In sports, gun jumping means a false start, specifically the moment when a competitor starts before the signal marking the beginning of the race. In M&A transactions, the term describes a situation in which the parties begin implementing the transaction before the conditions prescribed by merger control rules have been satisfied.

The risk most commonly arises between the signing of an agreement for the sale and purchase of shares or equity interests (signing) and the completion of the transaction (closing). During this period, the buyer has a legitimate interest in preserving the value of the target company and preparing for its future integration. However, until control has been lawfully transferred, the target company must continue to operate independently.

This raises an important question already at the stage of preparing the transaction documents how much influence may the buyer exercise over the target company before clearance by the Commission for the Protection of Competition?

What Is Gun Jumping?

Gun jumping is an umbrella term for conduct whereby, before closing, the parties begin implementing the transaction or coordinating their market conduct as if control over the target company had already been transferred to the buyer.

The Law on Protection of Competition does not use the term gun jumping, but it prescribes an obligation to notify a concentration where the statutory requirements are met and an obligation for the parties to suspend its implementation until the Commission issues its decision. This obligation is known as the standstill obligation.

In practice, the term gun jumping is used to describe two related but legally distinct types of risk, although the Law does not recognize this terminology. The first concerns the premature implementation of a concentration, that is, a breach of the notification and standstill obligations (procedural gun jumping). The second concerns unlawful coordination of the parties’ market conduct before closing (substantive gun jumping), which may constitute a breach of the rules on restrictive agreements.

In certain circumstances, the same conduct may raise both issues.

Breach of the Notification and Standstill Obligations (Procedural Gun Jumping)

Procedural gun jumping occurs when the parties fail to notify a concentration within the prescribed period or implement it before obtaining the required clearance. The most obvious example would be the transfer of shares, equity interests or management rights to the buyer before the Commission issues its decision.

However, a breach may also occur without a formal closing. If the agreed rights or the parties’ actual conduct already enable the buyer to exercise decisive influence over the target company, the concentration may be deemed to have been at least partially implemented.

Unlawful Coordination Before Closing (Substantive Gun Jumping)

Until closing, the buyer and the target company remain legally and commercially independent market participants. They must therefore refrain from coordinating their market conduct in advance or acting as if control had already been transferred to the buyer.

The risk is particularly pronounced where the buyer and the target company are actual or potential competitors. Agreements on prices and discounts, allocation of customers or markets, coordination of offers and similar conduct may constitute a restrictive agreement.

Certain conduct may simultaneously constitute both the premature implementation of a concentration and unlawful coordination. For example, if the buyer approves the target company’s prices or decides on its offers to customers before closing, it may thereby prematurely acquire influence over the target company’s business while also coordinating the market conduct of two still-independent market participants.

May the Agreement Be Signed Before Clearance by the Commission?

The standstill obligation does not prevent the parties from signing an agreement before obtaining clearance. This is precisely why M&A agreements are generally structured so that closing is conditional upon prior clearance by the Commission and any other competent authorities.

As a rule, the mere signing of an agreement does not constitute a transfer of control if the seller retains its ownership and management rights and the target company continues to make business decisions independently of the buyer. However, a formal gap between signing and closing is not sufficient in itself. The content of the agreement and the parties’ actual conduct must confirm that the buyer has not yet assumed control.

Of particular importance are the seller’s obligations applicable between signing and closing. Under these obligations, the seller undertakes to ensure that the target company continues to operate in the ordinary course of business and that certain extraordinary decisions are not taken without the buyer’s prior consent. The purpose of these obligations is to preserve the value and nature of the target company, not to enable the buyer to manage its day-to-day operations.

Depending on the circumstances of the transaction, contractual provisions designed to protect the value of the target company may include an obligation to obtain the buyer’s consent for changes to the share capital or constitutional documents, the payment of extraordinary dividends, the disposal of assets of particular importance or the incurrence of significant debt outside the ordinary course of business.

However, the buyer’s consent rights may be problematic if they are framed so broadly that they allow the buyer to influence the target company’s ordinary-course operations, particularly pricing and discounts, the conclusion of customary agreements with customers and suppliers, marketing, production and sales activities, or ordinary-course hiring. The situations in which such consent is required should therefore be limited to clearly defined, extraordinary and significant decisions, while the monetary thresholds above which the buyer’s consent is required should be tailored to the size and ordinary business practices of the target company.

Information Exchange During Due Diligence

Due diligence requires the buyer to obtain the information necessary to assess the value and risks of the target company. However, information exchange may become problematic if it enables the buyer to influence the target company’s business decisions before closing or to adjust its own market conduct on the basis of information to which it would not otherwise have access.

The risk is particularly pronounced where the buyer and the target company are actual or potential competitors and exchange current or forward-looking information on prices, discounts, margins, customers, planned offers, production capacities or business strategy. Such information exchange may develop into unlawful coordination of their market conduct, even if the transaction ultimately does not close. Access to this information should therefore be limited to what is genuinely necessary to assess the transaction.

Where the exchange of competitively sensitive information is nevertheless necessary to assess the transaction, the risk may be mitigated by using clean team arrangements, limiting the number of people with access to such information and, where possible, exchanging aggregated or historical data.

Integration Planning Before Closing

Before closing, the parties may plan the integration, that is, prepare activities that will be implemented only after control has been lawfully transferred. This may include establishing workstreams, analyzing information systems and internal procedures, preparing the future organizational structure and identifying the activities to be undertaken on the first day after closing.

Planning must nevertheless be distinguished from implementing the integration. Before closing, the parties should not combine their sales teams or jointly negotiate prices and other commercial terms with customers.

Decisions that will apply after the transfer of control may be prepared in advance, but they should not produce business effects before closing. Until then, the target company must make decisions concerning its ordinary-course operations independently.

What Does Enforcement Practice Show?

In the Altice/PT Portugal case, the European Commission found that Altice had begun exercising decisive influence over PT Portugal before the concentration was cleared. The Commission relied not only on provisions of the share purchase agreement that entitled Altice to approve certain business decisions of PT Portugal before closing, but also on specific instances in which Altice became involved in making those decisions. The exchange of sensitive business information between the parties was also taken into account. The Court of Justice of the European Union subsequently upheld the Commission’s key findings regarding the premature implementation of the concentration, while partially reducing one of the fines imposed.

This case shows that the assessment of gun jumping does not focus solely on the date of the formal transfer of ownership. The scope of the buyer’s contractual rights, its actual involvement in the target company’s business and the manner in which information is exchanged are also relevant.

A similar message emerges from Serbian enforcement practice. In the Prointer case, the Commission for the Protection of Competition found that the concentration had been implemented without prior clearance and imposed a measure for the protection of competition, even though it concluded that the concentration would not have produced adverse effects and would have been cleared had it been notified in due time.

Subsequent clearance, or the fact that the transaction does not restrict competition, therefore does not remedy an earlier breach of the standstill obligation.

What Are the Potential Consequences of Gun Jumping?

If a market participant implements a concentration in breach of the standstill obligation, the Commission may impose a measure for the protection of competition in an amount of up to 10% of the total annual revenue generated in the territory of the Republic of Serbia, calculated in accordance with the Law.

Failure to notify a concentration within the prescribed period may result in a procedural penalty ranging from EUR 500 to EUR 5,000 for each day of delay, provided that the total amount may not exceed 10% of the total annual revenue calculated in accordance with the Law.

If a concentration has been implemented without clearance, or if the conditions and obligations imposed by a conditional clearance decision have not been fulfilled, the Commission may impose deconcentration measures to restore or preserve competition, including measures designed to restore the situation that existed before the concentration was implemented.

In addition to financial consequences, proceedings may delay closing, increase transaction costs and make it more difficult to obtain regulatory approvals. Documents and electronic communications created during due diligence and integration planning may also become important evidence of who actually made the business decisions.

Between Preparation and Premature Control

The period between signing and closing requires cooperation between the buyer, the seller and the target company. The parties must exchange certain information, monitor the satisfaction of the conditions for closing and prepare for the future integration.

Nevertheless, until control has been lawfully transferred, the target company must remain independent. The buyer may protect the value of its future investment, but it must not manage the target company’s ordinary-course operations. It may prepare for the integration, but it must not begin implementing it.

The boundary is determined not only by the wording of the agreement, but by the totality of the agreed rights and the parties’ actual conduct. This period should therefore be structured so that the buyer can prepare to assume management, while still waiting for the “starting signal”.

This article is to be considered as exclusively informative, with no intention to provide legal advice. If you should need additional information, please contact us directly.