Earlier this year, the Fiscalía Nacional Económica (FNE), Chile’s competition authority, closed a gun-jumping investigation into GSK’s acquisition of Pfizer’s consumer healthcare business in Chile. The FNE reached this conclusion after a 2-year ex-officio investigation which was based on the erroneous assumption that the deal constituted an acquisition of joint control by GSK and Pfizer over a newly formed joint venture. The case highlights the importance of careful merger control analysis on a global basis, managing external messaging about a deal and liaising with regulators upfront to avoid issues including specifically in Latin American jurisdictions. This is important to minimise antitrust risk and ensure a smooth timetable for a transaction.
According to the merger control rules in Chile, in cases of acquisitions of sole control over a business, the turnover of the acquirer and the target counts towards meeting the merger threshold. Whereas in joint control situations, the relevant turnover that needs to be taken into account in order to assess whether a merger filing is required is that of each of the jointly controlling parents, including their corporate groups, and potentially the turnover of the joint venture itself. This can result in a filing of an acquisition of a small target given the parents themselves may have sufficient turnover. In this case, if the deal was an acquisition of sole control, it would not meet the thresholds as the target did not have enough turnover. However, the FNE assumed that the transaction was one of joint control and on that basis, the FNE assumed that GSK and Pfizer corporate groups’ turnovers in Chile would have been large enough to trigger a filing in Chile.
FNE’s assumptions were mainly based on public statements made by the companies themselves according to which, the deal would have led to the creation of a world-leading joint venture. However, the FNE also relied on other public information such as merger clearances obtained in a number of jurisdictions, including the US and the EU, as well as sales data provided by the national health authorities which showed that GSK and Pfizer had significant sales of consumer healthcare products in Chile.
The parties were ultimately able to demonstrate that the transaction was in fact an acquisition of sole control and because of this, the relevant turnover was not that of GSK and Pfizer’s corporate groups as the FNE initially assumed, but instead that of GSK’s group as the acquirer and Pfizer’s consumer healthcare business in Chile as the target. On that basis, the parties were able to demonstrate that the notification thresholds in Chile were not met and therefore, that they had not missed a filing.
FNE’s gung-jumping investigation was closed rather unspectacularly on 24 January 2022, without a fine. However, the case is interesting for a number of reasons. It shows the importance of announcing deals publicly in way that would not raise questions with competition authorities around the world. In a press release of 19 August 2019, GSK announced that it had completed the acquisition of Pfizer’s consumer healthcare business to create a “world-leading Joint Venture“. This led the FNE to the erroneous assumption that the deal constituted an acquisition of joint control, which started the ex-officio gun-jumping investigation in the first place. Had the press release been a bit clearer in relation to GSK’s acquisition of sole control over Pfizer’s consumer healthcare business, the case might have never happened. However, the FNE could have also contacted other competition authorities where the deal was notified, which would have quickly addressed any gun-jumping concerns and would have likely avoided a lengthy 2-year investigation.
The case also shows an increasing appetite by competition authorities in the region to monitor and enforce their merger control rules, especially when it comes to enforcing the obligation to notify deals that meet the notification thresholds. Aside from Chile, competition authorities in Brazil, Mexico and Ecuador have recently imposed significant gun-jumping fines for failures to notify deals, which shows an enforcement trend in the region and highlights the importance of conducting a thorough and detailed merger filings analysis in order to avoid such gun-jumping concerns.
Glaxo Smith Kline’s acquisition of Pfizer’s consumer healthcare business
On 19 December 2018, GSK announced that it reached an agreement with Pfizer to combine their consumer healthcare businesses into a “world-leading Joint Venture“. Pfizer would contribute its consumer healthcare business to GSK’s existing consumer healthcare business in return for equity shares in the business. According to a press release, GSK would acquire a “majority controlling equity interest of 68%” in Pfizer’s consumer healthcare business and Pfizer would have an “equity interest of 32% in the Joint Venture“, without further clarifying whether Pfizer’s stake would be controlling or not.
The deal was completed on 1 August 2019 after obtaining the necessary merger control approvals in a number of jurisdictions, including Australia, Brazil, Colombia, Costa Rica, the EU and the US. In the EU, the transaction was cleared with conditions on 10 July 2019. However, the transaction was not notified as a “joint venture” – as announced in GSK’s press release – in the sense that both parents could exercise joint control over the new entity, but instead as an acquisition of sole control by GSK over Pfizer’s consumer healthcare business.
The distinction between an acquisition of sole control vs. an acquisition of joint control has important consequences from a merger control perspective. In most jurisdictions, when assessing an acquisition of sole control over a target, the relevant turnover that should be taken into account to determine whether the relevant notification thresholds are met (and therefore, whether a merger filing is required) is that of the acquirer, including that of its corporate group and the target (and in most jurisdictions the seller’s turnover is not counted). However, in an acquisition of joint control, the relevant turnover that should be taken into account would be that of both joint venture parents, including their corporate groups and the turnover of the joint venture itself.
According to the European Commission’s clearance decision published on 9 January 2020, post-transaction “GSK will have sole control over the Combined [consumer healthcare] Business, which includes Pfizer CH” because, amongst other things, Pfizer did not have any veto rights over strategic decisions such as the adoption of the budget, business plan or appointment of senior management. It was therefore clear that the transaction was an acquisition of sole control, despite the characterisation as a “joint venture” in GSK’s press release.
The FNE’s gun-jumping investigation
On 15 April 2020, the FNE opened an ex-officio investigation into GSK’s acquisition of Pfizer’s consumer healthcare business for a possible failure to notify the transaction in Chile. According to information that the FNE had at the time, the transaction was subject to the mandatory and suspensory merger control rules in Chile.
Like many other jurisdictions, Chile imposes a strict obligation to notify deals that fall under the relevant notification thresholds. A failure to notify such deals or an early total or partial implementation prior to obtaining the necessary merger control clearance, is considered as “gun-jumping” and may be subject to heavy fines.
According to Decree Law No. 211 of 1973 (the Competition Act), Decree 41/2021 of the Ministry of Economy, which establishes the Mergers Regulation and Resolution No. 157 of March 2019 establishing the thresholds for mandatory notification, a merger notification in Chile is required when the following criteria are met: (i) the combined turnover of the parties in Chile in the financial year preceding the transaction is at least UF 2.5 million (approximately USD 92 million); and (ii) the turnover in Chile of each of at least two parties in the financial year preceding the transaction is at least UTA 450,000 (approximately USD 16.5 million). The thresholds in Chile are established in Unidades de Fomento (UF), which is an accounting unit linked to the consumer price index.
If these thresholds are met, the parties are obliged to notify the deal in Chile (Article 48, Competition Act). Once notified, the parties are prohibited from implementing the deal early, prior to obtaining merger clearance. A failure to comply with the standstill obligation may subject to heavy fines of up to 30% of the parties’ sales in Chile. However, a failure to notify the transaction in the first place, may be subject to a number of other measures such as the possible unwinding of the transaction, fines of up to 20 UF (approximately USD 15,000) per day the transaction is not notified and the prohibition to participate in public tenders for up to five years (Articles 3bis(a) and 26, Competition Act).
On that basis, the FNE considered that GSK’s acquisition of Pfizer’s consumer healthcare business met the notification thresholds, therefore triggering a filing in Chile, which the parties failed to make. In its decision, the FNE explained that it reached this preliminary conclusion by looking at publicly available information about the transaction, as well as public statements made by the companies themselves. For example, GSK mentioned in a press release that “[o]n 1st August 2019, we completed a transaction with Pfizer to combine our consumer healthcare businesses into a world-leading Consumer Healthcare Joint Venture.” These statements gave the FNE the (wrong) impression that the transaction was an acquisition of joint control by GSK and Pfizer of a newly formed consumer healthcare joint venture.
The FNE also mentioned in its decision that the transaction was notified and cleared with or without conditions in a number of jurisdictions, including Australia, Brazil, Colombia, Costa Rica, the EU and the US, but not in Chile. In addition, the FNE obtained information from the national public health institute (Instituto de Salud Pública) according to which GSK and Pfizer obtained significant revenues in Chile from sales of consumer healthcare products such as analgesics, vitamins, toothpaste and other non-prescription over-the-counter (OTC) medicines in pharmacies, hospitals and private clinics.
The FNE’s gun-jumping investigation was therefore based on the premise that GSK’s acquisition of Pfizer’s consumer healthcare business constituted an acquisition of joint control. Articles 48 of the Competition Act and paragraph 13 of the FNE’s Guidelines on Notification Thresholds of August 2019 provide that in cases of acquisitions of joint control, the relevant turnover that has to be taken into account in order to assess whether the notification thresholds are met is that of both controlling parents, including their corporate groups, as well as the turnover of the joint venture itself. In this case, since both GSK and Pfizer allegedly acquired joint control over Pfizer’s existing consumer healthcare business, the relevant turnover would be that of GSK and Pfizer’s corporate groups, which according to the FNE, was sufficient to trigger a filing in Chile.
GSK and Pfizer were able to dismiss these claims and address the FNE’s gun-jumping concerns. Despite the statements made by GSK in its press release announcing completion of the deal that the transaction involved the combination of GSK’s and Pfizer’s consumer healthcare businesses into a “world-leading Joint Venture“, the parties were able to demonstrate that the transaction did in fact constitute an acquisition of sole control.
The parties’ Stock and Asset Purchase Agreement showed that this was an acquisition of sole control
The parties argued that on 19 December 2018 they entered into a Stock and Asset Purchase Agreement (SAPA), whereby (i) GSK acquired an equity interest of 68% over Pfizer’s consumer healthcare business through a newly created company to which GSK contributed its own OTC business at closing thereby combining both Pfizer and GSK’s consumer healthcare business into one single entity; and (ii) Pfizer obtained an equity interest of 32% into the combined business as consideration for the transaction. Following the transaction, GSK owned the majority of the shares and voting rights into the combined business and Pfizer did not hold any veto rights with respect to decisions that are essential for the strategic commercial behaviour of the joint venture, such as approval of the business plan and budget or appointment of senior management. The powers conferred to Pfizer were intended solely to protect the value of its minority interest in the joint venture and did not grant negative control.
On that basis, the parties argued that their transaction would not fall under Article 47(c) of the Competition Act which refers to acquisitions of joint control, but instead under Article 47(b) of the Competition act which deals with acquisitions of sole control over a target. Accordingly, the relevant turnover that should have been considered by the FNE is not that of both GSK and Pfizer, including their corporate groups, but only that of the GSK group and Pfizer’s consumer healthcare business in Chile as the target. In this regard, Pfizer showed that the revenues obtained by its consumer healthcare business in Chile did not meet the notification thresholds. In fact, Pfizer indicated that as of November 2018, its local subsidiary had stopped importing products and the entire Chilean inventory was liquidated in the first half of 2019. As a result, the parties were able to prove that the transaction did not meet the notification threshold and a filing was not triggered in Chile.
Satisfied with these explanations, the FNE decided to close its gun-jumping investigation on 24 January 2022, almost 2 years after the case was initially launched.
- Check how a deal is announced publicly
This case is interesting for a number of reasons. Despite being a “false positive” in the sense that the FNE started a gun-jumping investigation into a case that was not notifiable in Chile, it shows that the way in which deals are announced publicly is important. Misrepresenting the structure of a deal can catch the attention of competition regulators worldwide, which might lead to costly gun-jumping investigations. GSK’s press release could have been drafted more clearly, pointing out that it would acquire sole control over Pfizer’s consumer healthcare business post-completion. However, the FNE could have also reached out to other competition regulators, such as the European Commission, which published its clearance decision on 10 July 2019 (9 months before the FNE decided to open its investigation on 15 April 2020), instead of engaging in a 2-year gun-jumping investigation.
- Informal guidance from or engagement with regulators in case of doubt is important
One interesting aspect of the FNE’s gun-jumping investigation is that the FNE reminded the parties about the possibility of engaging in informal pre-notification talks in case of doubts in relation to the obligation to notify a transaction in Chile. In its decision, the FNE made the point that when the deal was announced, this informal pre-notification phase was already available, also in relation to possible gun-jumping concerns. However, the FNE’s formal guidance (Instructivo sobre-pre-notificación) was only issued in May 2021. Before that date, it was unclear whether the parties could engage in informal and confidential pre-notification discussions with the authority and whether any opinions issued would have binding effects. The new guidance now clarifies that the FNE can issue written and binding opinions in relation to a large number of questions for potential transactions, including whether a filing is required in Chile.
- Watch out for gun jumping – Regulators in Latin America are getting tougher
Finally, this case shows that there is an increasing appetite by competition authorities in the region to enforce their merger control rules. Chile is not the only jurisdiction in Latin America that has recently dealt with gun-jumping cases. For example, on 9 September 2022, the competition authority in Mexico (COFECE) imposed a fine of USD 2.5 million on AT&T and Warner Bros Discovery for failing to notify the sale of WarnerMedia’s assets (including Warner Bros film and TV studios HBO, CNC and TNT) to rival Discovery. This is COFECE’s third gun-jumping fine this year. Similarly, on 26 May 2022, the competition authority in Brazil (CADE), imposed a hefty fine of USD 12 million on French water and management company Veolia for failing to notify the first step in its hostile takeover of rival Suez. On 28 October 2021, Ecuador’s competition authority (SCPM) imposed its largest gun-jumping fine ever (USD 2.6 million) on conglomerate Sia Products for a failure to notify its acquisition of sole control over a producer of paper products.