One of the key concerns of merging parties in any transaction is the steps they are allowed to take prior to the clearance of the merger. A recent case before the Court of Justice of the European Union (Case C‑633/16 Ernst & Young P/S Konkurrencerådet) has recently had to address this particular issue. On 18 January 2018, Advocate General Wahl handed down an opinion which provided helpful guidance on what steps companies could take without rendering themselves liable for gun jumping.
As many readers will know, under the terms of the EU Merger Regulation and the national merger law of certain EU member states, mergers have to be pre-cleared by the relevant competition authorities before being put into effect. During the period between notification and decision, the parties are not allowed to take any steps to put the transaction into effect. This is called the standstill obligation. The rationale behind this rule is that if the parties did implement the merger in whole or in part prior to the decision of the relevant competition authorities it would make that much more difficult to restore the status quo. If parties breach the standstill obligation, the practice sometimes referred to as gun-jumping, the merging parties can be fined and/or ordered to unwind any steps they have been prematurely taken to give effect to the merger.
The EU Commission has previously taken a strong line on those parties that breach the standstill obligation. On 26 October 2017, the EU General Court upheld a fine of EUR 20 million imposed by the European Commission on Harvest Marine, a Norwegian seafood company in 2014 for implementing its acquisition of Norwegian salmon producer Morpol before obtaining the required clearance from the Commission under the EU merger control rules. This follows a similar case a couple of years earlier where the Court of Justice of the European Union (CJEU) confirmed a 2012 Commission decision to fine Electrabel a similar amount for failing to notify the acquisition of a minority shareholding to the Commission, completing the deal without prior clearance from the Commission. These judgments provide important reminders of the need for all companies to carefully consider the application of the standstill obligations to their transactions under relevant merger law and the severe consequences of getting it wrong.
On 18 November 2013, KPMG DK and Ernst & Young (EY) decided to merge. Both firms are active on the Danish market in auditing and accountancy services. The merger was notified to the Danish competition authority for pre-clearance. In 2014, the Danish Competition Council approved EY acquisition of KPMG DK.
Despite this, a few months later, the Danish Competition Council found that KPMG DK and EY had breached the standstill obligation because KPMG DK had terminated its cooperation with the international KPMG network prior to the final approval of the merger. EY appealed. The Danish Maritime and Commercial Court requested a preliminary ruling from the CJEU regarding the scope and application of the standstill obligation in Danish law and its compatibility with the Regulation 139/2004 (the EU Merger Regulation). Under EU law concepts, Danish merger law would have to be interpreted consistently with similar concepts set out in the EU Merger Regulation
The Advocate General Opinion
On 18th January 2018 Advocate General Wahl delivered his opinion. The Advocate General’s opinion is advisory but is usually followed by the CJEU in the vast majority of cases.
In approaching the questions referred by the Danish Court, the Advocate General held that it would not be effective for the Court to set out in detail a general and exhaustive list of criteria with the aim of capturing all the possible measures that could potentially be caught by the standstill obligation. Instead his approach was to set out a negative definition of the standstill obligation to enhance legal certainty and give much needed guidance to parties to merger transactions for the future. Therefore this requires the Court to provide a definition of those measures that will not be caught by the obligation.
(i) What measures do not breach the standstill obligation?
The Advocate General concluded in his Opinion that the CJEU should answer the questions referred by finding that the obligation to suspend a concentration set out in Article 7(1) of the EU Merger Regulation 139/2004, (the standstill obligation under the EU Merger Regulation) does not affect measures which:
- are taken in connection with the process leading to a concentration; and
- precede and are severable from the measures actually leading to the acquisition of the possibility of exercising decisive influence on a target undertaking.
Accordingly, applying this test to the present case, the Advocate General noted that the merger agreement itself was subject to approval by the Competition Council and was not to be implemented before that approval was given. The Competition Council took the view that the termination of the cooperation agreement between KPMG DK and KPMG International network should be classified as a partial implementation of the merger.
However, the Advocate General begged to differ. Whilst the merger agreement provided that KPMG DK was to terminate its cooperation with KPMG International and termination of the cooperation agreement was a necessary prerequisite for that merger to take effect, it did not follow this was a breach of the standstill obligation. The termination did not, in any way, contribute to a shift in control between KPMG DK and EY. Although it can be argued that the termination of the cooperation agreement was part of the merger agreement, it was not inextricably linked to the transfer of control. The effect of that termination was simply that KPMG DK was no longer part of the KPMG network and would regain its independent status in the market for accountancy services. Although the termination might have had some effect on the market, it would not have meant that KPMG DK would no longer have been a competitor for EY.
(ii) Do measures need to have actual or potential market effect to be a breach?
The second question raised by the referring court was whether it is of relevance to the standstill obligation that the measure claiming to be a premature implementation of a concentration had any market effect and, if so, which criteria may be used to show such an effect. This question was asked because the termination of the cooperation agreement had caused some of KPMG DK’s clients to recommend a change of auditor at their general meetings prior to approval of the transaction. Was it necessary to show these developments had actual or potential market effects to prove a breach of the standstill obligation? The Advocate General stated that his opinion was that the possible market effects of a measure are of no relevance for application of the standstill obligation. That obligation must be complied with once a concentration meets the applicable thresholds.