Member Article

Recent “gun jumping” rulings across Europe have included fines on investors and serve as reminders that exchange of information between two competitors during an M&A negotiation has to be treated with caution.

In fact, if the focus in an M&A deal is usually on merger control clearances, the path towards the completion of the operation has also to be monitored very closely, in the sense that the companies involved should remain independent competitors until the deal is effectively closed.

INCREASING CONCERN OVER INFORMATION EXCHANGE IN M&A DEALSDuringan M&A deal, each exchange of information shall be viewed as a critical time for avoiding prohibited and anticompetitive information exchanges. This pressure intensifies with the different steps of a deal: the information memorandum, the due diligence stage, the negotiation stage and the period following the signing of the transaction documents.

A particular risk is known as “gun jumping”, which refers to the unlawful coordination between the parties prior to the merger clearance – figuratively, a false start, a premature integration of the target without waiting for the green light of the authorities. There can be procedural or substantive gun jumping. In the case of procedural gun jumping, the involved parties fail to apply for merger clearance, or breach the stand still obligation under applicable merger control law. Substantive gun jumping is committed when the parties exchange commercially sensitive information or coordinate their competitive conduct prior to merger clearance.

The current trend shows that, following the European Commission and some competition authorities in the European Union, the Hungarian Competition Authority (GVH) started to take action against anticompetitive M&A processes. The GVH imposed a fine for the first time on 31 March 2016, in a merger clearance decision, and confirmed this dynamic in a second case dated 2 May 2016. In this case, the acquirer registered itself as the shareholder of the target company and exercised its voting rights prior to the merger clearance, i.e., it committed a procedural gun-jumping. As a consequence, even if the GVH imposed a symbolic fine (a few million Forints compared to the general rules consisting of up to10% of the previous year’s net turnover of the undertaking) it gave a first warning and a clear vision of its ambition. The GVH may launch a proceeding ex officio and order the separation of the merged companies or the relinquishing of joint control, yet other obligations to restore effective competition as well as the impositionof fines are possible.

APPRECIATION AND IDENTIFICATION OF COMMERCIALLY SENSITIVE INFORMATIONThe main challenge remains the ability of companies to measure the level of sensibilityof their commercial information in an M&A process depending on the context, the characteristics of the market, the parties’ position, and the public or private or strategic nature of the information.

It is incumbent upon the seller to ensure the efficiency of the due diligence process and to ensure that such information is released progressively. A pragmatic approach is to be preferred and attention needs to be paid to adapt the right pace in progressing with the deal, before the interest of the operation dims, while performing proportionate due diligence to master the risk of sharing commercially sensitive information that may affect the market.

DO’S AND DON’TS OF THE EXCHANGE OF INFORMATIONIn view of the risk of disclosing sensitive information to competitors, companies should opt for a step-by-step approach. Thus, the announcement of an imminent merger is possible, but not the transfer of the assets of the team. Likewise, the acquirer should keep a distance from the target’s strategic decisions rather than adopting a shared commercial strategy at an early stage.

The best practices consist of organizing double data rooms sorted in order of sensitivity– with a black box containing the most sensitive ones – or even a firewall. Furthermore, implementing a clean team, i.e., an independent due diligence team, is a safeway to prevent anti-competitive exchange of information.

Finally, it should be noted that, in Hungary, a preliminary authorization for exercising the purchaser’s controlling rights over the target company prior to the merger clearance decision is possible. Such authorization can only be applied for together with the merger clearance application, and the purchaser must present its specific legitimate reasons supporting the necessity of the specific controlling rights it wishes to enforce based on the transaction agreement (e.g., information rights, decision making, etc.). The GVH, considering the potential harms to competition, allows the exercise of such rights if it is necessary for the protection of the value of the purchaser’s investment.