Gun-Jumping Risks in German Deals

What gun jumping means in German merger control

Gun jumping describes the implementation of a notifiable concentration before the competition authority has cleared it, as well as conduct between signing and closing that anticipates the effects of the deal. In Germany, the basis is the suspension obligation in § 41(1) GWB: the parties may not implement a concentration that has not been cleared by the Federal Cartel Office (Bundeskartellamt) before the review periods have expired, and they may not participate in its implementation. Legal transactions that breach this prohibition are invalid, subject to limited exceptions.

Gun jumping risks arise in three main situations. First, the parties fail to notify a deal that meets the German thresholds and close it. Second, the parties notify but close, or partly close, before clearance. Third, and most commonly in practice, the buyer gains influence over the target’s business between signing and closing through pre-closing covenants, integration planning or exchanges of sensitive information. Each of these situations can lead to fines and, in the worst case, to the unwinding of the deal.

The standstill obligation and its exceptions

The suspension obligation applies to every concentration that meets the thresholds of § 35 GWB, including the transaction value threshold, and that is not exclusively within the jurisdiction of the European Commission. It lasts until the Federal Cartel Office clears the deal or until the review periods expire without a prohibition: one month from receipt of the complete notification unless the authority opens phase two, and five months in phase two, subject to extensions (§ 40 GWB).

The statute contains several exceptions. Contracts on real estate transactions become effective once they are entered in the land register, and contracts on conversions, integrations, company formations and domination or profit transfer agreements become effective once registered, despite a breach. Other transactions can become valid if the concentration is notified after closing and the authority closes divestiture proceedings because the conditions for a prohibition were not met (§ 41(1) sentence 3 GWB). Public takeover bids and acquisitions through a stock exchange from several sellers are not prohibited if the concentration is notified without delay and the buyer does not exercise the voting rights, or exercises them only to preserve the value of its investment (§ 41(1a) GWB).

Exemptions from the suspension obligation

Under § 41(2) GWB, the Federal Cartel Office can grant an exemption from the suspension obligation on application if the parties show important reasons, in particular to prevent serious harm to one of the undertakings or to third parties. The exemption may be granted at any time, even before notification, and can be subject to conditions. In practice, exemptions are rare and are mainly relevant in rescue situations, such as the acquisition of a company in financial distress.

Pre-closing covenants: where gun jumping often happens

Share and asset purchase agreements usually contain covenants that require the seller to run the target in the ordinary course of business between signing and closing and that require the buyer’s consent for certain extraordinary measures. Such covenants are legitimate insofar as they protect the value of the target that the buyer has agreed to pay for. They become problematic if they give the buyer influence over the target’s ordinary commercial decisions, such as pricing, customer contracts, product launches, hiring or day-to-day investment.

The Court of Justice of the European Union clarified the EU standard in Ernst & Young (judgment of 31 May 2018, C-633/16): a concentration is implemented only by a transaction that, in whole or in part, in fact or in law, contributes to the change in control of the target. Preparatory steps that are not necessary for achieving the change of control do not fall within the standstill obligation, although they may still be assessed under the cartel prohibition. German practice follows a similar approach, while the Federal Cartel Office pays close attention to whether a buyer has in fact acquired influence before clearance.

Drafting compliant covenants

Good practice is to draft consent rights narrowly, with monetary thresholds that reflect the size of the target, and to list exceptions for ordinary business. Consent should not be required for individual customer offers or pricing decisions. Where consent is required, the process should run through a small group on the buyer side that does not include persons responsible for competing business, and decisions should be documented. If the buyer and the target are competitors, this risk overlaps with the risk of unlawful coordination under § 1 GWB and Article 101 TFEU.

Information exchange in due diligence and integration planning

Due diligence requires the seller to disclose information about the target, and integration planning requires the parties to prepare for the period after closing. Both are lawful in principle. However, where the parties compete or are in a vertical relationship, the exchange of competitively sensitive information, such as current and future prices, margins, customer-specific terms, capacity plans or strategy, can breach the cartel prohibition and, if the buyer uses the information to steer the target, can amount to gun jumping.

The usual safeguards are clean team arrangements, under which sensitive information is made available only to a limited group of advisers or employees who are not involved in day-to-day commercial decisions; aggregation or historical presentation of data; and written protocols. Integration planning should be limited to planning: the parties may prepare, but they may not implement joint pricing, allocate customers, coordinate bids or move employees before closing. For a general discussion of the limits on information sharing, see our article on information exchange between competitors.

Consequences of gun jumping: invalidity, fines and divestiture

The consequences in Germany are significant. Transactions that implement a notifiable concentration in breach of § 41(1) GWB are invalid, which can create uncertainty for the parties and for third parties. Implementing a concentration in breach of the suspension obligation, intentionally or negligently, is an administrative offence under § 81(2) no. 1 GWB. For undertakings, the fine can be up to 10 percent of total worldwide turnover in the business year preceding the authority’s decision (§ 81c(2) GWB). Individuals can also be fined.

If a notifiable concentration has been implemented without notification, the parties must notify it to the Federal Cartel Office without delay after the event (§ 39(6) GWB). The authority then examines the concentration in divestiture proceedings. If the conditions for a prohibition are met, the concentration must be dissolved unless the Federal Minister for Economic Affairs grants a ministerial authorisation (§ 41(3) GWB), and the authority can prohibit the exercise of voting rights or appoint a trustee to bring about the dissolution. Even where the deal raises no substantive concerns, a fine for the procedural breach remains possible. For the filing process itself, see our article on merger control filings with the Federal Cartel Office.

Managing gun jumping risk in practice

Most gun jumping risks can be controlled with careful preparation. Before signing, the parties should complete a multi-jurisdictional filing analysis, including the German turnover thresholds and the transaction value threshold, which is discussed in our article on the transaction value threshold. The transaction documents should make merger control clearance a condition precedent to closing, contain a realistic long-stop date and allocate responsibility for preparing filings and responding to authority requests.

Between signing and closing, the parties should apply the agreed protocol consistently: route consent requests through the agreed channel, keep sensitive information within the clean team, and prepare integration without implementing it. Communication with customers and suppliers should make clear that the companies remain independent until closing. Where a deal is caught by several merger control regimes, the timetable should take account of the longest review period, and the parties should avoid partial closings in some jurisdictions that could amount to implementation in others.

Illustration: a German industrial company signs the acquisition of a competitor. Shortly after signing, its sales director asks the target’s sales team to align quotes for a large tender “to avoid competing against ourselves”. Even though the deal is later cleared, this coordination before clearance can breach the suspension obligation and the cartel prohibition. A clear protocol and a briefing for the sales teams at signing would have prevented the problem.

Minority stakes, joint ventures and staggered acquisitions

German merger control covers not only acquisitions of control but also acquisitions of 25 percent or more of the shares or voting rights and the acquisition of competitively significant influence (§ 37(1) GWB). Deals involving minority investments, joint ventures or step-by-step acquisitions therefore need the same attention. A minority investor that obtains board seats, information rights or veto rights before clearance of a notifiable acquisition can breach the suspension obligation even though it does not acquire control. Where a buyer acquires a target in several steps, each step must be analysed separately, and options or convertible instruments should be structured so that they are not exercised before clearance.

In joint ventures, the parents should not begin joint operations, transfer customers or staff, or coordinate their activities through the joint venture before the concentration is cleared. Preparatory work such as drafting business plans and setting up the legal entity is generally possible, provided the entity does not start trading.

Internal investigations and remediation

If a possible breach is discovered, the parties should stop the conduct, preserve the relevant documents and assess whether a post-closing notification or a voluntary approach to the authority is required. Early legal advice is important, because the assessment of whether a breach occurred, and of how to address it with the authority, depends heavily on the facts.

How TRW & Co helps with gun jumping risks

We advise buyers and sellers on gun jumping risks throughout the transaction: filing analysis, drafting of conditions, covenants and clean team agreements, gun jumping protocols, briefings for deal and business teams, and the handling of suspected breaches. Our merger control and M&A teams work together so that the transaction documents and the merger control strategy fit together. To discuss a transaction, contact us. This article provides general information and is not legal advice.