In recent years there have been markedly increased levels of scrutiny from regulators over the sharing of sensitive information between competitors in the process of mergers, takeovers, and other corporate transactions. As a result, M&A deal teams are increasingly turning to clean-team arrangements to ensure that a competing business purchaser can review competitively sensitive data during its due diligence, while addressing ‘gun-jumping’ rules and competition law concerns.
One recent example of the risk resulting from sharing sensitive data between competitors is the record fines imposed by the European Commission (EC) in April 2018 on Dutch cable and telecommunications group, Altice, for receiving commercially sensitive information, among other things, from the target businesses involved in the respective transactions prior to obtaining competition clearance (see box ‘EC takes tougher stance… ’).
The EU Competition Commissioner signalled increased vigilance in May last year and the US Federal Trade Commission Bureau of Competition recently issued a warning and guidance about information sharing during
pre-merger negotiations and due diligence.
How does a clean team work?
A clean team is a select group of named individuals (which may include third-party advisers) who review and analyse relevant confidential data. Clean team members should not be in a position to use such information in their day-to-day commercial activities within a competitor — in particular, in competitive planning, pricing, or strategy. Members operate under strict protocols (agreed on a deal-by-deal basis) to ensure the sensitive information is not shared beyond those individuals. In the event of a deal collapsing, clean team members will usually be prohibited from being involved in competitive pricing or being deployed for a given period to a part of the business that competes with the target.
What type of information is handled by a clean team?
Only the most sensitive information needs to be subject to a clean team, such as future pricing and strategic and planning information. Companies should consider whether the information would normally be disclosed to a rival, or whether the information would allow competitors to align their commercial strategies, especially on pricing and future strategy and planning.
Timing of disclosures to be carefully managed
Companies often only release data to a clean team during the latter stages of a transaction, such as an exclusivity period. Releasing information at an earlier stage can raise questions about the interested party’s intentions and the effectiveness of the information protection protocols. Sensitive information of the sort released to a clean team can be used to verify assumptions, rather than form part of early-stage talks.
In the current environment, sensitivity over the sharing of sensitive commercial information is greater. The focus has been even stronger post-Altice. Authorities have become more aggressive and the risk of active scrutiny and sanctions has increased. As such, if a transaction contains a strategic element, clean teams can provide an answer.
EC takes tougher stance on ‘gun-jumping’ violations prior to closing
The EC has imposed a record fine of €124.5m on Dutch cable and telecommunications group, Altice, for a series of actions taken prior to the closing of its acquisition of PT Portugal in 2015. This is the largest-ever fine imposed by the EC for pre-emptive conduct – or ‘gun-jumping’ as it is known in EU merger control parlance – and so the decision marks a more aggressive stance towards gun-jumping that deal teams should be aware of.
The EC’s decision relates to Altice’s strategic acquisition of PT Portugal that was notified to the EC under the EU Merger Regulation (EUMR) in February 2015 and ultimately cleared in April 2015 following the divestment of Altice’s overlapping Portuguese businesses, due to substantive concerns raised by the EC regarding a number of telecommunications markets in Portugal.
Two years after the EC’s clearance decision, in May 2017, the EC issued formal allegations against Altice claiming that it had breached the obligation under the EUMR not to implement the transaction prior to clearance. This led to the EC’s decision on 24 April 2018, in which it imposed a fine of €124.5m on Altice for breach of the standstill obligation.
While the full text of the decision has yet to be published, the EC’s press release announcing its decision provides an indication of the infringing conduct, namely:
Certain interim operating covenants in the purchase agreement that gave Altice the right to exercise control over PT Portugal prior to closing (eg, by granting Altice veto rights over decisions concerning PT Portugal’s ordinary business).
In certain cases, Altice actually exercised control over PT Portugal (eg, by giving instructions on how to carry out a marketing campaign and by seeking and receiving detailed commercially sensitive information about PT Portugal).The decision is a stark reminder that purchasers should generally refrain from assuming any role in the target company’s day-to-day operations prior to closing. While integration planning remains legitimate, no integration steps should be implemented prior to closing. The decision also highlights the risks surrounding the exchange of commercially sensitive information prior to closing. In the context of strategic acquisitions, this should only take place within the context of clean-team arrangements.
Key pointers to avoid gun-jumping issues from the outset of transactions
|DO keep selling, promoting, and developing your business, competing vigorously with the other party.
|DON’T consolidate business activities and operations before closing.
|DO check with your legal team if you have questions as to the legality of certain activities (such as joint communication or information exchange).
|DON’T exchange competitively sensitive information between the buyer and the seller during the interim period, particularly if both parties compete with one another.
|DO check with your legal team if you feel that any of the restrictions are unworkable (alternative methods are often available).
|DON’T sit in on the other party’s corporate meetings, or veto or approve the other party’s strategic business decisions.
|DO take steps to protect value of investment (which are typically not a concern), eg:‘Ordinary course of business’ clauses which allow the seller to continue running business without interference from the buyer.
‘Material adverse change’ clauses which delineate the buyer’s ability to intervene; these clauses are only a concern if the threshold is so low that the buyer’s consent amounts to running the target business
|DON’T co-ordinate sales, marketing, pricing, and the running of the interested parties’ operations.
|DO plan for integrating the interested parties’ businesses post-closing (which is generally permissible).
|DON’T implement integration plans until after closing.
|DO negotiate insurance coverage for the target post-closing (which is typically not a concern since the information required to take out a policy is not competitively sensitive).
|DON’T hire staff for the target business post-closing if the hiring process affects the standalone competitiveness or viability of the target business during the pre-closing period (eg, because it triggers other employees to leave).