Gun jumping

Gun jumping can lead to huge fines on both sides of the Atlantic; deal teams and counsel need to exercise extreme caution on both interim covenants as well as their actual application in the period between signing and closing.

The gun jumping rules prohibit merging parties from implementing the transaction before merger clearance. The US Clayton Act prohibits the acquisition of “beneficial ownership” of the target before the expiry of the relevant HSR waiting period for notifiable transactions. The EUMR imposes a duty to notify before clearance, which is complemented by a standstill obligation prohibiting the parties from partially or fully “implementing” a concentration prior to EUMR clearance.

The US has the longest history of enforcement, spanning over several decades. US gun jumping cases have involved fact patterns including the acquisition of actual control over operations/assets or the management of the target, the negotiation of contracts/settlements vis-à-vis third parties on behalf of the target, exchange of competitively sensitive information without any safeguards to far-reaching pre-closing covenants that restrict the target’s ordinary business conduct. The highest settlement for gun jumping in the US was US$11 million, paid by ValueAct in 2016.

However, in recent years, the EC and national competition authorities in the EU have stepped up their gun jumping enforcement significantly. On 24 April 2018, the EC imposed the largest-ever gun jumping fine on Altice of €124.5 million, following an €80 million fine on the same company by the French Competition Authority two years earlier. The EC Altice case is by far the EC’s most detailed guidance on gun jumping, which reflects a very strict approach:

• Simply including very broad pre-closing covenants or “gap controls” relating to strategic issues crossed the line in terms what was strictly necessary to preserve the value of the target in the period between signing and closing and therefore constitutes gun jumping. The SPA gave Altice very broadly defined prior consent rights over (i) the appointment and removal of all directors or officers of the Target; (ii) the Target’s pricing policies for certain products/services offered to customers; and (iii) conclusion/termination of virtually all contracts of the target, including contracts that the Target would need to conclude in the ordinary business course.

Altice in practice exercised decisive influence by actually interfering with the Target’s decisions in marketing campaigns, in negotiations with key suppliers, with potential third party purchasers over the sale of a JV of the Target, and by exchanging competitively sensitive information.

In practice, this means that gun jumping is a much broader concept than the actual exercise of control over the target. It also suggests that the EC is taking an even stricter approach, by only accepting gap controls that are indispensable for the preservation of the value of the target business, in contrast with the US which can accept broader gap controls that only cover conduct outside the ordinary business course. 

Deal teams and counsel will need to exercise extreme care not only with the actual drafting and negotiation of gap controls, but with their actual implementation throughout the interim period between signing and closing, to ensure that the lines are not crossed.