[co-author: Miglena Vucheva]

On 31 May 2018, the European Court of Justice (ECJ) issued its preliminary ruling inthe Ernst & Young/KPMG Denmark case on the standstill obligation in mergers prior to authorisation.[1] The ruling clarifies that a merger is only implemented by a transaction that contributes to a change in control. The termination of a cooperation agreement – even if it gives rise to market effects – may not be regarded as bringing about the implementation of a concentration.

Facts

KPMG Denmark was a member of the KPMG International network by virtue of a cooperation agreement. On 18 November 2013 KPMG Denmark and Ernst & Young (EY) agreed to merge in Denmark. In accordance with the merger agreement, immediately after its signature, KPMG Denmark gave notice to KPMG International to terminate their cooperation agreement with effect from 30 September 2014. The merger was notified to the Danish competition authority a month later and was approved in May 2014.

In December 2014 the Danish competition authority decided that KPMG Denmark’s termination of the cooperation agreement constituted a premature implementation of the merger. It found that this infringed the “standstill obligation” in Danish competition law, which prohibits businesses from taking steps to implement their merger before it is approved by the authority.  EY appealed this decision and the Danish Court asked the ECJ to rule on the scope of the standstill obligation and whether the termination of the cooperation agreement meant the parties had infringed this obligation.

When Has a Transaction Been Implemented Under EU Merger Control Rules?

EU law, specifically Article 7 (1) of the EU Merger Regulation (EUMR), requires companies not to implement their deal before it is approved by the Commission. This obligation is transposed in the legislation of several EU Member States, including Denmark.

According to the ECJ ruling, a transaction has been implemented when there is a change in control of the target business. If a change in control takes place before the transaction is approved, the merging parties have “jumped the gun” on the prohibition on implementing the deal and are likely to be subject to a fine.

In Ernst & Young, the ECJ found that the termination of the cooperation agreement did not result in a change in control, despite the effects that the termination may have had on the market.  The termination was likely an ancillary and preparatory measure for the transaction and not its implementation, although this is left to the Danish court to decide.

The ECJ ruled that no change in control means no implementation, even if the transaction produces effects on the market. Conversely, in the absence of market effects, a transaction could still result in a change in control and be caught by the standstill provision.

Comments

• Although the ECJ judgment primarily concerns Danish competition law, it also applies to all merger cases subject to review by the Commission and allows for a more coherent interpretation of EU merger control rules on gun jumping by EU Member States.
• The ECJ confirms that the wording of Article 7(1) EUMR does not provide clear criteria as to what constitutes gun-jumping and so we need to rely on case law for guidance.  Ernst & Young clarifies that businesses can take certain steps to prepare for an upcoming transaction prior to notifying it, without infringing the standstill obligation.
• The Ernst & Young judgment builds on previous gun-jumping cases on “change in control”. For example, in Marine Harvest, the Commission fined Marine Harvest for failure to notify its acquisition of a minority stake in Morpol. The Commission considered that Marine Harvest had obtained de facto sole control when buying the minority stake and not when it subsequently made a public offer for the remaining shares, which it notified under the EUMR. In Electrabel, the company was fined for failing to notify a small increase in its shareholding in CMR from 47.92% to 49.95%. In both cases, the Commission considered that being the largest shareholder with a stable majority at shareholders’ meetings and low attendance at these meetings were strong indicators of de facto sole control. The Electrabel decision was upheld by the ECJ. Marine Harvest is currently on appeal to the ECJ.
• Ernst & Young is one of several EU and national gun-jumping cases in recent years.
  • In April 2018 the Commission fined Altice €124.5 million for implementing its PT Portugal acquisition before Commission approval.  The Commission has said that its decision (when published), will give guidance on avoiding gun-jumping.
  • In April 2018 Austria fined Stahl Lux €185,000 for obtaining sole control over the leather chemicals business of Clariant in 2014.
  • In July 2017 the Commission announced a gun-jumping investigation into Canon’s acquisition of Toshiba Medical Systems using a “warehousing” deal structure.  As a first step, the interim buyer acquired 95% in the share capital of Toshiba Medical Systems for €800, whereas Canon paid €5.28 billion for both the remaining 5% and share options over the interim buyer's stake.  This first step was carried out prior to notification to the Commission. Canon only exercised the share options following Commission approval of the merger. 
  • In November 2016 the French competition authority fined Altice and SFR €80 million for starting to integrate their merger before approval.
• We expect the published decisions in both Altice/PT Portugal and Canon/Toshiba Medical Systems to provide guidance on to what extent pre-closing information exchanges and transfer of economic risk without voting control may infringe EU law.
• We welcome the present ruling in recognising that merging parties can take some steps towards implementation of the merger without gun-jumping. However, companies should expect the Commission and national competition authorities to continue to take a strict view on possible gun-jumping. Merging parties should therefore be very cautious in taking steps to implement aspects of a deal before receiving merger clearance.

[1] Judgment of 31 May 2018 in Case C-633/16, Ernst & Young v Konkurrenceradet.

[View source.]