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In Print Reprints of articles written by or about Jones Day lawyers. Competition Law Constraints On Pre-Merger Co-Ordination (“Gun-Jumping”) Greg Olsen, Partner, Jones, Day, Reavis & Pogue The US Department of Justice’s Antitrust Division any activity which is outside of the “ordinary course” (“DoJ”) recently announced the settlement of proceed- during the period from signing until closing. ings against Computer Associates International Inc Competition Law Concerns (“Computer Associates”) relating to pre-closing co-or- dination activities (“gun jumping”) in its merger with In considering pre-closing integration activities and Platinum Technology International Inc. (“Platinum”) 1 . agreeing restrictions on the way in which the business The case, and the sizeable civil penalty of US $638,000 is to be operated, the parties should be aware that com- paid by Computer Associates, serves as a timely reminder petition laws are an important factor. There are two of competition law constraints on pre-closing activities complementary competition law concerns: between merger participants. The issue is of significance • If the merger requires notification and clearance in Europe since US and European competition laws are under an applicable competition law, there is often essentially at one in prohibiting gun-jumping but the an accompanying requirement that the parties take matter has to date been given less prominence outside no steps to implement the merger pending clear- of the US. ance. Most notably, this is a requirement under the EC Merger Regulation (“ECMR”) and the US Business Interests Hart-Scott-Rodino Antitrust Improvements Act of The business imperatives that motivate pre-closing co- 1976 (“HSR”). Generally, these restrictions are im- ordination include the following: posed in order to maintain the status quo so as to • Merger participants are understandably keen to facilitate any remedial action which may prove implement integration steps as quickly as possible. necessary. Indeed, it is apparent that a significant reason for • Secondly, European, US and other competition laws merger failure is badly managed or executed inte- require that the parties must continue to operate gration 2 . This is particularly the case where a delay their businesses as independent competitors pend- in the closing of a deal causes customer and work ing closing. This follows from the general prohibi- force defections. tion on the co-ordination of behaviour between • It is also commonplace for an acquiring entity to competitors and the exchange of sensitive informa- seek to restrict the commercial activities of the tar- tion which could facilitate such co-ordination. In get company pre-closing. This is often effected by contrast to the prohibition on taking steps to imple- the imposition of an obligation upon the vendor to ment the merger during the relevant waiting peri- ensure that the target business does not engage in ods imposed under the ECMR and HSR, this 1Department of Justice press release dated 23 April 2002 entitled “ Justice Department settles lawsuit against Computer Associ- ates for illegal pre-merger co-ordination ”. 2 Exposing the truth behind merger myths , Financial Times, 25 March 2002 This article first appeared in the June, 2002, issue of PLC and is reproduced with the permission of Practical Law . For further information, visit www.practicallaw.com

“gun-jumping” prohibition continues until the clos- must comply with their antitrust obligations and con- ing actually occurs. The competition laws continue tinue to operate independently pending consummation to prohibit co-ordination of competitive behaviour of their transaction. The Department views gun-jump- until the parties concerned have, in fact, become a ing as a serious matter and will proceed against parties single company. Since there is always a risk that the who fail to respect the law with regard to pre-consum- merger will not proceed to closing it is better for mation conduct.” merger participants not to have engaged in such Should gun-jumping be an enforcement priority activity at the outset. in Europe? Enforcement Whilst the rationale underlying the enforcement of laws Within the EU, it is not evident that the European Com- against gun-jumping is clear, there are issues to be con- mission or the national competition authorities have sidered before regulators in Europe embark on a vigorously challenged gun-jumping activities other than generalised enforcement programme namely: to attack overt implementation in instances involving a • As already stated, ineffective integration is often failure to notify a transaction 3 . The enforcement climate cited as a reason for merger failure. Given that the may however be changing in light of the DoJ’s recent period between signing and closing may become settlement of proceedings against Computer Associates. protracted, often due to extended regulatory clear- The case concerned Computer Associates $3.5 bil- ance timetables, unduly vigorous enforcement of lion cash tender offer for Platinum. Prior to the merger gun-jumping principles may ultimately impact announcement, both companies competed in a num- upon transaction success rates across the board. ber of computer software markets. The Merger Agree- • Given that only a very small proportion of mergers ment imposed pre-closing conduct of business give rise to serious competition concern and most restrictions on Platinum including the following: agreed deals proceed to completion, it may seem • Platinum needed Computer Associates’ approval unwarranted to place significant emphasis on the before entering into contracts with customers that policing of gun-jumping in all cases. provided for discounts of more than 20% from list • Some assistance could be drawn from the European price or that amended standard contract terms; and Commission’s approach to ancillary restraints. In es- • Computer Associates installed one of its employees sence, the European Commission is prepared to at Platinum’s headquarters to review and approve sanction restrictions which may be objectionable on customer contracts and undertake other activities a standalone basis if such restrictions are directly related to Platinum’s management. related and necessary to the implementation of the The DoJ claimed that these activities constituted il- merger. Building upon this principle, it could be legal gun-jumping in contravention of the HSR and Sec- argued that certain pre-merger co-ordination activ- tion 1 of the Sherman Act. Under the settlement, ity is necessary in order to achieve the deal and Computer Associates agreed to pay US$638,000 in civil should, therefore, be tolerated within reasonable penalties and undertook not to agree on prices, approve limits. or reject proposed customer contracts or exchange pro- • The DoJ has expressly recognised the tensions be- spective bid information with any future merger partners. tween gun jumping prohibitions and legitimate due Charles James, Assistant Attorney General in charge diligence/transition planning activities, and Division of the DoJ’s Antitrust Division stated “Merging parties representatives have announced that the Division 3 Samsung (Case No. IV/M.920); AP Moller (Case No. IV/M.969)

intends to formally provide additional guidance to • Distribution of any disclosed information should the business community on the issue in the com- be kept to a limited number of persons and ideally ing months. At a minimum, it would therefore be should not include those directly involved in mar- prudent for European regulators to await the issu- keting and selling activities. ance of these guidelines and benefit from the DoJ’s • Joint customer or supplier contact should be lim- studied examination of the issue before embarking ited to explaining the transaction and future opera- on a parallel enforcement programme. tions but should not include discussions on price and future terms of supply (even if initiated at the Practical Guidance request of the customer or supplier). The parties It must be recognised that competition law enforcement must not seek to allocate customers or geographic initiatives arising in the US often directly inform and territories. influence subsequent European regulatory actions. With • Joint tenders should be avoided. this in mind, it would be prudent for the parties to a • Employees should be not be transferred or seconded merger or acquisition in Europe to observe the follow- between the businesses. However, it would be per- ing practical steps: missible for an employee to apply for a position • Transition planning (as opposed to implementation) properly advertised in the ordinary course. is permissible pre-closing. However, it should always • Neither party should attempt to manage the other’s be done with appropriate legal guidance. business affairs. However, the parties can be required • The parties may share information to the extent to operate in the ordinary course prior to closing necessary to complete the transaction, to prepare subject to certain limitations. In particular, any ac- for operation post-closing and to engage in essen- tion which would restrict pricing, marketing, out- tial transition planning. However, the parties should put, customer relationships and product avoid sharing highly sensitive information concern- development is likely to be problematic and should ing pricing, costs, product innovation, business be carefully reviewed. strategies or customer specific data.