Five tips on how to avoid ‘injury’ when navigating lofty merger control/regulatory mountain peaks

However, unlike the relatively flat and safe Finnish landscape, ‘Mount Merger Control’, ‘Mount FDI Screening’ and ‘Mount EU FSR’ (the now feared trinity of merger control / regulatory ‘mountain ranges’), are lofty, deceptive and fraught with danger for the unwary and the unguided.

When planning to navigate these ‘mountain ranges’, a common mistake people make is thinking that input from an expert ‘guide’ isn’t needed because, from where they’re standing at least, the ‘turnover route’ they’re planning to take means that these ‘lofty regulatory peaks’ can easily be avoided. Only to find out later (before they fall, if they’re lucky) that the route to the top was always going to involve having to successfully navigate one or more of these peaks – they just didn’t see it from where they were standing!

In this article, we’ll highlight 5 key tips for navigating these ‘mountain ranges’.

1. Before you start your journey, make sure that you’re on the right route

It’s essential, before you even start your journey, that you make sure that you’re on the right route to start with. Make a miscalculation at this point, and you risk having to turn back later, or make a detour, adding to the time it takes you to get to the top.

If the transaction (whatever the nature of the transaction might be) involves a ‘change of control’ then you need to consider whether your route will take you over any of these ‘lofty peaks’. But, what does a ‘change of control’ mean? Whether there is a ‘change of control’ depends on if one of more of the parties involved have the possibility of exercising ‘decisive influence’. Whether this is the case is not always clearcut, can be deceptive, and you will need to be careful. This is where you will need input from your expert guide. An acquisition of a minority shareholding, the grating of share options, the terms of financial arrangements, the ability to block strategic decisions, the right to use an asset on a long term basis, and having a ‘strong common interest’ between shareholders (while maybe not readily apparent)  are all examples of what can, in certain circumstance, give rise to an ability to exercise ‘decisive influence’ - possibly triggering a filing requirement.

2. Don’t trip up and fall on the deceptive ‘turnover route’

Relying solely on the ‘turnover route’ to try and avoid having to navigate these difficult peaks can seem like an attractive option (i.e. the turnover of the buyer is X; the turnover of the target is Y, so the relevant turnover tests ‘clearly’ aren’t met).  This is risky, and you need to know what you are doing.

Calculating the turnover route can be deceptive and is not as simple or as straight forward as it might first seem. Again, make a miscalculation here and you may find yourself in severe difficulties later on.

Before you can use the turnover route, you first have to identify the correct undertakings involved for the purpose of the relevant rules.  This can vary depending on the nature of the transaction involved, the transaction structure, the applicable rules and other factors.  If you do not identify the correct undertakings involved for the purposes of the relevant rules, your turnover calculation will be flawed and you will start from the wrong place, making your journey very risky.

Furthermore, even if the transaction falls below the requisite turnover levels, it is still possible that the transaction raises merger control / regulatory concerns. Turnover tests are not necessarily definitive, and many regulators (including the CCPC) have the ability to ‘call-in’ (compel a notification) if the transaction does not satisfy the relevant turnover tests (including where the transaction has already completed).  In these circumstances, you’ll find yourself in the unenviable position of believing that you have safely navigated the ‘mountains’ and have come back down – only to be told that you have to start  again !  This also risks increased time, increased costs and deal uncertainty (e.g. the original purchase price / valuation may be open to question if conditions are imposed post-completion (including divestments etc.)).  You have to know what you’re doing if considering the ‘turnover route’ to avoid making a filing – so be very careful not to trip up here.

3. Actions taken by others can impact you, even if you’re not part of their ‘group’

In some circumstances, a change of control (or a change in the nature of control) can happen as a result of a transaction involving other parties – meaning that even if you are not involved in the transaction, you can nonetheless end up acquiring control (or joint control) as a result of the actions of others.  For example, if a shareholding base shifts to a mixture of a large number of small shareholdings and a single large shareholder – the single large shareholder could end up acquiring control as a result of transaction(s) involving other shareholders, triggering a filing requirement.  Be careful of this.

4. Trying to avoid the ‘peaks’ by climbing in stages generally doesn’t work

If you try to avoid having to navigate one or more of these ‘peaks’ by climbing in stages, that, most likely, won’t work.   
Transactions between the same parties carried out in two or more stages (and that are interrelated or interdependent) will likely be caught and treated as a single transaction.  Under the EU Merger Regulation, two or more transactions taking place between the same parties within a two-year period are treated as one and the same transaction (arising on the date of the last transaction) (the “2 Year EUMCR Rule”).  However, this 2 Year EUMCR Rule will not act to exclude interrelated or interdependent transactions carried out in stages that extend beyond 2 years. Such transactions are likely to be considered to be a single transaction, with the filing obligation occurring at the first transaction stage.  Again, be careful with this.

5. Don’t risk taking the wrong route – use an expert (merger control / regulatory) guide

Dealing with merger control, FDI screening and/or EU FSR obligations can be complex, and can be dangerously deceptive if you don’t know what to look for. If you get it wrong, there are significant risks ranging from fines to deal execution risks (including, in some cases, the risk of being compelled to divest, or unwind a transaction).

From a distance they may seem like inconvenient hills but the closer you get, and for those of us that navigate them on a regular basis, the more you come to appreciate the risks and complexities involved; and the specialist expertise needed to be able to safely navigate through them!