"More haste, less speed" – counting the cost of completing a merger before clearance

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Failing to comply with the EU Merger Regulation's (EUMR) mandatory "standstill" obligations can prove an expensive mistake – even if it is unintentional and you believe you have complied with the rules.

Last year, the European Commission (the Commission) fined Marine Harvest €20m for such a failure. The Commission's decision came shortly after the Court of Justice upheld (in case C-84/13P) a €20m fine which the Commission imposed in 2009, on Electrabel for a breach of the notification and standstill obligations. Marine Harvest is now appealing the fine. So what went wrong and are there lessons to be learned?

Notification and standstill

Unlike the UK merger rules, the EUMR contains provisions requiring mandatory prior notification. These rules are complemented by a "standstill" obligation that prevents companies from implementing the deal until it has been cleared by the Commission (or the deadline for decision has expired). There are exceptions to the "standstill rule", notably one which applies to public bids or "creeping" bids (where control is acquired through a series of transactions).

But beware – failure to comply with the notification or standstill obligations can lead to penalties. To date there have been only four cases of fines being imposed and the first two cases (back in the late 1990s) attracted relatively low fines. This has changed. The Commission has made it clear that it considers such breaches a serious infringement which "undermines the very essence of EU merger control".

What went wrong for Marine Harvest?

In December 2012, Marine Harvest, a salmon farmer, entered into a share purchase agreement to acquire 48.5 per cent of Morpol, which at the time was the largest salmon processor in the EEA. The parties entered into pre-notification discussions with the Commission around this time. Under Norwegian law the acquisition of the 48.5 per cent stake triggered an obligation to submit a mandatory public bid for the remaining shares. Marine Harvest made the public bid on 15 January 2013 and acquired 87.1 per cent of Morpol's shares.  

The  deal was formally notified on 9 August 2013. To meet competition concerns, Marine Harvest had to commit to divest most of Morpol's salmon farming operations in Scotland. The commitments were accepted and the deal was cleared on 30 September 2013.

But Marine Harvest's troubles had only just begun. The big issue in this case turned out to be less the impact on Scottish fish processing and more whether Marine Harvest had "jumped the gun" in completing the transaction in breach of the standstill provisions.

Marine Harvest proceeded, following legal advice, on the basis that the public bid exception to the standstill provision under Article 7(2) EUMR applied since the acquisition of the 48.5 per cent shareholding triggered a mandatory offer and that subsequent public offer, which together with the public offer effectively constituted a single acquisition of control that was legally and commercially inter-dependent. 

How the Commission sees it

The Commission takes a different view of events. It considers that the acquisition of 48.5 per cent gave Marine Harvest de facto control giving it decisive influence over the affairs of the business and therefore the obligation to notify and comply with the standstill obligation was immediately effective at that point (i.e. before the mandatory public offer). Nor does it consider the conditions for the exception would have been met. For one thing, the exception applies where shares are purchased from "various sellers" rather than from one seller. It also contends that Marine Harvest could have exercised its voting rights in the target company prior to clearance – although the Commission accepts it abstained from doing so.

Although it recognises that any infringement was unintentional and that the company had taken, and relied upon, external legal advice the Commission considers that Marine Harvest acted precipitously and therefore negligently. In essence the approach is that a large company with merger experience in the EU "should know better". The size of the fine, which represented one per cent of total company turnover, took into account the fact that the merger raised substantive competition issues. Also worth noting is that in looking at the duration of infringement, the Commission included the unusually long eight-month pre-notification period. In practice companies often find meeting data requirements can be very time-consuming. In this instance, the Commission considered the company was insufficiently forthcoming and could have acted more swiftly.

Appeal to the General Court

Marine Harvest is taking an appeal to the General Court (Case T-704/14) claiming that the decision imposing the fine was erroneous and that that Article 7(2) exception applies. Even if the Commission's interpretation is correct and the initial deal had given the company de facto control, it argues it had contractually agreed not to exercise its voting rights until obtained clearance. The company also challenges the severity of the fines as both disproportionate in the circumstances, and in violation of the principle of legal certainty given the novelty of the case. 

What lessons can be learnt?

There are a number of salutary points to be drawn from the case amongst which are:

  • the notification and standstill rules are highly technical – seek legal advice and seek it early;
  • the Commission's view is that the exception does not apply to purchasers from single shareholders;
  • if there is real doubt over the technical interpretation of exceptions under the EUMR consider whether to seek guidance from the Commission in advance; and
  • beware – the stakes for procedural mistakes are getting higher!