On 22 September 2021 the General Court ruled that pre-closing veto rights in an SPA entailed illegal implementation of an acquisition. The case illustrates that the risk of gun-jumping needs to be considered carefully in the drafting of pre-closing covenants in SPAs and in handling pre-closing information access.
In 2018, the European Commission fined Altice EUR 125 million for implementing a concentration prior to its notification and clearance. Altice, a multinational cable and telecommunications company, was acquiring PT Portugal, a telecommunications and multimedia operator in Portugal. The transaction was notified to the Commission and declared compatible with the internal market subject to certain conditions.
Following the release of press reports revealing several visits to PT Portugal by Altice executives, the Commission launched an investigation that found Altice to have ‘jumped the gun’ and exercised decisive control over PT Portugal prior to clearance. Reasons included that the transaction agreement conferred rights upon Altice that were used to veto decisions and intervene in the daily operations of PT Portugal, such as marketing campaigns and pricing, and that the transmission of commercially sensitive information from PT Portugal to Altice allowed for a level of control that went beyond what is considered permissible between signing and closing.
The Commission concluded that this constituted illegal gun-jumping in breach of Articles 4(1) and 7(1) of Council Regulation (EC) No. 139/2004.
See this article for further background on the Commission decision and its significance.
Since the 2018 decision, Article 7(1) and the meaning of ‘implementation’ has been interpreted more narrowly in the case of E&Y P/S v Konkurrencerådet, where it was held that ‘a concentration is implemented only by a transaction which, in whole or in part, in fact or in law, contributes to the change in control of the target undertaking’.
Citing the above-mentioned case at the hearing of the appeal, Altice argued that the Commission had extended the notion of ‘implementation’ beyond its scope and meaning by relying on conduct that did not amount to implementation in order to prove the infringement, and that the threshold should be set higher than the ‘possibility of exercising decisive influence’. Additionally, it was argued that the merely ancillary nature of the pre-closing covenants made them incapable of amounting to early implementation and that the transmission of information from PT Portugal to Altice could not contribute to the finding of exercise of control.
Not surprisingly, the Commission maintained its previous position on the broad interpretation of the stand-still obligation during the hearing.
The opinion of the General Court
The General Court (‘the Court’) reduced the fine imposed on Altice but dismissed all other claims. Target value protection in the period between signing and closing is in principle accepted by the Commission, but the Court found that the limitations in the SPA were too broad and numerous, and the monetary thresholds too low, to be considered legitimate and therefore went beyond what was necessary for value preservation. Examples of these limitations included the following:
- An obligation to obtain the consent of Altice to enter, modify or terminate contracts that determined PT Portugal’s commercial policy.
- The power of Altice to block any appointments or dismissals of officers and directors, as well as any amendments to their contracts.
- The power of Altice to block decisions on pricing policies and standard offer prices to customers.
- The power of Altice to block any transactions or commitments exceeding EUR 5 million.
The Court found that these covenants provided Altice with the possibility of exercising decisive influence over PT Portugal and supplementary documentation submitted to the Court proved the carrying out of this in practice. Additionally, the Court found that the commercially sensitive information exchanged between the parties contributed to the finding of exercise of decisive influence and to the implementation of the concentration. The combination of these elements resulted in the Court confirming the infringements of Articles 4(1) and 7(1) Council Regulation (EC) No. 139/2004.
The takeaway from the General Court’s opinion is that these pre-closing veto rights, in this SPA, were illegal in this case. Those waiting for the Court to draw a clear line in the sand separating the necessary from the illegal of pre-closing covenants protecting the economic value of the target, will find little guidance in this judgment. It is very much case-specific and whether pre-closing covenants in an SPA go beyond what is necessary to protect the value of the target will need to be considered carefully on a case-by-case basis in M&A transactions going forward.
 Article 3(2) of Council Regulation (EC) No. 139/2004