[co-author: Miglena Vucheva]
On 25 July 2018, the European Commission (“the Commission”) published its decision on the Altice/PT Portugal gun jumping case. The Commission concluded that various contractual clauses allowed Altice N.V. (“Altice”) to exercise decisive influence over the business of PT Portugal SGPS S.A. (“PT Portugal”) before Commission approval of the deal. The decision underlines the importance of a cautious approach to integration before merger approval has been obtained.
Facts
Altice and PT Portugal were telecommunications companies based in the Netherlands and Portugal, respectively. At the end of 2014, Altice agreed to acquire PT Portugal, its competitor. The deal was notified to the Commission in February 2015 and it was subsequently approved with remedies in April 2015. However, in February 2015, a Portuguese newspaper reported visits by Altice executives to PT Portugal. This prompted the Commission to request information and subsequently start an investigation into the relationship between Altice and PT Portugal. In 2017, the Commission formally alleged that Altice had implemented the transaction before Commission approval in violation of the EU Merger Regulation (“EUMR”). The Commission fined Altice €125 million in April 2018 for gun jumping. It found that the transaction agreement allowed Altice to exercise decisive influence over PT Portugal and that Altice’s actions in practice constituted exercise of that influence.
Altice has lodged an appeal in the General Court in Luxembourg against the Commission’s decision, case number T-425/18.
Importance of the Altice/PT Portugal decision
EUMR Articles 4(1) and 7(1) require the purchaser formally to notify the Commission of a transaction for approval before it is implemented. It prohibits the purchaser from implementing a deal before Commission approval. Guidance to date has been limited, barring recent case law on the subject (see MoFo’s recent client alert).
The Altice/PT Portugal decision is important because it provides guidance on the types of conduct and contractual clauses that, even in the absence of voting control, may be regarded as gun jumping if they go beyond what is necessary to protect the target’s value.
The infringement was more serious because Altice and PT Portugal were competitors. Before getting clearance, Altice received competitively sensitive information about PT Portugal and was essentially able to control its competitor’s actions on the market.
The Commission reviewed the documents in the data room to establish the average value of PT Portugal’s commercial contracts and contacted the seller for information about the interpretation of clauses in the transaction agreement and how the monetary limits were negotiated. The Commission used this information to support and, in some instances, prove its allegations against Altice.
Guidance provided by the Commission’s decision
Transaction agreement rights
The Commission found that Altice had the ability to interfere in PT Portugal’s (i) appointment of senior management; (ii) pricing policy and commercial terms and conditions with customers; and (iii) a broad range of contracts (including entering, terminating, and modifying rights). These rights went beyond what was required to protect the value of PT Portugal pending merger approval and completion.
The Commission highlighted concerns in its decision about the following rights that Altice had or exercised between signing and merger approval:
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A right to veto the appointment, dismissal, and changes to employment terms of any officer or director.
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A right to veto any changes to the target’s pricing terms.
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A right to veto changes to contracts with the vast majority of customers.
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Influence over contracts were not likely materially to impact the ordinary course of business (e.g., through low contract value thresholds).
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Veto rights over the monetary thresholds of contracts that include ordinary course of business contracts.
The following guidance for clauses in transaction documentation can be derived from the decision.
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If a contract falls in the ordinary course of business this is a good, but not decisive, indication that it is unlikely to have a material impact on the target’s value.
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Consultation rights for the purchaser are generally not problematic as they do not require the purchaser’s prior consent for the target’s actions.
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Actions in the ordinary course of business or the commercial policy of the target should not require the purchaser’s review or consent. That the consent is not to be unreasonably withheld does not turn the consent into a consultation right.
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A purchaser can have decisive influence over a target even before it becomes a shareholder.
Exercise of decisive control in practice
The Commission found that Altice exercised decisive influence over PT Portugal by (i) influencing several of its day-to-day business decisions, (ii) seeking to influence its business decisions, and (iii) exercising operational control and acting as its controlling shareholder before Commission approval.
Altice had been involved in PT Portugal’s pricing policies, contract negotiations, and marketing campaigns, through giving instructions and confidential information exchanges. The value of these campaigns and contracts in relation to the amount that Altice paid for PT Portugal showed that they could not be considered material to preserving PT Portugal’s value.
Conclusion
Altice/PT Portugal confirms that if the purchaser’s interim rights in the transaction agreement go beyond what is necessary to preserve the value of what it is buying, exercise of these rights may amount to gun jumping.
This case emphasises the importance of a purchaser taking legal advice on what rights it can request from seller and target to protect the value of its investment prior to closing and its exercise of the rights it has been granted in practice. This case is also a warning by the Commission that it is policing its rules on gun jumping with vigour and that an investigation can begin from something as simple as a newspaper article noting that the buyer’s executives have visited the target.
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