Parties to a merger agreement are prohibited under US and foreign antitrust laws from closing a deal that is subject to antitrust review – or taking certain preparatory steps to combine the two businesses – prior to receiving appropriate antitrust clearances. This “gun jumping” prohibition doesn’t bar the parties from agreeing to reasonable interim covenants requiring the seller to operate its business in the ordinary course.
But due to the unprecedented challenges that businesses are facing during the Covid-19 crisis, many buyers want to coordinate more closely with sellers during the period between signing and closing, and may want to draw interim operating covenants more tightly in order to compel that coordination. This O’Melveny memo says that they need to be mindful of the risk that those efforts may violate applicable antitrust prohibitions on “gun jumping.” Here’s an excerpt:
The COVID-19 pandemic has forced many companies to depart from their past “ordinary course” operating practices based on both the need to comply with new legal obligations and to adjust for significant changes in supply and demand across industries. As merging companies navigate deal complexities exacerbated by COVID-19, they should carefully consider the following:
– The US and EU competition authorities have been and remain active in enforcing gun-jumping laws, while in recent years other competition authorities across the world, and notably in China, have become increasingly active.
– Merging companies should pay particular attention to covenants requiring the target company to share information with and seek approval from the buyer in order to engage in conduct outside of the ordinary course and inconsistent with past practices. Given the unprecedented steps many companies are taking in light of the COVID-19 pandemic, it is expected that there will be significantly more coordination and disclosure between merging parties than is typical—coordination that could potentially raise gun-jumping concerns.
– Although antitrust agencies acknowledge the unprecedented nature of the COVID‑19 pandemic, they also have made clear that the standard of scrutiny of potentially anticompetitive transactions and practices—like gun-jumping—will not be relaxed notwithstanding the difficult circumstances caused by the pandemic.
The memo discusses how regulators in the U.S., the EU, China, Japan & South Korea approach gun jumping issues, and identifies common interim operating covenants that may potentially raise gun-jumping considerations in the current environment.
– John Jenkins