Procopé & Hornborg Competition blog: Caveat Emptor – let the buyer beware
For a private equity investor – or an industrial owner for that matter – the purpose of acquisition is to have control of the subsidiary. The complexity of competition law issues signifies big risks for buyers and investors. What do the increased risks entail for the buyer? Here are some key take-aways for buyer awareness:
1. Get the deal done in 2022?
Merger control procedure with the Competition and Consumer Authority can be long, expensive and time- consuming. Note that – most likely – the turnover thresholds that trigger a filing requirement in Finland will be lowered for 2023. So, if you are planning for an acquisition and are currently below the thresholds, it’s worth closing the deal in 2022.
2. No hands approach?
Voting rights, board nominations, involvement in the investment by strategic decision making and commercial policy might pave the way to extending the calculation of fines – 10 % of group turnover – and liability for damages up to the investing company. A no hands approach might be beneficial so that no corporate veil piercing occurs, but this is obviously in most cases not viable: all private equity investors and industrial owners use the control to add value. One tip for a hands on approach: buyer and owner personnel must be trained to fully comply, detect, and correct any competition law violations.
3. Pre-existing antitrust issue?
If you have a target, an effective and thorough due diligence phase taking a good look at any possible pre-existing contamination by competition law infringement is a top priority. Competition law needs to be a key part of the M&A due diligence process. The problem is that cartels, for example, are not easily discovered in a standard due diligence phase. Cartels are hidden and serious competition infringements and might contaminate the target indirectly, for example by way of an earlier asset transfer, membership to a trade association let alone a direct infringement by the target company.
4. Strong liability language in both investment and existing agreement
Given the big issue in the possibility of a hidden infringement, the provision of suitable warranty and indemnity protection in place to anticipate and allocate liability to counterparts is the key. Also, after the exit, the seller remains responsible for the infringement on grounds of guarantees and indemnities for period before exiting. Liabilities for fines and damages might haunt you after several years from exit.
5. Post-acquisition approach
The investor must ensure that the subsidiary or portfolio company maintains a serious approach to competition compliance. The portfolio company must carry out regular internal competition audits, implement effective competition policies properly and organize employee training. Note that cartels are not the only problem. Serious issues might arise in vertical relations, such as distribution. The law on vertical restrictions will be amended in spring 2022 and rules for horizontal interaction will undergo revision later in 2022 and 2023. Keeping up with new rules means regular revisits to contracts and compliance. A whistleblowing channel – why not? Consideration for a leniency application could be given if appropriate.
6. If you fail on the above points, the investment bites back
If you fail on your competition issue discovery process or in compliance matters, the investment might bite back in a bad way. If the portfolio company is exposed, it’s a hard sell to fund investors or if you plan to exit. In addition to fines and damages liability, the decrease in value is a true concern. Moreover, the following reputational risk is sometimes deemed the most important one, even greater than the financial risk. Such exposure is hugely damaging for any investor, customer, or key employee relationships in the future. In the end, buyer awareness for competition law issues is a huge part of enhancing your financial and reputational risk management.