In 2013, a number of KPMG and Ernst & Young (“EY”) companies entered into a merger agreement in relation to their Danish auditing activities. This transaction was subject to review by the Danish competition authority, which ultimately cleared it. As is the case under EU merger control law, Danish law prohibited the parties from taking any steps to implement their merger before clearance was received (the so-called “standstill obligation”). A failure to comply with the standstill obligation is commonly referred to as gun jumping.
At the time the merger agreement was concluded, the relevant KPMG companies were party to a cooperation agreement with KPMG International. The KPMG companies gave notice to terminate this agreement on the day the merger agreement was signed – that is, before clearance from the Danish competition authority was received.
In December 2014, the Danish competition agency declared that, by taking steps to terminate this agreement, KPMG has breached its standstill obligation and taken steps to implement the merger prior to approval. That is, that KPMG had “jumped the gun” in implementing the merger.
The parties appealed the decision. Given the provisions under Danish law are for all relevant purposes the same as those under the EU Merger Regulation, the Danish Courts referred the case to the ECJ to clarify the scope of the standstill obligation. The ECJ’s Advocate General released his opinion in January 2018, and advised that the termination of the agreement should not be classified as gun jumping (see our blog 'EU Court clarifies the scope of gun jumping under EU Law' here).
The ECJ’s judgment
The ECJ started by noting that, although the merger in question was subject to Danish law, given the Danish provisions were equivalent to those in the EU it had jurisdiction to provide a ruling. The judgment, therefore, has application to all mergers subject to review by the European Commission (and most EU Member State competition agencies), and not just mergers subject to review by the Danish competition authority.
The ECJ agreed with the Advocate General and held that the termination of the cooperation agreement could not amount to gun jumping. The ECJ noted that the standstill obligation under EU law prohibits the implementation of a “concentration”, which under EU (and Danish) law is defined as a lasting change in control of a business. By definition, therefore, any implementation of a concentration must involve taking steps to that contribute to a lasting change in the control of the target business.
In this case, while KPMG’s withdrawal from the cooperation agreement had a conditional link to the merger, it did not contribute to the change in control of the target business. The EY companies did not, as a result of the termination of the agreement by KPMG, gain any influence over the KPMG companies. Therefore, the termination of the agreement did not amount to gun jumping.
The ECJ also agreed with the Advocate General that the potential for the actions alleged to amount to gun jumping to cause market effects was irrelevant. The standstill obligation applies regardless of any impact on the market, and the question is simply whether the action contributed to a change in control of the target.
What does this mean?
Although the facts of this case are somewhat unique, the principles expressed by the ECJ have general application. The judgment can, therefore, give comfort to companies involved in merger control processes in the EU that they can take certain steps in preparation of implementing their merger without breaching the standstill obligation. While this guidance is useful, merger parties should still tread carefully in this space. In particular:
- As we have outlined in recent blogs (see our most recent blog 'Global merger control penalties continue to mount' here), both European and global competition agencies are cracking down on merger control infringements, with Altice recently fined EUR125 million for gun jumping. Any attempts to “push the limits” of the principles set out by the ECJ in its judgment could therefore be risky, and the full text of the Commission’s Altice decision, when available, should provide further guidance on where the Commission draws the line.
- Merger parties are still subject to their general obligations under competition law, in particular the prohibitions against anticompetitive agreements and abuses of dominance. Therefore, although pre-closing actions may not lead to a change in control and, therefore, not amount to gun jumping, they still run the risk of falling foul of competition law more generally. This is particularly the case where the merger parties are actual or potential competitors.
For these reasons, should merger parties wish to take actions that go beyond what is necessary to ensure the merged business can “hit the ground running” on day one after completion, or to protect the value of the investment in the pre-closing period, they should seek legal advice.
BCLP’s global Antitrust & Competition team advises clients on their merger control obligations across the world. If you have any questions about the ECJ’s judgment, or your obligations under merger control more generally, then do not hesitate to contact the lawyers listed.