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26 June 20244 minute read

Cautionary notes on gun-jumping in M&A negotiations

When business competitors negotiate a potential merger or acquisition (large or small), they need to bear in mind the Competition Act (Canada). These rules are often overlooked. Certainly it is critical to use a binding non-disclosure agreement that limits the purposes for which the information can be used. Before entering into negotiations, however, businesses should also consider introducing a shared set of guidelines for their conduct.

What is gun-jumping?

“Gun-jumping” refers to unlawful coordination between parties to a proposed merger transaction. It can result in investigations, fines or injunctive relief under the Competition Act. Similar rules typically apply under the competition and antitrust laws of other jurisdictions.

There are two types of gun-jumping. First, large transactions that exceed certain financial thresholds must be prenotified to the Competition Bureau. The parties cannot close until a waiting period elapses or is terminated. Early integration or restrictions on the conduct of the target may subject the parties to injunctive relief and/or administrative monetary penalties of up to $10,000 per day or a criminal fine of up to $50,000.

Second, regardless of the size of the deal, where parties to a proposed transaction are competitors (or potential competitors), they may violate the criminal conspiracy provision (section 45) of the Competition Act if, before the transaction closes, they agree to fix prices, allocate customers or markets, or control production or supply of the product(s) for which they are competitors. The offence lies in the agreement to coordinate conduct, irrespective of whether the agreement has any effect on the market. Potential penalties include fines in the discretion of the court (i.e. no preset maximum) and imprisonment of up to 14 years for individuals who participated in or directed the conduct.

In a prosecution for conspiracy, a court may infer that the parties have improperly coordinated their activities based on circumstantial evidence. The mere exchange of commercially sensitive information may lead to the inference the parties reached a prohibited agreement, especially if the competitors begin to align their marketing, pricing, bids or other commercial conduct.

Establish guidelines prior to negotiations

Undeniably, competitors have a legitimate need to exchange information with each other for the purpose of evaluating a potential transaction. In order to help protect against potential competition law concerns, parties should consider agreeing on some guidelines before information is exchanged or negotiations commence. The guidelines should be tailored to the situation with advice of counsel. While each circumstance will differ, a starting point for the development of guidelines could be as follows:

  • The participants will have entered into binding non-disclosure agreements prior to any exchange of confidential information.
  • The participants will ensure that the information received is
    • used only for the purpose of evaluating the potential transaction;
    • disclosed only to those individuals who need it for that purpose;
    • kept separate from ongoing business decisions, including by establishing appropriate security restrictions and electronic firewalls.
  • Information about the businesses should generally flow one-way only, from the potential seller to the potential buyer.
  • Sensitive information should not be disclosed at all if it is not necessary to the analysis of the potential transaction.
  • The participants will minimize the exchange of competitively sensitive information relevant to products (goods or services) for which they compete, particularly current or future information on:
    • pricing and bids;
    • cost of products sold, broken down by product or customer;
    • identification of customers and suppliers;
    • sales, profits and profit margins, particularly if broken down by product or customer; and
    • strategic, marketing and new product plans.
  • If sensitive information must be exchanged, where possible it should be presented in aggregate form or limited to historical information.
  • It may be appropriate to limit disclosure of sensitive information to a “clean team” comprised of non-operational personnel, such as third-party advisors and the members of an in-house M&A team. The parties would enter a “clean team agreement” governing those arrangements.

In addition to providing input on guidelines for information exchange, competition counsel can advise on relevant exceptions or defences that may be available to the criminal conspiracy provision.

For more information on gun jumping in negotiations and other issues that may arise with a potential merger or acquisition, please contact the authors or a member of our Corporate or Antitrust and Competition groups.

 

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