Warehousing structures post-Canon/Toshiba
Warehousing structures are high risk in EU and China following the Cannon/Toshiba decision, are still not permitted in the US. However, reverse warehousing or true options are still possible if structured properly.
Warehousing structures or “parking arrangements” are structures where the target is ‘parked’ with an interim buyer with a view to it being on-sold to the ultimate acquirer after merger approvals have been obtained.
Warehousing structures have been used in the past by:
- PE and financial sponsor buyers who trigger short-form filings, but are looking to achieve simultaneous (or near simultaneous) signing and completion (especially when short form review timetables were longer especially in China);
- trade buyers with significant antitrust issues looking to meaningfully compete in a competitive sale process against bidders without competition concerns; and
- > sellers looking to a speedy receipt of sale proceeds by avoiding lengthy merger review processes (especially in trade buyer deals with complex competition issues).
Warehousing structures have long been viewed as incompatible with US rules. Unfortunately, any lingering hopes that these could be used to avoid EU merger control rules were dashed with the 27 June 2019 EC decision against Canon (at least for the time being - the decision is subject to appeal).
In its decision, the EC fined Canon €28 million for breaching the standstill and prior notification requirements in its acquisition of Toshiba’s TMSC business. Canon and Toshiba also settled gun-jumping charges against them in the US for €2.5 million each, while they were fined smaller amounts in China and were also issued a warning in Japan.
Canon and Toshiba structured the transaction in two steps, pursuant to which (i) Toshiba would transfer the ownership of the TMSC business to a special purpose vehicle (“SPV”) set up by outside lawyers of Canon and Toshiba, while Canon paid the entire purchase price to Toshiba in exchange for options corresponding to all of the voting shares in TMSC held by the SPV; and (ii) Canon exercised the option to acquire the shares after the receipt of all requisite competition approvals.
Both the US and the Chinese authorities considered the structure as an avoidance structure that breached the standstill obligation, while the EU considered this as partial implementation which essentially amounts to gun jumping. Our blog post on Canon/Toshiba can be read here.
While traditional warehousing structures are no longer a real possibility under EU rules, there may still be scope, for some type of two-step structures that could remain within the strict limits of Canon/Toshiba. These include:
- “Reverse” warehouse structures, where the ultimate purchaser agrees to buy the target from the outset and begins a merger review but, upon hitting a stipulated deadline, transfers ownership of the target to a third party to divest; and
- Two-step structures which use true options to separate the two steps i.e. at step one a buyer purchases a minority/non-controlling stake with an option to acquire a majority/controlling stake at a later date. For this to work:
a. there must be no legal certainty or inter-conditionality in relation to the actual exercise of the option – in other words there must be genuine uncertainty as to whether the buyer will go on to acquire a controlling stake, and
b. no payment at step 1 of the full purchase price for the controlling stake (although a purchase price commensurate with purchase of a minority stake is, of course, allowed).
In China, although there is no formal guidance on this, there is likely to be some scepticism in relation to structures. A careful, fact specific risk analysis is required.
