European Commission Toughens Stance on Early Implementation of Mergers and Acquisitions (‘Gun –Jumping’)

On 12 and 13 December, the European Commission carried out ‘dawn raids’ on two PVC manufacturers in the UK. The companies are suspected of implementing a notifiable merger without first obtaining the mandatory regulatory clearance from the Commission – so-called ‘gun jumping’ – in breach of Article 7(1) of the EC Merger Regulations. The Commission’s concerns appear to include the exchange of sensitive information between the companies. If the companies are found guilty of gun-jumping, the Commission has powers to impose fines of up to 10% of their total worldwide group turnover.

This represents a significant toughening up of the Commission’s stance in relation to the ‘hold-separate’ requirement set forth in Article 7(1). Although the Commission has on two previous occasions fined companies for negligently completing transactions without obtaining prior Commission clearance, enforcement has been rare, and the last case was in 1999. It is unclear whether this case involves a completed transaction or the concerns involve the parties’ behavior prior to completion. If the concerns do include the exchange of sensitive information prior to the completion of a transaction, it would be the first time that this issue (an established concern in the US) has been the target of Commission action. Parties may, as a result, have to exercise more caution in relation to their pre-merger contacts in Europe than has previously been the case.

Moreover, this appears to be the first time the Commission has used its dawn raid procedure under the EC Merger Regulations. The Commission has had similar powers in relation to cartels for more than 40 years, but obtained them in relation to mergers only in 2004. Under these powers, the Commission is entitled to enter business premises and vehicles, inspect any non-privileged records relating to the business and question staff. Companies that fail to cooperate with a raid may face daily fines of up to 1% of worldwide group turnover.

This new enforcement stance in Europe means that it is more important than ever for companies involved in reportable transactions to establish and enforce clear internal guidelines about how the parties to the transaction will interact pending regulatory clearance. There is substantial scope for exchanging some information under certain procedures for the purpose on integration planning. But this action by the Commission, like several recent enforcement actions in the U.S. under the Hart-Scott-Rodino Act, requires greater attention to such issues.