Important competition law aspects of M&A transactions

Competition law and foreign direct investment (FDI) regulations present a number of challenges to the M&A process, with relevance on several different aspects both before, during and after closing of a transaction process. Early identification of potential competition law and FDI filing requirements can reduce the risks of lengthy and costly filing processes. Additionally, failure to comply with applicable regulations can result in serious penalties and consequences for the transaction parties, including prohibition of the transaction, administrative and criminal sanctions and reputational damage. 

Being conscious of when competition law applies and when to seek guidance from a competition law expert can thus be highly important when assessing risks, structuring transaction processes, and negotiating transaction agreements. 

Advokatfirmaet Schjødt's EU & Competition department offers complete services on all aspects of competition law and FDI in Scandinavia and the EU. This document describes some of the relevant issues that need to be considered. The purpose is not to provide to an exhaustive description, but to facilitate a deeper understanding of the risks involved, and when it is important to seek advice from a competition law expert.

While legal advisers and companies regularly involved in M&A transactions are often aware of the existence of merger control and FDI regimes, they are generally not familiar with the details. In order to properly assess and manage the risks involved, it is advisable to include competition law experts at an early stage in the transaction process.

• Merger and FDI filing requirements affect the transaction timetable and carry the risk that the transaction may not be completed in the agreed form. It is thus important both for the buyer and the seller to identify and understand the risks involved when negotiating and drafting the transaction documents, hereunder applicable conditions precedent, break-fees, and long-stop dates.
• Taking steps to complete the transaction before the merger has been cleared by the relevant competition authorities ("gun-jumping") is illegal and may result in significant fines. This includes the use of certain restrictive covenants in the transaction documents, such as extensive veto rights for the buyer with respect to the day-to-day operations of the target company in the period between signing and closing. 
• When the target company is an (actual or potential) competitor to the buyer, safeguards must be taken to avoid unlawful exchange of competitively sensitive information. The parties' right to disclose information may also be restricted by applicable FDI regulations. Clean-Team arrangements should be used to ensure that disclosure is made on a strict need-to-know basis.
• Unless justified in the particular case, the use of extensive non-compete and other post-closing obligations may violate applicable competition laws and be subject to significant fines. 

3.1 Merger control

Subject to certain thresholds being met, mergers and acquisitions are subject to mandatory filing requirements, meaning that the transaction may not be closed until it has been filed with, and cleared by, the relevant competition authority.

A merger clearance process may take substantial time and resources. If a Phase II investigation is required, the merger review process may take close to five months to conclude.^[1] A proactive approach and a well-written merger filing document may save the parties to the transaction both time and costs. Additionally, defining and applying the correct strategy is key to an efficient process. If the acquirer and the target have overlapping activities, it is advisable to conduct an early feasibility assessment to identify risks (and potential remedies), facilitate an efficient merger filing process and properly address the risks in the transaction documents.

Where multiple jurisdictions are involved, the assessment can be particularly complex, and it may be advisable to consult local counsel. When structuring the transaction process, it is therefore important to include an early assessment of potential merger filing requirements (potentially already on the bid-stage of the process if time is of the essence).

Lawyers advising on transactions, and the companies involved in the transaction, should note that the lack of a condition precedent correctly tuned to the merger filing process, as well as clauses governing the parties' rights and obligations with respect to a negative decision from the applicable competition agency, may lead to claims for payment against the buyer.^[2] The same would apply to unconditional break-fees and similar regulations. Lastly, an erroneously calculated long-stop date could lead to the termination of the agreement if a lengthy Phase II investigation is necessary, but not provided for in the calculation of the long-stop date.

An incorrect assessment of the applicable merger notification requirements may lead to significant fines for breach of merger filing requirements and stand-still obligations. It may also result in a transaction being prohibited and void after the transaction has been closed. Failure to comply with merger filing regulations can take two forms:

• Failure to notify a transaction pursuant to applicable merger regulations; and
• Pre-emptive steps towards implementation of the transaction (so-called gun-jumping).

The EU Court has concluded in several cases that the two above mentioned violations of the EU Merger Regulation amounts to two separate infringements and will be sanctioned as such.^[3]

In most jurisdictions in the EU, mandatory filing is triggered by a change of control in the target company. It is important to note that this also includes situations where the transaction gives rise to negative control^[4], and de facto control.^[5] Certain jurisdictions may also have either call-in options or mandatory filing requirements for transactions involving minority interests. Mandatory merger filing is regularly based on turnover thresholds and apply regardless of whether the transaction affects competition.

Gun-jumping will generally be considered as a serious infringement of applicable merger regulations. The term gun-jumping covers situations where the acquirer contributes, in whole or in part, in fact or in law, to the change of control of the target company. This does not only refer to the actual closing of the transaction or other direct efforts to integrate the target business into the business of the buyer. It may also include certain types of restrictive covenants entered into by the parties between signing and closing, especially those which seek to actively directing the business of the target company before regulatory approval has been obtained. As examples:

• Directing the strategy of the target company, inter alia by directing or amending the target company's pricing policies, sales strategies and geographic presence;
• Directing specific business relationships of the target company, including terminating and amending agreements;
• Restricting the ability of the target company to enter into new customer or supplier agreements;
• Extensive exchanges of competitively sensitive information (see also section 4 below); and
• Introducing own employees into the governing bodies of the target company or in positions within the target company.

If such restrictive covenants confer the possibility to exercise decisive influence over the target company and go beyond what is strictly necessary to preserve the value of the target company, they may amount to illegal gun-jumping.^[6]

Lastly, exchanges of competitively sensitive information may also be regarded as gun-jumping, in addition to potentially falling within the scope of the prohibition of anti-competitive agreements and concerted practices pursuant to TFEU Article 101 and similar national competition laws (see Section 4 below).

3.2 FDI Screening

European countries are becoming increasingly aware of the potential threat that foreign investments pose to national infrastructure and other important areas of society. As per August 2024, 23 EU/EEA countries including the Scandinavian countries^[7] have adopted FDI screening regimes.

The introduction of new and amended FDI regulations imposes additional requirements on the parties in the transaction process.^[8] Notification requirements generally apply to (direct and indirect) acquisitions of minority shareholdings of as little as 10 percent. Clearing may require substantial time and resources.^[9]

The FDI assessment should be conducted in parallel with the merger control assessment to ensure that the combined regulatory risk assessment is coherently included in the negotiation and the transaction documents. Similar considerations as mentioned above with respect to merger filings (see section 3.1) should be made also with respect to FDI filings.

Failure to comply with applicable FDI regulations may result in severe sanctions for the buyer, the seller, and the target company. Most importantly, transactions carried out without approval run the risk of being prohibited and void. In addition, the companies may be subject to administrative fines and/or criminal sanctions.

4.1 Information sharing under applicable competition laws

In considering whether to make an offer and entering into an agreement to acquire a business, the buyer has a legitimate need to obtain information about the target company. Understanding the target's business and its future prospects is key to reaching an agreement and determining the terms of the transaction. However, the exchange of competitively sensitive information may in some cases constitute a breach of competition law. If the acquirer and the target are (actual or potential^[10]) competitors, special safeguards need to be put in place.

An exchange of competitively sensitive information between a target company and the sellers on the one side, and the buyer on the other, could fall within the scope of the prohibition of anti-competitive agreements and concerted practices pursuant to TFEU Article 101 and similar national competition laws.^[11]

What constitutes competitively sensitive information cannot be assessed in the abstract and depends on the relevant market context. In general, information which would either reduce the strategic uncertainty or enable the buyer to align its commercial strategy to that of the target company, is regarded as competitively sensitive. This includes, in particular, information on future prices and factors important to the setting of prices, future volumes or capacities, future business or commercial strategies and future aspects of important product characteristics.

Competition law recognises the need to disclose certain sensitive information in an M&A process, but the information must be limited to what is strictly necessary to evaluate the deal. While it may be easier to motivate disclosure of sensitive information at later stages of the transaction process, it is important to note that there are no safe harbours. Safeguards should thus be implemented at all stages^[12] to ensure that the disclosure is not more extensive than what is strictly necessary. Clean team agreements should be considered, possibly with additional layers of confidentiality for particularly sensitive information (e.g. future prices).

In the period between signing and closing, the buyer and the target company must continue to act as competitors and refrain from exchanging competitively sensitive information. Even after signing, the buyer will in general have no legitimate need to receive confidential information about the target company.^[13]

After closing, the buyer and the target company will normally be part of the same undertaking for competition law purposes and be able to freely exchange information between them. However, if the transaction involves the sale of a minority share or the creation of a joint venture, safeguards must be implemented also after closing.

4.2 Restrictions on information sharing under applicable FDI regulations 

Forthcoming amendments to the Norwegian FDI regulations^[14] will introduce new rules restricting the possibility to exchange of information relating to companies and businesses subject to FDI screening, also in the M&A context. Similar restrictions may be found in agreements or regulations concerning national security interests, e.g. in the defence sector.

The Norwegian Ministry of Justice and Public Security will issue more detailed regulations on the information covered. The preparatory works states that information on technology and infrastructure which can be used by foreign governments for their own product development and information which combined may reflect vulnerabilities and values in a specific business or business sector may be covered. However, it may be possible to obtain consent to disclose information with appropriate safeguards, e.g. through clean team arrangements in which reporting outside clean team is limited to high-level information.

5. Non-compete and other post-Closing obligations

Non-compete provisions and other post-closing obligations^[15] may be important to protect the value of an investment, e.g. by ensuring that the seller does not emerge as a new entrant or poach the target's employees immediately after closing. However, such provisions may restrict competition and need to be carefully scrutinised to ensure that they are not more extensive than necessary.

They are lawful if and to the extent that they are directly related to, and necessary to the implementation of the transaction (so-called ancillary restraints). In order to be considered necessary, it must be established that, in the absence of the provision in question, the transaction could not have been implemented at all, or could only be carried out under considerably more uncertain conditions, at a substantially higher costs, over an appreciably longer period or with considerably greater difficulty.^[16] The assessment must take into account both the subject matter, the scope and the duration of the restriction, and must be based on the specifics of the transaction and the industry in question. However, some general guidelines have been provided, e.g.:^[17]

• Non-compete obligations may be justified for periods up to three years, depending on the scope of the transaction;
• Non-compete obligations must be relevant and thus limited both geographically and to the covered products and services;
• Non-competition clauses must relate to the sellers, and not to others;
• Non-competition clauses cannot restrict the purchase or holding of shares for purely financial purposes;
• Supply and purchase obligations providing for fixed quantities (with a variation clause) can be regarded as necessary, however, obligations to provide unlimited quantities, exclusivity or preferred-partner agreements are generally not considered necessary.

Given the wide variety of post-closing restrictions it is not possible to provide exhaustive guidance. It is generally advisable to include a competition law expert when considering such restrictions.

^{[1] Pursuant to the Norwegian Competition Act, Phase I lasts for 25 business days, while Phase II lasts for 45 business days (both with the possibility of extensions). Pursuant to the Danish Competition Act, Phase I lasts for up to 25 business days, and Phase II for up to 90 business days (both with the possibility of extensions). Pursuant to the Swedish Competition Act, Phase I lasts for up to 25 business days, and Phase II lasts for up to 3 months (both with the possibility of extensions).}

^{[2] Claims can include cost coverage, interest on delayed payment, and potentially also claims for breach of agreement.}

^{[3] See as an example the EU Court case C-10/18 P – Mowi ASA v the Commission.}

^{[4] I.e. where the acquirer does not purchase a majority of the shares but obtains veto over strategic decisions in the target company, e.g. the adoption of a business plan}

^{[5] See to this effect the EU Court case C-10/18 P – Mowi ASA v the Commission, where Mowi's purchase of 48,5 percent of the shares in Morpol was held to be a notifiable transaction.} 

^{[6] The mere possibility of exercising so-called decisive influence over the target company prior to obtaining merger clearance will suffice, and hence do not require that decisive influence has actually been exercised, see e.g. ECJ case C-746/21 P, para. 137.}

^{[7] Amendments to the Norwegian Security Act are expected to be effective during 2024. Sweden and Denmark introduced or updated their applicable regulations on foreign investments in 2023.} 

^{[8] As per September 2024, a total of 862 notifications on FDI has been submitted in Sweden (from 1 December 2023).}

^{[9] Pursuant to the amended Norwegian Security Act, the process can take up to 60 business days (with the possibility of extension). The amendments to the Norwegian Security Act are not yet in force, but there is an expectation that they will come into force during Q3 2024. Pursuant to the Danish and Swedish acts regulating review of foreign direct investments, the review period may be up to 6 months and 170 days, respectively.} 

^{[10] Actual competitors are companies active on the same product and geographic market, while potential competitors are companies who are likely to, within a short period of time, undertake the necessary investments to enter the relevant market of the other company.}

^{[11] For Norway; the Norwegian Competition Act section 10. For Sweden the Swedish Competition Act chapter 2, section 1. For Denmark; the Danish Competition Act section 6.} 

^{[12] Including information prepared and disclosed as part of information memorandums and similar during the bid stage.}

^{[13] extensive exchanges of information between signing and approval from the applicable competition authority may in itself may be evidence that the transaction has been implemented prior to obtaining merger clearance (i.e. amount to gun-jumping), see ECJ case C-746/21 P, para. 109.}

^{[14] The Norwegian Security Act, new Section 10-4. Expected to come into force during 2024.}

^{[15] E.g non-solicitation-, exclusivity- and confidentiality clauses.}

^{[16] Commission Notice on restrictions directly related and necessary to concentrations, para. 13.}

^{[17] Commission Notice on restrictions directly related and necessary to concentrations.}