Merger control / M&A: Gun-Jumping by two-step acquisition (so-called “warehousing”)

Mergers that are subject to merger control may not be completed before the antitrust authorities have cleared the transaction. This also applies if the company acquisition is carried out in a two-stage warehousing procedure involving an interim buyer who acquires control over the target company before clearance by the antitrust authorities has been obtained, followed by a transfer of ownership to the final acquirer after clearance. The EU Commission (EC) views these two steps as a single transaction – and has recently imposed a fine of EUR 28 million on Canon for breach of the standstill obligation.

Background: the transaction

In 2016, Canon notified the EC of its planned acquisition of Toshiba Medical Systems Corporation (TMSC). The merger was cleared unconditionally by the EC. However, Canon chose a so called “warehousing” two-stage transaction structure for the acquisition of TMSC:

First and prior to the merger notification, an interim buyer acquired 95 % of TMSC's share capital for a purchase price equivalent to EUR 800, while Canon paid EUR 5.28 billion for the remaining 5 % and purchase options for the interim buyer's block of shares. Following the EC's approval of the acquisition, Canon then exercised its stock options and subsequently held 100 % of TMSC's shares.

The EC´s decision of June 27, 2019

The EC considered the interim acquisition to be a breach of the EU Merger Control Regulation and imposed a fine of EUR 28 million on Canon. EU merger control rules require that merging companies notify a planned transaction that meets certain jurisdictional thresholds for review by the EC and do not implement them until notified to and cleared by the EC (so-called " standstill obligation"). From the EC's point of view, both transaction steps formed a single notifiable merger. The first step had already contributed to Canon´s acquisition of control and was necessary for it. Canon therefore was obliged to notify the merger prior to the first step.

The EC has been critical of warehousing structures for some time and has assumed a single takeover process since its guidance issued in 2008. The main issues in the present case were that the intermediary was not an independent third party and that the immediate payment of the purchase price transferred the economic risk directly to Canon. It remains to be seen how the EC will evaluate warehousing structures where, for example, an independent financial institution acts as an intermediary and would also retain the target company in the event the cartel authorities do not clear the transaction.

Practical advice

Violations of the standstill obligation are a significant risk in M&A transactions which are subject to merger control. The EC may impose fines of up to 10% of aggregated annual turnover of companies that intentionally or negligently breach the notification and/or standstill obligation. When structuring the transaction, the parties involved should therefore exercise caution and take into account any antitrust barriers. This applies not only to the exchange of information during negotiations and in the course of due diligence, but also to the influence of the designated acquirer on the target company until clearance by the antitrust authorities.

While the EC clarified in its EY/KPMG decision, that the scope of the standstill obligation applies to partial implementations of concentrations where the respective measures are necessary to achieve a change of control, the standstill obligation in Germany, for example, is clearly understood more broadly. In 2017, the German Federal Court of Justice (BGH) ruled that preparatory measures that take place in connection with the intended merger and are suitable to anticipate at least in part the integration of the companies involved as intended by the merger also constitute gun-jumping. While an implementation act clearly exists in the case of a takeover of shares or the management, in the case of other measures it is more difficult to determine the boundary between an admissible preparatory act and unlawful gun-jumping. Therefore, in order to avoid the imposition of substantial fines, the standstill obligation must also be taken into account in the drafting of the closing conditions and in the preparation of the actual integration of the target company.