A few days ago, we heard again about the 28 million € fine that the European Commission (EC) had imposed on the Japanese company Canon, for carrying out the acquisition of Toshiba Medical Systems Corporation (TMSC), a subsidiary of Toshiba. This was made without having received prior authorisation from the CNMC (Comisión Nacional de los Mercados y de la Competencia). This type of case is commonly known as “Gun Jumping”.
What does Gun Jumping mean?
Gun Jumping, in the words of the CNMC itself, "basically consists of executing an economic concentration operation, which should have been notified for prior authorisation, before the responsible authority (either the CNMC in Spain or the European Commission in Brussels) has given its approval. This practice is a breach of the Law on the Defence of Competition (LDC), as companies are obliged to notify their purchase operations to the CNMC before executing them when they exceed certain thresholds".
Significant increase in Gun Jumping cases
Gun Jumping cases have been progressively climbing up since 2014. They reached their peak in 2021, when a total of 19 Gun Jumping cases were registered globally. This is a significant increase considering that only 2 cases were registered in 2014.
The details of the sanction against Canon for Gun Jumping
Before we start to learn about the ruling, it is important to know the facts. The acquisition transaction by Canon, started in March 2016, when the two companies reached an agreement whereby the transaction would be split into two stages:
Interim transaction
In the first stage, Toshiba was supposed to transfer 95% of the shares of its subsidiary to a special purpose vehicle that was created specifically for this transaction. At the same time, Canon would acquire 5% of TMSC's shares and a call option on the vehicle company's shares for a total amount of 5.28 billion euros. The Japanese company submitted an initial pre-notification in March, notified the transaction in August and received EC clearance in September.
Final transaction
The second phase of the transaction did not start until December of the same year. Canon waited until then to obtain clearance from all merger control authorities for the Toshiba subsidiary to be incorporated as a subsidiary of Canon.
However, in March 2016, an anonymous whistle-blower contacted the EC to inform them of these proceedings. It was in June 2019, three years later, that the European Commission took the decision to impose two fines on the Japanese company. One for failing to notify a concentration and the other for implementing a concentration before obtaining authorisation.
These two fines were appealed by Canon to the General Court of the European Union (CJEU). They argued that the EC's decision was meaningless as the intermediate steps of the acquisition had already been implemented.
The Court ruled this past 18 May in its case T-609/19, rejecting Canon's arguments on the basis of the case law already handed down in the Ernst & Young case. This case confirmed that the full acquisition of control of a company is not the only criterion by which mergers are assessed, but that it is also important to take into account whether the operation contributes to a lasting change of control of the company. Therefore, the latter criterion is the basis for the decision of the EUAT, i.e. that the first step was "necessary" to take full control of the company, so that Canon violated the European competition rules by carrying it out before notifying the transaction.
When a merger occurs
Furthermore, the Court added that, even if the transaction was divided into two distinct phases, it was still a single concentration. The first phase being a necessary and indispensable step in the implementation and contributing to the change of control of TSMC. In fact, in Council Regulation 139/2004, the EU already defined that:
"A concentration shall be deemed to arise where there is a change of control on a lasting basis as a result of:
A) the merger of two or more previously independent undertakings or parts of undertakings; or
(B) the acquisition, by one or more undertakings, through the acquisition of equity or assets, by contract or otherwise, of direct or indirect control of the whole or parts of one or more other undertakings".
Finally, if you want to know more about how to deal with a company acquisition process, either from the perspective of the buyer or the seller, do not hesitate to contact Carrillo Asesores. The experts of our Legal Department will be able to study the situation so that your company does not suffer the same fate as the case we bring you today.
For sure, a transaction of such dimensions must be advised beforehand by expert lawyers and economists. We are at your service for whatever assistance you may need.
