, the parties should avoid sharing highly sensitive information concern- ing pricing, costs, product innovation, business strategies or customer specific data.

• Distribution of any disclosed information should

be kept to a limited number of persons and ideally should not include those directly involved in mar- keting and selling activities.

• Joint customer or supplier contact should be lim-

ited to explaining the transaction and future opera- tions but should not include discussions on price and future terms of supply (even if initiated at the request of the customer or supplier). The parties must not seek to allocate customers or geographic territories.

• Joint tenders should be avoided.
• Employees should be not be transferred or seconded

between the businesses. However, it would be per- missible for an employee to apply for a position properly advertised in the ordinary course.

• Neither party should attempt to manage the other’s

business affairs. However, the parties can be required to operate in the ordinary course prior to closing subject to certain limitations. In particular, any ac- tion which would restrict pricing, marketing, out- put, customer relationships and product development is likely to be problematic and should be carefully reviewed.