05 Oct, 2015

Serbian Antitrust Agency Pursues Potential “Gun Jumping” Case

On 4 September 2015, the Competition Commission, Serbian competition watchdog, closed an investigation against Agriser, a subsidiary of Ferrero Trading Lux S.A. and a member of Ferrero Group, owner of brands with global recognition including Nuttela, Kinder, Ferrero Rocher, etc.  This case may, as well, indicate an increasing interest of the Serbian antitrust authority in tackling concentrations in the form of asset deals subject to the privatization procedures.  In April this year Agriser purchased entire assets of Aleksa Šantić, a Serbian company active in the production of primary agriculture produces, within the framework of a public bid procedure governed by Privatization Agency of the Republic of Serbia.  Assets included arable land with accompanying immovable objects owned by the Serbian company.  Allegedly, acquisition of direct control over Aleksa Šantić by Agriser was not notified to the Competition Commission, which triggered an ex officio procedure for the appraisal of a breach of mandatory notification rules and legality of the concentration.

Namely, procedural gun jumping, under applicable merger control rules, occurs when notifiable concentration is effectively implemented without observing mandatory pre-merger notification requirements.  Another form of gun jumping is substantial gun jumping, a concept that captures coordination of competitive conducts between the concerned parties during preparation of the M&A deals.  Unlike procedural gun jumping, substantial gun jumping occurs irrespective of whether the transaction is notifiable under applicable merger control law.  As a result, instead of procedural merger regulations, rules applicable to cartels govern this type of behavior.  Nevertheless, companies involved in preparation of M&A transactions are also exposed to this type of gun jumping, since M&A operation itself assumes exchange of information between competitors that might be competition sensitive.  Under the circumstances of the case, transaction is notifiable if it meets the turnover thresholds defined under Article 61(1) of the Serbian Competition Act (SCA).

While the Commission has pursued premature implementation of concentrations thus far, this is the first case of a gun jumping that involves an acquisition of assets of a target undertaking.  In accordance with the Article 17 of the SCA, for the concentration to occur it is sufficient that an undertaking concerned acquires “direct or indirect control over other undertaking”.  For instance, acquisition of all or a part of the revenue-generating assets is deemed as an equivalent to an acquisition of direct or indirect control since it conveys to an acquiring undertaking a possibility of a decisive influence over target undertaking’s market conducts.

Procedural gun jumping may not always be obvious, or deliberate conduct, and applies to all forms of M&As.  As this case may indicate, an asset deal may be a form of a notifiable concentration in which gun jumping risks might be easily overlooked by the business community.  The case is especially relevant for multi-national companies investing in the Western Balkans region, where privatizations of state-owned companies in the form of asset deals are taking place on a day-to-day basis.

What are potential (financial) consequences if you implement a notifiable transaction prior to the clearance?

The notification of concentrations has an effect of a suspension of a concentration.  Notifiable concentration shall not be implemented neither before its notification (Article 63(1)) nor until it has been declared compatible with competition law by the Commission (Article 64(1) and (2)) – a standstill obligation.  Hence, where the transaction is notifiable, parties should observe the standstill obligation that prevents them from completing a concentration prior to the clearance.  Thus, gun jumping is considered a serious breach of competition rules, since it interferes with the antitrust authorities’ power to investigate compatibility of concentration with the Serbian market prior to its implementation.  Furthermore, it is a self-standing breach of the SCA.  Namely, the rule is applicable irrespective of whether the underlying transaction raises competitive concerns.  As a result, potential fines under the SCA are substantial and may reach up to 10% of total annual turnover of the undertakings involved (See Articles 68, para. 1(4) and Article 70, para. 2 of SCA).

Moreover, the antitrust authority may require the parties to unwind the transaction by ordering a measure of de-concentration (Article 67 of SCA).  Namely, “[i]f the Commission determines that a concentration has been implemented without prior approval […] it can pass a decision, imposing measures on parties to the concentration, necessary for re-establishment or preservation of competition on a relevant market (measures of de-concentration) ordering them to conduct divestiture of company, dispose of shares or share capital, cancel a contract or perform other actions in order to establish conditions existing before the implementation of concentration.”

Since the measure of de-concentration may be ordered after the transaction is completed, it is clear why procedural gun jumping is a serious risk to the long-term viability of a transaction.

Potentially, the breach may have a knock-on effect, as third parties may seek damages resulting from the violation of this legal requirement.

How to avoid and/or reduce gun jumping risks?

Recent case reinforces the need for an early involvement of antitrust counsel for a prudent construction of M&A transactions including asset deals.  Competition lawyer may identify potential gun jumping risks associated with the proposed transaction and develop an effective strategy for minimizing them.  Failure to do so may subject the parties to significant fines and divestiture risks.

What is important for the company is to avoid that notifiable transaction is effectively implemented:

  • Before the expiry of notification deadline
  • Prior to its clearance, once the transaction is notified

However, what premature implementation of the concentration means in practice is a wide concept subject to the legal interpretation, which requires careful analyses conducted by a competition lawyer.  Even a partial implementation of the transaction may amount to the gun jumping.  For example, in a joint venture Beterlsmann/Kirch/Premiere case, the European Commission considered the use and marketing of Kirch’s d-box by Premiere as “a partial execution of the intended merger of both companies […] and therefore violates the execution prohibition under European Merger Control.”

Therefore, before you “jump the gun” it is wiser to let your competition lawyer address legal competition “traps” for you, such as:

  • Identifying whether a pre-merger notification is required under the jurisdiction applicable to your transaction
  • Reviewing drafts of transaction documents or of a purchase agreement to ensure that they contain appropriate safeguards vis-à-vis standstill obligations
  • Make sure that any provisions relating to the control of target undertaking’s conduct are properly limited to the legitimate protection of value of transaction to avoid a claim that de facto control has been exercised prematurely, or that impermissible coordination of competitive activity has occurred
  • Advising on how to pursue an exchange of information with a target undertaking in order to avoid a substantial gun jumping
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