28 Juni 2019

Canon fined €28 million for gun jumping by way of a two-step warehousing structure

The European Commission has fined Canon €28 million for the pre-clearance implementation of its acquisition of Toshiba Medical Systems (TMSC) through the use of a two-step “warehousing” deal structure.
 
With the EC’s decision, antitrust enforcers in Asia, Europe and the United States have now found consistently that the Canon/TMSC warehousing approach amounted to “gun jumping”. Authorities in China and Japan gave their verdicts in 2017 and 2016 respectively and the U.S. Department of Justice settled gun jumping charges against Canon and Toshiba for US$ 2.5 million each earlier this year.
 
A clear message has been sent that companies should exercise extreme caution in using these types of deal structures.
 
Background 
In August 2016, Canon notified its proposed acquisition of TMSC to the EC. The EC cleared the transaction unconditionally in September 2016. The transaction was carried out using a two-step structure:
 
  • Step 1: Toshiba transferred 95% of the shares in TMSC to MS Holding Corporation for €800. MS Holding was a special purpose company indirectly set up by Toshiba and Canon through a third-party law firm. Canon paid immediately the entire purchase price of €5.28 billion to Toshiba for a 5% stake in TMSC and an option to acquire the interim buyer's 95% stake.
  • Step 2: Canon exercised its share option, acquiring 100% of the shares in TMSC. 
In July 2017, the EC issued a statement of objections, alleging an infringement of the EU Merger Regulation for early implementation of the transaction (read our insight here).
 
The Decision 
The EC found that Steps 1 and 2 were part of one single concentration.
 
It is worth noting that the EC’s press release announcing the decision stated explicitly that Step 1 was necessary for Canon to gain control of TMSC. This analysis connects with the criteria for illegal “partial implementation” of a transaction set out in the European Court of Justice’s ruling in Ernst & Young (read our insight here).
 
In Ernst & Young, the Court ruled that the standstill obligation under the EU Merger Regulation can prevent merging parties from taking measures that amount to partial implementation of a reportable transaction. But only if the measures present a “direct functional link” to the implementation, i.e. measures necessary to achieve a change of control. These measures should be distinguished from purely ancillary or preparatory measures taken in the context of a transaction that are not necessary for the acquisition of control over the target.
 
The fine 
The level of the fine is in line with prior EC decisions for gun jumping violations. In 2009 the EC fined Electrabel €20 million and in 2014 Marine Harvest the same amount for acquiring de facto control prior to EC clearance. The fine is considerably lower than the €124.5 million fine that the EC imposed on Altice for actually exercising control prior to clearance by intervening in a rather systematic way in the management of the target (read our insight here).
 
Implications for two-step warehousing arrangements  
Since the adoption of the Commission’s 2008 Consolidated Jurisdictional Notice there has been a significant shift in the EC’s treatment of warehousing structures. In that Notice, the EC clearly took the position that two step warehousing structures where the target is “parked” on a temporary basis with a third-party interim buyer, can be viewed as partial implementation of a single concentration, even when the buyer does not acquire control over the target during that interim period.
 
The structure used in Canon/Toshiba was a combination of a warehousing structure and an option structure, which does not appear to be robust from a competition standpoint:
 
  • First, MS Holding was not an independent third party intermediary but rather a corporate vehicle created by Canon and Toshiba through a third party law firm. This was indeed the view of the U.S. authorities, which considered the structure used in Canon/Toshiba as a “device” used to evade the U.S. pre-merger notification law (see para five of the U.S. Complaint). 
  • Second, the option structure did not enable Canon to exercise actual control, but it did involve the payment of the full purchase price by Canon. Which meant that Canon effectively bore all of the commercial risk relating to TMSC as of the day of Canon’s acquisition of the option (see paras 27 onwards of the U.S. Complaint). This raises the question whether the option was a real “option” in the first place.
What can companies do going forward? 
The bigger question is whether more robust forms of warehousing structures such as “reverse” warehousing would be viewed as compliant with the gun jumping rules. Reverse warehousing is where the bank or third party is the default purchaser of the target in the event a long stop date is hit without clearance. Such structures may not raise the same level of risk depending on how they are structured. 
 
That said, the Canon decision is a clear reminder that caution should be exercised when using warehousing and certain option structures. We will have more clarity once the public version of the EC’s decision is published, hopefully in a few weeks.
 
Moreover, Canon has already announced that it will appeal the decision to the EU General Court.
 
Continued focus on procedural infringements in merger control 
The decision comes against the backdrop of a significant uptick in procedural infringement decisions by the EC over the past 4 years. Altice was fined €124.5 million for gun jumping, GE was fined €52 million and Facebook €110 million, both for providing misleading information in the context of merger review. There are a number of ongoing investigations by the EC, including one for breaching merger commitments and one for supplying misleading information.