In its Canon judgment, the General Court confirmed the Commission’s restrictive approach to warehousing structures and upheld a EUR 28 million gun-jumping fine. In this blog post we explain why the EC’s fine was upheld by the Court and what the judgment means for the future of two-step transactions.

Background

The transaction under scrutiny consisted of two steps:

Step 1: Before obtaining the EC’s clearance, Canon acquired 5% of TMSC’s shares plus call options on the remaining 95% (paying EUR 5.28 billion to Toshiba). The remaining 95% was transferred to an SPV, set up by Canon and Toshiba, for only EUR 800. The shareholders of this SPV had agreed in advance to sell their shares at a fixed price when Canon exercised its call options (following the required merger clearances). 

Step 2: Following the EC’s clearance decision, Canon exercised the call option and became the sole owner of TMSC. For more details on the transaction structure, please see our previous post.

In the EC’s view, Canon had partially implemented the TMSC transaction and infringed the standstill obligation and the (separate) obligation to notify the EC, by going forward with Step 1 prior to receiving clearance. The EC therefore imposed two fines on Canon, totalling EUR 28 million.

Judgment and takeaways

The GC dismissed Canon’s appeal in its entirety. 

Here are the key takeaways from the Court’s judgment:

1. Warehousing is still risky. The judgment is an endorsement of the EC’s approach to ‘generally’ consider acquisitions by an interim warehouser as part of an overarching single transaction (see para. 35 Consolidated Jurisdictional Notice). The only remaining option appears to be warehousing by a bank with a mandate to sell the target to a third-party purchaser if clearance for the transaction is not obtained.  For this exception to apply, only property (and not control) can be transferred and neither the temporary nor the final acquirer should be able to exercise determinative influence during the interim period. While in Canon’s case the interim buyer’s control was indeed only temporary, the objective of the two-step structure was for Canon to obtain the ‘greatest certainty’ possible that it would eventually acquire control over the target. According to the Court, in particular, the fact that Canon ‘retained exclusive competence to determine the identity of the future purchaser of TMSC’ goes beyond a standard share purchase agreement with a merger control condition precedent. As a result, Canon was determined to have ‘the possibility of exercising a certain degree of influence over TMSC’ during the interim period.
2. Option structures are still possible. Two-step structures, involving the purchase of a minority stake with an option to acquire a majority at a later point in time, still remain possible.  However, a number of conditions must be met. First, there must be sufficient uncertainty that the option will be exercised. Secondly, the full value of the majority should not already be paid when the option rights are bought. Thirdly, a reasonable notice period should be observed between the exercise of the option and the transfer of the shares (see the EC’s 2017 decision in Volvo/First Rent a Car). In Canon’s case, the full price for the target was paid in advance. Canon also acquired the right to become the target’s owner or sell the target to a purchaser of its choice. The GC noted in this respect that, if the transaction was not cleared, Canon ‘would have been able to choose to whom to sell its share options and thus had the possibility, for example, to decide not to sell them to a major competitor’. The Court, referring to Cementbouw v Commission, also stated that the fact that Canon bore the entire financial and economic risk of the transaction is a relevant criterion for concluding that the interim arrangement was part of the same single concentration. In other words, in a genuine option structure, parties should delay payment of at least part of the consideration until after clearance has been obtained.
3. Illegal implementation vs preparatory steps. The legal criterion that underpins the EC’s decision is whether the merging parties carried out operations ‘which contribute to a lasting change of control over the target undertaking’. And while it is change of control that gives rise to a potentially notifiable concentration, the Court made it clear that the implementation of a concentration may occur via steps that do not, on their own, give control to the acquirer over the target. In practice, it may not be easy to distinguish illegal operations that contribute to a change of control from admissible operations that are ancillary or preparatory to the implementation of a transaction. The Court recalls, with reference to Ernst & Young, that ancillary or preparatory operations should not have a ‘direct functional link’ with the implementation of the transaction. This line might not always be easy to draw precisely, but in Canon’s case, it was clear that Step 1 went far beyond an ancillary/preparatory step.

What’s next?

It is expected that Canon will appeal the judgment. Meanwhile, another important case to look out for, concerning the standstill obligation, is the appeal by Altice of a 2021 GC judgment that upheld the EC’s fine of EUR 124.5 million imposed on Altice for gun jumping.